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Monday, July 18, 2011

The Crumbling Case for Austerity

Austerity doesn't work:

The Crumbling Case for Cutting Spending to Stimulate the Economy, by Chad Stone, CBPP: Empirical support for the view that sharp, immediate cuts in government spending would be good for the U.S. economy was never strong, and it’s getting weaker.
The Economist is on the case, highlighting two new studies showing that austerity and growth don’t mix in the short term. ...
The first new study is from the International Monetary Fund.  In its 2010 World Economic Outlook, the IMF put the kibosh on the idea that deficit reduction would boost economic growth in the short run.  IMF researchers have now presented a revised and extended version of that analysis reaching the same conclusion.
The second new study, by Roberto Perotti, backs up those of us who have been arguing for some time that these international examples have little in common with current U.S. budget and economic conditions.  What makes the Perotti study so significant is that he has been one of the leading researchers cited by advocates of sharp, immediate cuts in government spending.
Perotti conducted detailed case studies of the four largest multi-year deficit-reduction efforts that researchers have commonly regarded as spending-based.  He found that they were actually much smaller, and much less tilted toward spending cuts, than previous studies had assumed.
Perotti also found that all four countries’ economies benefited from a rapid decline in interest rates and a moderation of wage growth, which in turn made domestic firms more competitive internationally; an expansion of exports was key to economic growth in three of the four cases. ...
In short, the more closely you look at the evidence for the claim that cutting federal spending dramatically right now would be good for the economy, the less convincing that claim becomes.

Interest rates are already at rock bottom, and wage growth is not a problem, so the key conditions for austerity to work -- if it ever works -- are not present in the US economy.

    Posted by on Monday, July 18, 2011 at 05:22 PM in Economics, Fiscal Policy | Permalink  Comments (26)

          


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