Does the economic analysis associated with the modern Austrian school favor a policy of restraining the government’s fiscal deficit even in a subpar economy, as suggested by those who (pejoratively) label such a policy “austerian”? Because resources are not superabundant even in a subpar economy, the answer is yes, unless (implausibly) the return on the last (lowest-payoff) dollar of government expenditure exceeds the return on private investment.
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By a debt trap or fiscal black hole, also known as a situation of “unpleasant arithmetic” (see White 2014, pp. 409–12), I mean a situation of such high indebtedness that the interest rate on sovereign bonds exceeds the growth rate of GDP, so that (even supposing that the current budget is otherwise balanced) the sovereign debt is growing faster than GDP simply from compounding, which further raises the debt-to-GDP ratio, in turn raising default risk and bond yields ever further. Eventually, if the government does not begin to run primary budget surpluses, conduct sufficient asset sales, or receive sufficient external gifts, then it must explicitly default on its debt or, if the debt is denominated in its own currency the way US debt is, implicitly default in real terms -- diluting the real value of what it owes -- by printing money faster than was anticipated by the purchasers of outstanding bonds.
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SDAE Presidential address, 24 November 2013. I thank Patrick Newman for research assistance.
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White, L.H. “Austerian” economics: Does the Vienna school favor fiscal deficit reduction even in a subpar economy?. Rev Austrian Econ 27, 351–358 (2014). https://doi.org/10.1007/s11138-014-0278-4
- Fiscal deficit
- Free lunch
- Ricardian equivalence
- JEL codes