If Austerity cut waste, it would probably work. The problem is that in government waste usually stems from bureaucratic calcification and corruption. Calcified and corrupt bureaucracies are highly resistant to change and have the system "wired" to defeat it, so they don't generally get hit much. Austerity's cuts fall disproportionately upon social safety nets and productive activities, hence the result.

I've been of the impression for a while that government waste and corruption grows without bound until it destroys the host, resulting in a revolution or some other kind of "reboot," and then repeat. There appears to be no way of actually cutting it without setting fire to the entire thing. Few things in nature are as tenacious as a parasite.

See: http://en.wikipedia.org/wiki/Iron_law_of_oligarchy

> I suspect austerity does work but has an inflection point. It can (theoretically) be used to cut outright government waste.

So that makes intuitive sense, but a lot of things in economics (and everything else complex) make intuitive sense but turn out to be completely wrong. The problem is that while we both "suspect" that this is true or close to true, all that really means is that our gut says it must be and we're smart enough to know about a mechanism like inflection points that can be used to rationalize it.

Or, since we have an intuitive hunch and we know about things like inflection points, we might go and investigate more carefully doing our best to find out how it works in the wild. Until then, I'll admit, it is much fun to "Gladwell" it over drinks, no?

More fun? Definitely, especially with someone who just used the phrase "to Gladwell it", which I love and really hope I remember to start using regularly to describe this kind of thing.

I suspect people are less likely to investigate things that make intuitive sense, due to confirmation bias.

State austerity during a market recession makes no sense because the state is one of the few participants who is still able to borrow at reasonable rates. The borrowing will still have to occur, because people need to eat, however it is paid back at Wonga rates of six squillion APR, rather than at the government bond level.

wasted spending is not a social problem in itself -- it just moves wealth around, but doesn't destroy wealth.

Wasted production -- on stuff no one wants (like wartime destruction), is a problem.

Opportunity cost is wasted production (paying people to lay bricks instead of building efficient brick-building machines, say), and that's the motivation for "free market instead of central planning", but that's what austerity means. Austerity means cutting government spending to raise the government's bottom line -- but the government's bottom line isn't like yours. If the country owes its own citizens money, it won't go bankrupt -- that's just taxation under a different name

Term you are looking for is Laffer Curve. http://en.wikipedia.org/wiki/Laffer_curve

The Laffer Curve suggests that there is a maximum level of taxation beyond which increases in the tax rate do not generate additional revenue. (Also sometimes called the "Sheriff of Nottingham paradox": raising taxes on people with nothing does not yield more money)

I was suggesting that there are certain government programs that incur a cost to operate incur a greater cost to cease operating. They generate a net positive on the money spent. Cutting them for "austerity" is foolish.

One must remember that the Laffer curve is a theoretical discussion that can help to explain economic phenomenons. It's not a law of nature.

Laffer curve may point us towards the general direction, but real world observation have showed that there is no simple, smooth curve that predicts tax income versus tax rate - human behaviour is far to much stochastic for that.

Not that theoretical http://www.objectobot.com/wp-content/uploads/2012/12/ADavies...