Study: Austerity lowers wages and increases long-term unemployment

[phantom power]

In a new paper for the International Monetary Fund, Laurence Ball, Daniel Leigh and Prakash Loungani look at 173 episodes of fiscal austerity over the past 30 years—with the average deficit cut amounting to 1 percent of GDP. Their verdict? Austerity “lowers incomes in the short term, with wage-earners taking more of a hit than others; it also raises unemployment, particularly long-term unemployment.”

More specifically, an austerity program that curbs the deficit by 1 percent of GDP reduces real incomes by about 0.6 percent and raises unemployment by almost 0.5 percentage points. What’s more, the IMF notes, the losses are twice as big when the central bank can’t cut rates (a good description of the present.) Typically, income and employment don’t fully recover even five years after the austerity program is put in place.

There’s also a class dimension here: A deficit cut of that size tends to cause real wage income, where lower-income folks get their money, to shrink by 0.9 percent, whereas rents and profits, which higher-income folks depend on, decline by just 0.3 percent. And, as the chart on the right shows, profits tend to bounce back faster than wages.

Some austerity programs can be harsher than others. The IMF study notes that plans to reduce the deficit can be particularly brutal if central banks “do not or cannot blunt some of the pain through a monetary policy stimulus.” (In 1992, Italy and Finland took steps to rein in their deficits but mitigated the discomfort by depreciating their currencies and boosting exports.) Meanwhile, if multiple countries are all carrying out austerity at the same time, the overall pain is likely to be greater. This sums up the current debt crisis in the euro zone: Individual euro member states can’t depreciate their own currencies because they’re all on the euro; the European Central Bank isn’t providing much monetary stimulus; and the economically ailing countries are all dragging one another other down.

http://digbysblog.blogspot.com/2011/09/keep-on-clapping-but-it-wont-make-it.html

[maxsolomon]

1. quit injecting facts into this debate!

we KNOW it's time to cut gubmint spending (but never defense, because we're very very scared)!

:sarcasm:, sort of...

[Enrique]

2. interesting coming from an IMF study

as I understand it, many austerity programs are mandated by the IMF.

I'm curious about IMF involvement in those 173 "episodes of fiscal austerity" in this study.

[Hydra]

6. I would wager at least 150 were their idea

But it's like when a Corp funds a study to prove their product is safe...and it's shown to be totally not. You can sit on it, and many do, but it comes out in the end.

But we all knew this was bogus. The Banksters blew up their own bubble and demanded everyone else pay for it.

That's not going to have consequences? And then you nothing to replace the bubble that was lost? Ya, that's sound economic thinking.

At least, it's the kind of sound economic thinking that puts people in graveyards.

[provis99]

3. yes, but that's what the IMF is trying to do.

Lower wages and increase unemployment, to create a reserve labor force. Something along the Pinochet model that that idiot Herman (Goring) Cain keeps ranting about.

[Starry Messenger]

4. recommend.

[xchrom]

5. Recommend

[chill_wind]

7. They'll get no argument from Krugman, Stiglitz, Galbraith, Baker

and several hundred more.

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=439&topic_id=1866711&mesg_id=1866754

K & R.