The Austerity Delusion

According to the International Monetary Fund, via "The Economist":

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In a recent study of 173 fiscal-policy changes in rich countries from 1978 to 2009, economists from the IMF found that cutting a country’s budget deficit by 1% of GDP typically reduces real output by about two-thirds of a percentage point and raises the unemployment rate by one-third of a percentage point...

Whenever investors seek shelter, even from an American slowdown, they choose Treasuries, and thus the dollar. In an economy constrained by low interest rates, a stubborn trade deficit and natural demand for the world’s reserve currency, there is little to cushion the blow of austerity...

America cannot wait forever to rein in its debt. It needs to lay out credible plans for medium-term deficit reduction. But it has more leeway to delay cuts than most other countries, thanks to continued demand for its debt. Another year of recovery would help confidence more than a premature swing of the fiscal axe. 

Amen.

(Link thanks to Mark Thoma - Economist's View.)