Thursday, May 19, 2011

Not So Fast: The Case for Slower Deficit Reduction

Over at Economist's View, Mark Thoma explains how, even if we assume a rather low multiplier of 1.0 for cuts to government spending, that cuts in the range of even $600 billion over two years are likely to have a severe negative effect on unemployment. For example, to do a rough "back of the envelope" calculation, a cut of $300 billion would result in an increase in unemployment of 1% or about 1.5 million workers per year for a total increase in unemployment of 2% or 3 million unemployed over two years.

While it is wise to address deficits over the long term, doing so now when the private sector is not in a position to make up for decreased government spending will seriously hurt the economy and cost a lot of innocent people their jobs.

When it comes to deficit reduction, timing is everything.

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