Barry Eichengreen writes on fiscal consolidation -- budget cuts to reassure the bond markets -- observing that while austerity is necessary for Southern Euorpe's debt-burdened countries,* the U.S., Germany, and even the United Kingdom don't need such policies. While he's writing below about Britain's Liberal-Conservative government, the analysis could apply just as well to deficit hawks in the United States.
It is almost as if governments like Britain's are attempting to manipulate the private sector into believing that the dire conditions required for an expansionary fiscal consolidation have already been met. It as if they are trying to terrorize the private sector, so that when the fiscal ax actually falls, consumers and investors will be sufficiently relieved that disaster has been averted that they will increase spending.
If so, leaders are playing a dangerous game that depends on encouraging more future spending by exciting consumers and investors now, while depressing actual spending just when it is most urgently needed. ... Or maybe politicians don't believe any of this and are simply intent on cutting spending for ideological reasons, irrespective of the economic consequences.
That's why, for instance, you see people vastly overstating the costs of our debt burden or freaking out about small shifts in long-term interest rates that remain at historic lows. But if you look at the actual indicators, the immediate problem isn't the deficit, it's that we're not spending enough on targeted programs to create jobs and bolster economic growth.
-- Tim Fernholz
*Typically, we'd refer to them as the PIGS -- Portugal, Italy, Greece, Spain -- but when I did so in a conversation with an IMF official, the reaction was a very severe "We don't refer to them that way." So I'll behave.
