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

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Presentation on theme: "Austerity in Recession: A Terribly Damaging Obsession CAP Presentation Jared Bernstein CBPP"— Presentation transcript:

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

2 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.

3 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.

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

5 Europe is Not the Only One in the Austerity Biz: Fiscal Policy Impacts on GDP Growth

6 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??!!)

7 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.

8 Spreads of 10-yr Bond Yields Against 2007 Current Acct Deficits Source: Jay Shambaugh, The Euros Three Crises (2012)


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