Thursday, 9 September 2010

Stimulate or cut the deficit

The current political debate in the United States, and a lesser degree in Europe and to a still smaller extent in Australia, about whether the proper course of economic policy is to stimulate the economy or worry about reducing government debt fascinates me. I see it as the big political issue of the day.
My inclination is to side with with those who worry less about the future than the now and therefore and I tend to come down on the side of those advocating governments and central banks should be doing whatever can be done to reduce the suffering that unemployment rates of 10% or more naturally bring. The New York Times columnist and Nobel prize winning economist Paul Krugman relentlessly puts this Keynesian case in both his weekly column for the paper and his daily web postings and deserves to be on the must read link list of anyone seriously interested in politics.
I'm probably not doing Professor Krugman justice but to me he argues well that fixing today's unemployment problem is the first task and that fixing the increased government deficit that is necessary to fix unemployment is a problem for a few years down the track. That all seems well and good but for the terrible fear that the politicians who make spending decisions are not as rational as he is and that their capacity to spend (or in the case of Republicans to reduce taxes as a so-called stimulatory measure) always outweighs their ability to approve spending cuts or tax increases.
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