Cut or spend?
| 17:55 UK time, Tuesday, 22 June 2010
Hi it's Xavier here. There's a lot of talk about austerity at the moment.
just announced fiscal reform plans to cut debt. Governments are cutting away across Germany, Greece, Italy, Spain, France, Ireland, Portugal are all doing it. And the UK is poised for Tuesday's emergency budget.
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But rewind to last year's and fiscal stimulus was in vogue. Pumping public money into the economy to keep it (and us..) afloat was all the rage. But now, as far as Europe's concerned, austerity is king. How did we get here?
Obama's concerned and has written a to G20 leaders warning of the dangers of speedy cuts:
in the past stimulus was too quickly withdrawn and resulted in renewed hardships and recession
But the UK government is sticking to its guns, saying Britain needs to cut quickly to It's not just Obama who's worried, Nobel prize winning economist has criticised Germany's cuts:
Many economists, myself included, regard this turn to austerity as a huge mistake. German austerity will worsen the crisis in the euro area, making it that much harder for Spain and other troubled economies to recover.
But is austerity just another word for responsibility? Blogger William Anderson says it is, and questions the wisdom of fiscal stimulus:
What Krugman calls "austerity" really is nothing more than some modest spending cutbacks by governments around the world...the unsustainable booms of both the Clinton and Bush years pushed the economy in the wrong direction, and until we are able (and willing) to permit the fundamentals of the economy to get into balance, we are going to see these recessionary conditions continue.
It's easy for us non-economists to get lost in a whirl of financial jargon. Which economic sage can we trust? Blogger Tyler Cowen reminds us that many of these wisemen dwell in the murky realm of
Macroeconomics really is just a theory. Politicians are reluctant to spend more money, in tough times, on the basis of a mere theory. Advocates of fiscal stimulus make it sound as simple as solving an undergraduate homework problem and I think they sometimes genuinely do not realize how much the rest of the world, including politicians, views them as simply being very convinced by their own theory.
What's clear is that we're still in the throes of a financial crisis. Decisions to cut or spend will affect us all. Can governments cut their way to recovery? Or should we protect growth by spending now and cutting later? Will this only work if the world co-operates on economic matters?
