The Fiscal Austerity Trap

How Budget Deficit Alarmism Risks Sabotaging Growth and Creating Self-fulfilling Budget Difficulties

By Thomas Palley, New America Foundation September 15, 2009

Fiscal conservatives are opportunistically looking to use the recession induced spike in the budget deficit to revive their crusade for fiscal austerity. The case for fiscal austerity is based on flawed economic analysis and it is not supported by thoughtful budget analysis. It was the wrong agenda before the crisis and it is even more wrong now.

Though there is understanding of the need for budget deficits to provide short-term Keynesian fiscal stimulus, there is little understanding of the medium-term need for budget deficits to facilitate the process of private sector deleveraging and to restore growth.

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