[skylan_q]

What the is the precedent for austerity?

To have enough money left behind to pay the bills.

What countries have used it successfully to get out of recession and improve unemployment?

This worked in the (now seemingly ancient) past. Governments were a much smaller portion of the economy and taxes were much lower to begin with. These days, up to 50% of people can be employed by the government. When governments get that large, there is no possibility nor space for a recovery:

Stimulus: add more debt to an unpayable debt? increase taxes and chase out people who pay the largest sum of taxes?

Austerity: cut gov't pay and jobs? that leads to less tax revenue and higher unemployment... nevermind the fact that the party won't ever be elected again.

The only way to win at this is to not have an economy that depends so heavily on indebted government nor one that removes risks for the banking system. If a country is already at that point there is no moving forward. Declare bankruptcy, destroy your credit ratings and start over.

[robryan]

How does declaring bankruptcy help creating more jobs? (Honest Question) Would seem to me that it would been even harder to get credit flowing once all your previous creditors have been wiped out.

From an admittedly fairly uninformed position it appears to me that cutting spending is only going to further erode businesses positions and tax revenue, leading to an even worse position.

[skylan_q]

In the short-term it doesn't help the employment situation. Like in (software) engineering, there is no free lunch.

Here's another example in Canada of austerity working: http://articles.businessinsider.com/2010-06-07/markets/29978...

They have 5 bullet points, and I think only 4 really applies. But even then, Canadians weren't getting heavily leveraged, especially since the BoC had a single mandate of keeping inflation in check which means high interest rates (and no mandate to respond to labor market conditions, which usually results in more leveraging and higher inflation)

This austerity something most hated Chretien for, but people didn't make too much of a fuss. 10% expenditure reduction? grumble grumble... Today's reaction: sacrificing a 2.4% increase in the federal budget for a 1.8% increase? BRUTAL AUSTERITY DON'T YOU REMEMBER NAZIS???

Ontarians all hate Mike Harris. After he was done the deficit was gone and debts reduced, schools and medical care resumed as before and everyone had jobs. We brought in automotive emissions tests, many new provincial parks, many new lands for natives and the environment was much cleaner than when he showed up. He was hated because he made everyone do what they were supposed to do. As far as I've seen, people only like the politician that promises the moon and loads on debt that "someone else" will pay for. :(

From an admittedly fairly uninformed position it appears to me that cutting spending is only going to further erode businesses positions and tax revenue, leading to an even worse position.

Many people use their gut to voice their opinions on these things, and that's not to say that they're wrong. People often extend the concept of household finances to the economy.

Simple analogy might help explain where that notion might come from: Your parents are heavily indebted seniors that do some chores for you in order to live with you. You are working to support yourself and them, financially. Your company is having money issues and decides you are working 30h weeks instead of 40h weeks. (25% pay cut) Would you then take money from your heavily indebted parents to then buy product (economic stimulus) from the company so that their earnings increase just enough to be able to afford to hire you back to full capacity? Would you have your heavily indebted parents borrow more money to buy enough product? Not likely. You'd probably rather just look for other work or start a company and take the financial hit/cost of having to look for new work or starting a company. Basically starting over. You could also just tough it out and stick to eating cheap canned goods, cancel netflix, and slowing down repayment of your parent's debt and getting them the cheap diapers and only absolutely necessary meds (austerity option)

Applying moral of the story: If Spain doesn't go through bankruptcy, (or severe, short-term austerity) it's keeping the 30h work week while the parents are still saddled with huge debts while also trying to maintain the lifestyle that it could maintain working 40h weeks. So the less Spain spends today and tomorrow, the less it has to tax today and tomorrow.

The above is all for illustrative purposes.

Would seem to me that it would been even harder to get credit flowing once all your previous creditors have been wiped out.

For sure, no one will be keen on buying 30-year government bonds. This is a huge problem for the credit markets. We've seen some mixed results in Iceland, though. But a larger economy like Spains? Might not fare as well.

[forgottenpaswrd]

"How does declaring bankruptcy help creating more jobs?"

Iceland is the answer. Jobs are recovering superfast after they declared bankruptcy.

You start over again. You face your problems, instead of delaying it. There is a sense of relief when the storm is over and you survived. When all lies are clear by the (horrible)truth, when fraudsters are on everybody's eyes.

Credit is harder to get, and this IS GOOD, when you came from an over indebted economy. Interest rates grow, and savers are fairy compensated from their work.

"From an admittedly fairly uninformed position it appears to me that cutting spending is only going to further erode businesses positions and tax revenue, leading to an even worse position."

Cutting spending is going to erode government position, not business position. On the contrary, when governments prints money the Gov gets free money, and big business get free money, but small business and tax payers are taxed to death.

Inflation over the official levels is the biggest tax on society. If declared inflaction is 2% but real one is 10%, they are taxing 8% of the society's wealth. And you will have to pay taxes to the gobertment in the 8% of "benefit" you have if you manage to not lose your wealth.

Money is better spent by small business and people that by big governments and big corporations. We are lending those entities so they can get money at 0.2% interest rate while I have to pay 17%.

[WalterBright]

What bankruptcy does is reallocate resources from non-productive operations to productive ones. At least that's how it used to work.

[gijjk]

"precedent" means "past experience", not "abstract theory".

macroeconomics != microeconomics.

<100% tax on in-country activity can't really drive anyone away, because leaving the country would mean leaving money on the table.

http://www.zpub.com/notes/idle.html