Austerity

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Austerity is an alternative sometimes offered by conservative political movements in response to economic downturns. Faced with falling tax revenue and increased need to borrow countries in the southern tier of the Eurozone turned to austerity during the Great Recession despite high unemployment rates.

Intended to reduce debt, austerity often backfires, resulting in such steep drops in economic activity[1] that tax revenue is so depressed that additional debt must be incurred.[2]

Notes

  1. "Growth Forecast Errors and Fiscal Multipliers" working paper by Oliver Blanchard and Daniel Leigh International Monetary Fund January 3, 2013
  2. "Austerity, Italian Style" opinion by Paul Krugman in The New York Times February 24, 2013