Debt Solution Lies in Success of Europe

The Boston Globe wonders, should Washington order another hefty round of Keynesian deficit spending in order to spur the limping U.S. economy? Absolutely, say many prominent economists.

So a big new stimulus package is the way to go? Absolutely not, say many prominent economists.

In short, there is no consensus. And if even the world's most esteemed economic theorists cannot decide whether a huge new spending bill would make the current crisis better or worse, guidance will have to come from somewhere else, says the Globe.

Perhaps that somewhere is Europe, where governments have deliberately rejected Washington's embrace of massive deficit spending as the best way to rev up an ailing economy – with better outcomes.

Britain was the birthplace of John Maynard Keynes, but the British government is pursuing precisely the opposite of a Keynesian approach to fiscal policy, says the Globe.

  • Rather than trying to boost demand and create more jobs through extravagant increases in spending and debt, London is practicing austerity.

  • The coalition government headed by Prime Minister David Cameron is sharply cutting public spending, pruning back everything from welfare benefits to the military.

  • About 8 per cent of Britain's roughly 6 million public-sector jobs, or 490,000, will be eliminated.

    Britain is not an outlier. Governments from Germany to Greece are slashing public outlays, reports the New York Times.

    Results so far?

  • Economic growth in the United States has been weaker, and the loss of jobs steeper, than in the 16-country euro zone.

  • Especially striking is the contrast with Germany, which resisted heavy U.S. pressure to undertake substantial new deficit spending.

  • While the U.S. economy has been growing at an anaemic annual rate of barely 2 per cent in recent months, Germany's economy is currently soaring at a 9 per cent annual rate.

  • Unemployment in Germany has fallen to 7.5 per cent, the lowest it has been in 18 years.

    Source: Jeff Jacoby, Debt Solution Lies in Success of Europe, Boston Globe, November 3, 2010.

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    First published by the National Center for Policy Analysis, United States

    FMF Policy Bulletin/ 09 November 2010

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