+++ P.O./V.V.I (FT) Fed told public spending can lift ailing economies

P.O.

Portugal has beaten the Zombies!

It has been presented at Jackson Hole as validated research.

FED told public spending can lift ailing economies even in countries with a high ratio of debt to GDP.

This is precisely what Portugal did with a resounding success.

Quod erat demonstrandum!

It took a small in size Country, but big and great in everything else like Portugal to show the World that the conventional theory was wrong.

Actually you know what…?

Portugal or maybe it’s Finance Minister Professor Mario Centeno together with the Prime Minister Mr Antonio Costa should win The Nobel Memorial Prize in Economic Sciences (officially Swedish: Sveriges riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne, or the Swedish National Bank’s Prize in Economic Sciences in Memory of Alfred Nobel), commonly referred to as the Nobel Prize in Economics.

I’s an award for outstanding contributions to the field of economics, and generally regarded as the most prestigious award for that field.(Wikipedia)

I can’t think of anything more outstanding than this, in these times.

For the record I am an Economist.

Francisco (Abouaf) de Curiel Marques Pereira

Fed told public spending can lift ailing economies

By Sam Fleming in Jackson Hole, Source: FT.com

Ramping up public spending in a flailing economy can improve a country’s fiscal health even when public debt is already high, according to research that raises hopes that governments have greater scope to battle future downturns.

Alan Auerbach and Yuriy Gorodnichenko of the University of California Berkeley, presented research at Jackson Hole, Wyoming, that counters the view that countries should be clamping down on spending in recessions for fear of driving up their indebtedness.

Central bankers meeting in at the Kansas City Fed’s annual symposium have been discussing a range of topics beyond their traditional realm of monetary policy, examining trade, income distribution, and the impact of technology as well as fiscal policy. While the recovery is becoming increasingly widespread geographically, debate at the conference, entitled “Fostering a Dynamic Global Economy,” has reflected an underlying concern that widening inequality and social tensions could trigger hazardous policy choices, including a dash to protectionism.

The research presented on Saturday looks at the effects of shocks to public spending on debt and other measures of “fiscal pressure” such as interest rates and credit default swaps.

“These results suggest that fiscal stimulus in a weak economy could be an effective tool to boost the economy and that the penalty from doing so in terms of elevated debt levels and borrowing costs is likely modest for the countries we study,” the two authors wrote. “Indeed, fiscal stimulus in a weak economy can improve fiscal sustainability along the metrics we study.”

The findings come as central banks confront the possibility that they will enter the next recession with little monetary firepower given benchmark interest rates remain so low – meaning there may be more pressure on governments to help by loosening tax and spending policies.

With government debt in the US already at 77 per cent of GDP and heading higher many conservative lawmakers are calling for urgent action to pare back the public sector. They would be likely to balk at signing up to a big fiscal stimulus if a new recession struck, yet the paper suggests that would be a poor decision.

Jason Furman, the former chair of Barack Obama’s Council of Economic Advisers who is now at Harvard, responded to the paper with a simple conclusion: “We have been giving catastrophically bad advice to countries with high debt to GDP ratios.”

Looking at data starting in the 1980s, the researchers found that expansionary fiscal policies adopted when the economy is struggling may not only stimulate economic growth, but also reduce debt-to-GDP ratios as well as interest rates and CDS spreads on government debt.

The report supports conclusions by a number of academic papers in recent years, including from Larry Summers, the former Treasury Secretary, and J. Bradford DeLong, another UC Berkeleyprofessor, who in 2012 argued fiscal efforts in downturns can effectively pay for themselves.

The authors of the new paper cautioned that they are not making an unconditional argument for stimulus. “The experience of Greece and other countries in Southern Europe is a grave warning about the political risks and limits of fiscal policy. Bridges to nowhere, “pet” projects and other wasteful spending can outweigh any benefits of countercyclical fiscal policy.”

Most big advanced economies have seen rising debt-to-GDP ratios since 2007, raising worries about their ability to use fiscal stimulus to counter a future recession. In the US, the Congressional Budget Office estimates that debt held by the public will rise to 91 per cent of GDP, or $26 trillion, by 2027. At that level, debt held by the public would be the largest since 1947.

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