Here's why austerity probably wasn't a bad thing still. Agree or disagree. But at the end of this remember that if you live in the U.S. you owe the rest of the world $52,000 in government debt per capita. It's one of the highest per capita debts in the world. If the economy is growing as it was for most of their data points (1946-2009 were in all pretty good years for the economy of the first world nations studied), then growth and debt isn't that big of a deal. You keep making more money and you keep spending a larger percentage of that and you are seeing the same returns on your investment so you keep making more nominal money. There is no problem as long as there is continued growth. But when you hit a revenue shortage you face debts that you can suddenly not pay. You have promised liabilities in the form of government programs to people and you no longer have the cash to make it happen, no matter how good of an investment in your government's future you may think it to be, and no matter how much returns those investments may bring in later. You don't have the cash, you're bankrupt. Austerity measures are spending cuts so that you can make the bills you have to make instead of bills that are nice investments. If you are spending based on expected raises at work and then you lose your job, you probably don't have money to go back to school and improve your chances of making that much money again. This is the essence of austerity. If, in this analogy, you took out student loans to make up the difference and invest in yourself again, everything is better if you can get another job and resume growth. If you can't, you're even more screwed because you have more debt and no more revenue. Most importantly, the study (even with the adjusted results) still shows that growth tapers off after the 60-90 percent Debt/GDP ratio from 2.8 between 30-90 to 2.2 above that. If anything, we could interpret this to mean that there is a small but significant difference in return on investment. So we could say investment is a good idea up to a point, and after that, you are borrowing money at a higher risk to receive less reward. I also think that it is worth mentioning that all of these countries are managed well financially. Can you imagine how different the results would have been if they had included all countries of the world?
I don't believe the argument is whether or not austerity is or isn't a good thing. The real debate is not 'if', but 'when'. Keynesian economics suggests that you reduce your deficit during times of growth, not during a contraction. Home finance analogies fall short in the fact that there is no analogy for a Central Bank. Of course financing debt should become a drag on growth, but the question is 'how much?', and knowing that, you can plan the best move to get out of a contraction. Too much stimulus and you create unnecessary future obligations, too much austerity, and you wallow in a sluggish economy for unnecessarily long. That's why the exact numbers here matter, and why a difference of -0.1 and +2.2 for a 90% GDP of debt is quite important.
You can't call any of these 'exact numbers' in any sense though. As nice as it would be to have a road map to economic success, these are samples without controls like almost all economic science. Everything you see is an analysis of an extremely complex system with an excel sheet. Exact numbers do matter, but we don't have them. Maybe if reducing the deficit was practiced at any time in the United States then we could talk about 'if' and 'when' but I say better late than never. We simply do not have enough data to move beyond common sense yet.
I agree that all these numbers are very debatable. Well, in recent history, it was practiced by the Clinton administration. But IMHO common sense says: don't treat a country's budget like that of a household. The EU is giving us plenty of present day examples of why austerity in a contraction leads to more contraction. By far, the biggest contributor to the recent deficit was loss of revenue due to contraction, and actually, the US deficit is shrinking as we speak as the economy continues to add jobs. Clinton didn't get a surplus due to austerity measures, it was due to an economic boom. Common sense says we should have continued to pay down the debt at that time when we could have without causing a contraction.Maybe if reducing the deficit was practiced at any time in the United States then we could talk about 'if' and 'when' but I say better late than never.
We're close to on the same page. I agree that our currently high deficit is due to revenue vs expenditures which have grown wildly out of balance in the recession. And I agree that Clinton's budget surplus was due to economic growth, but Clinton also increased taxes and reduced spending in social welfare programs - austerity. And even then, it was only 3 years before Bush screwed it up.