Thursday, July 1, 2010

No, Really, Austerity Doesn't Work

From the NY Times:

As Europe’s major economies focus on belt-tightening, they are following the path of Ireland. But the once thriving nation is struggling, with no sign of a rapid turnaround in sight.

Let's think about that opening paragraph for just a moment.

1.) Everyone wants to "tighten their belts."

2.) Ireland tried that two years ago.

3.) Two years later "the once thriving nation is struggling, with no sign of a rapid turnaround in sight."

In other words:

"belt tightening" does not lead to "expansion."

"But maybe if we do it, it will be different."

Well, the Baltics also tried it:

Much like Spain, Ireland and the UK, the Baltic states were badly hit by the bursting of a credit bubble in 2008 that sent their economies into freefall and their budget deficits soaring.

While others cushioned the impact with stimulus spending, the Baltic trio plunged straight into austerity. As a result, they suffered the deepest recessions in the European Union last year, with Latvia’s economy shrinking by 18 per cent.

I realize there are people out there who are unconcerned with facts; they will continue to say Washington needs to "stop spending". These people are fools.

Again, let's review the GDP equation.


Consumer Spending
Net Exports
Government Spending

According to the CBO, government spending accounts for about 20% of the US economy.

Ladies and gentlemen, this really isn't that hard.