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What Have We Learned About Austerity Since the Great Recession?

Michael Madowitz, What Have We Learned About Austerity Since the Great Recession?, May 2014.

“There are three major lessons for policymakers from this research:

  1. Direct government intervention during recessions, either through deficit-financed tax cuts or deficit-financed increases in government spending, is a more powerful tool for fighting recessions than we realized before the Great Recession.
  2. In a slack economy, or one that is operating below its potential, austerity—taking money out of the economy to balance government budgets—is especially bad policy. Whether via tax hikes or cuts in government spending, contracting the government’s budget during a recession reduces gross domestic product, or GDP, by more than the size of the cuts—possibly as much as three times more.
  3. The costs of doing nothing can be permanent and much higher than we previously thought: U.S. GDP is currently 10 percent below its prerecession 2014 projection, and many economists believe that we have reached a new normal. If this is true, austerity could cost the U.S. economy more than $1 trillion in economic activity every year, even after we have fully recovered from the Great Recession.”

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