EVEN AN AEI EXPERT THINKS AUSTERITY IS BAD

(h/t Susie Madrak at Crooks & Liars)

You can find a shorter version here.

Japan's lessons for America's budget warriors
John H. Makin | American Enterprise Institute
January 29, 2013

Japan’s huge debt buildup, like America’s, has occurred alongside widespread cries of unsustainability and warnings of an imminent bond market collapse, soaring inflation and interest rates, and financial calamity. The actual outcome has defied the predictions, as many sad speculators who have bet on a collapse in the Japanese government bond (JGB) market can attest.

Persistently rising bond prices in Japan and the United States have undercut the “sky-is-falling” rationale for deficit reduction.

Congress and the president need to avoid excessive austerity with respect to changes in fiscal policy this year. Over the past four years, on average, the fiscal boost applied to the American economy has been worth about 3 percent of GDP. This year, with tax increases and sequestration, fiscal drag will be about 1.5 percent of GDP.

The lessons from Europe and Japan are that austerity, per se, is not the way to move to a sustainable fiscal stance.