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Fascinating how the meaning of the word 'austerity' has drifted away from the meaning of 'austere'. A balanced budget doesn't seem very 'austere' to me.

Many people arguing against balancing budgets (or 'austerity' if you will) do so because the first budgets to be slashed are usually things where the benefits are long-term, such as education. But it's a false dichotomy that these are the only choices.

Then there's the economists, who will pull out some toy model and claim xyz is good/bad. Too me it seems more like religions (being a Keynesian, Austrian, etc), where people search for facts that confirm their positions.

The problem with most macroeconomic theories is that they ignore too many important details.

So for example, you can borrow money to invest in the future which is usually good in the long run, or you can spend it on things you don't need such as hosting international sports competitions, ineffective military equipment, ... This means you can come to completely different conclusions as to the effectiveness of government spending. In the words of Warren Buffet, we don't talk about 'quality' of GDP enough.

There's a nice paper by Mankiw on the topic of science vs engineering in economics:

https://www.nber.org/papers/w12349

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> A balanced budget doesn't seem very 'austere' to me.

Except that that's not what it means. Norway has been running a budget surplus for years (because of oil), but is not engaging in austerity; the UK was running a deficit and engaging in austerity at the same time.

Austerity is generally understood to mean a reduction of the structural deficit in a time when the economy is struggling or contracting. It is considered counterproductive because it typically makes the economy even worse by killing domestic demand (directly and through cascading effects). See also the paradox of thrift [1].

[1] https://en.wikipedia.org/wiki/Paradox_of_thrift

Except the UK economy has been expanding for a long time now and it's still described as using austerity. Austerity now simply means reduction in spending on "social security" of pretty much any form.

Spending your way out of recession [in the midst of large pre-existing debt] has its own supporters and detractors. I've generally come to the conclusion that whatever your budgetary preference you can find an macro-economist to agree with you.

> Except the UK economy has been expanding for a long time now and it's still described as using austerity.

That's why I wrote that the UK was engaging in austerity. Past tense. Osborne abandoned austerity in 2012 (though the Cameron government's economic policymaking still does not show a clear strategy and the UK's economy is still pretty fragile [1]).

That the term "austerity" is sometimes used imprecisely (especially in colloquial speech) is not something I disagree with; however, austerity is not synonymous with having a balanced budget, as the OP claimed.

> Spending your way out of recession [in the midst of large pre-existing debt] has its own supporters and detractors. I've generally come to the conclusion that whatever your budgetary preference you can find an macro-economist to agree with you.

First, these are not the only two alternatives (fallacy of the excluded middle and all that). Second, critics of austerity do not rely on "finding a macro-economist to agree with them" but on the pretty clear evidence that at least for the ongoing crisis, austerity has been unsuccessful (change in government spending has been correlated with change in GDP; i.e., less government spending => less or negative GDP growth). In short, the hypothesis that austerity leads to GDP growth has so far been falsified by the evidence we have.

[1] Loss of real GDP and lower real wages compared to pre-crisis levels; a recovery largely fueled by consumption (in part, ironically, because of increased net migration to Britain) and rising housing prices, which is not sustainable in the long term.

This is partly true but misses the point: if you're slashing social security spending and using the excuse that any government spending will lead to catastrophe, while still spending on whatever your political supporters want then you're lying to people, plain and simple. People have every right to be angry about that.

>Except the UK economy has been expanding for a long time now and it's still described as using austerity.

That's a slightly optimistic definition of growth:

http://www.tradingeconomics.com/united-kingdom/gdp-growth

It might more realistically be called "bumping along the bottom."

But austerity doesn't just mean cuts in social services. It also means using "austerity" as an excuse to pay workers as little as possible, while making their living and working conditions as insecure as possible.

This has the interesting effect that what little growth there is very unevenly distributed, and most of the population doesn't benefit from it at all.

You have to think about this for a while to understand what's really happening: the true meaning of austerity is a calculated crippling of real economic expansion in favour of regressive wealth redistribution.

This is the one consistent meaning - and it also applies to the use of debt as a weapon against countries and individuals.

Well, i was curious about the exact meaning of austerity so i looked it up before i wrote the post. The three or four sites that i visited (amongst them Wikipedia) agreed with the meaning i used.

Structural deficit is a poorly-defined term, in the sense that there are many reasonable values for it. If you define austerity this way, then we can't even agree if we have austerity or not.

It's also not what most creditors care about. What does it matter if you don't get your money back because of cyclical or structural deficits?

Perhaps you misunderstood me, i didn't mean to imply that austerity is equivalent to a balanced budget. I used austerity in the sense of "increasing revenues and reducing spending" to balance a budget that is in the red.

Austerity is a religion in Europe and it's strongly supported by Germany, which is the leading economic powerhouse and major EU creditor.

If you look at the surplus it works well for their exports but the salaries are at the same level they were in the 90s. So although unemployment is low and exports were going strong (hence corporations like BMW and Mercedes are making huge profits) the salaries were largely at the same levels. The German government decide to keep the surplus instead of spending money in local and foreign investment which keeps virtually the EUR low. It's a policy heavily criticized by both USA and European economists.

One might argue that these choices worked very well for Germany. Not very well for the rest of the Eurozone, especially the Mediterranean countries, which found themselves having huge deficits. The EU has structural problems which the German model speed up.

It's important to note GDP is far from independent of underlying demographics. A stable population ends up older than post WWII countries where used to which requires an older retirement age and a lower percentage of workers to support spending levels. This shift feels like austerity, but countries have no choice long term.

Exactly, government-managed retirement funds were created after WWII, at a time when there was few retirees and a massive young workforce.

Now it's the other way around : the demographic transition is hitting the retirement age all over Europe and it is an alarming problems for many countries including France and Germany.

It's also worth remembering that the asset bubbles in Portugal, Ireland, Greece and Spain were inflated by the Eurozone's low interest rates. The reason those interest rates were set so low was to boost the German economy, which was in the doldrums, post-reunification.

Greece did not suffer from an asset bubble, the other countries you mentioned did.

Interest rate convergence was one of the criteria for introduction of the Euro:

https://en.wikipedia.org/wiki/Euro_convergence_criteria#Crit...

Point 5, long-term interest rates

The ECB's mandate is to worry about price-stability, not the German economy

https://www.ecb.europa.eu/mopo/intro/objective/html/index.en...

Practice may of course deviate from theory, but i don't think it did much here.

German unification was 1990, we are talking about the time around 2000. Many central banks in the world lowered interest rates after the dot-com crash & 9-11 and the economic slowdown that followed.

You might argue that this caused asset bubbles, and i would tend to agree.

If it were up to me, i would add "avoiding asset bubbles" to the ECB mandate, if you want to you could regard it as a kind of price-stability mandate for assets.

> Greece did not suffer from an asset bubble...

Greece's House price index (2007=100) shows a cumulative rise of 44.3 from 2001 thru 2007, and a cumulative drop of 49 from 2008 thru 2014 - http://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=129.RPP.A.G...

As of February 2014, "Greece [had] suffered the second biggest property crash in the EU since the debt crisis began." - http://www.theguardian.com/world/2014/feb/28/home-ownership-...

From Q3'08 to Q2'14, Greek house prices declined by 41.6% in real terms - http://www.bankofgreece.gr/BogDocumentEn/PRODEXPO_Oct_2014.p...

Thanks for the numbers, you are right.

The charts are remarkably similar for

Greece http://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=129.RPP.Q.G...

Spain http://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=129.RPP.Q.E...

Portugal http://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=129.RPP.Q.P...

But i would still claim that in the case of Greece, the (masked) public debt crisis preceded the asset bubble whereas in Spain, Portugal and Ireland the public debt crisis followed the asset bubble.

First, i'd like to state that i'm talking about austerity in general, not about Greece in particular. Greece needs a debt restructuring, there's no way around it.

The whole reason for all that austerity was that some countries were unable to refinance their debt and other countries are afraid they might not be able to refinance in the future. Refinancing debt in hard times becomes harder yet if it is externally financed.

You need to convince someone to lend you money if you want to run a deficit.

Love it or hate it, the Germans don't like a soft currency. The reason is probably the prelude to the rise of Hitler, which was marked by hyperinflation from printing too much money. It has been in their "DNA" since WW2, and no amount of economic handwaving is going to change that, at least in the forseeable future. In practice Germany has had a budget deficit nearly every year of course (such is politics), they just aren't that big.

The reason Germany joined the Eurozone was the absence of debt mutualisation. The Bundesbank warned that this was hard/impossible without political union, but they were ignored. And so, here we are.

Some claim the Germans intentionally inflated their currency to stiff the French who held crippling levels of debt over the Germans.

Inflating away the currency had no benefit for reparations.

The details are here

https://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_R...

https://en.wikipedia.org/wiki/World_War_I_reparations

And if there was no 'Russian threat', no 'cold war' and no Marshall Plan... How well do you think a 'hard currency' would have worked for them?

Because it's the only way to make sure there's less squandering. Mediterranean countries are screwed because they're so lame they couldn't do anything worthwile with the easy money they got, so they wasted all of it. Airports that have never been used, stadiums in small towns close to each other, so-called "phantom" cities... And that's just the "shocking" tip of the iceberg of widespread mismanagement. You either force these low-lifers to cut spending or they'll keep getting themselves in a position where they'll never repay their debt.

Your point of view is extremely naive and insulting. You can't blame entire nations for the lack proper government management or cultural differences.

On the other hand, I understand that you're probably are a lesser mind and you simplify complex topics, like the one discussed here. It make you think you understand them. But you don't.

Your comment is implying that all Germans are Nazis. They are not.

You can and you should blame entire nations for their cultural differences. It's obvious they're responsible -and must be held accountable- for how they behave. This is elementary.

You could attack me or you could use reason. You chose the first, so I'm not going to reason with you any more.

> Austerity is a religion in Europe

Austerity is a religion among the world's bankers and has been for some time; the US has been no less a subscriber to it than Europe and has been fully on board with imposition of austerity measures as conditions for World Bank and IMF efforts in the past.

Its getting noticed more in Europe because the attempts to impose it in the Eurozone have, unlike decades of IMF and World Bank efforts, actually targeted countries outside of the Third World that First World observers actually notice and care about.

Where Has All the Education Gone?

Lant Pritchett

+ Author Affiliations The Kennedy School of Government. e-mail: lant_pritchett@harvard.edu

Abstract

Cross‐national data show no association between increases in human capital attributable to the rising educational attainment of the labor force and the rate of growth of output per worker. This implies that the association of educational capital growth with conventional measures of total factor production is large, strongly statistically significant, and negative. These are “on average” results, derived from imposing a constant coefficient. However, the development impact of education varied widely across countries and has fallen short of expectations for three possible reasons. First, the institutional/governance environment could have been sufficiently perverse that the accumulation of educational capital lowered economic growth. Second, marginal returns to education could have fallen rapidly as the supply of educated labor expanded while demand remained stagnant. Third, educational quality could have been so low that years of schooling created no human capital. The extent and mix of these three phenomena vary from country to country in explaining the actual economic impact of education, or the lack thereof. Copyright Oxford University Press 2001

http://wber.oxfordjournals.org/content/15/3/367.abstract

Even the distinction between macroeconomics and microeconomics is not scientific.

If I have a model that doesn't work in smaller AND larger (whatever that means) contexts, it's a bad model.

Physicists admit it, economists might, politicians don't.

My own "religion" is that you should build a reward function for every actor in a system (be it state, politician, company, CEO, consumer, ...) and see how they react to different events (legislation, appearance and disappearance of new services/products, ...).

If you follow that line, you'll end up with a very pessimistic view and an Austrian mindset.

IMO game theory is the foundation of economics and it explains how it could look like, what's happening right now, why central banks collude and why any monopoly on violence and/or the issuance of money will degrade into what we currently have.

In the end, the budgets are irrelevant, politicians don't want to balance them and even if for some reason one does, his successors won't.

> If I have a model that doesn't work in smaller AND larger (whatever that means) contexts, it's a bad model.

That seems like a very strange remark. First, macroeconomics va. microeconomics is not about large and small, but about the whole vs. parts of it. And that indeed makes a huge difference.

Second, we use different models all the time, pretty much everywhere. So in engineering small local systems you would use classical mechanics. In physics, not. There are similar examples in computer science.

> That seems like a very strange remark. First, macroeconomics va. microeconomics is not about large and small, but about the whole vs. parts of it. And that indeed makes a huge difference.

To expand on that: A sovereign nation state has the power to tax, to legislate, and to regulate trade with other nations; outside the Eurozone, to issue its own currency. Households and businesses can do none of the above, but are subject to the decisions that their governments make on their behalf.

In physics, we view it as a bad thing and a deep flaw when the macro model (GR) and the micro model (QM) don't agree. Large amounts of effort in physics are devoted to deriving macro models from micro models - this is the entire purpose of statistical mechanics, for example.

Same goes in economics and a large degree to why Keynes was thrown out by freshwater schools in the 70s.

Only to be resurrected lately because the new unified models were empirically shown to have little macro predictive power, ie. They were wrong.

But the Keynesian macro models similarly have little predictive power. They've failed most of the modern tests which actually distinguish them from monetarism.

(There have been several "tests" of Keynesian thinking where Keynesian predictions agree with monetarist predictions, but such tests can't distinguish between the two theories.)

Most of the modern shift in economic thinking is based more on fashion than on new information. See, e.g., Scott Sumner on the topic: http://econlog.econlib.org/archives/2014/05/when_ideologies.... http://econlog.econlib.org/archives/2015/03/ways_of_thinkin....

Good old IS-LM has done fairly well the past decade. I'm not sure what you're saying: that both Keynesianism and monetarism suck, or that there is a debate between two credible schools of thought and an unclear winner?

Measuring a big system might be useful if you are interested in this information.

However, steering the big system by looking at the big statistics while ignoring its much more deterministic effects on parts is both, an oversimplification and common practice.

Just think of a tax where they talk about future income streams for government but totally deny the costs (especially for complex taxations or ambiguous legislation). Or changes to the way GDP is calculated. Or "economical stimulation" via war.

"""If I have a model that doesn't work in smaller AND larger (whatever that means) contexts, it's a bad model."""

I'd argue that global markets are chaotic (dynamical systems) and thus this statement is a little too simplified for my taste.

"things you don't need such as hosting international sports competitions"

I am skeptical of all the highly corrupt organizations (FIFA, Olympics) that are private companies, often tax exempt, externalize costs and privatize profits. But in case of Munich, I think the Olympic games in 1972 and the heavily investment in infrastructure for this games, has actually more than paid off for Munich.

> But it's a false dichotomy that these are the only choices.

I agree. Unfortunately, these are the only choices that are typically envisioned by people advocating balanced budgets, so they are automatically associated to the concept. It's the responsibility of such advocates to come up with alternative choices; alas, as we've just seen, they don't seem willing to entertain the possible existence of alternative paths.

> The problem with most macroeconomic theories is that they ignore too many important details. So for example [...] you can come to completely different conclusions as to the effectiveness of government spending.

Among the many important details these theories ignore is the actual identity of people responsible for such spending.

A politicians' goal is to get reelected. If not, their party will quickly replace them with someone who has that goal.

Budget cuts, when they are made, are done in the places where they will minimise the political damage to the party making the cuts.

It's not that nobody can come up with saving money in the bureaucracy, military&secret services, government subsidies, etc. It's just that they are costly in terms of political power and therefore not discussed at all. And the easiest things to slash are things your own voters don't care about and the easiest taxes to increase those that your voters don't pay.

I doubt that any kind of economic thinking goes into these decisions.

"Fascinating how the meaning of the word 'austerity' has drifted away from the meaning of 'austere'. A balanced budget doesn't seem very 'austere' to me."

But it is. Money is used to do productive things. Money is created when a bank issues debt. If no one is spending money, and paying down their old debts due previously reckless lending and borrowing, you have a depression, where lots of people want to work, but can't, because no one is buying anything. The only people making money are the lenders - until people start defaulting. Who is to kick start the engine?

Well, you've got four choices;

- the government, which works well if it is quality spending, ie. it's channeled towards infrastructure and/or consumption (see the U.S. vs Europe). but it is politically unpopular among the rich because it is theoretically inflationary.

- Or the central bank can buy up debt on the market (quantitative easing), but with everyone paying down their debts, this doesn't actually help the economy as much. Also not popular with the rich because it's inflationary.

- Wait it out, ie. Stop spending money and make everyone pay down their debts. This is the "austerity" plan, where a generation of people will be unemployed because of the supposed sins of the past - a cleansing ritual approach to the economy. Popular with the rich because they can afford to sit back and wait.

- Option four is a debt jubilee where creditors get a haircut and we all feel spurred to spend money again because we aren't so far in debt. This is popular with the masses and (obviously) unpopular with the rich. This is what happened to some degree in Iceland. And this is in effect what Greece is asking Europe to do as the most realistic outcome from the 2008 crash.

"But it's a false dichotomy that these are the only choices"

Actually, no, it's a real dichotomy. Either you believe in balanced budgets at all times, or you believe that deficit spending is justified sometimes. Similarly for occasional debt jubilees vs the sanctity of the bond holder. These are stark choices as they have major implications on entitlements like medical and social insurance in a crisis.

"Then there's the economists, who will pull out some toy model and claim xyz is good/bad. Too me it seems more like religions (being a Keynesian, Austrian, etc), where people search for facts that confirm their positions."

A model is just a consistent logical argument. Because economics is so tied to politics, the logical arguments get religious fast. That's kind of human nature.

Searching for facts to confirm (or contradict!) your position is usually a good thing - we call that empiricism. I'd note that not all economic traditions believe in empiricism (the Austrians do not, for example - they believe their system is axiomatic).

"The problem with most macroeconomic theories is that they ignore too many important details."

The point of a model is to have predictive power without being so complicated that it's impossible to use. There's some subjectivity as to what is "important" in making an argument.

"So for example, you can borrow money to invest in the future which is usually good in the long run, or you can spend it on things you don't need ..... In the words of Warren Buffet, we don't talk about 'quality' of GDP enough."

That would be because we are still stuck in debating whether government spending helps at all, which is anathema to a large number of property holders. Among those that want stimulus - look at the Econ blogosphere! - there have been endless debates circa 2008-2009 about quality stimulus vs. pork spending stimulus.

Those discussions have ceased because austerity has become the political rule in Europe (and to a lesser degree but still strong in a polarized US electorate). No point debating what to spend money on if there's nothing to spend. So debates have turned to QE and debt writeoffs - two of the other four tools left that I mentioned above.

Hold your horses - because you're paying down debt doesn't mean 'nobody is buying anything'. That only happens if you're over your head. I pay down debt all the time (mortgage) and buy things all the time.

If debt paying is increased, then buying is reduced, ok. And that means the previous level of growth is reduced. Which has a multiplicative effect because everybody is betting on increased growth, by investing in a bigger operation etc. Which leaves them struggling to pay off THEIR debt.

Maybe if we all were content with reasonable growth, instead of buying lottery tickets all the time, betting on increased growth. But you'll get in trouble with your investors if you 'miss out' on any opportunity. This investment market is insane.

I meant "nobody is buying anything" at a "macro" level. Of course the economy continues to chug, it's just not performing at its potential (ie. cheap capital, cheap labour is available and no one wants to use it).

Your second paragraph basically explains the debt deflationary spiral at the core of Keynes' economics.

I agree that speculative investment is a problem, but we are (in Europe / the U.S. is doing relatively fine) still talking about "unreasonably low growth" given levels of unemployment - people that are idle and want to work! An economy that isn't growing has become closer to zero sum: one persons gain is another's loss.

Given the historical strength of the rich at retaining and growing their relative share, this doesn't bode well for the masses. Depressions and recessions spark revolutions when they last too long.

> If no one is spending money, and paying down their old debts due previously reckless lending and borrowing, you have a depression, where lots of people want to work, but can't, because no one is buying anything.

You know, monetary theorists make me dizzy.

Please explain how people were able to live before debt was defined as money? Because there was a before, and people lived by then.

What monetarists often forget is that inflation (both positive and negative) exists. What's a surprising and ironic realization, because "inflation" is the thing they study.

You can make any kind of shady accounting, and define any kinds of equality you want at the monetary side of the economy. In the end, the real side will distribute everything that is produced to people that want it, and set the real wealth of the economy. If you want to claim that monetary phenomena cause real problems, well, you must claim a link between them, because it's not automatic, and "money disappears" isn't one (although "prices are sticky" is).

"Please explain how people were able to live before debt was defined as money? Because there was a before, and people lived by then."

Not really. Money historically was created for tallying and clearing credit accounts. It was debt that led to exchange. This has been explored pretty heavily in recent books from Felix Martin, Graeber, Weatherford, etc. Of course money is more than debt -- but it is intrinsically linked. Hard money is something of a delusion.

There were people before there was money, and there wasn't a monetary paradox that killed them all.

Also, people did use hard money at the past. No we should not go back there, but it did exist, and people didn't starve because of that.

"There were people before there was money, and there wasn't a monetary paradox that killed them all."

I agree, of course. Most exchange was gift or reciprocity-oriented. I'm just saying that money emerged for a variety of reasons, one of which (probably the biggest) was to clear accounts as communities grew to a scale where reciprocity can't scale. Barter as Adam Smith describes it never really existed in ancient societies.

"Also, people did use hard money at the past. No we should not go back there, but it did exist..."

Again, also agree.

", and people didn't starve because of that."

But they did! Numerous economic crises, whether depressions or hyperinflation can be traced through ancient times - the 3rd century fall of the Roman empire (hyperinflation), the various Italian banking crises in the 14th and 15th centuries, Tulip mania, panics and depressions through the 1700s and 1800s, leading to the failure of the Gold standard (the ultimate hard money backstop) in the Great Depression....

Going back to your first response, "If you want to claim that monetary phenomena cause real problems, well, you must claim a link between them", but that's what Keynes (and others) spent a lot of time actually doing in the 1920-40's. The world got complicated and the gold standard broke down. The rise of shadow banking makes things even more complicated in this age.

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