tokend.org/final-death-race-1-final-death.php The housing costs are in-line to low for a family of 4, particularly if they need 3 beds children of opposite gender. I applaud these people for taking vacations. I wish we did. So, that is money well spent in my opinion. My advice: Ditch the cars Bag private Keep the mortgage and charitable because with that your taxes should be lower this year than last.
Might be hard if they love NYC, but the costs there are huge. They could own a nice house with a yard outright in exchange for their equity in the house pretty soon, if they would relocate. Missed this. I work in midtown Manhattan. Even if they are there, that is not the average price of eggs at Whole Foods. Again, just because there are expensive things being sold, does not mean that one must buy them.
That is the lesson for this couple. I think about this post quite often and what it really says about our society. What I take away from this, unless you are in the special 0. There is a lot of division and resentment in this country, and the way many people can have polarized reactions to this post is a prime example of it. Currently zip code defines our style, announces our values, establishes our status, preserves our wealth, and allows us to pass it along to our children.
If one were to calculate their savings on a yearly basis more accurately, they need to include Housing Principal Payments as well:. I think thats pretty decent given that they live in HCOL area. That is without changing a single thing. Fair point. They are definitely building their net worth by being down principal. With their level of burn, they need to be more diligent in savings and cutting on extraneous expenses. Actually, even the student loan repayment builds their net worth and is also savings. You need to keep in mind the entire balance sheet, not just cash in a deposit account why personal finance people think this is a proxy for savings blows my mind.
Retirement accounts are savings. Employer matches are savings. Reduction in debt is savings. The principal portion of the payment is just paying themselves back from when they borrowed against future earnings when they took out the mortgage. Further, those charitable contributions and miscellaneous expenses are about as discretionary as you can get. The thing to focus on his cash flow.
And their cash flow is very light for their expenses. I scoff when my college sends me donation requests. No way. By the size of their student loans it looks like they already donated plenty. I donate to charity every year, volunteer locally when I can, and mentor younger colleagues and friends. I certainly encourage anyone who have the means to help people and causes everywhere that could use our help. But be careful on not becoming a charitable case yourself to your community, family, or government when you no longer can earn money reasonably. Pay yourself first. Thanks for sharing your thoughts.
The new tax reform is going to hurt coastal city residents more at the margin indeed with the SALT cap deduction and mortgage interest cap. I like your example of the nurse working overtime. The tax calculation is wrong — every heard of progressive tax system? Also with deductions such as standard deduction, house interest deduction etc.
Never heard of a progressive tax system. If you did, you would understand better instead of pontificate the tax liability. Do you want guillotines in Zuccotti Park?
Because this is how you get guillotines in Zuccotti Park. Stop buying your kids brand new clothes, buy your groceries at Walmart and use coupons as well as shopping the sales. Get rid of your luxury vehicles boats, jet skis, quad runners, antique cars etc.
Take mini- vacations close to home instead of going abroad. We lost our jobs on the same day and now we live on a fraction of that. I had to sit down and take a long hard look at what I was spending and why. I understand a person can get into a painful situation, but low on money is not the real problem only a symptom. Our children occasionally get new clothes from relatives, but mostly we use the local buy nothing community to get used clothes and toys and then return them to that community to pass along to other kids. The only new clothing we bought was a pair of running trousers for my husband, who runs to and from work.
Our lifestyle is very frugal, other than private school and nanny which we view as an investment and necessity, respectively. They also go to activities gym, swimming, piano, soccer when they are old enough. You cannot buy groceries at Walmart here.
And, in fact, if you want to do Costco you need a car, which is the first expense they should ditch. These people likely work 7 days a week and their value to their employer is measured in billable hours. They need to maximize the amount of hours they can bill and still function as parents. So they have to pay to save time…on commute, on groceries, childcare and vacations. I get why it shocks you but I guarantee if you walked 10 blocks in their shoes it would make a lot more sense. A lot of which is redistributed to less wealthy parts of the country. That said, they should ditch the cars and forget private.
They cannot afford private for 2 kids on that salary. Conflating the two is a huge mistake, and something that policy makers need to stop doing if they are going to actually address these issues. But mixing the concepts of income and wealth is problematic because it prevents us from addressing many of the important nuances between the two. For one, by and large we are taxed on income but not on wealth. Maybe, but from my experience, probably not. The list goes on.
But then what would they do with it? Not one, but TWO luxury cars? In NY? Save some money, save some time, get a Camry or Avalon and an Explorer. And gas would be lower, as both of those cars are more fuel efficient well, maybe not an Avalon, but an I4 camry would definitely be better than an I6 or V8 5 series. My husband and I make k a year both physicians. Live on k per year. Maxing out our ks and the rest goes to med school debt which is approx k combined.
We are expecting our first child soon. Home with about k mortgage. We are content with what we have and where we are in life. First, I think the numbers are illustrative, but realistic in the NY area. So lifestyle needs to adjust to that. It may not happen every year — the year after buying a house, or having a kid. But again, this saving is a path to create LT wealth and get off the treadmill.
Those commenting are right, there isn't a decision between gas and milk for this family. Thy aren't roughing it compared to most. Though if we are taking this argument, look globally, and be thankful you have water, electricity and education in a safe country. This goes away when they start school and can be redirected to accounts, and when those are full, they can be redirected to retirement savings. Staying at home with the children may save these costs especially for those earning less than these earners , but there is no guarantee that there will be a job at the end, especially at equivalent earnings, plus the stay-at-home parent loses out on SS and k contributions and match.
We felt squeezed, too, when the children were young, but our cash flow improved significantly when they reached school age because they went to public school. I disagree. Childcare does not go away when kids start school unless your job starts at and ends at PM. In fact it becomes profoundly more complicated and stressful. My kids are in public school 2miles from our house. Oh and of course summer, winter and spring break. And if you have a terrific nanny who has been working 40hrs a week for you and you suddenly chop her hours to she starts looking for another job to fill in the gap. In my opinion they are living a great life.
If they were really struggling they would be living in NJ or Staten Island where housing costs less than Brooklyn. Adding all that together, and they have a fairly reasonable savings rate for their income. Good observation. I hope nothing is misleading because the chart shows exactly how much they are saving in the retirement accounts each year. Within 30 years, they will have a fully paid off multi million dollar property.
If they had rented, they would have nothing to live in for free or pass on to their children. This is why I strongly believe everybody should get neutral information by at least owning their primary residence. Save like mad and get neutral! I cannot feel any sympathy for these people. I live in Maine. Have a beautiful house on 2 acres. My daughter just graduated high school and will be attending Northeastern University in the fall.
I could of chosen a high pressure, try to be big wheel career. I chose not to. Life is not about things. Let me correct my initial statement I do feel sorry for these people. While obviously school smart, they are stupid on another level. Money will not buy you happiness.
Your response to the push-back regarding vacations ignores how unreasonably expensive those vacations are. But if I had a family of four, and took several vacations, I can easily see how it adds up. How big is your family? There is almost always a cheap place to eat near work. Koreatown, Chinatown, your local pizzeria- they are all cheap! Charity expenses should be brought down to a max of 5k annually. Gas — 5k pa? Kidding me? Should be much less or just get a Tesla, and you clearly do not need 2 cars.
On the other hand, 18k for three vacations is far from enough — you should easily double this. I cannot argue against the neutrality of their real estate postion as much as it cannot be argued that 2xk pieces of real estate — one personal and one investment, represent an effectively equivalent non-neutral position. Real estate is a builder of wealth, family wealth, whether it be bequethed or just simply an asset cornerstone. Their wealth accumulation, leveraged and tax subsidized, continues regardless the number of parcels.
It is all like saying they are k neutral because ,well, they just have to have and fund one. There are a number of holes here.
Not accusing anyone of making stuff up but some of this does not add up and suggests this was some sort of chimera of a number of different lives rolled into one. First, plans provide discipline in saving for college and give a nice tax break, which they apparently need. This is a no-brainer that any educated person should do. Children ages 3 and 5 do not need nor necessarily appreciate elaborate vacations.
In fact, they may find flying, going through security, seemingly endless walking through airports stressful. Taking kids to faraway places and then having to watch them like hawks is not so relaxing for the parents either. There are plenty of fun day trips to LI or NJ that could include an overnight stay someplace just to get out of the house. The AMNH in particular has a very robust commitment to science education. I find the part about extracurricular enrichment expenses relative to a 3 and 5 year-old absurd. In the first place, subjecting a 3 year-old to so many structured activities is counter-productive.
Young children need time to just play, not spend the whole day developing specific skills. Second, Mandarin study does not need to be expensive. My daughter is half Chinese so I know. Spending large sums on tennis lessons for a 3 and even a 5 year-old sounds bogus at best and a waste of money at worse. It is far smarter to send them to an intensive summer program when they are ready for first exposure. More cost effective and a better chance to retain something useful. If one of the kids is a prodigy that is different, but that was not the description provided above.
Other observations from readers about cars have merit. If the parents have flexible working schedules, having a car is a great time-saver for running errands, but it is still a luxury. With alternatives like car services, Uber, and when convenient public transportation—and assuming the parents work long hours—there is no way car ownership is as economical as using the above services and renting a car on the weekend. With their schedules it is unlikely they have time to fool with parking two cars on the street. Regarding the cost of education, NYC has a number of very strong elementary schools.
There are also strong public middle and high schools that require testing to get into.
I would argue that at 3 and 5 years old sending kids to expensive private schools is a waste of money and more likely motivated by racial, religious, or social biases than anything else caveat: unless one or both parents went to a given private school themselves, loved it, and strongly believes it is worth the expense for their kids. This expense is why so many New Yorkers with kids end up moving to NJ. Even with high property taxes, if the schools are good the savings vs two kids in NYC private schools is huge, even with commuting expense, plus you usually get more home for your money.
In the parents defense, the calculation of what they spend a month currently and extrapolating that to their old age is a straw man. Children are the most expensive luxury they have by far. Eventually the kids grow up and take on their own responsibilities. With kids gone the parents can downsize their apartment and potentially make a lot off the sale if they can move or retire to a less expensive locale.
They will not need to carry 2 cars. Vacations, food, clothing and all the rest will decline in cost. And if they have continued to fully fund their Ks and invested them conservatively, they should not be eating cat food at retirement time. I purposely worked less hours when my daughter was age to spend more time with her education outside of the schoolhouse. My wife did the same. What emerged was a kid who did well academically, is going to a famous college with a nice merit scholarship, and we maintain a close relationship. As I am now looking back a bit from the descending curve of life I realize even more than I did in the process that this was fulfilling time incredibly well spent.
Wonderful feedback about spending time with your daughter especially. That must be so gratifying to see her do so well. Wife and I were lucky enough to have flexibility and we were not driven to have an extravagant life style. We were far more interested in helping daughter develop her potential. Not because we were such awesome people but because we truly found it fun! And still do. I think any parent that finds their children interesting and can summon up all the patience they can muster from time to time will do a great job in parenting. And then the daycare.
And then what really gets me is the Mercedes and Land Rover. I mean come in, in NY. Trains go everywhere. Okay, if you need a car — buy used.
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That will take away the car payment and all you need is insurance period. Also, you children are babies. There is no reason to take 3 vacations a year. They will not remember anyway. Wait till they get older and take trips. Where are you buying your food. No 3 or 5 year old needs piano and violin lessons. Also, you should only be given to charity if you can afford too. We enjoy and yes it would be nice to have more money, but I am grateful for the life we have. I think once you start making that amount of money you enter into another lifestyle and things start to just get away from you.
What would they do if god forbid one of them was disabled and they now are down to one income? I hope they will still feel happy within themselves as money is only good at bringing happiness and joy if you already feel that inside. Thanks for posting this article. We live in the San Francisco Bay Area. Tuition is a lot higher than even 15 years ago. As you might expect student loan interest deductions are phased out. Child care costs are astronomical in the Bay Area. Educating the kids in a better school district means either private school tuition or a better neighborhood with astronomical mortgage and property tax.
Saving up for every increasing college tuition for the kids will pretty much make it difficult to save for retirement. There a great deal exponentially increasing headwinds as you push to higher incomes much higher taxes, required child care for two working parents, professional school student loans. This is where the penalty for being married really hurts e.
Household income goes down but taxes to down quite a bit. Nanny costs go away. Moving out of the Bay Area dramatically lowers housing costs and tuition for the kids. Your lifestyle is your burden. Have you considered scaling down some expenses? How many vechiles, brand and make do you own? Consider a change?
Is the newest gadget a must for you, consider a change? And so on. You make plenty then cry about the taxes. Be grateful for what you have. People in lower brackets have many more problems than you do. Scale back grow up. Yeah, problems like which bills to put off, how to afford getting dental care for their family, what to do if a car needs a repair.
I hate people like you. We linked to this post on our blog — second comment after a second read — so interesting. We reviewed The Millionaire Next Door dukeofdollars. It never ceases to amaze me how no matter how much money I make, I find a way to spend it.
I used to be happy with a three star resort, but the few lucky occasions I had to go the 5 star route ruined me for life. Same thing with cars. Might be time for a reset. Good comments and some widely divergent opinions. Like a few have said, I grew up lower middle class. Dad owned a gas station in a small town in middle America.
Mom was a housewife until after I was in HS then went to work for a friend working in a jewelry store. Dad found time to serve on the planning and zoning commission, serve on the city council for 15 yrs, bowl, sponsor and participate on baseball and softball teams in his younger years, serve on the church steering committee, was JayCee and Elk of the year several times and farm after he sold his station at age My brother and I were fortunate to pick up full scholarships.
My wife chose to stay home and raise our two kids, something I value more and more every day. We chose to bank my raises and invest them. Until I made 06, we lived pretty much on my 04 level salary and invested the rest. It comes down to priorities. We did a few expensive vacations like Disneyworld 2x , but generally spent time visiting relatives and not spending a ton on expensive vacations every year. I turned down assignments in places like Washington, DC which would have eaten up my whole salary, and paid attention to the cost of living for where we were going to be based.
I was asked to apply for a high level government job out in Hawaii when I retired. Not vacationing in the Hamptons, but enjoying life, and we were in Grand Cayman 3x visiting our daughter at school there. Like many others, we got sandbagged a few times along the way with the tech crash, some corporate bankruptcies that hurt the portfolio and the crash of right after I retired from the military. As Sam says, you have to examine all your options. Likewise, if you look for ways to economize and make sound choices, you may eventually get away from the daily grind.
Wow this article hits home. My wife and I live in SF and currently make a combined k a year as W2 earners in our mid-thirties. I had to re-check my taxes 3 times before I believed the bill was correct. We rent a 2 bed 2 bath apartment and walk to work, walk our daughters to school, and rent is cheap barely increased since I moved in 12 years ago.
Our big decision is when do we take on a mountain of debt and buy a home. We are very fortunate to live where we live, have jobs we both enjoy, and have two wonderful daughters to raise. I sympathize you and everyone else in the same w-2 income bracket. The tax rate is unfair and penalizing. Sure, many other countries have slightly higher income tax but they also provide much better benefit, such as day care and public education. The country just milks hard working people to death. Please expound on the Mr. Money Mustache reference. This article is a great example of that.
Everybody can be more frugal and save, not everybody can hustle to make more money. This is his brilliance, and the key to making a lot of money online and in other business ventures. You need reach the most amount of people in any business to get rich. The taxes alone really make it hard to leave another city in the US when your cost of living is much cheaper, and there are still many people to side hustle with. After reading this post, this is quite the opposite of the Mr.
Money Mustache philosphy, but after reading from both perspectives, I can see how it can be easy to spend that amount of money in such an expensive city. What is really amazing to me, is how they literally pay more taxes than the median income!! Many times we hear the rich should be taxed at higher rates, when I see those numbers it really makes me feel more on the fence. I see both sides, but if I was in that position, I would be doing anything I could to reduce that tax bill for sure.
We should never assume its easy for people with high income to save as much as those who make less. The article points out reasons for their thinking whether or not you agree , things like wanting the best for our kids is something we wall can relate too. They could definitely reduce vacations, but if your working like mad, would you want a nice vacation from the work you put in? When our son was born I Dad started working from home and I gotta say, the relationship I have with my son is second to none.
Same goes with spending. We go to the park together almost every day and have fun. Thank you for really good article. I have created comparison chart to the one you have provided in the beginning of this page. We were a family of 3 in my data is taken from there. Now we have a lovely 2mo baby girl. We are average middle age and middle class white collars working in one of Swedish media companies.
We are about to move to our own semi-detached house soon and we both use public transport to get to work on daily basis since its fantastic here. We do not have such extremely high salaries over here but expenses are not that huge either. We save a lot on health and education since its free to everyone. Here you will find our income and expenses converted into USD.
Chris says:. We stayed at motels 2 beds and a cot or went camping. They'll also get lots of offers of work from network marketing scams of one sort or another which would make a programme in themselves and several offers of work on a commission only basis, but sadly nothing from what I'd call real, core work, be it scrubbing floors or managing director of a cutting edge tech. Your generation created this mess, now accept it. My goals now are to market within the niches I enjoy, work towards developing several Ebook projects, and marketing myself to higher paying clients. I transferred from a community college so transferring to Journalism, Advertising, etc. Then it all goes to charity with healthy contributions along the way.
Could be interesting for some. I really enjoyed this article. Many years ago I was a flight attendant and a pilot told me the same thing. He said, my problems are your problems. Mine just cost more. It was a great comment and I was probably 23 at the time. It made me realize people normally do not gain financial freedom.
We live in a world where cars get nicer and houses get bigger. Here I was thinking he had all. Six figure income. What else was there…but according to him he was living pay check to pay check like the rest of us. Over the years it has helped me think about what I spend money on. While we have two good incomes and have done significantly better than most our counter parts, we have a lot of room to grow.
You seem to be indicating that they paid taxes on their entire income minus the k contributions, which is of course ridiculous. What about the exemptions for themselves and 2 kids? The charitable contributions? The student loan interest? The property taxes? Hi Whatabout. But not this family. All of these items including deductions, whether they take the standard or obviously here would itemize are subject to phase-outs. So their AGI really is pretty much gross less k contributions. And medical plan — not mentioned in the article, but surely they pay some amount for medical coverage.
You are right on. We are in the same income bracket and AMT in my opinion puts undue burden on the upper middle class. There is no way around it if your income is primarily w Professional degrees law school, business school, medical school, etc. There are no tuition controls for these degrees and are quite expensive.
Even academic degrees are pricey. In your example, you present mortgage principal and interest together. I am a Canadian citizen and have lived here my entire life and paid for my post secondary education- not sure where you got our education is practically free! Please enlighten me? Did I miss something? I was ecstatic to see this article and affirm that my financial being was not nuthouse worthy. Are you joking — I paid over k like the rest of my fellow post secondary compadres to get 4 years and an MBA.
I would like you to elaborate where you got your info that our education is practically free? I read your blog regularly great advice and always entertaining but this is my first reply to a post and I had a question for you. In other posts you said that you always maxed out your retirement account… How did you do it? Student loan payments? Pittsburgh has terrible public transportation so I had a car no car payments however add just basic food costs no eating out. Do you think it is worth sticking around with a low salary and hope for an IPO or get out?
And biology is pretty limited unless I go back for a PhD. See: Historical k Contribution Limits. I also stayed until pm every evening to eat the free cafeteria food at 85 Broad Street! Thank you, Sam, for the quick response!! And find a job that has a match. I am lucky, I live in a cheap city, my little sqft house would have cost me almost 1.
But I think it is time to leave bio and go back to IT! Plus, at this point, your ISO should have been fully vested. If there is an ipo, you will be able to cash out somehow I doubt you have a significant stake though since this is your first job. I appreciate your input… I have a little over K in stock options, which is about 0. But the longer it takes the less likely it seems. I drank the kool-aid and stayed too long! New grads in Silicon Valley make the same mistake as you all the time including me. I hope you were able to learn a lot at the start-up, that really should be the only reason new grads work at start-up, big exit is really just an extra lottery ticket.
That budget would be reduced substantially. If they don't win half the season's races, and they don't race for a team who pays them a decent salary, and they don't have hefty sponsors—they couldn't afford to rent a decent apartment in suburban Indiana. The most famous race in the world borrows IndyCar's somewhat complicated economics system and takes it to a new level.
Teams still make money from sponsors, paid drivers, and their share of the prize money, but the drivers have to navigate a somewhat laughable maze of contracts and clauses. Drivers come up with the money in several ways, such as personal wealth, sponsors, or personal loans from individual backers. At the time of handing over the cash to the team, a driver or his agent sit down with a team representative to draft a contract. This contract highlights how much the driver will receive in salary, if any, and what percentage they will keep from the prize money after the Leaders Circle money is deducted.
Once this contract is hashed out, the driver can officially turn some laps. Once the race is over, the driver is handed an enormous check with an enormous amount of money and is forced to go on stage to give an acceptance speech; leading everyone to believe that all of that money is theirs to keep. Per several drivers and other sources close to this matter, this is what actually happens:. NASCAR has grown to become a megapower in the American motorsports landscape, and until recently, it held the most expensive TV contracts, had the most on-air time of any non-ball sport, and commanded billions of dollars per year in licensing fees.
However, a changing economic landscape and demographic profile that increasingly prefers to follow sports online rather than TV, or doesn't care for stock car racing at all, haven't been kind to the series. As a result, the series has slowly but surely lost some of the marketable appeal that attracted top-notch sponsors. The sanctioning body has similar ways of making an income as Formula 1 and IndyCar. At the very top, there is a massive revenue stream from TV rights that are sold to networks, most recently to NBC.
Then, like with the other two series, there are race sanctioning fees which according to SEC filings made by International Speedway Corp. Lastly, there are the headlining and other secondary sponsors that pump much-needed cash into the stock car racing circus' bank accounts. NASCAR teams work on nearly identical business models as Formula 1 and IndyCar, but in terms of profit sharing with the sanctioning body, they more closely resemble F1. The share of the TV money, which as of the NBC contract was rated at 25 percent to the teams, will be dispersed through the purse money and other bonuses.
Because NASCAR is made up of more than one series, the money has to be allocated accordingly, but according to financial filings, Similar to other forms of motorsports, NASCAR teams are also open to taking drivers' money and juicy sponsorship contracts in exchange for drives, further securing more funding for the team. Some of the bigger teams with large engineering and data-analysis operations sell their services to smaller teams who can't or choose not to staff an army of engineers and data coaches.
Stock car drivers have lots of cash to look forward to —quite a bit more than in IndyCar, but usually less than most Formula 1 drivers. And although these outrageous incomes may be dwindling, NASCAR drivers are hands down some of the best compensated in all of motorsport. The money arrives into the pockets of the awkward-looking, boot-cut racing suits in different ways. Then there are drivers' sponsors and personal endorsements, which again, depending on the driver's popularity and can vary from nothing to another cool million or two. Lastly—and this is the area where everything is up for grabs and drivers can either make or break—is the prize money.
At the end of the day, everyone gets a piece of the pie. However, much like their open-wheel counterparts, NASCAR drivers also have to negotiate their share of the prize money because some of it must be shared with the team. The series' top drivers get to keep about half of the prize money, with the average being between 35 to 40 percent according to sources, and some drivers also have sliding percentage clauses built into their contracts.
NASCAR drivers also have to provide their own health and life insurance in order to protect themselves from costly hospital bills or possible death. According to Forbes , Dale Earnhardt Jr. But, it's interesting to analyze the way he earned his money. Despite the downward slide in TV ratings and ticket sales, these exorbitant salaries are still generated in Right before retiring, Earnhardt Jr. Formula 1, IndyCar, and NASCAR are all going through a period of uncertainty, where despite some good signs and some bad signs, changing technologies, fluctuating consumer behaviors, and rising costs of doing business are forcing them to constantly reevaluate and even change their outdated business models.
That is if they want to be around for another decade, of course. When it comes to the racing teams, this is the entity that perhaps has the most to lose. Teams have to hire staff, buy facilities, finance a payroll, and risk real cash with the hopes that good drivers come in and race for them, wealthy drivers come in and pay them, or that a combination of the two comes in and wins races and helps them attract sponsors.
However, teams are somewhat protected by revenue share models that although can't keep them fully afloat, helps keep some of the lights on. Lastly, it's unclear what the future holds for racing drivers. While the top dogs of the world will continue to make fortunes behind the wheel, others will keep risking their lives for little to no money. However, my biggest concern isn't the underperformers, but the talented young men and women who keep being turned away because they don't have the financial backing to get a seat. Because in the end, what's the point of having a grid full of cars plastered with hefty sponsors if the drivers aren't any damn good?
By Jerry Perez July 30, Mark Thompson—Getty Images. Formula 1. How does Formula 1 make its money? A television camera broadcasts the action at the Brazilian Grand Prix. He concluded, "In all, there is no evidence here that large fiscal contractions budget deficit reductions bring benefits to confidence and growth that offset the direct effects of the contractions.
They bring exactly what one would expect: small contractions bring recessions and big contractions bring depressions. Similarly, economist Paul Krugman analyzed the relationship between GDP and reduction in budget deficits for several European countries in April and concluded that austerity was slowing growth. He wrote: "this also implies that 1 euro of austerity yields only about 0. No wonder, then, that the whole austerity enterprise is spiraling into disaster.
The Greek government-debt crisis brought a package of austerity measures, put forth by the EU and the IMF mostly in the context of the three successive bailouts the country endured from to ; it was met with great anger by the Greek public, leading to riots and social unrest. Massive demonstrations were organized throughout Greece, intended to pressure members of parliament into voting against the package. Around , the IMF started issuing guidance suggesting that austerity could be harmful when applied without regard to an economy's underlying fundamentals. In it published a detailed analysis concluding that "if financial markets focus on the short-term behavior of the debt ratio, or if country authorities engage in repeated rounds of tightening in an effort to get the debt ratio to converge to the official target," austerity policies could slow or reverse economic growth and inhibit full employment.
In all, the Greek economy suffered the longest recession of any advanced capitalist economy to date, overtaking the US Great Depression. As such, the crisis hit hardly the populace as the series of sudden reforms and austerity measures led to impoverishment and loss of income and property, as well as a small-scale humanitarian crisis. In the legislative elections in June, Hollande's Socialist Party won a supermajority capable of amending the French Constitution and enabling the immediate enactment of the promised reforms.
Latvia's economy returned to growth in and , outpacing the 27 nations in the EU, while implementing significant austerity measures. Advocates of austerity argue that Latvia represents an empirical example of the benefits of austerity, while critics argue that austerity created unnecessary hardship with the output in still below the pre-crisis level. The economy has not returned to pre-crisis levels despite strong growth, especially in the export sector in — The IMF, EU, and other international donors provided substantial financial assistance to Latvia as part of an agreement to defend the currency's peg to the euro in exchange for the government's commitment to stringent austerity measures.
The government of Prime Minister Valdis Dombrovskis remained committed to fiscal prudence and reducing the fiscal deficit from 7. Unemployment was Latvia entered the euro zone in Eighteen months after harsh austerity measures were enacted including both spending cuts and tax increases ,  economic growth began to return, although unemployment remained above pre-crisis levels. Latvian exports have skyrocketed and both the trade deficit and budget deficit have decreased dramatically.
More than one-third of government positions were eliminated, and the rest received sharp pay cuts. Exports increased after goods prices were reduced due to private business lowering wages in tandem with the government. Paul Krugman wrote in January that Latvia had yet to regain its pre-crisis level of employment.
He also wrote, "So we're looking at a Depression-level slump, and 5 years later only a partial bounceback; unemployment is down but still very high, and the decline has a lot to do with emigration. It's not what you'd call a triumphant success story, any more than the partial US recovery from to —which was actually considerably more impressive—represented a huge victory over the Depression.
And it's in no sense a refutation of Keynesianism, either. Even in Keynesian models, a small open economy can, in the long run, restore full employment through deflation and internal devaluation; the point, however, is that it involves many years of suffering". Latvian Prime Minister Valdis Dombrovskis defended his policies in a television interview, stating that Krugman refused to admit his error in predicting that Latvia's austerity policy would fail.
Following the financial crisis of — a period of economic recession began in the UK. The austerity programme was initiated in by the Conservative and Liberal Democrat coalition government, despite widespread opposition from the academic community. The first was that the structural current budget deficit would be eliminated to "achieve cyclically-adjusted current balance by the end of the rolling, five-year forecast period". The second was that national debt as a percentage of GDP would be falling.
The government intended to achieve both of its goals through substantial reductions in public expenditure. This was to be achieved by a combination of public spending reductions and tax increases. Economists Alberto Alesina , Carlo A. The authors commented that the UK government austerity programme had resulted in growth that was higher than the European average and that the UK's economic performance had been much stronger than the International Monetary Fund had predicted.
The United States' response to the economic crash was largely influenced by Wall Street and IMF interests, who favored fiscal retrenchment in the face of the economic crash. Evidence exists to suggest that Pete Peterson and the Petersonites have heavily influenced US policy on economic recovery since the Nixon era,  and presented itself in , despite Austerity Measures being "wildly out of step with public opinion and reputable economic policy Austerity programs can be controversial. Complaints include such measures being "anti-developmental", "self-defeating", and tending "to have an adverse impact on the poorest segments of the population".
In many situations, austerity programs are implemented by countries that were previously under dictatorial regimes, leading to criticism that citizens are forced to repay the debts of their oppressors. In , , and , workers and students in Greece and other European countries demonstrated against cuts to pensions, public services, and education spending as a result of government austerity measures.
Following the announcement of plans to introduce austerity measures in Greece, massive demonstrations occurred throughout the country aimed at pressing parliamentarians to vote against the austerity package. In Athens alone, 19 arrests were made, while 46 civilians and 38 policemen had been injured by 29 June The third round of austerity was approved by the Greek parliament on 12 February and met strong opposition, especially in Athens and Thessaloniki , where police clashed with demonstrators.
Opponents argue that austerity measures depress economic growth and ultimately cause reduced tax revenues that outweigh the benefits of reduced public spending.
Moreover, in countries with already anemic economic growth, austerity can engender deflation, which inflates existing debt. Such austerity packages can also cause the country to fall into a liquidity trap , causing credit markets to freeze up and unemployment to increase. Opponents point to cases in Ireland and Spain in which austerity measures instituted in response to financial crises in proved ineffective in combating public debt and placed those countries at risk of defaulting in late Determining the multipliers used in the research to achieve the results found by the IMF was also described as an "exercise in futility" by Professor Carlos Vegh of the University of Michigan.
O'Rourke of Oxford University write that the IMF's new estimate of the extent to which austerity restricts growth was much lower than historical data suggest. And yet when Greece got into trouble it was tried again. Strategies that involve short-term stimulus with longer-term austerity are not mutually exclusive. Steps can be taken in the present that will reduce future spending, such as "bending the curve" on pensions by reducing cost of living adjustments or raising the retirement age for younger members of the population, while at the same time creating short-term spending or tax cut programs to stimulate the economy to create jobs.
IMF managing director Christine Lagarde wrote in August , "For the advanced economies, there is an unmistakable need to restore fiscal sustainability through credible consolidation plans. At the same time we know that slamming on the brakes too quickly will hurt the recovery and worsen job prospects.
So fiscal adjustment must resolve the conundrum of being neither too fast nor too slow. Shaping a Goldilocks fiscal consolidation is all about timing. What is needed is a dual focus on medium-term consolidation and short-term support for growth. That may sound contradictory, but the two are mutually reinforcing. Decisions on future consolidation, tackling the issues that will bring sustained fiscal improvement, create space in the near term for policies that support growth. Federal Reserve Chair Ben Bernanke wrote in September , "the two goals—achieving fiscal sustainability, which is the result of responsible policies set in place for the longer term, and avoiding creation of fiscal headwinds for the recovery—are not incompatible.
Acting now to put in place a credible plan for reducing future deficits over the long term, while being attentive to the implications of fiscal choices for the recovery in the near term, can help serve both objectives. The term "age of austerity" was popularised by UK Conservative Party leader David Cameron in his keynote speech to the Conservative Party forum in Cheltenham on 26 April , in which he committed to end years of what he called "excessive government spending".
Merriam-Webster's Dictionary named the word "austerity" as its " Word of the Year " for because of the number of web searches this word generated that year. According to the president and publisher of the dictionary, " austerity had more than , searches on the dictionary's free online [website] tool" and the spike in searches "came with more coverage of the debt crisis". According to economist David Stuckler and physician Sanjay Basu in their study The Body Economic: Why Austerity Kills , a health crisis is being triggered by austerity policies, including up to 10, additional suicides that have occurred across Europe and the U.
Much of the acceptance of Austerity in the General Public has centred around the way debate has been framed, and relates to an issue with Representative Democracy; since the public do not have widely available access to the latest economic research, which is highly critical of economic retrenchment in times of crisis, the public must rely on which politician sounds most plausible.
Bradford DeLong and Lawrence Summers explained why an expansionary fiscal policy is effective in reducing a government's future debt burden, pointing out that the policy has a positive impact on its future productivity level. As the economy is boosted by government spending, the increased output yields higher tax revenue, and so we have.
Then we can see that an expansionary fiscal policy is self-financing: . Then we can find that a fiscal stimulus makes the long-term budget in surplus if the real government borrowing rate satisfies the following condition: . Research by Gauti Eggertsson et al. If the rate is so low that monetary policies cannot mitigate the negative impact of the austerity measures, the significant decrease of tax base makes the revenue of the government and the budget position worse. This erosion of the tax base is the effect of the endogenous component of the deficit. Supporters of austerity measures tend to use the metaphor that a government's debt is like a household's debt.
They intend to frighten people with the notion that the government's overspending leads to the government's default. But this metaphor has been shown to be inaccurate. For a country that has its own currency, its government can create credits by itself, and its central bank can keep the interest rate close to or equal to the nominal risk-free rate. Louis says that the US government's debt is denominated in US Dollars, therefore the government will never go bankrupt.
The fear of inflation also features high on lists regarding the concerns about abandoning austerity, however, this is more ideological than practical once again, as the main means of controlling inflation is taxation, which governments also control. From Wikipedia, the free encyclopedia. For other uses, see Austerity disambiguation.
For current opposition to present-day austerity measures, see Anti-austerity movement. Policies to cut spending to reduce government deficit or debt. Index Outline Category. History Branches Classification. History of economics Schools of economics Mainstream economics Heterodox economics Economic methodology Economic theory Political economy Microeconomics Macroeconomics International economics Applied economics Mathematical economics Econometrics. Concepts Theory Techniques. Economic systems Economic growth Market National accounting Experimental economics Computational economics Game theory Operations research.