Daily Archives: October 17, 2011

The economic policy debate in Washington has come down to a boxing match between two opposing remedies – ‘stimulus’ in one corner and ‘austerity’ in the other. Unfortunately, considering each so-called solution in isolation has hampered both analysis and decision-making. The proponents of stimulus argue that the losses in aggregate demand following the global financial crisis must be reversed. Their opponents say that austerity is needed to restore fiscal sustainability. But to understand how elements of each fit together, a different approach is needed, one that integrates the sets of economic logic and data employed by the two sides.

There are three tangible steps to boost growth. First, fundamental tax reform is essential, as is a viable plan for medium and long-term fiscal consolidation. Lastly, policy actions must make it easier for households and businesses to respond positively to fiscal stimulus or to low interest rates.

These seemingly disparate steps come into focus as one connects the dots in the causes of sluggish US economic growth. Taken together, they could improve growth sufficiently to bring the unemployment rate back to pre-crisis levels within four years. Otherwise, the debate we are having about stimulus versus austerity risks being as futile as rearranging the deck chairs on the Titanic. Read more

You cannot remove the fragilities in Europe’s banking system without solving the sovereign debt crisis… and you cannot solve the debt crisis without stabilising the banks. This much has finally been recognised by the Group of 20 finance ministers at their meetings in Paris over the weekend. They must now move on to addressing the underlying issues at next week’s European summit and the meeting of the G20 heads of state in November.

The bank-debt dynamics that grip the eurozone have all the elements of a destabilising feedback loop. As such, the longer they persist, the harder they are to overcome and the greater the economic and social costs. It is encouraging to see policymakers searching for a holistic policy, after months of ad hoc decisions. But for this to be reflected in more than just comforting rhetoric, they must quickly overcome disagreements on key issues. To make things yet more interesting, they must tackle these problems while countering the detrimental impact on economic growth, limiting the drain on public finances, and safeguarding the integrity of the monetary institutions.

Greater clarity on whether the medium-term stabilisation of the eurozone involves a fiscal union for the current configuration or among a smaller set of countries with similar initial profiles is vital also. Make no mistake about it; there is no escaping these issues. Hopefully, the next few weeks will see elected leaders address them from a position of leadership. If they do not, they will find it even harder to deal with a crisis that is consistently progressing from one bad outcome to an even worse one. Read more