There have been many calls lately to immediately cut government spending. Wouldn't our economy do better if the government wasn't spending so much money? Actually, no. There are five countries who have implemented severe "austerity measures" in response to the economic crisis: Portugal, Spain, Ireland, Greece, and Britain. We now have yet more data showing what happens when you cut spending during times of economic fragility: the economy contracts, people are laid off, they stop buying, then more people are laid off, then everyone defaults on their loans, tax revenues plummet, interest rates soar, and the deficit ends up increasing! Long term spending on our aging population is the real problem, not big deficits now during a period of high unemployment.
Business Insider yesterday: "So now we know: Not only does austerity not help the economy, it doesn't even help governments get out of debt, as Greece's and Spain's latest horrific numbers confirm. The governments have been cutting spending, and deficits have gotten worse. So, what's the point of austerity again?"
Wall Street Journal yesterday: "Greece's budget deficit in 2010 was 10.5% of gross domestic product, significantly larger than the Greek government and European Union's forecasts, EU statistics agency Eurostat said Tuesday. Lower-than-expected government revenue was the main culprit behind the larger deficit number."
New York Times a few weeks ago: "In the United States, the debate over how to cut the long-term budget deficit is just getting under way. But in one year into its own controversial austerity program to plug a gaping fiscal hole, the future is now. And for the moment, the early returns are less than promising. Retail sales plunged 3.5 percent in March, the sharpest monthly downturn in Britain in 15 years."
Looks like Keynes was right.
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