One of my favorite David Brooks columns

Here is one excerpt:

In times like these, deficit spending to pump up the economy doesn’t make consumers feel more confident; it makes them feel more insecure because they see a political system out of control. Deficit spending doesn’t induce small businesspeople to hire and expand. It scares them because they conclude the growth isn’t real and they know big tax increases are on the horizon. It doesn’t make political leaders feel better either. Lacking faith that they can wisely cut the debt in some magically virtuous future, they see their nations careening to fiscal ruin.

Read the whole thing.  Just about every paragraph is excerpt-worthy, for instance:

Alberto Alesina of Harvard has surveyed the history of debt reduction. He’s found that, in many cases, large and decisive deficit reduction policies were followed by increases in growth, not recessions. Countries that reduced debt viewed the future with more confidence. The political leaders who ordered the painful cuts were often returned to office. As Alesina put it in a recent paper, “in several episodes, spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions.”

This was true in Europe and the U.S. in the 1990s, and in many other cases before. In a separate study, Italian economists Francesco Giavazzi and Marco Pagano looked at the way Ireland and Denmark sharply cut debt in the 1980s. Once again, lower deficits led to higher growth.

There are, of course, ways to explain these other histories.  Monetary policies, interest rates, and exchange rates were all different in many of these studied cases.  The point is not that aggressive fiscal policy is always bad.  The point is that there are plenty of coherent models where fiscal consolidation is better than fiscal expansion.  "Lack of confidence in a nation's fiscal future" is a key condition for many of those models to hold.  Is that not possibly the case today?


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