The Austerity Trap
Below is a recent editorial from the New York Times that does an excellent job of summarizing the failures of austerity policies.
The NYTimes also published a very good analysis of how austerity measures have actually increased debt loads in many countries, instead of reducing them:Â Â “Despite Push for Austerity, European Debt has Soared”
I made the same point in the lead article in our new Economy at Work publication that came out last month.
The IMF’s recent World Economic Outlook publishedÂ earlier this month,Â has interesting relevant material, particularly the section where they revise their estimates of short-term fiscal multipliers.Â They had used fiscal multipliers of 0.5, now they suggest they should be 0.9 to 1.7 — meaning $1 billion in spending cuts would lead to a reduction of GDP ofÂ $0.9 to $1.7 billion, also reducing revenues.Â So spending cuts have the impact of increasing debt/GDP ratios.
This provides foundation for the IMF’s recent call for countries to concentrate on growth and stimulus measures rather than “fiscal consolidation”, repudiating Harper’s attempt to have the G20 and IMF focus on austerity.
Other material from the IMF has called for use of more progressive taxes.Â TheÂ IMF’s October 2012Â Fiscal Monitor says Â “fiscal adjustment should be better tailored to support social equity and long-term employment” (p. 34).
And the IMF’s Global Financial Stability Report also just published this month that progress on financial reforms has been far too slow.
I don’t see much attention paid to this analysis in Parliament or Queen’s Park, where we still have governments set on a misguided and damaging austerity agenda.
The Austerity Trap
New York Times
October 24, 2012
The lesson that should be learned from Greece is that its fiscal mess has been made far worse by severe budget cuts.
New data from the European Union, released on Monday andÂ analyzed in The TimesÂ by Landon Thomas Jr. and David Jolly, show that countries that have most ruthlessly cut their budgets â€” Greece, especially â€” have seen their overall debt loads increase as a share of the economy.
The data provide objective support for what has been clear to just about everyone except pro-austerity German officials and deficit-crazed Republican politicians. Namely, deep government budget cuts at a time of economic weakness are counterproductive, complicating, if not ruining, the chances for economic growth.
The new European statistics also dovetail with a recentÂ analysisÂ by economists from the International Monetary Fund. They found that budget cutbacks are much more damaging to economies recovering from recession than has been previously believed. The reason is that with interest rates stuck near zero, there is no room to lower them when fiscal policy is tightened, and thus no way to offset the pain of budget cutbacks.
If governments push ahead anyway with deep spending cuts, the result is only more economic weakness without the hoped for budget improvement.