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Austerity is Not a Solution: Why the Deficit Hawks are Wrong

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  • Robert Pollin
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    Abstract

    Wall Street hyper-speculation brought the global economy to its knees in 2008-09.� To prevent a 1930s-level Depression at that time, economic policymakers throughout the world enacted extraordinary measures.� These included large-scale fiscal stimulus programs, financed by major expansions in central government fiscal deficits.� In the U.S., the fiscal deficit reached 9.9 percent of GDP in 2009, and is projected at 10.3 percent of GDP in 2010.� But roughly 18 months after these measures were introduced, a new wave of opposition to large-scale fiscal deficits has emerged.�� This paper reviews the arguments developed by various leading deficit hawks.� In� fact, they are not advancing one main argument or even a unified set of positions, but rather four distinct claims:� 1)� Large fiscal deficits will cause high interest rates, large government debts, and inflation; 2) Even if the current deficits have not caused high interest rates and inflation, they are eroding business confidence; 3) The multiplier for fiscal stimulus policies is always close to zero and has been so with the current measures; and 4) Regardless of short-term considerations, we are courting disaster in the long run with structural deficits that the recession only worsened.� This paper argues that none of these deficit hawk positions stand up to scrutiny.� I also argue that through critiquing the four deficit-hawk positions, we can also bring greater clarity toward developing a workable recovery program.� This will include fiscal deficits that can stabilize state and local government budgets; maintain sufficient funds for unemployment insurance; and continue support for long-term investments in traditional infrastructure and clean energy.��� But such fiscal policies also need to combine with credit-market measures that are capable of ‘pulling on a string’—i.e. creating strong enough incentives for both lenders and borrowers to unlock credit markets.

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    Bibliographic Info

    Paper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number wp235.

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    Date of creation: 2010
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    Handle: RePEc:uma:periwp:wp235

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    Cited by:
    1. Robert Pollin & James Heintz, 2013. "Study of U.S. Financial System," FESSUD studies fstudy10, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.

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