Austerity vs. Growth

Two European nations have recently had elections: France and Greece. In both cases the electoral shift raises the level of uncertainty in financial markets.


At the polls this last week, both France and Greece threw out center right parties and replaced them with more left wing political coalitions. This is widely regarded as a reaction to the austerity policies being pushed by the current administrations. The incoming administrations will press an agenda more focused on growing the economy of their respective nations.

Why would you want to live a life of austerity when you could be growing your economy? That seems like kind of a no brainer. The answer lies in the disparate economic policies behind the buzzwords “austerity” and “growth.”

Austerity is a program of cutbacks in government spending, attempting to balance the budget, and maybe reduce government debt. Some of the cutbacks are immediate, in the form of pay cuts and layoffs of government employees. Some of the cutbacks are long term, such as raising the retirement age. The idea is to live within your means, and so reduce the risk that you will have to default on the money you have borrowed.

Growth policies mean spend money that you don’t have. Increase government deficit spending to employ more people. Those people will spend their government supplied income, leading to an expansion of the economy. As the economy expands, taxes go up along with the expansion. Classic Keynesian economics.

Of course, governments have run large deficits for years, in good times and bad. That is why they are starting to have problems borrowing money.

My thought is that it is better to cut spending now, while you still can borrow money, than to default, and then have to cut spending anyway. But if I was having to cut my standard of living, or lost my paycheck and had no other options, I might see things differently.