Screw ‘austerity,’ what the economy needs is stimulus

Posted by AzBlueMeanie:

Two economic reports today demonstrate that GOP economic policy is always wrong, always.

The International Monetary Fund (IMF) reports that the European "austerity" that Tea-Publicans point to for massive budget cuts here in the U.S. increases unemployment and reduces paychecks — something that GOP economic policy has been doing for years. IMF: Austerity boosts unemployment, lowers paychecks:

[T]he Republican line on job creation has been simple: Cut government spending, tame the deficit, and unemployment will fall. Maybe not tomorrow, maybe not the day after, but soon. “To put it simply,” House Majority Leader Eric Cantor (R- Va.) said last spring, “less government spending means more private-sector jobs.” But that’s not exactly a rigorous study. So here’s a rigorous study.

In a new paper for the International Monetary Fund, Laurence Ball, Daniel Leigh and Prakash Loungani 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. What’s more, the IMF notes, the losses are twice as big when the central bank can’t cut rates (a good description of the present.) Typically, income and employment don’t fully recover even five years after the austerity program is put in place.

There’s also a class dimension here: A deficit cut of that size tends to cause real wage income, where lower-income folks get their money, to shrink by 0.9 percent, whereas rents and profits, which higher-income folks depend on, decline by just 0.3 percent. And, as the chart on the right shows, profits tend to bounce back faster than wages.

Some austerity programs can be harsher than others. The IMF study notes that plans to reduce the deficit can be particularly brutal if central banks “do not or cannot blunt some of the pain through a monetary policy stimulus.”

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[T]he historical record is clear: Austerity does ugly, ugly things to a country’s economy in the short term, which is why the IMF now recommends passing deficit-reduction plans that kick in only “when the recovery is more robust.”

Congressional Budget Office (CBO) director Doug Elmendorf doesn’t advocate for specific policy proposals. Rather, his office tells Congress how much the policies that they decide on will cost. CBO: Spend money now!:

[D]uring his testimony in front of the “supercommittee” this morning, Elmendorf came awfully close to pushing Congress to support stimulus spending as part of its deficit reduction charge.

“Credible policy changes that would substantially reduce deficits late in the coming decade and over the long term, without immediate cuts in spending or increases in taxes, would support the economic expansion in the next few years and strengthen the economy over the longer term,” Elmendorf said at the hearing. “There is no inherent contradiction between using fiscal policy to support the economy today, while the unemployment rate is high … and imposing fiscal restraint several years from now, when output and employment will probably be close to their potential.”

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Elmendorf made the case that [increased government spending is] the best approach. “If policymakers wanted to achieve both a short-term economic boost and medium-term and long-term fiscal sustainability, a combination of policies would be required: changes in taxes and spending that would widen the deficit now but reduce it later in the decade,” he said.

Elmendorf did caution, however, that such an approach would need a good amount of political will behind it.

And there's the problem. We have one political party determined to destroy the economy in order to destroy a president for perceived partisan political advantage, regardless of how many American lives they destroy in the process — eh, they are just collateral damage. Tea-Publicans believe that Americans will reward them for their destructive behavior — as they did in 2010.

The only answer is to toss out every Tea-Publican in 2012. Their discredited faith based supply-side "trickle down" GOP economics has been demonstrably proven to be a failure. It has destroyed the economy of this country. The only way to end this economic policy insanity is to reduce their numbers in political office to a fringe minority.

H/T Ezra Klein's Wonkblog.

UPDATE: Steve Benen adds Political Animal – Elmendorf all but endorses American Jobs Act:

Elmendorf even went so far as tout the benefits of a payroll tax break — which Obama wants and which Republicans oppose — as having the most significant economic impact.

Taken together, every credible observer with a pulse — the Fed, the CBO, a wide variety of economists, the financial industry, the bond market, business leaders — are all saying more or less the same thing. They all want policymakers to approve short-term stimulus and oppose drastic short-term budget cuts. GOP officials, of course, desperately want to do the opposite.

It’s against this backdrop that House Republicans believe “every economist” agrees the GOP is on the right track. It’s hard to overstate how ridiculous that claim really is.

Steve snarks: "It’s a good thing congressional Republicans “do not accept the legitimacy of scholars and intellectual authorities,” or by now, they’d start to feel pretty discouraged."

PREVIOUSLY: Obama's Economic Stimulus Program Created Up to 3.3 Million Jobs, CBO Says – Bloomberg:

President Barack Obama’s stimulus package may have created or saved as many as 3.3 million jobs last quarter and lowered the unemployment rate by as much as 1.8 percentage points, the Congressional Budget Office said.

The $814 billion program, known as the American Recovery and Reinvestment Act, or ARRA, probably added between 1.7 percent and 4.5 percent to gross domestic product for the three months through June, the nonpartisan agency said in a report issued yesterday. [August 23, 2010]

Looks like the Texas turd blossom, Governor Goodhair Rick Perry, was only off by 3.3 million jobs in his grandstanding during Monday night's TeaNN debate.