Austerity is Not a Solution: Why the Deficit Hawks are Wrong
AbstractWall 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 InfoPaper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number wp235.
Date of creation: 2010
Date of revision:
Find related papers by JEL classification:
- E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-10-02 (All new papers)
- NEP-CBA-2010-10-02 (Central Banking)
- NEP-MAC-2010-10-02 (Macroeconomics)
- NEP-PKE-2010-10-02 (Post Keynesian Economics)
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