“The nation’s unemployment rate would probably be nearly a point lower, roughly 6.5 percent, and economic growth almost two points higher this year if Washington had not cut spending and raised taxes as it has since 2011, according to private-sector and government economists.”
The New York Times
The wind against austerity is attempting to pick up steam in the United States as Europe reconsiders its policies.
The Fed, from whom economists appear to have taken their cue, is saying that contractionary fiscal policy is restraining growth.
Bernanke first supported raising the debt ceiling, then popularized the term “fiscal cliff” and now complains that the cause of slow growth is fiscal when fiscal prudence is the right thing to do. Does the Fed Chairman understand the meaning of the word “consistency”?
The policy inference from Reinhart and Rogoff whose conclusions are robust is that especially beyond the 90% debt-to-GDP ratio pro growth policies which do not use more debt to grow the economy will work. Moreover, US debt-GDP ratio is beyond 100% when both growth and currency risks rise.
Fiscal prudence motivates growth, not reduce it. US growth rate would have been 1% higher had its debt-GDP ratio been less than 90%.
The world economy is slowing down not because of a bias for fiscal prudence but because of large debt-GDP ratios in US, Japan and the eurozone and tight inflation targets in the G8 countries.