Wednesday, August 10, 2011

Republican Economic Strategist Questions Austerity Strategy

In a post in the New York Times, economist Bruce Bartlett, advisor to Ronald Reagan, George H.W. Bush, Jack Kemp and Ron Paul questions the continued push for austerity measures in the current economic situation.  He points out that we have historical evidence of what happens when you retrench during a severe recession / depression.  We did it before, in 1937.  And it caused a huge setback in the recovery from the Great Depression. He observes that
once in a while economists get to observe a natural experiment where policy is changed in a way that allows a theory to be tested by real-world results. We are about to run just such an experiment by tightening fiscal policy and cutting spending significantly below baseline projections at a time when the economy is weak. As I pointed out in a July 12 post, we performed this experiment once before, in 1937. The budget deficit was sharply reduced and a recession immediately followed.
Austerity is the wrong economic tool to use when you're in a recession.  In the absence of private demand, the government must step in an create demand (and jobs).  Conservatives continue to believe in magic, and the efficacy of expansionary austerity.  When you're locked into a zero-bound interest rate, expansionary austerity will not work (if it ever did) since the lever needed to make it work (lowering interest rates) is not available.

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