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LoginEconomicsfocusCutorlooseHistorysuggeststhatausterityandgrowthjustdonotmixTOLISTENtoBarackObama,thereisnotrade-offbetweensupportingaweakeconomyandtacklingAmerica’sstrainedpublicfinances.“Wehavetocutthespendingwecan’taffordsowecanputtheeconomyonsounderfooting,”thepresidentsaidonJuly2nd.Bigspendingcutsarenecessary,headded,to“giveourbusinessestheconfidencetheyneedtogrowandcreatejobs”.Perhaps.AsuccessfuloutcometotalksbetweenCongressandtheWhiteHouseoveramulti-trillion-dollarpackageofbudgetcutsisclearlypreferabletoachaoticdebtdefault.Thenagain,public-sectorjoblosseshelpeddrivetheunemploymentrateupto9.2%inJune,whichdidn’tobviouslydoalotforconfidence.MrObamaisnotaloneinarguingthatausteritycanboostgrowth:Britain’sdeficit-slashingcoalitiongovernmentandtheEuropeanCentralBank(ECB)alsomakethecase.AdeclineininterestratesduetoalowerprobabilityofdefaultshouldsupportinvestmentandassetJul14th2011|fromtheprinteditionAdvertisement1.Charlemagne:TheviewfromtheVistula2.Italyandtheeuro:Ontheedge3.Contagionintheeurozone:Selectingdefault4.DemocracyvChina:WhatChinachallenges5.Lexington:Dicingwithdebtandthefuture6.Thedeathpenalty:WorsethanTexas7.Thedebt-ceilingdebate:McConnell'sretreat8.Foodstamps:Thestruggletoeat9.PushingforacarbontaxinAustralia:Anexpensivegamble10.Thedefenceindustry:ThelastmannedfighterOverthepastfivedaysMostcommentedAdvertisementComment(4)E-mailPrintSubscribeMyaccountRegisterDigital&mobileNewslettersAllBusiness&financeBusinesseducationWhichMBA?IdeasarenaHomeWorldpoliticsBusiness&financeEconomicsScience&technologyCultureprices.Expectationsoflowerfuturetaxesandhigherlifetimeearningsmayencourageinvestmentandspending.AnewECBworkingpaperarguesthat“afiscalcontractionmayturnouttobeexpansionaryiftheexpectationchannelbecomessufficientlystrong.”Inpractice,however,itrarelyworksoutthatway.Inarecentstudyof173fiscal-policychangesinrichcountriesfrom1978to2009,economistsfromtheIMFfoundthatcuttingacountry’sbudgetdeficitby1%ofGDPtypicallyreducesrealoutputbyabouttwo-thirdsofapercentagepointandraisestheunemploymentratebyone-thirdofapercentagepoint.Occasionally,aneconomywillbuckthetrend.Inanewpaper,RobertoPerottiofBocconiUniversitypresentsaseriesofcasestudiesof“expansionaryausterity”,inwhichcutsinspendingcoincidewithGDPgrowth.Supportfortheconfidencetheoryisscarce.Inonlyoneofthecasesconsidered—aperiodofDanishfiscalconsolidationfrom1983to1986—didrisingdomesticdemandleadanexpansion.AndDenmarkin1983couldscarcelybemoredifferentfromAmericatoday.Itseconomywasstronger,growingat4%peryearwhenausteritybegan(comparedwith1.9%inthefirstquarterforAmerica).Moreimportant,Denmarkhadstratosphericinterestrates.Consolidationsucceededinbringinglong-termratesdownfromapeakof23%.Durable-goodsconsumptionandinvestmentboomed.Housepricesroseby60%from1982to1986,raisinghouseholdwealthandbuoyingconfidence.InAmericathelong-terminterestrateisalreadyonthefloor,atunder4%,yetconsumptionremainsanaemic.Housingmarketsarestuckinapost-crashfunk.Withinterestrateslow,anausterity-inducedfallininflationwouldincreaserealratesandweakenanalreadylistlesseconomy.Risingdomesticconfidenceisnottheonlyroutetogrowthamidausterity.Foreigndemandistypicallymoreimportant.From1987to1989Ireland’sfiscalbalancesimprovedanddebtdeclinedevenasgrowthaccelerated.Onceagain,fallinginterestratesmattered:long-termratesstoodataround13%whencutskickedin.Butexchangeratesmatteredmore.IntheyearimmediatelybeforeIrelandtighteneditsbelt,itscurrencyappreciatedby20%againstthatofBritain,itslargesttradingpartner.Thetrendreversedinearly1987andsterlingsubsequentlyroseby17%againstthepunt.Irishexportssurgedby10%ayearfrom1987to1990,accountingformostoftheeconomy’simpressivegrowth.Italy’s1990sausterityprogramme,oftencitedbyEuropeanpolicymakersasproofthatacountrylikeGreececanwrestledownitshugedebtburden,tellsasimilarstory.From1991to1998Italymoveditsbudgettosurplusandstabiliseditsdebt,onlybrieflydippingintorecessionin1993.Here,too,aplungingcurrencyprovedessential.InSeptember1992ItalywasforcedoutoftheEuropeanExchangeRateMechanism,apre-eurosystemofsemi-peggedcurrencies.Overthenextfewyearsthelirafellbyroughly40%againsttheD-mark.Italy’scurrent-accountbalanceswungtosurplusandgrowthleapt.ThereisalessoninthisforGreece,butnottheoneeuro-zoneleaderswishtoimpart.Americawillstruggletoduplicatethesesuccesses.Thescopeforincreasingexportsislimitedbytheprocessofdebtreductioninotherricheconomies.ExportsaccountforaTheroadtoRomeHugemess,untidysolutionsFirefightingEvensplitsCalvesandcubsDimongeezer»CutorlooseReprintsRelatedtopicsUnitedKingdomLaggingEconomicIndicatorsForeignexchangeFinancialmarketsBarackObamaProducts&eventsStayinformedtodayandeverydaySubscribetoTheEconomist'salerts.Gete-mailnewslettersSubscribetoTheEconomist'sTwitter FollowTheEconomistSeeaselectionofTheEconomist'stopicalvideosanddebatesFollowTheEconomistLatestblogpostsWillyoubeaknowntravellerFromGulliver-July16th,23:58IgnoringtheobviousFromSchumpeter-July15th,21:21LinkexchangeFromFreeexchange-July15th,IntimacyandseparationareconnectedFromProspero-July15th,19:54Afewthingstoremembe