Austerity in Recession: A Terribly Damaging Obsession CAP Presentation Jared Bernstein CBPP

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Austerity in Recession: A Terribly Damaging Obsession CAP Presentation Jared Bernstein CBPP

TopLines Austerity (fiscal contraction) as policy to offset recession isnt working, either in Europe OR HERE. Neither is it helping much to reduce Debt/GDP Theres 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 demandconsumption and investmentfalls by about 1 percent.

Source: Jay Shambaugh, The Euros 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 dont 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 Ds 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 Euros Three Crises (2012)