Can austerity be an effective response to the economic crisis?

下面为大家整理一篇优秀的Economic analysis essay代写范文 -- Can austerity be an effective response to the economic crisis?，文章讲述自从过去几年爆发经济危机以来，欧洲联盟目前正经历着自成立以来最严重的危机。毫无疑问，尤其是在希腊，最近几年经历了最惊人的命运逆转之一。从1990年代中期开始的大约十年中，希腊似乎几乎无能为力。该国正以惊人的速度增长，每年以4.5％的速度增长，这一成绩仅在爱尔兰就超过了欧盟。到2000年，它已经取得了令人瞩目的融合成就，将通货膨胀率和预算赤字从1980年代的两位数降低到了马斯特里赫特规定的严格范围之内。在新千年的曙光中，希腊似乎已经在许多方面转变了自己。

Can austerity be an effective response to the economic crisis?

Since the outbreak of the economic crisis in the past few years, the European Union is currently experiencing its deepest crisis since it came into existence. Especially in Greece, with no doubt, has experienced one of the most astonishing reversals of fortunes in the last few years.  For about ten years beginning in the mid-1990s, Greece seemed almost unable to do anything wrong. The country was growing at amazing rates, by some 4.5% per year, a performance surpassed within the European Union only by Ireland. By the year 2000, it had achieved an impressive convergence accomplishment, bringing down its inflation rates and budget deficits from the double-digit figures of the 1980s to within the strict limits of the Maastricht rules. In the dawn of the new millennium, Greece seemed to have transformed itself in numerous respects. For the first time in its history, it became a net capital exporter, with impressive foreign investments in the banking sector, in telecommunications, energy and increasingly in a wider range of activities. Political instability and contestation had given their place to "good governance" and concerted social dialogue. Furthermore, all have been changed so dramatically in just a few months - from September 2009, when Greece first indicated a substantial divergence from its budget deficit target, to February 2010, when the Greek government openly admitted that it was unable to refinance its debt through market borrowing - must be a stupefying puzzle to any outside observer.

The political discourse of the US and Europe has been dominated by one word “austerity” coping with problems like economic crisis in Greece. Austerity refers to a set of policies that have the common name to cut government spending in order to avoid making new loans as much as possible and put enough money aside in order to pay the interest on existing loans and try to repay them. A balanced budget of the state is, according to the advocates of this policy, a way of creating stability and a positive business climate that drive investment and growth. However, the case for austerity has been seriously criticized by very prominent economists and the question of whether austerity is an appropriate response to the crisis is a matter of hot debate in economics even though politicians throughout the spectrum take it almost as a natural given. 

For example, Europe sunk into a protracted period of deepening poverty, mass unemployment, social exclusion, greater inequality, and collective despair as a result of austerity policies adopted in response to the debt and currency crisis of the past four years, according to an extensive study being published by an International Federation. "Whilst other continents successfully reduce poverty, Europe adds to it," says the 68-page report from the International Federation of Red Cross and Red Crescent Societies. "The long-term consequences of this crisis have yet to surface. The problems caused will be felt for decades even if the economy turns for the better in the near future … We wonder if we as a continent really understand what has hit us."

The case for austerity has been also criticized by many economists belonging to the so called Neo-Keynesian school who argued that austerity measures can stump economic growth. One of the best known spokesmen for this position is the Nobel laureate Paul Krugman. Krugman argues, following Keynes, that fiscal austerity or balancing the government budget is always desirable but the right moment to impose cuts in spending is during a period when the economy is growing very fast and not during the crisis (Krugman 1). The essential point that Krugman and other neo-Keynesians attempt to make is that cuts in spending inevitably result in the decrease of demand for goods and services on the market leading to less need for the production of goods that triggers less employment and pushes the economy into a vicious cycle (Krugman 1). He also cites a lot of data in favor of his position. For example, he provides an interesting statistic according to which countries that have imposed austerity systematically experience a decline of economic activity. He writes, “The countries forced into severe austerity experienced very severe downturns, and the downturns were more or less proportional to the degree of austerity” (Krugman 2). If this piece of data is correct, then it directly supports the theory behind Krugman’s reasoning because according to the theory, the lack of consumer demand should and the subsequent decline of growth should be directly proportional to the degree of austerity. Mass unemployment ,which can prove Krugman’s theory in another way – especially among the young, 120 million Europeans living in or at risk of poverty – increased waves of illegal immigration clashing with rising xenophobia in the host countries, growing risks of social unrest and political instability estimated to be two to three times higher than most other parts of the world, greater levels of insecurity among the traditional middle classes – all combine to make a European future more uncertain than at any time in the postwar era. The conservative proponents of austerity have responded to the criticisms raised by Krugman and others. Very frequently, these authors direct their arguments directly against Krugman’s position. Paul Roderick Gregory, an economist writing for The Forbes, dismissed Krugman’s proposals not at the conceptual level by explaining how a depressed economy might overcome the problem of a decreased demand and exit a depression, but at the level of facts by trying to disprove his hypothesis. He does recognize that Greece has had a decrease in growth that followed spending cuts, but he argues that a serious scientist cannot base his theory on just one example (Gregory). Instead, tries to prove that there is no correlation between the amount of government spending and growth among the 30 most developed countries since the crisis of 2008. According to him, Krugman’s theory gives implies a testable hypothesis that GDP growth is directly proportional to government spending (Gregory). He then proceeds to provide data that undermine that hypothesis so he concludes that Krugman is wrong to argue that austerity is not an appropriate response to crisis (Gregory).

What can be said about Gregory’s criticism of Krugman is that is seems to be directed against a straw man argument. Namely, Gregory seems to be attacking a position that Krugman never espoused. While Krugman did argue that cuts in spending slow down economic growth, he did not claim that increase in spending will automatically lead to more growth. It is rather that a serious person cannot make such an argument because whether or not government spending will create growth depends on the way in which money was spent. Therefore, Gregory does not offer a serious criticism of Krugman, which leads to a tentative conclusion that austerity is not an appropriate response to crisis.

  We can also make a preferable option when facing the economic crisis: stimulus, instead of taking austerity measures. When too many people want to save and too few to invest, then resources (including workers) fall idle, according to a British economist, John Maynard Keynes. Firms and families might save too much because of financial uncertainty or because they are rushing to “deleverage”—to reduce the ratio of their debts to their assets. 

   In normal times central banks would try to spur growth by taking austerity measures, to adjust interest rates to discourage saving and encourage borrowing. Yet by early 2009 most central banks had reduced their main interest rates almost to zero, without the desired result. Over indebtedness, some surmised, might have been preventing people from borrowing as much as they would like, whatever the interest rate. Governments, Keynesians reckoned, needed to make up for hamstrung firms and families, by borrowing and spending more (or taxing less) to put excess savings to work.

When there is slack in the economy, fiscal stimulus can be particularly powerful thanks to a “multiplier” effect. A dollar spent building a railway, for example, might go to the wages of a construction worker. He then spends the extra income on groceries, enriching a shopkeeper, who in turn goes shopping himself and so on. Every dollar of stimulus could thus result in two dollars of output—a multiplier of two. (Multipliers also apply to government cutbacks, amplifying the reduction in GDP.) That allows governments to deliver a hefty economic bang at moderate fiscal cost.

Yet fiscal stimulus is needed most when governments already have extra costs to bear. From 2007 to 2010 rich countries saw the ratio of their gross sovereign debt to GDP spike from 74% to 101% on average. British public debt jumped from just 44% of GDP to 79%, while America’s leapt from 66% of GDP to 98%. Greece’s soared by 40 percentage points, to 148% of GDP (see chart 1). Greece’s deficit was so high that when the government revealed it, the admission set off a crisis of confidence in public finances in southern Europe, and thus in the viability of the euro itself.

Stimulus was not the main reason debt piled up: the biggest drag on public finances came from lower tax receipts, thanks to weak profits and high unemployment. Financial bail-outs added to the fiscal toll, as did “automatic stabilizers”—measures like unemployment benefits that automatically raise spending and support demand when recession strikes. The International Monetary Fund (IMF) estimates that almost 60% of the rise in government debt since 2008 stems from collapsing revenues, more than twice the cost of stimulus and bail-outs combined.

In fact, it is possible to regard excessive bank lending as a symptom of deeper economic flaws. The economist Thomas Palley sees stimulus measures as a means of offsetting growth in income inequality, with access to cheap credit replacing the broken welfare guarantee of social democracy. So President Obama’s policy need to reform requires redistribution of wealth and incomes.

Redistributive measures go quite well with stimulus policies, because they may be expected to increase aggregate demand in the short term (owing to lower-income households' higher propensity to consume) and minimize the economy's dependence on debt financing in the long term. Initial damage to the confidence of the business class caused by higher taxes on the wealthy would be balanced by the prospect of higher overall consumption.

Therefore, Gregory does not offer a serious criticism of Krugman, and the discussion between austerity and stimulus, which leads to a tentative conclusion that austerity is not an appropriate response to crisis.

Works Cited

Gregory, Paul Roderick. "Krugman On Austerity: How About Looking At The Facts For A Change?" Forbes. Forbes Magazine, 21 Oct. 2013. Web. 5 Nov. 2014. <http://www.forbes.com/sites/paulroderickgregory/2013/10/21/krugman-on-austerity-how-about-looking-at-the-facts-for-a-change/>.

Krugman, Paul. "How the Case for Austerity Has Crumbled by Paul Krugman." Http://www.nybooks.com/. 6 June 2013. Web. 5 Nov. 2014. <http://www.nybooks.com/articles/archives/2013/jun/06/how-case-austerity-has-crumbled/>.

Robert Skidelsky “Stimulus, not austerity, is the key to global economic recovery”

theguardian.com, Monday 1 July 2013 16.01 BST

<http://www.theguardian.com/business/economics-blog/2013/jul/01/stimulus-austerity-global-economic-recovery>

The economists “Stimulus vs austerity, sovereign doubts”

           Sep 28th 2013

           <http://www.economist.com/news/schools-brief/21586802-fourth-our-series-articles-financial-crisis-looks-surge-public>

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