I think a certain self-flagellating approach to fiscal policy has taken hold in policy circles, both here and in the euro area (see the Economist's discussion; see also WSJ RTE). Sometimes, fiscal restraint in a downturn is unavoidable; for instance Southern European countries that have investors fleeing their debt do need fiscal consolidation, augmented by other measures.
But in the case of the United States, we have faced a long term fiscal challenge for a long time. The biggest portion of the challenge comes not from provisions of the stimulus package, or TARP, but rather from our refusal to deal with long term cost trajectories in the entitlement programs, and our refusal to tax ourselves, as exemplified by the tax cuts of 2001 and 2003.[4]
Spending cuts in the short run, and the refusal to fund unemployment insurance and transfers to the states, is certainly counterproductive to the extent that they throw the economy into another downturn, or condemn us to stagnant growth. Such cuts provide the patina of "fiscal responsibility", while failing to address the core budget busting problems, as laid out in CBO's recent Long Term Budget Outlook. Much better to pin down long term expectations regarding the debt by dealing with entitlements, and maintain current aggregate demand by avoiding ill advised cuts that will do little to impact long term debt sustainability. (See Giavazzi (2010) for more).
Go read the whole post its really worth your time. Especially with all this tea party fringe economics running around in the media.
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