The Trickle-Down Delusion by Seip John;Harper Dee Wood;

Author:Seip, John;Harper, Dee Wood;
Language: eng
Format: epub
Tags: undefined
Publisher: UPA
Published: 2012-08-15T00:00:00+00:00

Austerity Causes Slow Growth,

Which Increases Deficits

Shortage of demand, in the past, has been addressed by fiscal stimulus, however, with the triumph of trickle-down, economists, commentators, politicians and others enamored with trickle-down theory obsess with concern about government (local, state and federal) ability to pay off debt rather than trying to help suffering members of the middle class and poor with government spending to spur job growth.

Trickle-down “Austerians” received support from economists Carmen Reinhart (University of Maryland) and Kenneth Rogoff (Harvard) who observed in their 2009 book, This Time Is Different: Eight Centuries of Financial Folly,[89] accumulation of excessive government debt inevitably leads to economic misery. A few months after the book was published Reinhart, in a Forbes article, characterized a 90 percent ratio of “gross government debt” to GDP as a tipping point beyond which economic growth is impaired,[90] concerns she reiterated in testimony before a bipartisan congressional fiscal commission a few months later.[91] “Gross government debt” was at 90 percent around year-end 2010. Reinhart and Rogoff issued a paper in 2010, “Growth in a Time of Debt,” repeating their conclusion—one which other economists had trouble replicating, an effort complicated by their refusal to share their raw data analysis. University of Massachusetts economists Thomas Herndon, Michael Ash and Robert Pollin eventually were given the critical data spreadsheets and found, in results widely reported in 2013, that a spreadsheet coding error skewed the results. They concluded that the average real GDP growth rate for countries carrying a public debt-to-GDP ratio of over 90 percent was not the -0.1 percent as published by Reinhart and Rogoff but actually 2.2 percent. Further, they found no breakpoint beyond which growth falls off rapidly.[92] Their conclusion was supported by an IMF Working Paper published in February 2014.[93]

This finding tends to support numerous economists, among them, Paul Krugman. Krugman expressed concern for the broader problem that we may have causality reversed: stagnant growth may cause higher deficits because of resultant shortfall in revenues, as opposed to the traditional concern that rising deficits result in stagnant growth.[94] (This concern regarding reverse causality was shared by Yale University economist and 2013 Nobel Prize winner Robert Shiller in a 2011 article titled “Debt and Delusion.”[95]) For examples, Krugman pointed to how the great decline in GDP immediately after World War II resulted in the debt to GDP ratio growing; that debt rose rapidly in Japan after growth slowed in the 1990s, and that European debt levels rose rapidly after growth slowed there.

Recently, Ireland imposed austerity to fight debt only to see growth slow, imperiling future service of debt, only recently beginning to emerge from this episode, while Iceland, with a debt to GDP ratio of 900 percent, unilaterally cut itself slack with many of its foreign creditors, depreciated its currency, and promoted growth, while it also placed its largest lenders in receivership and forced creditors rather than taxpayers to bear the losses of its banks.

In accord with Krugman and Shiller, Thomas Ferguson, professor of political science at the University

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