The Broken Theory of Growth Through Austerity and Deficit Reduction

[Bill USA]

http://www.newdeal20.org/2011/03/28/the-broken-theory-of-growth-through-austerity-and-deficit-reduction-39962/

Tim Fernholz and Jim Tankersley have a great article, “GOP Prescription: Spending Cuts and Lower Wages Equal More Jobs“, where they dig into the current economic rationality behind the push for short-term spending cuts. They link to a GOP report, “Spend Less, Owe Less, Grow the Economy“, which is based on an AEI study, “A Guide for Deficit Reduction in the United States Based on Historical Consolidations That Worked.” And that study is based on a 2009 study by Alberto Alesina and Silvia Ardagna of Harvard, titled “Large changes in fiscal policy: taxes versus spending.”

This last study has a bit of a history in the economic blogosphere. David Brooks introduced it into centrist pundit commentary with his June 2010 article “Prune and Grow,” noting, “Alberto Alesina of Harvard has surveyed the history of debt reduction. He’s found that, in many cases, large and decisive deficit reduction policies were followed by increases in growth, not recessions.” Centrists rejoiced! But Ryan Avent at The Economist, whose BS detector is very sharp, immediately noted that Alesina was looking at cuts “without considering the dynamics of these adjustments… There is little reason to believe that sharp fiscal adjustments in the current American context will produce growth,” and that the countries Alesina cited didn’t seem to match up.

Around the same time, Roosevelt Institute Senior Fellow Marshall Auerback looked at the arguments about Canada’s policy in the 1990s, which was being promoted by the English government as a kind of growth-through-austerity poster child, and found that Canada’s experience was primarily the result of the growth of exports and expansive monetary policy. We all noted that this kind of drunk-under-the-spotlight approach to historical examination characterized a lot of the research on this topic.

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The hits kept coming. Dean Baker and CEPR took apart the argument as well in their report http://www.cepr.net/index.php/publications/reports/the-myth-of-expansionary-fiscal-austerity">“The Myth of Expansionary Fiscal Austerity” (http://www.cepr.net/documents/publications/austerity-myth-2010-10.pdf">full PDF here). And Roosevelt Institute Senior Fellows Thomas Ferguson and Robert Johnson tackled this argument as part of their paper on the deficit http://www.newdeal20.org/2010/12/02/a-world-upside-down-deficit-fantasies-in-the-great-recession-thomas-ferguson-and-robert-johnson-expose-unnecessary-deficit-hysteria-28658/?utm_source=New+Deal+2.0+newsletter&utm_campaign=1d050b07dd-New_Deal_2_0_newsletter_3_31_2011&utm_medium=email">“A World Upside Down? Deficit Fantasies in the Great Recession“ (http://www.newdeal20.org/wp-content/uploads/2010/12/a-world-upside-down">paper in pdf), where they distinguished between budget whales and minnows (more on that in a second).

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[Taverner]

1. Austerity almost killed Israel's economy shortly after its formation

At that time, the US nor the UK was sending them any money - and trade was tough, since they were surrounded by enemies

So they went on an austerity plan, and it crippled the economy

[NothingRight]

2. GOP finds it easier to compare apples to anything but apples

Great post, and great articles that highlight what the GOP doesn't want anyone to know. It is easy to look back on any society, any nation, and find a time where they did what you are trying to convince the people needs to be done now, but that in no way means that their situation compared to the current one, and therefore has absolutely no relevance without context.

Our current situation was not born out of a gross expansion of government, outside of the military and defense following 9/11. Terrorist attacks on the U.S. allowed the neocons to sell their war hawk mindset in the name of revenge. Homeland Security, war in Afghanistan, war in Iraq, expansion of the defense budgets, oh, and not bothering to provide accounting for it, along with the greed of the financial sector created the situation we are in.

To remedy these problems, cutting discretionary, non-defense spending is absolutely the wrong way to go. Further tax cuts on businesses without closing the plague of tax loopholes is borderline criminal, and not allowing the Bush tax cuts to expire is simple collusion with the the elites to keep a foot on the throat of our nation.

In the immediate term, cutting is absolutely the wrong thing to do. Investment in specific areas will create jobs, which will create consumers, which will create jobs, which will create a broader tax base, which will create a reduction in the deficit and the debt.

The GOP sold the people a bill of goods by telling people they would focus on jobs, jobs, jobs. Anyone who still believes that is in a conservative myopic coma.

Spread the word. Only the truth can help us now.

[bemildred]

3. It is a stupid idea, doesn't stand up to the slightest examination.

Ask yourself "How would that work?" and you will quickly find that it doesn't, which entirely coincides with observation.

It is true that government spending more than it takes in can cause trouble over the long run, but it is fatuous to think that screwing the poor will fix it.