South By North Strategies, Ltd.

In a new research paper, the Center for Economic and Policy Research explains why fiscal austerity measures are unlikely to expand the American economy. From the report …

In short, there is little reason to believe that a fiscal adjustment will lead to a substantial improvement in the United States’ trade position any time in the near future. This channel for offsetting the contractionary impact of deficit reduction is not very promising.
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The investment channel does not appear much more promising. With interest rates already at historic lows, it seems implausible that whatever further decline may occur as a result of adjustment could have very much impact. In most sectors output remains far below capacity, so firms have little incentive to expand capacity far in advance of demand. This is especially true because the bubble in non-residential real estate led to enormous excess supply in most areas.
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Businesses can invest in modernizing equipment, but the impact of further declines in interest rates is likely to be limited. There is a large body of research that finds that investment is not very responsive to interest rates.8 Furthermore, the rate of growth of equipment and software investment is already quite rapid, with growth averaging 19.9 percent from third quarter of 2009 to the second quarter of 2010. It does not seem likely that lower interest rates will increase this rate substantially, especially in a context where demand is contracting due to budget cuts.