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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)