BREAKING NEWS: Austerity Policies Create Austerity

Surprise, surprise, surprise!  Nobody could have predicted!

When you introduce austerity programs, the economy slows down!

Typically, government spending rises when the economy turns down. That’s because the cost of safety net programs, such as unemployment insurance, go up. And sometimes governments deliberately boost spending to stimulate the economy. But the federal government’s long-term budget problems loom large. And state and local government finances are reeling from the economic downturn. As a result, government stimulus has been unusually limited.

State and local governments cut spending
Figure 5: State and local governments cut spending

Figure 5 compares recent inflation-adjusted spending by state and local governments with past periods. The red line represents the most recent recession and recovery. The shaded region portrays the range of outcomes over the eight previous recessions and recoveries, with the average displayed in black. During the current period, the housing bust has cut into the revenue of state and local governments, forcing them to slash spending (Feroli et al. 2012). That contrasts with comparable periods in the past, when such spending typically increased.

I don’t see government spending turning around soon. Indeed, spending at the federal level is set to contract sharply at the end of this year as several temporary programs end. Some of those programs may be extended. But, overall, we can expect federal spending trends to weigh on near-term economic growth.

Greater transfers from the Federal Government could have been used to offset these local and state cuts, but many Republican governors would not hear of it.  Scott Walker in Wisconsin rejected billions of dollars for high-speed rail which would have created thousands of jobs.  Chris Christie rejected the largest public works program in decades for what now appears to be thoroughly spurious (read: dishonest) reasons.

The reasons were simply that they demand govenrment be small, regardless of the cost of that policy on the citizens of America.


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2 thoughts on “BREAKING NEWS: Austerity Policies Create Austerity

  1. When it comes to large national economies, the only proven method of reversing a steep and deep economic downturn is to swallow hard, hold your nose and spend your way out of it. FDR invented it, and Obama proved that it still works. Every single other strategy has either failed miserably (Hoover, 112th Congress) or has never been tried.

    It’s worth noting that in special cases such as stagflation, austerity measures (Carter & Volcker) have worked when nothing else did. But that’s the exception to the rule.

  2. Huh? What is going to happen when investors quit buying government bonds? This is inevitable. This is not a normal recession but a debt induced crisis. To spend more money is like the drunk starting out the day with a drink. This works fine until your liver fails.

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