Contractionary Fiscal Policy is Contractionary

Imagine a world where politicians actually understood something about economics.  Wouldn’t that be wonderful?  Now open your eyes, you’re in Scott Walker’s Wisconsin where economic policies have lead to 6 months of straight private sector job losses.  But wait, there’s more!  His policies have also driven public sector workers to leave the workforce in droves.  While the Republicans cheer the departure of “union thugs,” the economy tanks because of  drop in demand.

See how well the drop in GDP correlates with the drop in public-sector employment?

GDP & Employment

Jared Bernstein:

We generally recognize that GDP losses map onto job losses but the fit is not usually this tight—there are lags in the generalized relationship between growth and jobs and lots of other moving parts.  But that’s less the case in state and local governments.  Here, the chain of events is pretty obvious and pretty clear.  You squeeze their budgets, it shows up quickly and directly in growth and jobs.

Conversely, and here’s the policy part, were we to use federal stimulus to help relieve their budgets, we could get this relationship running in a better direction.


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