# OK

The purpose of this diary is to arm the righteous with a refutation for austerity that can be delivered on any elevator ride.

The purported objective of austerity measures (tax hikes and spending cuts) is to diminish a nation's debt-to-GDP ratio by cutting its annual deficit.  But, it is well known that such measures negatively impact the economy (GDP) -- in fact, there are tables of multipliers telling by how much each measure can be expected to negatively impact the GDP.

But, even if your austerity measures are so good that they drive the deficit to zero, you have not decreased the prior debt, which will still be in the numerator of the next year's debt-to-GDP ratio (debt/GDP).  And, you will have shrunk (negatively impacted) its denominator (GD) for a net increase in debt/GDP, which is the opposite of the purported objective of austerity measures!

It’s like when an airplane gets into a spin: the response of the airplane becomes counter-intuitive. Trying to get the nose of the airplane up will only tighten the spin.

Politicians instinctively try to shrink the debt-to-GDP ratio (debt/GDP) by cutting deficits through “austerity measures”: tax hikes and spending cuts that target (mostly) the lower 90% of the population. In Mark Zandi’s table of fiscal multipliers (partial derivatives), such measures have multipliers that are greater than one, i.e., they decrease the GDP more than they decrease the deficit.

To illustrate the point, let’s take a simple hypothetical example. Let’s suppose that our annual deficit is \$1T, debt is \$10T, and GDP is \$10T. And, let’s suppose that our austerity measures cut that deficit in half, and all of the multipliers are exactly one.

A year later, the new debt-to-GDP ratio will be (\$10T + \$0.5T) / (\$10T – \$0.5T), i.e., \$10.5T/\$9.5, i.e., roughly 1.105. In other words, these austerity measures increased the debt-to-GDP ratio by ten and a half percent. And, the next year, things will only get worse.

Also, note that the result would be even worse if the austerity measures cut the deficit to zero: the result would be \$10T/\$.9T, which is an 11% increase in the debt-to-GDP ratio. Try it with multipliers of .1 instead of 1; you’ll still increase the debt-to-GDP ratio.

It is simple arithmetic that (unless debt/GDP is very small) austerity will backfire, just like trying to pull up the nose of an airplane that’s in a spin.

#### Tags

EMAIL TO A FRIEND X