Thursday, July 7, 2011

Expansionary Austerity: Still Dead!

From a new IMF working paper, the idea of expansionary austerity is still dead, contrary to what the Tea Party GOP zombies (including Zombie President Obama) assert:
[E]stimation results based on fiscal actions identified directly from contemporaneous policy documents provide little support for the expansionary austerity hypothesis. In particular, we compile an international dataset of fiscal policy adjustments motivated by a desire to reduce the budget deficit and not in response to current and prospective economic conditions using the Romer and Romer (2010) historical approach. Based on the fiscal actions thus identified, our baseline specification implies that a 1 percent of GDP fiscal consolidation reduces real private consumption by 0.75 percent within two years, while real GDP declines by 0.62 percent. The baseline results survive a battery of robustness tests. Our main finding that fiscal consolidation is contractionary holds up in cases where one would most expect fiscal consolidation to raise private domestic demand. In particular, even large spending-based fiscal retrenchments are contractionary, as are fiscal consolidations occurring in economies with a high perceived sovereign default risk.
Yes, kids, cutting spending during times of economic retrenchment causes more harm than good and, in the long run, increases the debt.  But since that deviates from "common sense*," it must not be true.

Our collective national denial of reality will continue until expansionary austerity works.

*“Common sense is merely the deposit of prejudice laid down in the human mind before the age of 18” --Albert Einstein, Nobel Prize Winning Scientist & Socialist

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