Just a few weeks ago, International Monetary Fund Chief Christine Lagarde offered some very good advice. She urged policymakers on both sides of the Atlantic to follow a familiar path: address long-term fiscal issues while at the same time, focusing on job creation and economic growth in the short term.
Conservatives, of course, not only reject this approach, but struggle to understand it. In the U.S., Republican principles dictate that less public investment necessarily leads to more economic growth, and more public-sector layoffs leads to less unemployment. Austerity, even in a weak economy with a jobs crisis, leads to better results.
Or so the argument goes. Today, Lagarde’s IMF is once again setting the right strtaight.
In a new paper for the International Monetary Fund, Laurence Ball, Daniel Leigh and Prakash Lounani 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. Typically, income and employment don’t fully recover even five years after the austerity program is put in place, the paper said.
The effects tend to nearly always hit the poor harder, and even when conditions eventually improve, wages grow slower than private-sector profits.
Right about now, some on the right start writing emails, insisting that austerity efforts can be effective in combating inflation, lowering interest rates, and preventing the public sector from “crowding out” private investment. And there’s some truth to this — there are conditions in which it makes sense to focus on spending cuts and deficit reduction.
The problem, which Republicans simply refuse to understand, is that these aren’t the right conditions. Inflation is low, interest rates are low, and there is no “crowding out.” Instead, we see high unemployment and anemic growth.
As Paul Krugman put it, “Yes, contractionary policy is contractionary. And as the authors point out, it’s probably even more contractionary than usual under current conditions.”
Austerity makes matters worse. The evidence is unambiguous.
Congressional Republicans, who’ve been wrong about every economic challenge of the last generation, want to do it anyway. And next year, there’s a reasonably good chance voters will hand over all of the reins of the federal government to the GOP so it can do just that.