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The Fiscal Austerity Dilemma: Revisiting Keynesian Principles for Sustainable Growth

Discusses the dangers of budget deficit hysteria, advocating for sustained deficit financed fiscal policy to stimulate growth, private sector deleveraging, and maintain a sustainable debt/GDP ratio. Challenges the flawed economic analysis behind fiscal austerity and warns against the triple damage it may cause.

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The Fiscal Austerity Dilemma: Revisiting Keynesian Principles for Sustainable Growth

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  1. The Fiscal Austerity Trap:How Budget Deficit Hysteria Risks Sabotaging Growth & Creating Self-Fulfilling Budget Difficulties Thomas Palley New America Foundation Mail@thomaspalley.com

  2. Introduction • Return of fiscal austerity agenda = case of “Déjà vu all over again”. • Wrong economic agenda. • Wrong political agenda.

  3. Why We Need Sustained Deficit Financed Fiscal Policy - 1 • (1) Keynesian stimulus to fight the recession. • (2) Help private sector deleveraging. • (3) Spur economic growth.

  4. Figure 1. The “virtuous” circle linking growth and deficit financed public investment. Growth + + Deficit financed public investment Fiscal space +

  5. What is a Sustainable Deficit? • Sustainable deficit keeps steady debt/GDP ratio. (1) With growth of 2.5% & debt/GDP ratio of 100% •  sustainable deficit = 2.5% of GDP. (2) If real interest rate = 2%  implies interest service burden of 4%.

  6. Is Our Current Budget Situation Sustainable?Table 1. Projected annual average budget deficit as a percent of GDP, 2009 –2050. (Source: Kogan et al., 2008)

  7. Conclusion - 1 • Fiscal austerity based on flawed economic analysis & is not supported by the numbers. • Need budget deficits to: • (1) Fight recession. • (2) Help private sector deleverage • (3) Spur growth via Public Inv.

  8. Conclusion - 2 • Fiscal austerity will do triple damage: • Risk economic stagnation & sub-par growth. • Make economic reform more difficult. • Uses budget deficit as Trojan Horse to justify an assault on vital public programs – especially Social Security.

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