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Fiscal Traps and Macro Policy after the Eurozone Crisis

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  • Greg Hannsgen
  • Dimitri B. Papadimitriou

Abstract

The United States must make a fundamental choice in its economic policy in the next few months, a choice that will shape the US economy for years to come. Pundits and policymakers are divided over how to address what is widely referred to as the "fiscal cliff," a combination of tax increases and spending cuts that will further weaken the domestic economy. Will the United States continue its current, misguided, policy of implementing European-style austerity measures, and the economic contraction that is the inevitable consequence of such policies? Or will it turn aside from the fiscal cliff, using a combination of its sovereign currency system and Keynesian fiscal policy to strengthen aggregate demand? Our analysis presents a model of what we call the "fiscal trap"—a self-imposed spiral of economic contraction resulting from a fundamental misunderstanding of the role and function of fiscal policy in times of economic weakness. Within this framework, we begin our analysis with the disastrous results of austerity policies in the European Union (EU) and the UK. Our account of these policies and their results is meant as a cautionary tale for the United States, not as a model.

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  • Greg Hannsgen & Dimitri B. Papadimitriou, 2012. "Fiscal Traps and Macro Policy after the Eurozone Crisis," Economics Public Policy Brief Archive ppb_127, Levy Economics Institute.
  • Handle: RePEc:lev:levppb:ppb_127
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    Cited by:

    1. Hüseyin ŞEN & Ayşe KAYA, 2017. "Mali Konsolidasyon Büyüme ve İstihdam için Bir Çıpa mı, Mali Tuzak mı? Teorik ve Ampirik Literatür Temelli Bir Analiz," Sosyoekonomi Journal, Sosyoekonomi Society, issue 25(34).
    2. Dimitri B. Papadimitriou & Greg Hannsgen & Michalis Nikiforos, 2013. "Is the Link between Output and Jobs Broken?," Economics Strategic Analysis Archive sa_mar_13, Levy Economics Institute.
    3. Dimitri B. Papadimitriou & Greg Hannsgen & Michalis Nikiforos & Gennaro Zezza, 2013. "Rescuing the Recovery: Prospects and Policies for the United States," Economics Strategic Analysis Archive sa_oct_13, Levy Economics Institute.
    4. Bendreff Desilus, 2020. "Fiscal Policy in Argentina, Brazil, and Mexico and the 2030 Agenda for Sustainable Development," Economics Working Paper Archive wp_960, Levy Economics Institute.
    5. Aristidis Bitzenis & Vasileios Vlachos & Friedrich Schneider, 2016. "An Exploration of the Greek Shadow Economy: Can Its Transfer into the Official Economy Provide Economic Relief Amid the Crisis?," Journal of Economic Issues, Taylor & Francis Journals, vol. 50(1), pages 165-196, January.
    6. Constantinos Alexiou & Joseph G. Nellis, 2013. "Challenging the Raison d’etre of Internal Devaluation in the Context of the Greek Economy," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 60(6), pages 813-836, December.

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