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IMF: Austerity boosts unemployment, lowers paychecks - The Washington Post
These past few years, the Republican line on job creation has been simple: Cut government spending, tame the deficit, and unemployment will fall. Maybe not tomorrow, maybe not the day after, but soon. “To put it simply,” House Majority Leader Eric Cantor (R- Va.) said last spring, “less government spending means more private-sector jobs.” But that’s not exactly a rigorous study. So here’s a rigorous study.
In a new paper for the International Monetary Fund, Laurence Ball, Daniel Leigh and Prakash Loungani look at 173 episodes of fiscal austerity over the past 30 years—with the average deficit cut amounting to 1 percent of GDP. Their verdict? Austerity “lowers incomes in the short term, with wage-earners taking more of a hit than others; it also raises unemployment, particularly long-term unemployment.”
More specifically, an austerity program that curbs the deficit by 1 percent of GDP reduces real incomes by about 0.6 percent and raises unemployment by almost 0.5 percentage points. What’s more, the IMF notes, the losses are twice as big when the central bank can’t cut rates (a good description of the present.) Typically, income and employment don’t fully recover even five years after the austerity program is put in place.
These past few years, the Republican line on job creation has been simple: Cut government spending, tame the deficit, and unemployment will fall. Maybe not tomorrow, maybe not the day after, but soon. “To put it simply,” House Majority Leader Eric Cantor (R- Va.) said last spring, “less government spending means more private-sector jobs.” But that’s not exactly a rigorous study. So here’s a rigorous study.
In a new paper for the International Monetary Fund, Laurence Ball, Daniel Leigh and Prakash Loungani look at 173 episodes of fiscal austerity over the past 30 years—with the average deficit cut amounting to 1 percent of GDP. Their verdict? Austerity “lowers incomes in the short term, with wage-earners taking more of a hit than others; it also raises unemployment, particularly long-term unemployment.”
More specifically, an austerity program that curbs the deficit by 1 percent of GDP reduces real incomes by about 0.6 percent and raises unemployment by almost 0.5 percentage points. What’s more, the IMF notes, the losses are twice as big when the central bank can’t cut rates (a good description of the present.) Typically, income and employment don’t fully recover even five years after the austerity program is put in place.
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