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Repeating a now familiar warning, CBO Direcor Doug Elmendorf told the Super Congress today that too-deep spending cuts could slow even further an already ailing economy, and that short-term higher deficits could be necessary for economic recovery.

Elmendorf’s message: to avoid slowing the economy even further, the deficit must get worse before it gets better.

“If policymakers wanted to achieve both a short-term economic boost and medium- and long-term fiscal sustainability,” Elmendorf said, the “most effective” policy would be “changes in taxes and spending that would widen the deficit now but narrow it later in the decade.”

He warned, however, that the approach would work best if future policy changes “were sufficiently specific and widely supported” so that individuals and businesses can believe “that the future fiscal restraint would truly take effect.”

Elemendorf also discussed the recent findings by IMF economists (and others) that "in countries that really set out to do fiscal austerity, the results tend to not be good in the short term."

"I think the principle lesson of looking at countries like Greece and others is that it is a terrible situation to end up in, where one has to make drastic abrupt changes in policy. But if you look at Greece or Ireland or the experience in the UK which did not face such a crisis but has made a very, very determined pivot in its policy, those economies are not doing very well right now. And I think leaders of those countries felt they had no alternative given where they had gotten to... That they were at a point where people were not lending the governments money anymore or about to stop lending them money.... So they had to make drastic changes. But that is not a situation that we would like to find ourselves in."[...]

It's not just Elmendorf. According to IMF economists, the GOP approach of slashing spending by even just 1 percent of GDP would under current conditions lead to a big spike in unemployment and a sizable drop in incomes, all while doing almost nothing to actually reduce deficits. The effects, according to the IMF are exacerbated when central banks can't reduce interest rates anymore -- a situation the Fed finds itself in right now.

Here that is in graph form from Kevin Drum.


Republicans want all belt-tightening and no spending and no tax reforms or increases. Democrats have fallen into the deficit trap and seem to be fully on the austerity bandwagon. But they, and President Obama who will deliver his "cut it more!" proposal next week, need to take Elmendorf's warning very seriously. The belt is as tight as it needs to get right now.

Originally posted to Joan McCarter on Tue Sep 13, 2011 at 03:47 PM PDT.

Also republished by Daily Kos.

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Comment Preferences

  •  Tip Jar (17+ / 0-)

    "There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning." —Warren Buffett

    by Joan McCarter on Tue Sep 13, 2011 at 03:47:02 PM PDT

  •  There is a UN report (10+ / 0-)

    telling Europe and the US the same thing    

    in much stronger terms.

    Everybody knows it is the wrong thing to do, so why are they doing it anyway?

    Yes we can, but he won't.

    by dkmich on Tue Sep 13, 2011 at 04:05:44 PM PDT

    •  Yep (7+ / 0-)

      even the head of imf came out today and said this. I hope she doesn't meet the same down fall as the old imf person who wanted banks to eat the bad investments instead of the taxpayer

      •  It's because they are not economists. (0+ / 0-)

        Can't they get Bernanke or Krugman or one of the econ's with gravitas to meet with them?  

        The Dude abides, now get off my lawn.

        by Boris49 on Tue Sep 13, 2011 at 04:54:02 PM PDT

        [ Parent ]

      •  the IMF is in a process of change. (2+ / 0-)
        Recommended by:
        historys mysteries, flight2q

        It used to be the exclusive playground of bankers from rich countries, who preyed on poor countries.  By long unwritten tradition, the head of the World Bank was always an American, and the head of the IMF was always a European.  Tellingly, there was a VERY large effort last time to change that and place someone from China, India, or South America in charge of the IMF instead--a crystal-clear indication of the power shift that happened when most of the countries in South America kicked the IMF out, formed left-leaning governments, and utterly rejected the whole failed "austerity" agenda.

        At around the same time, the balance of power within the WTO also shifted, with the formation of the G20+ bloc which successfully brought the Dohan Round to a complete standstill.

        The US and Europe will, in just a few short decades, no longer be the economic superpowers.  The BRIC nations (Brazil, Russia, India, and China) will be.

        The American Century is already ending.


        •  It may sound unpatriotic, but thank God for that! (0+ / 0-)

          It sticks in my craw every time I hear that something is "In our national interests".  It's become universal: EVERYTHING is in our national, or should I say everthing is in the interests of some company who has their hands deep into the pockets of some political hack on the hill?

          It's about time that we focused on our domestic issues:  education, infrastructure and poverty.

          If coming to the end of the American Century means we don't send our men and women off to every corner of the globe to die for some corporation's interests, then I'll blow taps.  We can use the bugle for jazz instead.

          The Dude abides, now get off my lawn.

          by Boris49 on Wed Sep 14, 2011 at 10:59:54 AM PDT

          [ Parent ]

    •  it's funny listening to the IMF say this: (1+ / 0-)
      Recommended by:
      Elemendorf also discussed the recent findings by IMF economists (and others) that "in countries that really set out to do fiscal austerity, the results tend to not be good in the short term."

      after the bastards pushed austerity onto an entire continent for decades and didn't give up until they were thrown out on their ass.

  •  Bill Gross of Pimpco just figured this out re UK (8+ / 0-)

    LONDON, Sept 5 (Reuters) - The austerity measures
    implemented by British finance minister George Osborne risk pushing the UK economy into recession, Bill Gross, the manager of PIMCO, said in an interview with the Times newspaper.

     Gross, who manages the world's biggest bond fund, told the newspaper that a "mid-course correction" of the fiscal plans would lift the economy and should not damage the country's standing with bond investors.

     "The economy in the UK is worse off than it was when the plan was developed, so there should be at a minimum fine-tuning and perhaps re-routing of the plan," he was quoted as saying.

     Gross said a similar argument applied to other leading
    economies, including in the euro zone and the United States, which he said faced a mounting crisis.  

    So it's The Why do you hate this country You're Obsessed with misquoting me out of context while I was in the process of misspeaking with the sun in my eyes while chowing down and bashing Sharia law God Bless America defense.......

    by JML9999 on Tue Sep 13, 2011 at 04:06:47 PM PDT

  •  Austerity hurting aggregate demand? (11+ / 0-)

    Who could have guessed.

    Let me recall Econ 101.



    C is the consumer, suffering from stagnant median wages for over a decade.

    I is business investment, which often goes to China for cheap labor, and is so concerned about the outlook for sales in the US that it has put off investment until visibility clears up.

    G is government, federal+state+local.  State and local can't run deficits,

    X is exports, but China, Germany and Japan have cornered the market.  And none of these three countries has expressed an interest in becoming a net iMporter.  In fact, China continues to engage in protectionism to ensure that his doesn't happen (if Romney gets the nod, he's already written that he will use China against President Obama in the campaign).

    M is iMports, which Americans, suffering from stagnant incomes, continue to seek, as a Chinese-made bike is cheaper than a US-made one.  Heck, even Brooks Brothers makes but one type of shirt in the USA, and that's because it avails itself of a government cotton-subsidy.  All other shirts are made overseas.

    Having said all this, that leave G, specifically FEDERAL government spending.

    It's really not rocket science, especially with the federal government able to borrow 10-year debt at 1.99%.

    Learn about Centrist Economics, learn about Robert Rubin's Hamilton Project.

    by PatriciaVa on Tue Sep 13, 2011 at 04:15:21 PM PDT

    •  You've hit on... (4+ / 0-)

      The real issue here.  Just like with history and science, belief and ideology have been given equal weight in our society with reality -- and in doing so we have conflated beliefs and reality.
       Once what we believe becomes real to us, no amount of evidence to the contrary will undo the convincement.  And once enough people believe it may-as-well be true, facts be damned, it will be true, regardless of the facts.  Look at the social security debate -- facts say that ss is fine, but nobody believes it.

      Economics is no longer the dismal science, it is simply dismal.  Basic concepts like the formula for GDP have been tossed aside in favor of precepts of economic faith like 'government spending is bad'.  And if it continues, like with social security, it will also be true regardless of reality.

      The only thing we can do (I teach economics, myself) is speak up every single time some jack-ass decides to pass off his/her beliefs as if they are real.   We probably won't convince them, but we might keep them from confusing somebody else to the point where what they are peddling becomes believable.

      The shared delusion can only take so much damage before it alters itself to accommodate the stupid and save itself.

      A blog link on the subject

      Credulant (adj): Something that is not fully credible because it is unsourced but it sounds true so it is accepted without argument.

      by xajaxsingerx on Tue Sep 13, 2011 at 04:31:23 PM PDT

      [ Parent ]

    •  as an aside . . . . (1+ / 0-)
      Recommended by:
      historys mysteries
      if Romney gets the nod, he's already written that he will use China against President Obama in the campaign

      if he tries that, the corporados will squash him like a bug.  They are very very very big fans of cheap imports from China, since they are the ones making money on all the cheap imports from China (at least the ones who haven't already started moving their runaway factories to Vietnam or Cambodia).

      Anyone who tries to screw with the global "free trade" structure will incur the wrath of the high and mighty.

      It's just another reason why the corporados have been abandoning the repug party in droves.

  •  THIS will never happen (0+ / 0-)
    if future policy changes “were sufficiently specific and widely supported” so that individuals and businesses can believe “that the future fiscal restraint would truly take effect.”

    Unfortunately there is nothing on either side of the political divide that even remotely suggest this will take place. Rendering his premise a moot point.

  •  I don't get the whole 'austerity' thing (3+ / 0-)

    Whatever happened to 'it takes money to make money' or does that just work for business and if yes, what does that say for the argument that a country should be run like a business?

    "If that's what Fallujah is, then what's that band with all the Mexican kids in it?"

    by iSenseChange on Tue Sep 13, 2011 at 04:32:13 PM PDT

  •  Shades of 1995 (2+ / 0-)
    Recommended by:
    Candide08, historys mysteries

    Newt to start trash talking the CBO in 3,2,1

    She was only a whiskey maker, but he loved her still.

    by wretchedhive on Tue Sep 13, 2011 at 04:33:04 PM PDT

  •   And soil salinization is bad for agriculture N/T (1+ / 0-)
    Recommended by:
    Calamity Jean

    Nudniks need not apply.

    by killermiller on Tue Sep 13, 2011 at 04:35:35 PM PDT

  •  Doesn't matter... (1+ / 0-)
    Recommended by:
    historys mysteries

    Tea-publican ideology is what matters.

    Just like the innocence or guilt of some Texas inmates - doesn't matter.

    "The right to be heard does not automatically include the right to be taken seriously." -- Hubert H. Humphrey

    by Candide08 on Tue Sep 13, 2011 at 04:35:53 PM PDT

  •  Joan, (0+ / 0-)

    I'm pretty sure that's spelled "SOOOPER Congress!!"....

  •  Austerity is the biggest middle class killer, (8+ / 0-)

    hence the huge push by the monied/ruling class. Friedman Economics has a proven history since the seventies of this fact. Funny to hear IMF economists admitting as much considering that it is they, along with the World Bank, that have FORCED austerity measures onto EVERY developing nation that it has loaned money to for decades. Just look to Greece for a current example. Past countries include Russia, Poland, scores of South American nations...the list is insanely long. Usually the way it worked in the 70's was the CIA along with a handful of "Chicago Boys" (Friedman trained freemarketers) would work with an aspiring dictator (Pinochet as an example) to back the overthrow, install Chicago Boys as economic advisers, and use the shock instilled in the country's citizens to force austerity measures, break unions, lower corporate tax rates and begin the wholesale selloff of the nations resources to corporations from America and other first world countries. It would destroy middle classes, devalue currency, cause hyperinflation...and make a handful of corporatists EXTREAMLY wealthy. If said nation reaches a tipping point and manages to throw out the dictator, the IMF and World Bank would FORCE further austerity as a condition of any loans. This would keep the money flow to the corporations and hold a fledgling democracy in check from becoming competitive. The corporatists must have milked the second world nations for all they could, and have now begun bringing these measures to the big guys (US, England etc). Aided by NAFTA, off shore bank accounts and global economies, corporations no longer feel any advantage to maintaining strong economies in what was once their "home countries". They are now willing and apparently able to squeeze every dollar out of any Nation through the same combination of austerity measures, attacks on unions, lower taxes for themselves, decimating social safetynets...all to turn a quick buck.

    These people don't give a shit about America...they finagle the tax rate to avoid paying their share, they are keeping trillions out of the Economy to help starve it and employ an entire political party (and several top judges) to help them.

    After the Big Depression even many of the wealthy lost everything. Remember the classes icon of the monocled banker wearing a barrel? The Great Bush Recession was designed in a way to protect the monied elite from impact...hell, many even profited immensely from it this time around. The Economy has officially recovered as of 2009, for them. The 90% of America still struggling don't count I guess.  

    Fuck the unsatisfied, greedy rich. They began this class war decades ago and may feel the full wrath of the masses much sooner than they think.

  •  and I say that a six-hour hail of fiery (0+ / 0-)

    meteorites are bad for my sweet corn crop.

    Any other news?

    Nowhere do I understand that national security is a substitute for the law.---Thomas Drake You cannot tell from appearances how things will go.--Winston Churchill

    by SouthernLiberalinMD on Tue Sep 13, 2011 at 04:41:46 PM PDT

  •  geez, I guess thats why he earns the big bucks (4+ / 0-)

    You can pick one door, behind one door is depression, the other is growth:

    1. "Job Creators" will save us, if only they pay no taxes and can do whatever they want.


    2. "Elected Government" can spend to create demand, and thus create jobs. If government spends on productive infrustructure, you have a double boost to the economy.

    A man, a plan, a canal, Panama

    by Karl Rover on Tue Sep 13, 2011 at 04:45:41 PM PDT

  •  Deficit spending works in a bad economy. (1+ / 0-)
    Recommended by:
    historys mysteries

    Lesson numero uno from the Great Depression forward.

    Why Obama didn't learn it at Columbia or Harvard is extremely distressing.

    Oh wait, he was brain washed at Milton Friedman's University of Chicago.

    Send your old shoes to the new George W. Bush library.

    by maxschell on Tue Sep 13, 2011 at 04:46:12 PM PDT

  •  this is the best post I have read in years, and (2+ / 0-)

    thank you so much JOAN I honor you for you honestly.  

    Ms. B.

  •  And Obama will ignore the advice. (2+ / 0-)
  •  Wonder why... (3+ / 0-)

    ...the Dems never likened the Economy to a dirt road...

    when you hit a muddy patch (the bad times), you power through it to the other side.  If you're Republican/Conservative, you switch off the engine and Pray for God to deliver you from your dilemma.

    but who am I kidding?  Easy-to-understand message form Dems?  I'll expect to see the Nobel-level mathematics and charts for weeks...

    "Secrecy is the beginning of tyranny"---Robert Heinlein, writing as Lazarus long

    by justadood on Tue Sep 13, 2011 at 05:27:08 PM PDT

  •  Is the CBO chief now going to tell us the sky is (3+ / 0-)

    blue and water is wet?

    Most non-greedy people knew this.

    That being said, I am still not spending any money until they tax the rich.

  •  So, we're more pro-austerity than the IMF?+ (1+ / 0-)
    Recommended by:
    historys mysteries

    That's not good. I honestly didn't think that was even possible.

    Thousands of years ago the question was asked: 'Am I my brother's keeper?' That question has never yet been answered in a way that is satisfactory to civilized society. ~ Eugene V. Debbs

    by PlutocracyFiles on Tue Sep 13, 2011 at 07:15:39 PM PDT

  •  Austerity? (1+ / 0-)
    Recommended by:

    This year the federal government will spend $3.8 trillion. Our deficit is roughly $1.6 trillion. Our national debt exceeds $14.3 trillion, not counting unfunded entitlement liabilities. We just raised the debt ceiling to $16.9 trillion. The recent debt ceiling deal touted 900 plus billion dollars in" immediate" budget cuts just to find the cuts are actually  over 10 years. The actual budget cut for next year is 22 billion dollars out of a 3.6 TRILLION dollar budget, less than 1/2 of 1 percent.  Congress has passed off it's responsiblity to the "supe committee" who are split evenly along party lines.  It is gridlocked before it begins.

    Making matters worse, both political parties are still using the time-honored Washington dodge of "baseline budgeting," meaning that the proposed cuts are not actual reductions in spending from year to year, but cuts from projected future increases. So regardless of whatever cuts will be announced, actual federal spending will continue to rise.

    This is austerity?

    “I bring reason to your ears, and, in language as plain as ABC, hold up truth to your eyes.” Thomas Paine, December 23, 1776

    by Dose o Reality on Tue Sep 13, 2011 at 08:23:46 PM PDT

    •  too funny (3+ / 0-)
      Recommended by:
      wsexson, matx, flight2q

      Damn those socialist republicans who have been running the government for the past three decades. (giggle)

      Wanna see austerity?  Go visit any inner city. (Wait, wait--let me guess; they're all just lazy bastards, right?)

      BTW, if you really knew what Thomas Paine was all about, you'd never quote him again.  He remains the only major Revolutionary figure who has no monument anywhere in Washington DC--and there's a reason for that.  You'd find his ideas on the redistribution of wealth particularly interesting, I think . . .   (snicker)

      •  Actually (0+ / 0-)

        Mr Paine and I share a lot of the same views and both are independent thinkers. WE agree on a lot of things, and disagree on some things. Which most grown people can do.  Too bad the inbred, sheeple mentality are shared by some many on both sides of the political spectrum and especially on this site.

        “I bring reason to your ears, and, in language as plain as ABC, hold up truth to your eyes.” Thomas Paine, December 23, 1776

        by Dose o Reality on Wed Sep 14, 2011 at 07:18:01 AM PDT

        [ Parent ]

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