Make us your home page
Instagram

Today’s top headlines delivered to you daily.

(View our Privacy Policy)

Cutting back is not the answer

At first, most developed economies responded to the global financial crisis in 2008 and '09 with stimulus. They increased government spending and cut taxes. John Maynard Keynes provided the playbook: In slack times, the government needs to fill in for diminished private demand.

But 2010 is shaping up to be a year of parsimony. To win support for an international bailout, Greece enacted a tough package of budget cuts and tax increases. Spain's left-wing government at the end of May slashed civil-servant pay by 5 percent and froze pensions — even though one in five Spaniards is out of work. German Chancellor Angela Merkel unveiled a $144 billion package that would raise taxes on airline flights and cut defense spending and public works. "We can't have everything we want if we are to shape the future," Merkel said.

In the United States, even though unemployment remains high, the House scaled back a proposed jobs bill out of concern for the deficit. President Barack Obama called for federal agencies to identify cuts of up to 5 percent in 2012. States and cities are slashing budgets and raising taxes. Worldwide, what New York Times columnist Paul Krugman has called "the pain caucus" is in the ascendancy.

Countries are joining the caucus for different reasons. Many, especially slow-growing, highly indebted countries in southern Europe, see austerity as a way to avoid the fate of Greece. Others are reacting to fears of stimulus-induced inflation. In fact, signs of inflation are scarce.

"To say that we need policies now to fight a global outbreak of inflation is like arguing that we need policies now to guard against the imminent alarming spread of the North Polar ice cap," says University of California-Berkeley economist Brad DeLong. Yet important economies remain hypersensitive to the merest trace of inflation. Germany is taking tough steps because it wants to set an example for the European monetary union, but also because it is paralyzed by the ghost of the 1920s' hyperinflation, which paved the way for Hitler.

In the United States, the same internal debate that roiled the Clinton White House in 1993 — when advisers Robert Rubin and Robert Reich tangled over the relative merits of deficit reduction and stimulus — is being replayed. In 1993 the Rubinites won, arguing that Democrats needed to demonstrate a commitment to deficit reduction to avoid being tarred as tax-and-spenders.

The Obama administration has made a different calculation: Higher short-term deficits are a greater political risk than slower growth and higher unemployment. But the debate fails to recognize the anti-stimulus provided by states and cities, which are prohibited from running deficits. The Center on Budget and Policy Priorities calculated that 33 states made tax changes in 2008 or '09 that would increase annual revenues by $31.7 billion. Meanwhile, state and local governments slashed 22,000 jobs in May. "The actions that states are taking because of the recession and their balanced-budget requirements are slowing the economy," said Nicholas Johnson, director of the state fiscal project at CBPP.

It's difficult to contract your way to growth. The world's large economies need to run higher deficits in the short term to promote growth and close the gaps later. St. Augustine famously pleaded: "Grant me chastity and continence, but not yet." Policymakers might rethink Augustine. Give us austerity and deficit reduction — but not yet.

Cutting back is not the answer 06/19/10 [Last modified: Friday, June 18, 2010 5:24pm]
Photo reprints | Article reprints

© 2017 Tampa Bay Times

    

Join the discussion: Click to view comments, add yours

Loading...
  1. Rowdies shut out at Pittsburgh

    Soccer

    PITTSBURGH — The Rowdies lost their first USL game in nearly a month, 1-0 to Pittsburgh on Thursday night.

  2. Trump reveals that he didn't record Comey after all

    Politics

    WASHINGTON — President Donald Trump declared Thursday he never made and doesn't have recordings of his private conversations with ousted former FBI director James Comey, ending a monthlong guessing game that he started with a cryptic tweet and that ensnared his administration in yet more controversy.

    President Donald Trump said Thursday that he didn’t record his conversations with James Comey.
  3. Lightning fans, don't get attached to your first-round draft picks

    Lightning Strikes

    CHICAGO — When Lightning GM Steve Yzerman announces his first-round pick tonight in the amateur draft at No. 14, he'll invite the prospect onto the stage for the once-in-a-lifetime photo opportunity.

    Tampa Bay Lightning left wing Jonathan Drouin (27) eludes  Montreal Canadiens left wing Phillip Danault (24) during the second period of Wednesday???‚??„?s (12/28/16) game between the Tampa Bay Lightning and the Montreal Canadiens at the Amalie Arena in Tampa.
  4. Investigation Discovery TV show profiles 2011 Landy Martinez murder case

    Crime

    The murder of a St. Petersburg man will be featured this week on a new true crime series Murder Calls on Investigation Discovery.

    Jose Adame sits in a Pinellas County courtroom during his 2016 trial and conviction for first-degree murder. Adame was convicted of first-degree murder last year for torturing and then executing his boyfriend as he pleaded for his life in 2011. Now it will be featured in a new true crime series Murder Calls on Investigation Discovery. The episode will air on June 26 at 9 p.m. [DOUGLAS R. CLIFFORD   |   Times]
  5. Uhuru mayoral candidate Jesse Nevel protests exclusion from debate

    Blogs

    ST. PETERSBURG — Jesse Nevel, the International People’s Democratic Uhuru Movement candidate for mayor, on Thursday demanded that he be allowed to participate in a July 25 televised debate between incumbent Mayor Rick Kriseman and challenger Rick Baker.

    Mayoral candidate Jesse Nevel holds a news conference outside the headquarters of the Tampa Bay Times on Thursday to protest his exclusion from the mayoral debate. Nevel is a member of the International People’s Democratic Uhuru Movement.