Budget Cuts Will Have a Heavy Cost on Employment and Jobs

Econbrowser: Crowding Out Watch, Updated:

Another implication of having interest rates at zero (at least the five year real) is that if fiscal policy is made more contractionary (as in some recent plans), then the contractionary impact should be large (this is just the mirror image of fiscal policy effectiveness in a liquidity trap).

In English that means because interest rates are so law (zero fed funds rate), and because expected inflation is so low (despite scare stories here and there), and because there is no evidence of “crowding out” (preference for federal debt making private debt/spending less attractive, thus harming the economy), when government fiscal policy contracts (spends less), the economy takes it on the chin.

But Keynes was a foreign pinko, so never mind the data.

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