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Krugman touts IMF Study and more Deficit Spending

March 10, 2013
Paul Krugman is touting a new IMF study which claims that "austerity" increases the National Debt/GDP ratio. The study's finding is that budget cuts in high debt countries leads to more borrowing because of shortfalls in GDP and tax revenues. This result hinges on the impact of fiscal multipliers. A large multiplier leads to a higher debt/GDP ratio and a small multiplier does not. Its too bad that Krugman does not read the Circle Bastiat blog where Joseph Salerno reported on a different IMF study which showed the fiscal multiplier was small, near zero, and negative over the long haul. From Salerno's blogpost: "Last and most important for the U.S. economy, the study sorts the sample into “country-episodes” where the total central government debt to GDP ratio has exceeded 60 percent for more than three consecutive years. This is the case for the U.S. from 2007 to the present. For the high-debt country-episodes the impact fiscal multiplier is close to zero and the long-run multiplier is -2.30. This means that $1.00 of additional government spending has no effect on impact but in the long run destroys $2.30 of total output in the economy." The (IMF) authors conclude, in part:
We have found that the effect of government consumption is very small on impact, with estimates clustered close to zero. This supports the notion that fiscal policy (particularly on the expenditure side) may be rather slow in impacting economic activity, which raises questions as to the usefulness of discretionary fiscal policy for short-run stabilization purposes. . . . Further, fiscal stimulus may be counterproductive in highly-indebted countries; in countries with debt levels as low as 60 percent of GDP, government consumption shocks may have strong negative effects on output. . . . Moreover, fiscal stimuli are likely to become even weaker; and potentially yield even negative multipliers, in the near future, because of the high debt ratios observed in countries, particularly in the industrialized world.

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