Goldman Sachs Chart on Obama's Job Plan

The chart below is from Goldman Sachs and shows how different fiscal policies will affect the economy.  Two thinkgs to note:

First, look at how the current spending will create a fiscal drag, pull down the economy - this is because of the large cutback state and local government spending (the American austerity policy).

Second, look at the effects created by Obama's plan - either hold constant or small stimulus.

The New Age of Austerity

The New Age of Austerity is the phrase in today's article in The New York Times, by David Leonhardt, on the difficulty the United States will have in reducing the long-term debt problems it is facing. The root question is how much of tax increases and spending cuts can be done while keeping the economy growing and not having an adverse decline in government services. Basically, there are no painless choices, but there are less painful choices. And while everyone has to feel some of the pain, who should feel more and who should feel less is a hard political choice.

The times also has a great interactive budget puzzle, where the reader gets a change to put their own budget priorities to the test. Good luck.

Rewards of Austerity

Fiscal austerity is the big focus now. The basic idea is that the cost of rising national debts are too much and that nations, in the heart of a global recession, need to cut government spending. The big examples of this have been in Europe - namely the PIIGS (Portugal, Italy, Ireland, Greece and Spain). Last spring, when the focus was Greece, Ireland was held up as a model of fiscal austerity and prudence since it had cut its government spending in the face of recession. Of course the result of such a choice is to further weaken the economy - which is the case with Ireland. However, the reward for such behavior has been higher (not lower) interest rates. Check out the chart below from the German magazine Spiegel. Clearly, the bond markets don't care about austerity. They care about the ability to repay debt - which increases as an economy gets stronger.