The Fiscal and Economic Effects of Austerity

by Simon Johnson, Peterson Institute for International Economics

June 4, 2013

Continuing uncertainty around the US federal budget in general, and the debt ceiling in particular, is not helpful—and may prove destabilizing both at home and around the world. Another round of confrontation over the debt ceiling would not be helpful to growth or employment. A sudden move towards further tightening of fiscal policy in the United States could have similar results. There is no meaningful evidence that the United States needs to cut federal deficits dramatically this year, or even over the next five years. There is no threshold for US federal debt, either gross or net, that would necessarily trigger slower growth or higher bond yields or any other economic problem. There is a danger that the United States will inflict upon itself an unnecessary and damaging degree of austerity. The United States should instead be building an economy within which federal revenue can be robust, and public spending growth can be contained over the next decade.

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