From Rolling Stone: http://www.rollingstone.com/politics/blogs/national-affairs/what-part-of-austerity-isnt-working-dont-people-get-20120617
By Jared Bernstein
June 18, 2012
June 18, 2012
As I prepared for a talk on austerity last week, I found myself a bit stuck. What can you say other than that it’s very clearly not working, nor should we expect it to, nor has it ever? And then I hit upon what I think is the key question: Why do governments stick with the austerity approach when all the evidence suggests it's a total failure?
First, some facts. By austerity I mean attacking recession by cutting spending and raising taxes – the opposite of Keynesianism, which dictates that if the private sector isn't spending enough money to get the economy moving, the government needs to temporarily step in and supply the juice (aka "stimulus"). Europe and the UK are committed to austerity, and – not coincidentally – they've seen growth deteriorate and unemployment jump (to over 20 percent in Greece and Spain). The figure below, from this excellent – and pretty readable – paper by economist Jay Shambaugh reveals the expected positive correlation between governments that cut spending and slower GDP growth.
Too bad for Europe, right? But, wait – we’re doing the austerity thing too, cutting spending as stimulus fades and failing to enact jobs measures, such as fiscal relief to cash-strapped state and local governments or public infrastructure investment – measures that appear more necessary with each new, disappointing economic report.
In a way, our austerity policies are actually less defensible than those in some European countries. With the price of borrowing so extremely low here, capital markets are basically pleading for our government to borrow and get busy with temporary growth measures. That’s not happening in Spain, Italy, Portugal, and Greece, and for good reason: government debt in those countries is highly risky, and priced accordingly.