Transcript Austerity in Recession: A Terribly Damaging

Austerity in Recession: A Terribly
Damaging Obsession
CAP Presentation
Jared Bernstein
CBPP
[email protected]
TopLines
• Austerity (fiscal contraction) as policy to offset
recession isn’t working, either in Europe OR
HERE.
• Neither is it helping much to reduce Debt/GDP
• There’s simple logic as to why
• Thus, a fundamental question is why we and
Europe are doing it, and what could make us
wake up and turn this around.
Evidence
• IMF: Fiscal consolidation typically has a
contractionary effect on output. A fiscal
consolidation equal to 1 percent of GDP
typically reduces GDP by about 0.5 percent
within two years and raises the
unemployment rate by about 0.3 percentage
point. Domestic demand—consumption and
investment—falls by about 1 percent.
Source: Jay Shambaugh, The Euro’s Three Crises (2012)
Europe is Not the Only One in the Austerity Biz: Fiscal Policy Impacts on GDP Growth
So, Why is it So Popular??!!
• Alesina et al: episodes where it worked,
but…CRS shows “sucesses” occurred only
when economies where already well on the
mend.
• Deficit fetishism
• Um…dude…we don’t have a choice!
(OK re Greece, Spain…but UK…US??!!)
The Sly Ideology of Deficit Fetishism
• To be clear, structural budget deficits are bad
and must go. (Recent history suggest D’s get
this better than Rs, btw.)
• BUT, 3 reasons for fetishism behind austerity:
--A tactic has become an intractable policy
position;
--Misinterpreting balance in the Clinton years;
--Strategy to shrink government.
Spreads of 10-yr Bond Yields Against 2007 Current Acct Deficits
Source: Jay Shambaugh, The Euro’s Three Crises (2012)