Must-Read: Bill Emmott: Let’s Get Fiscal

Must-Read: I find myself thinking that when Larry and I presented our “Fiscal Policy in a Depressed Economy” back in 2012, some critics (Valerie Ramey) said they did not think there was hysteresis–that recessions did not, in fact, cast shadows on future productive potential–other critics (Marty Feldstein) said that they thought recessions had a cleansing effect (either through sectoral-adjustment or policy-reform channels) and hence boosted future potential; and yet others (Ken Rogoff) believed that the interest rates on government debt did not in fact represent the true opportunity cost of government borrowing, and it would turn out to be very expensive for even reserve currency-issuing sovereigns with exorbitant privilege to pull the fiscal-expansion fire alarm.

I wonder if any of them would claim that austerity lowers future debt/GDP burdens today?

Bill Emmott: Let’s Get Fiscal: “There can be pain without gain–a lesson that Western populations have been learning the hard way since at least 2012…

…With years of fiscal austerity in the United States, Europe, and Japan having achieved nothing, it is time for governments to start spending again. The proposal will be met with outrage from many governments, especially, but not exclusively, Germany’s, and will be dismissed by the many political candidates who treat sovereign debt, built up by the incumbents they are seeking to depose, as the devil’s work. But beyond ideology and self-interest lies a simple and unavoidable truth: austerity is not working. Japanese Prime Minister Shinzo Abe reluctantly acknowledged austerity’s failure…. The eurozone–the developed world’s leading champion of austerity–has yet to come to the same realization, despite glaring evidence. In 2012, eurozone leaders signed a fiscal compact aimed at controlling public debt–which, in total, amounted to 91.3% of GDP, according to the International Monetary Fund – by forcing countries to cut spending and raise taxes. By 2015, the eurozone’s budget deficit, as a share of GDP, had fallen by two-thirds from its peak in 2010.
Yet gross public debt had actually increased, to 93.2% of GDP….

The more governments cut their deficits, the faster growth slows–and the further out of reach debt-reduction targets become. Thus runs the self-defeating cycle of fiscal austerity…. Policymakers after 2010… assume[d] that reducing government demand would help to boost private investment. (In the eurozone, it should be noted, arguments for fiscal austerity were also fueled by mistrust among governments, with creditor countries demanding that debtors endure some pain in exchange for ‘gains’ like bailouts.) But times have changed. For starters, we are no longer living in an inflationary era…. Pursuing austerity in this context has resulted in a drag on growth so severe that not even the halving of energy prices over the last 18 months has overcome it.

Expansionary monetary policy–that is, massive injections of liquidity through so-called quantitative easing–is clearly not enough, either…. In today’s world, nothing can substitute for fiscal expansion…. Europe needs a new Marshall Plan, this time self-financed, rather than funded by the Americans, to kick-start economic growth and boost productivity. There is plenty of scope for a similar program in the US, too…. At a time of low borrowing costs and little to no inflation (or even deflation), austerity is not the answer. It is time for policymakers to recognize that there is no need for pain that is not bringing any gain. It is time to get fiscal.


Brad DeLong
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