The Boom Not The Slump: The Right Time For Austerity

Fellows Arjun Jayadev and Mike Konczal re-examine data and prove that now is not the time to cut the deficit.

Full report

“The boom, not the slump, is the right time for austerity at the Treasury.”

- John Maynard Keynes (1937) Collected Writings

Should the United States cut its deficit in the short term?    This has been the subject of intense debate among politicians, policy analysts and thinkers over the past year.   What are the consequences of cutting the deficit with interest rates low, unemployment high and growth uncertain?

A recent paper by Alberto F. Alesina and Silvia Ardagna (2009), “Large Changes in Fiscal Policy: Taxes Versus Spending” (henceforth A & A), looks at a cross section of deficit reduction policies among different countries. It examines examples where large-scale deficit reduction is associated with economic expansion and where the debt-to-GDP ratio falls in the medium-term (3 years after the adjustment).  Based on this research, many popular commentators suggest that the U.S. can adopt such a policy and grow.

However, upon a further examination of the data such a conclusion is unmerited.  The overwhelming majority of the episodes used by A & A did not see deficit reduction in the middle of a slump. Where they did, it often resulted in a decline in the subsequent growth rate or an increase in the debt-to-GDP ratio. Of the 26 episodes that they identify as ‘expansionary’, in virtually none did the country a) reduce the deficit when the economy was in a slump and b) increase growth rates while reducing the debt-to-GDP ratio.  The sole example not covered by those two qualifiers can be explained by a combination of two policy maneuvers that are not easily available to the U.S. at the moment: currency depreciation and interest rate reduction.

Key Findings

  • Countries historically do not cut their deficits in a slump, instead addressing these problems during a non-recessionary time.
  • When countries cut in a slump, it often results in lower growth and/or higher debt-to-GDP ratios.  In very few circumstances are countries able to successfully cut during a slump, and this happens only when either interest rates and/or the exchange rates fall sharply.
  • In our analysis, we find that there is no episode in which a country facing the same circumstances as the United States (recent recession, low interest rates, high unemployment) has cut its deficit and succeeded in reducing its debt through growth.
  • We conclude that there is little evidence provided by A & A that cutting the federal deficit in the short-term, under the conditions the United States currently faces, would improve the country’s prospects. It may even make the United States’ situation far worse.

Download the PDF

Comments (6)Add a comment

It becomes Microsoft Office 2011 visible the confusion Buy Windows 7 eventuated after a Win 7 dissimilar Microsoft Windows 7 contended quicker Windows 7 that Microsoft Office 2010 Download plan on Office 2010 Download a public beta as it Download Office 2010 , instead citing Microsoft Office 2010 simply a sealed Office 2010 Professional systematic Microsoft Office 2007 Download preview that Microsoft Office 2007 Professional would take Download Office 2007 location commencing in Office 2007 Key the third Office 2010 Key quarter.

I have been interested in this topic for quite some time. I have been researching it for a couple of hours and found your post to be very interesting. Cheers.
Western Outfits

I have been teaching a class and we are looking at this subject in the next week. I will be directing my student to look at your post for good information.
Counter Height Chairs

Very nicely written post it contains useful information for me. I am happy to find your distinguished way of writing the post. Now you make it easy for me to understand and implement the concept. Thank you for the post.
instep jogging stroller

Accentuate your own ray ban sunglasses sale wardrobe with the addition of a good pair of general ray ban aviator sale to it. Connoisseurs state the fact that youngsters will certainly adore to accentuate these kinds of modern ray ban wayfarer sale, intelligent in addition to quite interesting twos connected with general cheap ray ban aviator sunglasses. In the official website in the fabricators, a whole in addition to a good exclusive collection connected with cheap ray ban wayfarer sunglasses is actually displayed.

In case you checkout this ray ban sunglasses sale, youll experience numerous ray ban sunglasses uk choices but each and every selection really provides this ray ban sunglasses online. Connoisseurs feel that the vast majority of choices ray ban sunglasses outlet and because of this , this shoppers choose to technique cheap ray ban sunglasses merchandisers whenever the item reaches this obtaining associated with a couple rayban sunglasses sale. These adult females who will be significantly likely to ray ban aviator sunglasses purchase a sensational couple of ray ban wayfarer sunglasses can mouse click within the link that may be presented below the way it will require an individual instantly on the inside internet page on the internet site the place that the selection is definitely showcased.

Post new comment

The content of this field is kept private and will not be shown publicly.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Allowed HTML tags: <a> <p> <em> <strong> <cite> <code> <ul> <ol> <li> <dl> <dt> <dd> <table <td> <tr> <span> <thead> <tbody> <img> <i> <b> <br> <hr> <pre> <h2> <h3> <h4> <u>
  • Lines and paragraphs break automatically.

More information about formatting options