Sunday, July 31, 2011

NYT with some good economic reporting

Binyamin Appelbaum and Catherine Rampell have a great article on the front page of Monday's Times, "From Big Spending to Big Cuts, All While the Economy Stalls." It looks at what the actual research says regarding cutting spending in an economy like ours. Nothing crazy or new or groundbreaking here, but it lays out nicely how this is not such a good idea.

The best part is where they get some Chicago economist talking about his theory that it's actually the opposite:
Some conservative economists argue that even the immediate impact of a deal could be positive. Classic economic theory holds that people respond to the growth of government by spending less of their own money, because they assume that taxes will increase. A reduction in the federal debt therefore should encourage people to spend more of their money.

“From an accounting point of view, it seems obvious that you would reduce G.D.P. if you cut government spending,” said Randall Kroszner, an economics professor at the University of Chicago and a former Fed governor appointed by Mr. Bush. “But the key is really the impact on consumption and investment. If you reduce government spending and if people think that reduces uncertainty about the tax burden down the line, they may be more comfortable with spending.”

Economists who have examined the historical record, however, say the evidence is clear that the immediate impact of spending cuts outweighs any short-term benefits to confidence.

“When you look at the history of these things, the finding is that we shouldn’t be kidding ourselves,” said Paolo Mauro, chief of the fiscal affairs department at the International Monetary Fund and the editor of a book of case studies, “Chipping Away at Public Debt.” “When you do fiscal adjustment in the near term, it does have an adverse impact on economic growth.”




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