As we hurtle toward oblivion in these debt limit talks, I know I’m a lonely voice, but somebody needs to question the entire premise here. What is the urgent need to cut the deficit right now when millions of people are out of work, demand is below trend and interest rate are at near-historical low points? The answer is there’s none. Administration hacks can say that government budgets are like family budgets all they want, it doesn’t make it any more true. We can all be cheered by a “shared sacrifice” budget with equal splits of spending cut and revenue increases, but that doesn’t make it particularly desirable either. Standard economic theory tells us that contracting fiscal policy right now will contract the economy right along with it.

A new paper from the IMF (pdf) puts another nail in the coffin of the doctrine of expansionary austerity. It basically shows that results purporting to show economic expansion following spending cuts and/or tax increases were based on a statistical illusion: an expanding economy can often lead to rising revenue and/or falling spending (e.g. because safety-net spending falls or because the government cuts back in an attempt to cool off inflationary pressures). And as a result, what the Alesina-Ardagna results capture is muddle by reverse causation […]

If we were discussing a politically neutral subject, the evidence here would long since have been considered definitive: expansionary austerity is a doctrine that failed. But since we’re in the political realm, of course, such a convenient doctrine can’t be abandoned. On the contrary, it now seems to be the official doctrine of both the GOP and the White House.

It’s convenient because it’s the cheapest stimulus there is, and represents as much of a “have your cake and eat it” moment as the theory that tax cuts produce more revenue. That’s deeply attractive to politicians who want to be everything to their constituencies.

So ideas that could actually create jobs – a national infrastructure bank, or bill to promote work-sharing (which has had great success lowering unemployment in Germany), don’t get off the ground. Only austerity is seen as viable. And that’s the opposite of factual.

Joseph Stiglitz writes about the next Great Recession today:

The remedies to the U.S. deficit follow immediately from this diagnosis: Put America back to work by stimulating the economy; end the mindless wars; rein in military and drug costs; and raise taxes, at least on the very rich. But the right will have none of this, and instead is pushing for even more tax cuts for corporations and the wealthy, together with expenditure cuts in investments and social protection that put the future of the U.S. economy in peril and that shred what remains of the social contract. Meanwhile, the U.S. financial sector has been lobbying hard to free itself of regulations, so that it can return to its previous, disastrously carefree, ways […]

Do we really need another costly experiment with ideas that have repeatedly failed? We shouldn’t, but increasingly it appears that we will have to endure another one nonetheless. A failure of either Europe or the United States to return to robust growth would be bad for the global economy. The failure of both would be disastrous—even if the major emerging-market countries have attained self-sustaining growth. Unfortunately, unless wiser heads prevail, that is the way the world is heading.

Hard to argue with that.

David Dayen

David Dayen

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