Friday, June 8, 2012

More austerity, more debt

How is that austerity working for you? According to a recent policy brief by UN-DESA, not so well. The authors (Oliver Paddison and Rob Vos) say that:
"Available evidence suggests that fi scal austerity is not helping restore economic growth or debt sustainability; countries that made the biggest spending cuts to reduce fiscal deficits have seen their debt-to-GDP ratios rise even further (see figure)."

The graph shows that higher primary surpluses (difference between revenue and spending, excluding financial payments) are correlated with higher level of public debt. The reason is that austerity reduces the level of activity and depresses revenues as you would expect according to Keynesian principles.

I think increasingly we have an analogy with evolution and creationism in the debate about the effects of austerity. Logic and evidence are clearly on one side, but belief, well that goes in any direction. The problem is that beliefs, ideology, and vested interests have an impact on policy.

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