GOP Fantasy

This is not a surprise. If you can add 2+2 and come up with 4 this is not magic.  Lo and behold austerity, it turns out, is contractionary. What the Hell!

In a new paper for the International Monetary Fund, Laurence Ball, Daniel Leigh and Prakash Loungani look at 173 episodes of fiscal austerity over the past 30 years—with the average deficit cut amounting to 1 percent of GDP. Their verdict? Austerity “lowers incomes in the short term, with wage-earners taking more of a hit than others; it also raises unemployment, particularly long-term unemployment.”

More specifically, an austerity program that curbs the deficit by 1 percent of GDP reduces real incomes by about 0.6 percent and raises unemployment by almost 0.5 percentage points. What’s more, the IMF notes, the losses are twice as big when the central bank can’t cut rates (a good description of the present.) Typically, income and employment don’t fully recover even five years after the austerity program is put in place.

There’s also a class dimension here: A deficit cut of that size tends to cause real wage income, where lower-income folks get their money, to shrink by 0.9 percent, whereas rents and profits, which higher-income folks depend on, decline by just 0.3 percent. And, as the chart on the right shows, profits tend to bounce back faster than wages.

Some austerity programs can be harsher than others. The IMF study notes that plans to reduce the deficit can be particularly brutal if central banks “do not or cannot blunt some of the pain through a monetary policy stimulus.” (In 1992, Italy and Finland took steps to rein in their deficits but mitigated the discomfort by depreciating their currencies and boosting exports.) Meanwhile, if multiple countries are all carrying out austerity at the same time, the overall pain is likely to be greater. This sums up the current debt crisis in the euro zone: Individual euro member states can’t depreciate their own currencies because they’re all on the euro; the European Central Bank isn’t providing much monetary stimulus; and the economically ailing countries are all dragging one another other down.

As Krugman says:

In the first half of last year a strange delusion swept much of the policy elite on both sides of the Atlantic — the belief that cutting spending in the face of high unemployment would actually create jobs. I went after this stuff early and hard (I suspect that the confidence fairy will be one of my lasting contributions to economic discourse); still, it’s good to have a steadily mounting weight of evidence about just how wrong that view was.The latest entry is a comprehensive review of past episodes of austerity by economists at the IMF, from which the figure above is taken. Yes, contractionary policy is contractionary. And as the authors point out, it’s probably even more contractionary than usual under current conditions...Unfortunately, austerity programs are now the rule everywhere; even if the new Obama plan became law, which it won’t, it would only slow the pace of fiscal consolidation in America, and there’s nothing like it even on the table elsewhere.

I actually don't know why I am posting this since pretty much everyone who stops by here has a brain but I thought it important.