Slashing Spending Increases Deficits

Economists Paul Krugman, Brad DeLong and even Larry Summers have long argued that cutting government spending during a recession is bad policy — and have pointed to the failure of such policies in Europe as proof.  Now new evidence supports them.

The fundamental economic question of the last five years has been a simple one: how much does stimulus work? The answer, according to a new paper by Daniel Riera-Crichton, Carlos Vegh, and Guillermo Vuletin, is much more than we previously thought. And that means austerity has also hurt more than we thought — so much so that it might even be self-defeating.

That’s right: cutting spending in a slump might actually make debt problems worse.

…This leaves us in an upside-down world where smaller deficits might actually make our debt problems worse. When interest rates are zero, spending cuts can cripple the economy so much that GDP falls more than the government saves. And that means the debt-to-GDP ratio might increase even though government spending is decreasing — like it has in Greece. That’s why the IMF thinks infrastructure spending would almost pay for itself right now,

WonkBlog: Washington Post

So let’s get it on!  The American Society of Civil Engineers gives the U.S. a D+ for its infrastructure effort.

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