Question

1. What are the arguments against austerity measures during a depression or severe recession?

citations required

Answer 1

Austerity measures are basically government cutting expenses to reduce spendings and hence, budget deficits. There is continuous debates as to whether austerity measrues are effective or not. There are many pros and cons of austerity measures. As the question is asking for cons, lets us list them.

• Liquidity trap fear is misplaced- It is often cited that not cutting money supply will mean that the yields on bonds will go down and hence people will stop investing- a liquidity trap. The truth is though that this doesnt really happen inr reality¹.
• Reducing money supply reduces demand further. And that affects the already reeling private sector. This is not a good idea. increasing money supply will result in higher spending and hence the private sector will recover quickly².
• Austerity doesnt help in higher bond yields. As government cuts spending, the revenues also drop. The market doesnt know if the government will be able to pay the debts and hence bonds yield keep rising. That is not a good place to be in³.
• Increased austerity reduces nominal GDP and hence also reduces tax revenues. This leads to further issues in government being able to repay thed debt. This is self-defeating³.
• There is no evidence that cutting spending creates increased confidence. In the UK, confidence kept decreasing in 2012 despite the austerity measures and UK sunk into double dip recession⁴.

References-

1. Austerity: Too Much of a Good Thing? https://voxeu.org/sites/default/files/file/austerity_ecollection.pdf
2. What we know about next recession? https://www.epi.org/publication/next-recession-bivens/
3. Austerity pros and cons https://www.economicshelp.org/blog/5366/economics/austerity-pros-and-cons/
4. UK sinks into double dip recession https://www.theguardian.com/business/2012/apr/25/uk-sinks-double-dip-recession-gdp