Austerity, Not Uncertainty, Is the Scary Part of Fiscal Shutdowns

There is a general consensus that annual fiscal policy fights hurt the economy’s recovery. Many people, however, get the story quite wrong. It has nothing to do with 'uncertainty'; rather, it's the unfortunate fact that the brouhaha, in the final instance, leads to smaller budget deficits, i.e. 'austerity', significantly diminishing the level of effective demand.

It’s austerity that is reliably damaging to recover efforts, not uncertainty. And each year’s fiscal drama has tended to produce another dose of austerity. The very large reduction in the budget deficit between 2009 and 2012, combined with the extraordinarily slow pace of recovery over this same time period is not a coincidence. This should be a lesson to evidence-based policymakers: You should be much more worried about accepting more austerity as the price of ending the fiscal drama than any damage caused by the drama itself.

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