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:  “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 published earlier this month, has interesting relevant material, particularly the section where they revise their estimates of short-term fiscal multipliers.  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 of $0.9 to $1.7 billion, also reducing revenues.  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.  The  IMF’s October 2012 Fiscal Monitor says  “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 and analyzed in The Times by Landon Thomas Jr. and David Jolly, show that countries that have most ruthlessly cut their budgets — Greece, especially — 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 recent analysis 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.


  • It would be interesting to know what is the IMF view of the multiplier attached to austerity in Canada. I would assume it is high since the IMF and the Bank of Canada argue that we are still operating well below capacity – as defined conservatively by them – and are close to the zero lower bound on interest rates. As you say, the IMF view is sadly seen here as relevant only to the UK, Greece, Spain etc.

  • Economic prosparity in Canada could be boosted substantially by enacting a few changes–just a coulpe are listed for consideration of economists to pump out the potential effect for the next 25 years+
    1. Exports of resource products to include GST as must be paid by Canadian consumers. (energy, petroleum, ores, forestry, agrcultural, etc.)
    2. Require in-Canada processing of resources into finished products for domestic use and allowing surpluses to be exported. (Bitumen, oil, gas, logs, pulp, mining ores, live cattle & grains, energy, etc.

  • Sorry but that’s a load of globalist claptrap more suited to the dysfunctional US bamboozle machine, otherwise known as mainstream media, than to a Canadian blog. Any discussion of austerity, without any qualification about what the cutback applies to, is just plain stupid. So, payments to dead people for instance should be kept up just to maintain a certain debt to GDP ratio? When the tide goes out you can see who has been swimming naked. Similarly, when times get tough, what seemed like a good idea in good times, is revealed as a waste or counterproductive. Eliminating such is always a good idea, ratio be damned. The current crop of politicians is utterly incapable of recognizing anything but their own interest and need to be turfed out. We need a new slate and the best ideas I’ve heard of come from the CanadianActionParty dot ca, though I’m more than a bit biased, being a member in good standing.

  • Hi Bob:

    Thanks for your comments because I think they very do a good job of articulating some of the sentiment and some of the rationale at a certain level behind those who support spending cuts at this time.

    You’ve given a bit of an articulation between the individual “I’m feeling the pain and so should they” feeling at the individual level and the politicians attempts to create a crisis to force changes and cuts, as Naomi Klein has so well-written about.

    It also reminds me of Robert de Niro’s character in the 1976 movie “Taxi Driver” who looks forward to “some day (when) a real rain will come and wash all the scum off the streets”.

    But instead of misapplying a quasi-religious sense of moral redemption and atonement to economic affairs that will make the situation far worse, force millions into unemployment (as we’re seeing in Europe) and cause extraordinary unnecessary hardship, I think it is far better to prescribe rational economic policies.

    An economic downturn is absolutely the worst time to impose cuts. Nevertheless, politicians often take advantage of them to force through deep cuts. These aren’t about achieving rational efficiencies: they are politically motivated cuts to environmental monitoring, to employment insurance, to funding for any sort of program and organization they don’t agree with.

    (Meanwhile there’s little hesitation about spending close to a million to ship the PM’s car to India so he can go on a private tour of the Taj Mahal.)

    While I obviously disagree with you, I think you’ve done a good job of articulating sentiments that we need to take consideration of: a sort of behavioural economics at the macro level.

  • The real key to getting out this economic mess is simple.:

    …massive spending on middle class job creation

    ***The exact opposite of the current slash and burn current approach…***

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