Does fiscal policy matter? Is there a better way to reduce unemployment?

One inconvenient truth facing those who still favor the "austerity" approach to our current economic predicament (slow growth, high unemployment) is that the austerity approach makes the problem worse. When we cut government spending, we reduce economic growth and we put more people out of work.

Read the whole thing; my original post was here.   On my point 1, that the central bank moves last, Brad writes:

Josh Barro: Boehner Accidentally Explains Why His Deficit Position Is Phony: Yesterday, in an interview with Bloomberg Television, House Speaker John Boehner warned that the U.S. government must balance its budget. After all, he said:

I’m traveling all this week for work, so I probably won’t be blogging at my usual frequency.  But I had to say at least something about today’s big fiscal policy development.

The way to analyze whether, at the margin, it is raising or lowering government spending that is better for the economy right now is to do a benefit-cost analysis. Following DeLong and Summers (2012), let the parameters for an economy at the zero lower bound of nominal interest rates and with anchored inflation expectations be:

Before discussing the possible consequences from the fiscal cliff, here is a brief definition of what exactly it means. In the beginning of 2013 the government is expected to reduce its deficit by almost a half, this sharp change in the county’s deficit in such short period of time is known as the fiscal cliff. Behind this name are actually standing broad government spending cuts and tax increases from 1st of January.

(cc photo by joost ijmuiden)