By Jane L. Johnson, Mises Wire | March 26, 2025
The word “austerity” is defined as sternness or severity of manner or attitude; extreme plainness and simplicity of style or appearance; conditions characterized by severity, sternness, or asceticism; or a way of life that limits luxuries. Austerity is also defined as a set of policies that reduce government spending and increase taxes. These policies can include “austerity measures,” often used during economic crises, including cutting government salaries, social programs, foreign aid, and safety net expenditures.
The US is Awash in Debt of All Types—Public and Private, Collateralized and Unsecured, Short-Term and Long-Term
Federal debt outstanding is currently over $36 trillion, representing 123 percent of US gross domestic product (GDP). Federal spending on defense and debt service each ran just over $1 trillion in 2024. Historian Niall Ferguson of Stanford University’s Hoover Institution contends that equal levels of spending on defense and debt service has been the ruin of great powers, citing Britain from 1920-1936 when debt service exceeded military spending and led to appeasement.
Municipal debt (of states, counties, and cities) in the US was $4.2 trillion in 2024, a 2.9 percent increase from the previous year.
The Federal Reserve Bank of New York reports these household debt levels at the end of 2024:
- Mortgage balances $12.61 trillion
- Home equity line of credit (HELOC) balances $396 billion
- Credit card balances $1.21 trillion, 4 percent above the level a year earlier
- Auto loan balances $1.66 trillion
- Student loan balances $1.62 trillion
A Multi-Generation Story of American Consumerism
Few Americans of the Greatest Generation (those born from 1901-27 and earlier) are alive today. Few remain of the Silent Generation (those born from 1928 until the large post-war Baby Boom generation began in 1945). These are the older generations who demonstrate frugality by such quirky habits as actually saving string and turning out lights when leaving the room, reflexive actions that amuse younger generations who have known only plentiful material amenities and have become the ultimate consumers that economic growth today depends on for roughly 70 percent of US gross domestic product.
Austerity is not a natural way of life for today’s postwar younger generations of Americans such as Gen X, Millennials, Gen Z and Generation Alpha. These generations harbor expectations of large screen televisions in every room of the house, separate bedrooms for every child in a family, a car for every adult and typically also for every child of driving age, and cell phones for every member of the family instead of one landline telephone serving the communication needs of an entire household.
These Americans exhibit high time preference, enjoying consumption today at the expense of tomorrow’s youth, who will inevitably receive the burden of today’s accumulating IOUs. This may be an underlying explanation of today’s Millennial and Gen Z fertility rates as low as 1.66 births per woman—well below the replacement rate of 2.1—threatening the survival of intergenerational benefit programs such as Social Security.
Recent Use of the “A” Word
Some Americans speak negatively of “austerity” in a Manichean manner, stigmatizing it as the only alternative to Modern Monetary Theory (MMT), the notion that since the US is a sovereign country with its own sovereign currency, the country can issue increasingly greater amounts of sovereign debt to pay for whatever the populace may desire until it hits the limits of real resource constraints. However, very few reputable professional economists endorse MMT as a viable monetary or fiscal policy.
MMT enthusiasts claim that because the debt is issued in the nation’s sovereign currency, printing more money (that is, monetizing national debt to increase the money supply) offers an easy way to repay the debt if it ever needs to. The money is not “owed” to some external entity. In fact, however, MMT implicitly seems to aver that a debtor country need never intend to repay debt, but can always ignore that eventuality by simply generating more of their own sovereign currency as they issue more debt.
MMT’s popularity has encouraged proposals for spending on matters of political and economic importance such as a universal basic income (UBI), reparations for marginalized groups with grievances, free or subsidized housing for all, free college, and Medicare for All. And we are told not to worry if no one wants to raise taxes to pay for these beneficent handouts, as has typically been the case among American taxpayers. According to MMT advocates, these benefits for the populace are all possible because debt issuance and repayment are all just an accounting exercise that can easily be handled.
Real-World Debt and Austerity: The Case of Greece
Notorious cases outside the US show that such government fiscal profligacy actually is a serious matter. Government debt runs at 88.1 percent of GDP among eurozone (countries adopting the euro currency) and 81.5 percent of GDP in the European Union (EU) itself. But Greece, Italy, France, Belgium, Spain, and Portugal all run at higher levels of government debt than those averages, with Greece leading at 163 percent of GDP. Greece illustrates the potential outcome of reckless deficit spending and enforced austerity measures.
In 1981, Greece joined the European Economic Community (EEC), which later evolved into the European Union (EU) in 1992. Observers were concerned that the country would have difficulty meeting the EU’s government debt standards specified in the 1992 Maastricht Treaty: budget deficits must not exceed 3 percent of GDP, and sovereign debt must not exceed 60 percent of GDP. At the time, Greece’s government deficit and debt were well above those EU limits.
Greece was initially unable to adopt the Euro currency, failing to meet the fiscal criteria: inflation below 1.5 percent, budget deficit below 3 percent of GDP, and debt no higher than 60 percent of GDP. Greece belatedly adopted the euro in 2001, although its fiscal condition had not improved significantly. It was later revealed that the country misrepresented its finances to join the eurozone when US investment bank Goldman Sachs helped it conceal part of its debts through complex credit-swap transactions.
From 2007-2009, Greece suffered from the global financial crisis, being unable to service its increasing national debt. In 2009, prime minister Papandreou revealed that the country’s budget deficit would exceed 12 percent of GDP, a figure later revised upward to over 15 percent. Credit-rating agencies downgraded Greek sovereign debt to junk status, raising borrowing costs.
To avoid default, the International Monetary Fund (IMF) and EU provided Greece with loans of 110 billion euros, and Papandreou committed to austerity measures consisting of tax increases, spending cuts, and pension reductions. The European Central Bank (ECB)—emulating the US experience with quantitative easing—began buying government bonds of struggling members like Greece.
Conditions deteriorated further and, finally in 2013, the Greek parliament approved austerity measures that included layoffs of 25,000 public employees, budget cuts, wage cuts, and tax reforms. These measures were very unpopular and labor unions called a general strike in protest. Conditions have stagnated since then. This story of Greece sounds suspiciously similar to events beginning to occur in the US, where recent Department of Government Efficiency (DOGE) cuts are being implemented.
Where Might the US be Headed From Here?
DOGE is scheduled to run from January 20, 2025 through July 4, 2026, a mere 17 months. Whether its work will be deemed a sustainable long-term success or failure is unclear, since long-term criteria themselves remain undefined. Lawsuits have been filed by aggrieved individuals and groups, but courts have barely begun to take on the legal challenges posed.
Recent polls show somewhat declining support for DOGE’s efforts, along with organized opposition from some in Congress, the judiciary, labor unions, and some portion of the general public. Americans’ responses to further DOGE action will indicate their mood as they contemplate possible moves toward austerity policies—tax increases or possible end of the 2017 tax cuts, reductions in federal spending, and employment that affect ordinary Americans’ daily lives, social programs and safety net provisions.
The US appears some distance yet from serious public support for lasting deficit reduction and a plan to put the country on a trajectory to reduce the historically large outstanding debt. Americans remain the world’s grandest consumers, demonstrating a time preference for more current consumption and lower saving rates than would be required to put the country on a better fiscal trajectory.
Perhaps during his remaining 17-month assignment Elon Musk will yet suggest measures to make permanent his current cost-cutting efforts. Anyone who could alter Americans’ time preference for consumption, however, should be considered a candidate for the Nobel Memorial Prize in Economic Sciences—or perhaps the Nobel Peace Prize.
Jane Johnson is a retired college economics instructor who currently teaches economics at the Osher Lifelong Learning Institute in southern California. She is a graduate of Vassar College, and has graduate degrees from UC-Berkeley, and the University of Washington.
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