Austerity may be defined as a large fiscal contraction that causes a substantial increase in unemployment. If the government has a budget deficit that is unsustainable, or a debt level that is too high, it is sometimes suggested that austerity is inevitable. For an economy with a flexible exchange rate and debt in its own currency, which includes the Eurozone as a whole, this is simply false. Fiscal contraction can always be delayed until monetary policy can offset the deflationary impact of any fiscal contraction. Unfortunately this is not true for a member of a currency union that requires a greater fiscal contraction than the union as a whole. Even in this case, however, a sharp and deep fiscal contraction will be an inefficient waste of resources. As the macroeconomic theory behind these propositions is simple and widely accepted, the interesting question about the current global austerity is why it has happened. Simon Wren-Lewis is currently Professor of Economic Policy at the Blavatnik School of Government at Oxford University, having previously been a professor in the Economic Department at Oxford. He is also an Emeritus Fellow of Merton College. He began his career as an economist in H.M.Treasury, and then moved to the National Institute of Economic and Social Research, where he ended up as Head of Macroeconomic Research. In 1990 he became a professor at Strathclyde University, and from 1995 to 2006 he was a professor at Exeter University. He has published papers on macroeconomics in a wide range of academic journals including the Economic Journal, European Economic Review, and American Economic Review. Since becoming an academic he has advised H.M.Treasury, the Bank of England and the Office for Budget Responsibility. In September 2015 he was appointed to the British Labour Party’s Economic Advisory Committee. He writes on economic policy issues in various publications and at his blog: mainlymacro.blogspot.com. Academic work has often had a strong policy focus. In 1989 he published, with colleagues at the National Institute, a study suggesting that an entry rate of 1.95 DM/£ into the ERM was too high, which at the time was a minority view. In 2002 he wrote one of the background papers for the Treasury's 2003 assessment of its five economic tests for joining EMU. He was also the principal external advisor to the Bank of England on the development of its core macroeconomic models. A long time advocate of Fiscal Councils, his 2007 proposal was influential in the formation of the UK‘s Office of Budget Responsibility. Since starting his blog at the end of 2011, he has written extensively about macroeconomic policy in the UK and the Eurozone.

Ask this episode

“What did the council decide on item 42?” — answered with the speaker and the moment.

Transcript

Related