Arjun Jayadev ’05 Ph.D. and his colleague at the Roosevelt Institute, Mike Konczal, are co-authors of the working paper, The Boom Not The Slump: The Right Time For Austerity, recently cited in Paul Krugman’s New York Times blog entry, Expansionary Austerity?
Jayadev and Konczal’s paper critiques the idea that large-scale deficit reductions are associated with economic expansion which is a conclusion drawn from the Alberto F. Alesina and Silvia Ardagna (2009) paper, “Large Changes in Fiscal Policy: Taxes Versus Spending.” Alesina & Ardagna’s research has led many popular commentators to suggest that the U.S. can adopt such a policy and grow.
Not likely, according to Jayadev. In fact, the opposite may be true. If the U.S. proceeds to take steps to reduce the deficit during this economic slump, we may actually experience a decline in growth. “When you look at three years after the deficit reduction episodes, quite often growth rates actually slow down compared with three years before. So, if we were to reduce the deficit immediately there is a distinct possibility that may happen here. This is especially the case since in the last two months there has been a distinct slowdown in the United States.”
With the U.S. economy still struggling, it is obviously important to question how best to proceed. The Jayadev-Konczal paper provides an alternative perspective to those advocating an immediate deficit reduction. “There is a debate right now and certainly there will be policy decisions made after November. The economy has not recovered as people had hoped as the stimulus was too small for that to occur (this is not 20-20 hindsight since many people noted it at the time). Now we are going to have to look at another round of stimulus money or cutting back. What our paper shows is that there is no historical evidence provided by the advocates of deficit reduction that cutting back in a similar situation that the U.S. is in has ever led to growth and debt reduction.”