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Austerity Is Hammering State Economies

Austerity Is Hammering State Economies

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Adam S. Hersh digs deeper into these numbers to see why slashing public spending makes a fragile economy worse and argues that a strong and sustained economic recovery hinges on government investment.
Adam S. Hersh digs deeper into these numbers to see why slashing public spending makes a fragile economy worse and argues that a strong and sustained economic recovery hinges on government investment.

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Published by: Center for American Progress on Jun 20, 2012
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1Center or American Progress | Austerity Is Hammering State Economies
Austerity Is Hammering State Economies
States that Cut Spending in Response to the Recession FareWorse Economically
Adam S. Hersh June 21, 2012
Public spending cus, while on he rise worldwide, are bad or he U.S. economy. U.S.saes provide a good illusraion o his principle. Since he sar o he Grea Recession20 saes have cu public spending while 30 saes expanded spending.
1
Tose ha cuspending have ared worse economically han hose ha expanded spending.Te median “spending cu” sae saw he ollowing resuls:
•
Te unemploymen rae is 4.1 percenage poins higher
•
Tere are 6 percen ewer privae-secor jobs
•
Te sae economy is growing 2.7 percenage poins slower han beore he recessionOn average, saes ha resised cus and expanded public expendiures saw he ollowingresuls:
•
Unemploymen is 3.5 percenage poins higher han beore he recession
•
Los privae-secor jobs are only wo-hirds he rae o he average spending cu sae.
•
Te economy is growing 2.6 percenage poins aser han beore he recession.Tis column digs deeper ino hese numbers o see why slashing public spending makesa ragile economy worse. We argue ha a srong and susained economic recovery hinges on governmen invesmen.
Misguided beliefs in austerity
Governmens around he world are zealously pursuing public-spending cus. Tey  believe ha scal auseriy is a cure or heir increasingly ragile home economies.Bu economiss have long known ha when an economy urns souh, public spending oninvesmens and services can make all he dierence beween robus recovery and prolonged
 
2Center or American Progress | Austerity Is Hammering State Economies
sagnaion. A ragile economy can be butressed and boosed by increased public spend-ing on invesmens like educaion, inrasrucure, energy eciency, and puting money inpeople’s pockes hrough saey-ne programs like unemploymen insurance and Medicaid.Te governmen—like amilies and businesses—also buys a remendous volume o goods and services rom he privae marke. As businesses see more sales and poen-ial cusomers, hey will have condence in he economy o add jobs and crank up heeconomy’s privae-secor engine.Dramaically cuting spending in a ragile economy, however, can pull he rug ourom nascen economic growh, as we are seeing now here in he Unied Saes andaround he world.Te economics o his ac have no changed, bu he poliics have. And Americans are worse o or i.
Public spending helped generate an economic recovery
 As he U.S. economy plunged ino recession hroughou 2008 and early 2009, govern-men expendiures a all levelsexpanded o ose and butresshe alling privae-secor econ-omy. (see Figure 1) From heourh quarer o 2007 hroughmid-2010, governmen expendi-ures increased by 4 percen aeradjusing or infaion.Te increased governmen spend-ing helped reverse he double-digi conracion in he privaeeconomy caused by he real esae bubble collapse and ensuing nan-cial crisis. By lae 2009 increasedpublic spending had helpedresore he privae secor o sus-ained posiive economic growh.Privae-secor employmen, whichhad been shrinking a 839,000 jobs per monh in January 2009, was again adding ne new jobs bMarch 2010.
FIGURE 1
Private economy stalls when government spending cuts back 
4.4 percent total spending cut associated with flatlining private growth
 
$2,450$2,490$2,510$2,530$2,550$2,570-14%-12%-10%-8%-6%-4%-2%02%4%6%
   2   0   0   7  q   4   2   0   0   8  q    1   2   0   0   8  q    2   2   0   0   8  q    3   2   0   0   8  q   4   2   0   0   9  q    1   2   0   0   9  q    2   2   0   0   9  q    3   2   0   0   9  q   4   2   0   1   0  q    1   2   0   1   0  q    2   2   0   1   0  q    3   2   0   1   0  q   4   2   0   1   1  q    1   2   0   1   1  q    2   2   0   1   1  q    3   2   0   1   1  q   4   2   0   1   2  q    1
$2,470
Private GDP growth rateGovernment expendituresReal private GDP growth rateTotal government consumptionand investment, $ billion (real)
 
Source: Author’s analysis o Bureau o Economic Analysis data.
 
3Center or American Progress | Austerity Is Hammering State Economies
States pull back spending, threaten recovery
Bu in he second hal o 2010, combined governmen spending in he U.S. conracedsharply—rom $2.6 rillion down o $2.5 rillion in he ourh quarer o 2011, a 4.4percen cu.Te privae economy el he impac in shor order. Privae-secor growh ell rom morehan 5 percen in early 2010 o less han 2 percen by he second quarer o 2011. Privaegrowh srenghened o an exen in lae 2011 aer uncerainy subsided over wheherconservaives in Congress would push he U.S. governmen o deaul on is debs. Buprivae-secor growh is slowing again as governmen wihdraws is suppor or servicesand invesmen ha provide a oundaion or privae economic aciviy.Mos o he expendiure cus in he Unied Saes can be raced o sae and local govern-mens, where balanced budge rules and so-called “axpayer bills o righs” limiingpublic-expendiure increases boh consrain sae governmens’ abiliies o pursueeconomic policies o counerac he eecs o downurns and reurn aeced economieso sronger ooing. Te scal crunch occurs a a ime when sae and local services aremos needed o help amilies and businesses weaher he economic sorm.Because i is more dicul or saes o adjus heir scal posiions, Congress rouinely makes aid o sae and local governmens a key componen o measures o srenghenhe economy during a downurn. Tis aid remains one o hepolicies wih he bigges bang or he buck in counering a weak economy. Relieving he scal srain on saeand local governmens should be par o he policy mix i Congress is able o overcomeconservaive obsrucion o growh-enhancing public expendiures.Consrains on heir budges do no ae sae governmens o spending cus, as heanalysis below shows. By drawing on “rainy day unds,” expanding expendiures on hesae capial budge or big-icke public invesmens, and shiing ax burdens away rommiddle-class and low-income amilies ono hose more able o pay, saes can increaseexpendiures and are seeing remarkably dieren consequences han saes ha cu.
Effects of different spending paths
o see how sae spending aecs economic oucomes, we divided U.S. saes ino wogroups based on wheher hey had expanded or conraced public spending since hesar o he Grea Recession in December 2007, adjused or infaion.
2
 Figure 2 shows he dieren economic rajecories o saes cuting spending and saesexpanding spending. Te lines plo he median o each group o saes—he poin wherehal o saes are higher and hal are lower—or each economic indicaor. Te median

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