Economists Agree That Spending Cuts Hurt Weak Economies -- Fox Calls Them "Insane"
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Fox contributor Gary Kaltbaum today said that it's "insane people" who believe that "if you cut spending, it's gonna hurt the economy." In fact, actual economic experts agree that cutting spending during weak economic growth damages recoveries and depresses employment.
This was the conclusion of the October 2010 World Economic Outlook report, in which the International Monetary Fund examined data from the past 30 years to see what impact austerity measures had on weak-performing economies. The IMF wrote:
A key result is that fiscal consolidation is typically contractionary. A fiscal consolidation equal to 1 percent of GDP typically reduces real GDP by about 0.5 percent after two years. The effect on the unemployment rate is an increase of about 0.3 percentage point after two years. The results are statistically significant at conventional levels. Overall, the idea that fiscal austerity stimulates economic activity in the short term finds little support in the data.
But according to Kaltbaum, this belief is shared only by "insane people."
Discussing the recent House-passed spending bill to avert a government shutdown, Kaltbaum complained that the United States will never eliminate the deficit, saying:
KALTBAUM: It's never gonna get done. Look, spending, for whatever reason, just continues to go higher and higher and higher. And all this rhetoric from both sides, even from the Republican side -- it's just not gonna get done. The problem is, somehow we got to the point where everybody believes, or at least I think insane people believe that if you cut spending, it's gonna hurt the economy.
He went on to say, "It's crazy. Cutting spending will not hurt the economy."
He has argued that "if it weren't for this destructive fiscal austerity, our unemployment rate would almost certainly be lower now than it was at a comparable stage of the 'Morning in America' recovery during the Reagan era." The economies in Europe are further proof, say economists, that imposing austerity on countries during weak economic growth retards recoveries.
Also, while Kaltbaum may claim that spending has gone up "for whatever reason," let's not forget the United States is recovering from the worst financial crisis and recession in 70 years. With unemployment still high, actual economists continue to stress that the focus right now for the country should be on boosting employment, which is more important in the short-term for lowering unemployment, rather than reducing the deficit.
Economic Policy Institute president Lawrence Mishel wrote: "Any further spending cuts at the federal -- as per the plans by Wisconsin Rep. Paul Ryan (R) or presumptive GOP presidential nominee Mitt Romney -- or at the state or local levels will only exacerbate the problem and slow the recovery or even cause the economy to shrink." Mishel went on to explain that the "best approach" to jobs creation "means having a higher fiscal deficit for a few more years":
This still remains the best approach: Invest in infrastructure and school modernization at a time when savings are ample and interest rates are low. Prevent further cutbacks in needed state and local services that have been slowing the recovery. Maintain safety net benefits such as food stamps and unemployment benefits that help those hurt by the recession and also help boost consumer spending. These create more jobs than other spending at this moment, according to the Congressional Budget Office.
Such a plan necessarily means having a higher fiscal deficit for a few more years. This is necessary to support overall demand in the economy and should be joined by expansionary monetary policy as well. The real deficit problem we face is not from current deficits, which are primarily due to the weak economy and the associated loss in revenues. Rather, our deficit problem is the longer-term rise in healthcare costs and the scaling back of tax rates that have been undercutting revenue. This should be addressed once the recovery becomes robust. We must also do more to strengthen wage growth and improve job quality and security.
In its report, the IMF added that austerity measures could reduce the negative impact on the economy, writing: "Interest rate cuts and a fall in the value of the currency usually soften the impact of fiscal consolidation on growth. However, this cushioning effect is lower when interest rates are already near zero, or when many countries consolidate at the same time." Conversely, the current U.S. interest rate is practically zero.