Breaking News: Austerity Policies Curb Economic Growth

James Pethokoukis points to an analysis of Bowles-Simpson – the compromise debt reduction plan that sets so many hearts aflutter – from Macroecomic Advisers. What would a package of tax cuts and spending cuts do for growth?

The fiscal drag reduces GDP growth by an average of 0.3 percentage point per year from 2012 through 2021.  However, the drag is front-loaded, averaging between 0.4 and 0.5 percentage point from 2012 to 2015. The unemployment rate barely dips below 7%.  By the end of 2015 it is roughly a percentage point higher than in the baseline, and by the end of the simulation almost two percentage points higher.

This is completely unsurprising, because this is what austerity plans do – they induce pain while reassuring investors and teeing up growth in the long run. See also: “Kingdom, United.” The oddity is that our political conversation right now is all about spending cuts with the implication that failing to cut spending is retarding growth. Economists don’t believe that’s true. The (less often heard now) Republican catch phrase – “cut and grow” – makes about as much sense as “diet and get fat.”* But they’re in the enviable position of demanding that a Democratic president sign on to austerity plans that don’t generate more employment, and then beating him in 2012 with the issue of high unemployment.

*Unless you’re talking about cutting regulation, which offers some hope of spurring growth.