When the deep recession hit and tax receipts plummeted, a steady chorus grew: “If we slash government spending, the private sector will explode with economic activity.”
The logic of that assumption was always pretty meager. How would widespread layoffs of teachers, public safety personnel, and road crews become an impetus for private sector activity?
Armstrong economics professor Nicholas Mangee tackled this issue of austerity in his recent Savannah Morning News column: Our economic times: The fanciful world of expansionary austerity
He notes the ample evidence that sudden contractions in government spending do not spur growth — rather the opposite.
From Mangee’s column: Decades of experience suggest that painful economic contractions are only amplified when expenditures diminish within an economy regardless of which sector the cuts are being drawn from.
An example:
One need only look across the Atlantic for the most recent evidence on the importance of timing in policy implementation. Portugal, for instance, has found itself in a most precarious debt position even after obediently complying with the European Central Bank’s austerity measures. Why? Because the measures have deprived their economy of growth and, in turn, decreased gross domestic product.
When GDP falls, a country’s debt-to-GDP ratio (the bellwether for a country’s fiscal health) rises. Sadly, a similar story could be told for other EU members as the region’s unemployment rate has just reached 10.8 percent with Spain’s rate climbing over 23 percent.
He also notes that there are clear advantages to reducing debt, if the timing is right: “Reeling in a country’s debt is critical to its long-term growth prospects. But most economists understand the best time to do so is on an economic upswing.”
We should never have embraced policies during the Bush presidency that caused the yearly deficits and total debt to climb dramatically.
Mangee’s columns will be appearing every other Wednesday in the Savannah Morning News. It’s going to be good to have a regular dose of fact-based economic analysis in the local paper.