NYU economist Michael Spence explains that the word austerity is used in two very different ways. When an economy is in recession, one type of austerity – wage and income restraint – is helpful, whereas another type of austerity – fiscal restraint – is harmful. This is not just a matter of semantics. “The confusion that has resulted”, he writes, “is anything but harmless”.
[T]he much-discussed conflict between austerity and growth … is based on a fairly serious misunderstanding. For Germans, austerity, in the form of sustained wage and income restraint, was an important part of the growth-oriented reforms that their country completed in 2006. ….
But, on the receiving end of the message in southern Europe (and across the Atlantic), “austerity” is interpreted largely in fiscal terms – as an excessively rapid and potentially growth-destroying drive to cut deficits faster than the economy can structurally adjust and fill the gap in aggregate demand. In other words, harsh austerity is being viewed largely through a Keynesian lens. ….
[R]estoring stability and growth is only partly about reviving short-term aggregate demand. It is also about structural reform and rebalancing, which comes at a cost. Achieving a sustainable pattern of growth requires choices that affect not just the level of aggregate demand, but also its composition – for example, investment versus consumption.
Michael Spence, “Clarity about Austerity“, Project Syndicate, 19 June 2012.
Michael Spence (born 1943) shared the 2001 Nobel Prize in Economics with George A. Akerlof and Joseph E. Stiglitz, “for their analyses of markets with asymmetric information.” He is best known as author of the article “Job Market Signaling“, published in The Quarterly Journal of Economics 87:3 (1973), pp. 355-374. According to Google Scholar, his article has been cited more than 8,000 times.