Finding\u00a0an answer to that last question is one of the strengths of the approach to thinking about the economy pioneered by Wynne Godley<\/a>, and fleshed out further\u00a0in the Levy Institute’s\u00a0strategic analysis series<\/a>. This approach also provides a clear\u00a0understanding of how deeply irresponsible it is to cut government spending\u00a0under present economic conditions: because\u00a0the danger, given the state of the US and UK economies, is not just that budget cuts might\u00a0slow down the economy,\u00a0but that they might\u00a0not<\/em>.<\/p>\n Let’s look at the United States in particular. In their just-released\u00a0report<\/a>, Dimitri Papadimitriou, Greg Hannsgen, Michalis Nikiforos, and Gennaro Zezza point out that, with the exception of a short cycle in the ’70s, “there has been no other recovery in the modern history of the US economy in which government spending decreased in real terms.”<\/p>\n The Congressional Budget Office is predicting that the budget deficit will continue to shrink over the next few years, from 2.8 percent of GDP in 2014 to 2.4 percent in 2018. At the same time, the authors note, the CBO is telling us that GDP will grow at 2.8 percent, 3 percent, 2.7 percent, and 2.1 percent in 2015, ’16, ’17, and ’18, respectively. If we assume that both of those forecasts (for the budget deficit and GDP growth)\u00a0come true, what would the rest of the economy need to look like?<\/p>\n The United States has run current account deficits, which act as a drag on economic growth, for decades. And despite the recent increase in net exports of petroleum products, which has helped keep the US trade deficit from returning\u00a0to its sky-high precrisis levels, there is little reason to think that the external\u00a0deficit will substantially improve over the next few years (if anything, the authors argue, it is likely to get worse. There’s\u00a0more on recent developments in the foreign sector beginning on p. 6<\/a> of the report).<\/p>\n That being the case, GDP growth rates of the sort projected by the CBO can only come to pass on the basis of a rise in private sector spending. In fact, Papadimitriou et al. show that private sector spending would have to expand so much that it\u00a0<\/em>would exceed private sector income for the first time since the\u00a0crisis<\/em>.\u00a0In other words, growth would depend on rising private indebtedness.<\/p>\n If the dollar continues to appreciate further and the economies of US trading partners end up performing worse than the IMF expects (a very real possibility, the authors point out, given the optimism\u00a0of IMF forecasts),\u00a0this increase in private sector spending over income — and thus the increase in the private debt-to-income ratio — would have to be even larger.\u00a0Here’s what\u00a0that would look like (in the chart below, “Scenario 1” corresponds to slower growth among US trading partners [by 1 percent of GDP annually], “Scenario 2” to a 25 percent appreciation of the dollar over the next four years, and “Scenario 3” to a combination of the two):<\/p>\n![\"Exceptional](\"http:\/\/multiplier-effect.org\/files\/2015\/05\/Exceptional-Austerity_Levy-Institute-Strategic-Analysis_May-2015.png\")
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![\"Austerity](\"http:\/\/multiplier-effect.org\/files\/2015\/05\/Austerity-and-Private-Debt_Levy-Institute-Strategic-Analysis_May-2015.png\")
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