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What will be the affects of austerity?

October 26, 2010
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While other European governments have announced plans to return to austerity through cutting government spending, the British announcement last week has received a lot of attention.  The New York Times ran an article on Saturday comparing British cuts versus those in the US.  However, the question remains, will austerity work?  I had previously commented that when austerity had worked, such as in Sweden in the 1990s, other countries’ economies were growing, allowing Sweden to still benefit from economic success while reducing its government deficit.  Professor Mark Blyth has created a video explaining this in more detail (his interview with NPR is available here).

To highlight the problems with major austerity packages during a global recession, The New York Times printed an article about the plight of small businesses in Greece.  Businesses with ten or less employees are the lifeblood of the Greek economy, and the number of small firms has been decreasing since the beginning of 2010.  Part of the problem is that the Greek government recently raised the VAT (basically a sales tax) early this year in an effort to lower the budget deficit.  In addition, if the government is serious about implementing austerity reforms, the government should have less money that it can use to support small businesses unless this money comes from another program.  As a result, austerity appears to be both hurting the small business sector and limiting the Greek government’s ability to help these same businesses.

The Greek government reforms may still help revive the economy, since it is attempting to liberalize many markets such as transportation and retail pharmacies.   These reforms could in turn prod the creation of more small businesses, but of course there are going to be losers as well as winners with any reforms.  However, will the reforms create more jobs than austerity destroys?

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