Austerity is a Bad Idea

http://tpmdc.talkingpointsmemo.com/2...ve.php?ref=fpa

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Brian Beutler | September 13, 2011, 3:36PM


During Tuesday's joint Super Committee hearing on the origin and drivers of U.S. debt, Republicans were eager, as they are in many settings, to portray the country as on the brink of a genuine debt crisis -- and to argue that the most effective remedies to a debt crisis are spending cuts, not tax increases.

This sounds like bland political pabulum, and in some ways it is. But it's also a huge reveal. If we're not in a fiscal crisis, and we thus have years of running room ahead of us to make appropriate, and non-drastic policy changes, then there's no immediate imperative to make the dramatic changes to Medicare and other popular government safety net programs Republicans want to see.

Here's how CBO director Doug Elmendorf responded when Sen. Rob Portman (R-OH) nudged him about the relative merits of cutting spending (i.e. rolling back government services) as part of a national austerity program.

According to economists, "in countries that really set out to do fiscal austerity, the results tend to not be good in the short term," Elmendorf said. "I think the principle lesson of looking at countries like Greece and others is that it is a terrible situation to end up in, where one has to make drastic abrupt changes in policy. But if you look at Greece or Ireland or the experience in the UK which did not face such a crisis but has made a very, very determined pivot in its policy, those economies are not doing very well right now. And I think leaders of those countries felt they had no alternative given where they had gotten to... That they were at a point where people were not lending the governments money anymore or about to stop lending them money...So they had to make drastic changes. But that is not a situation that we would like to find ourselves in."

And we don't have to. There's no reason to make the leap to austerity, even if it's politically expedient. In fact, we have the luxury of being able to pair a credible medium-term deficit reduction plan with immediate anti-austerity policies.

It's not just Elmendorf. According to IMF economists, the GOP approach of slashing spending by even just 1 percent of GDP would under current conditions lead to a big spike in unemployment and a sizable drop in incomes, all while doing almost nothing to actually reduce deficits. The effects, according to the IMF are exacerbated when central banks can't reduce interest rates anymore -- a situation the Fed finds itself in right now. Kevin Drum put this all together in a single graph.


So the GOP talking point that the U.S. is just like Greece is key to their strategy of forcing big cuts to retirement programs and programs for the poor -- but it's extremely risky for everybody.

http://www.imf.org/external/pubs/ft/...11/09/Ball.htm
Painful Medicine
FINANCE & DEVELOPMENT, September 2011, Vol. 48, No. 3
Laurence Ball, Daniel Leigh, and Prakash Loungani
Although advanced economies need medium-run fiscal consolidation, slamming on the brakes too quickly will hurt incomes and job prospects.

WHEN British Prime Minister David Cameron announced his government’s deficit reduction plans earlier this year he said, “Those who argue that dealing with our deficit and promoting growth are somehow alternatives are wrong. You cannot put off the first in order to promote the second” (Cameron, 2011).
The challenge facing the United Kingdom and many advanced economies is how to bring debt down to safer levels in the face of a weak recovery. Will deficit reduction lead to stronger growth and job creation in the short run?
Recent IMF research provides an answer to this question. Evidence from data over the past 30 years shows that consolidation lowers incomes in the short term, with wage-earners taking more of a hit than others; it also raises unemployment, particularly long-term unemployment.
For the advanced economies, there is an unmistakable need to restore fiscal sustainability through credible consolidation plans. At the same time, we know that slamming on the brakes too quickly will hurt the recovery and worsen job prospects. Hence the potential longer-run benefits of fiscal consolidation must be balanced against the short- and medium-run adverse impacts on growth and jobs.
The twin challenges
The Great Recession of 2007–09 has led to the most pronounced increase in unemployment the advanced countries have seen in the post–World War II period. Unemployment averaged 5 percent in 2007 but shot up to 8 percent by 2009 and has remained high since then (see Chart 1, left panel). In many countries, such as Ireland and Spain, unemployment is at double-digit levels; in the United States, two year after the recession was officially declared to have ended, unemployment remains above 9 percent and net job creation is at a virtual standstill.

The Great Recession has also been a factor in increasing public debt, in large part because of the collapse in tax revenues as incomes fell. Other contributors to the debt buildup were the costs of financial bailouts of banks and companies and the fiscal stimulus provided by many countries to stave off a depression. In advanced economies public debt has increased from 70 percent of GDP in 2007 to about 100 percent of GDP—its highest level in 50 years (see Chart 1, right panel). Looking ahead, population aging could create even more serious problems for public finances (see F&D, June 2011).
Will it hurt?
Many governments are already undertaking or planning policies to reduce government debt and deficits (fiscal consolidations), through a combination of spending cuts and tax hikes. What are the likely short-term effects of these plans?
Because such plans have been quite common, history offers a good guide. Over the past 30 years, there have been 173 episodes during which 17 advanced economies undertook budgetary measures aimed at fiscal consolidation. (The countries are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, Portugal, Spain, Sweden, United Kingdom, and the United States.) The average size of fiscal consolidation was about 1 percent of GDP a year.
To obtain estimates of the effects of fiscal consolidation, the IMF research draws on historical accounts and records of policy actions—tax hikes and spending cuts—motivated by a desire to bring about deficit reduction. This is a more accurate measure of policy actions than those used in previous studies, which often rely on the observed change in the budget deficit adjusted for the economic cycle (see box).

Continued on Link at top of page

PIMCO's Gross urges rethink of UK recovery strategy

Sun Sep 4, 2011 7:55pm EDT
LONDON, Sept 5 (Reuters) - The austerity measures
implemented by British finance minister George Osborne risk
pushing the UK economy into recession, Bill Gross, the manager
of PIMCO, said in an interview with the Times newspaper.
Gross, who manages the world's biggest bond fund, told the
newspaper that a "mid-course correction" of the fiscal plans
would lift the economy and should not damage the country's
standing with bond investors.
"The economy in the UK is worse off than it was when the
plan was developed, so there should be at a minimum fine-tuning
and perhaps re-routing of the plan," he was quoted as saying.
Gross said a similar argument applied to other leading
economies, including in the euro zone and the United States,
which he said faced a mounting crisis. [ID:nN1E77S1I6]
"The UK is actually in the best position of all to make a
mid-course correction," Gross said.
He told the newspaper that he did not want a 180-degree
U-turn but that for PIMCO "a mild re-adjustment that might keep
the economy out of recession would be viewed very favourably".
(Writing by Stephen Mangan; Editing by Dale Hudson)

For those that dont remember, months ago S&L praised England's austerity program. I wonder what he will say now.

Quote:

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Originally Posted by Havakasha

For those that dont remember, months ago S&L praised England's austerity program. I wonder what he will say now.

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"praised"? Yes, now that you mention it, I recall being so passionate about UK's austerity program such that I "praised" it LMFAO.

I do understand that a recession is a correction though.

Are you still in favor of the British austerity program? Still praising it as the right decision for them to take? Disagree with Bill Gross? Oh i forgot you dont answer questions,especially because your answers go on the record. :) I quess your in fear of ending up like Peter Schiff one of your favorite economic theorists. How did he do in prediciting hyperinflation in the U.S. in the last years including this one?

From the September 10 -- 16, 2011 issue of The Economist

"THE IMMEDIATE PRIORITY SHOULD BE SUPPORTING DEMAND--OR AT LEAST NOT DOING HARM TO IT. THE LEFT IS RIGHT ON ONE THING: THE MAIN CAUSE OF OF THE CURRENT HIGH JOBLESSNESS IS THE SEVERITY OF THE LAST RECESSION AND THE WEAKNESS OF THE SUBSEQUENT RECOVERY. YET THE WEST'S ECONOMIES HAVE EMBARKED ON CONTRACTIONARY POLICIES. IN SOME CASES THE FAULT LIES WITH MONETARY POLICY:THE EUROPEAN CENTRAL BANK SHOULD REVERSE ITS RECENT RATE RISES.BUT THE MAIN CULPRIT IS A COLLECTIVE, PREMATURE SHIFT TO FISCAL
AUSTERITY (sound familiar S&L? lol) BY GOVERNMENTS.
AS THIS NEWSPAPER HAS REPEATELY ARGUED , POLITICIANS NEED TO STRIKE A BARGAIN WITH THE BOND MARKETS: COMBINE POLICIES THAT CUSHION GROWTH NOW WITH MEASURES THAT WILL BRING DEFICITS UNDER CONTROL IN THE MEDIUM TERM. RAISE THE RETIREMENT AGE, FOR INSTANCE AND THAT LEAVES MORE ROOM TO STIMULATE GROWTH IN THE SHORT TERM. A MINIMALTEST OF MR. OBAMA'S JOBS AGENDA WILL BE WHETHER IT IS BIG ENOUGH TO COUNTER
THE FISCAL TIGHTENING EQUIVALENT TO 2% OF GDP, THAT IS SLATED FOR NEXT YEAR.

WHERE SHOULD THE SHORT TERM MONEY GO? SOME FORMS OF STIMULUS ARE BETTER THAN OTHERS AT SUPPORTING UNEMPLOYMENT. GERMANY'S SUBSIDIES FOR SHORTENED WORKING HOURS HELPED DISSUADE FIRMS FROM FIRING WORKERS;MR. OBAMA'S SUBSIDIES FOR GREEN TECHNOLGIES FATTENED THE BOTTOM LINE OF A FEW CHOSEN FIRMS BUT DID VERY LITTLETO SPUR JOBS. GOVERNMENTS SHOULD PRIORITIZE POLICIES THAT DO. SOME INFRASTRUCTURE SPENDING, SUCH AS BUILDING ROADS AND REPAIRING ROADS AND REPAIRING SCHOOLS, FALLS INTO THAT CATEGORY. SOME TAX INCENTIVES THAT CUT THE COST OF HIRING, PARTICULARLY FOR EXTRA NEW WORKERS-WHICH IS WHY IT MAKES SENSE FOR AMERICA TO EXTEND AND EVEN EXPAND, ITS PAYROLL-TAX CUT. AND SO IN AMERICA'S CASE DOES FEDERAL AID TO THE STATES, SINCE THE MAIN WAY STATES CUT THEIR BUDGETS IS FIRING WORKERS"