The Short-Term Austerity Fairy Has No Wings

fairy-01

Double, double toil and trouble;
Economy burn, and unemployment bubble.

Over the weekend the NYTimes reported on the annual economic forecast from the International Monetary Fund (IMF), which is predicting slower economic growth in the United States (1.9 percent). The IMF is a multinational organization that seeks to ” foster global monetary cooperation, secure financial stability […] promote high employment and sustainable economic growth,” while also serving as type of international loaning institution for developing countries. In the report the IMF also states that “growth would be as much as 1.75 percentage points higher if not for a rush to cut the government’s budget deficit.”

From the Times piece:

The IMF said the United States should reverse the spending cuts and instead adopt a plan to slow the growth in spending on government-funded health care and pensions, known as “entitlements.” The Fund would also like the United States to collect more in taxes.

“The deficit reduction in 2013 has been excessively rapid and ill-designed,” the IMF said. “These cuts should be replaced with a back-loaded mix of entitlement savings and new revenues.”

The IMF goes on to warn, however, of the same long-term fiscal issues that everyone knows — an aging population, unsustainable healthcare cost growth, and a long run debt that will crush us beneath it’s mammoth dollar-sign weight. Yet leaving that aside, this policy fetish of short-term austerity in the face of a weak economic recovery has basically been the story since 2011, no? The pursuit of ‘expansionary austerity’ was supposed to sweep away the detritus of the global recession. It was supposed to be the best of times. Yet deficit reduction in the United States, while less severe than other parts of the world, has nevertheless produced the same outcome; depressed economic growth. The austerity fairy has had no wings, no magic, no balm to make the recovery a resplendent “great forgetting.” 

I’ve highlighted in the past what makes this recovery different, most recently in terms of public employment, but in the end it’s all about spending more when you need to make a bad situation better. In the spirit of that thought Jared Bernstein uses the new IMF projections to remind everyone of this great graph:

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This comes from a recent speech given by Federal Reserve Vice-Chairman Janet Yellen. It profiles the effects of discretionary policy on the economy after a contraction, by contribution to GDP growth (in percentage points). We started spending slightly more than average to offset the Great Recession, but still less than in ’01 and ’82, and quickly set to making sure it got much worse. To put it another way, we’ve comparatively gone about flinging matches on the gas-soaked carpet to prevent termites from bringing the house down.

File it as exhibit umpteenth-billion in how this recovery is different, as well as worse, and some not-insignificant portion of it is our own doing. We’ve tolerated less growth and higher unemployment to chase a supply-side policy dream that was as real (i.e., fake) as the last one. The alternative of doing more isn’t a miracle cure either, but it has intrinsic positive benefits that are superior to our current course of doing worse than nothing. It’s another reminder that this is your economy on austerity;

Screen Shot 2013-05-09 at 11.18.41 AM

People realize now that perhaps this wasn’t the best policy. The IMF, which recently apologized for the stalwart advocacy of austerity that has immiserated the Greek populace, is now appropriating the advice of it’s critics and telling the U.S. to knock it off, sort to speak. The question facing us, then, is “Will we listen?”

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