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Against early stimulus exit
By Joseph E. Stiglitz |
March 9, 2010, Tuesday
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Print Edition
Print Edition
A WAVE of fiscal austerity is rushing over Europe and America. The magnitude of budget deficits - like the magnitude of the downturn - has taken many by surprise.
But despite protests by the yesterday's proponents of deregulation, who would like the government to remain passive, most economists believe that government spending has made a difference, helping to avert another Great Depression.
Spending, especially on investments in education, technology, and infrastructure, can actually lead to lower long-term deficits. Banks' short-sightedness helped create the crisis; we cannot let government short-sightedness - prodded by the financial sector - prolong it.
Faster growth and returns on public investment yield higher tax revenues, and a 5 to 6 percent return is more than enough to offset temporary increases in the national debt. A social cost-benefit analysis (taking into account impacts other than on the budget) makes such expenditures, even when debt-financed, even more attractive.
Finally, most economists agree that, apart from these considerations, the appropriate size of a deficit depends in part on the state of the economy. A weaker economy calls for a larger deficit, and the appropriate size of the deficit in the face of a recession depends on the precise circumstances.
It is here that economists disagree. Forecasting is always difficult, but especially so in troubled times. What has happened is (fortunately) not an everyday occurrence; it would be foolish to look at past recoveries to predict this one.
Yet, even with large deficits, economic growth in the US and Europe is anemic, and forecasts of private-sector growth suggest that in the absence of continued government support, there is risk of continued stagnation.
The risks are asymmetric: if these forecasts are wrong, and there is a more robust recovery, then, of course, expenditures can be cut back and/or taxes increased.
But if these forecasts are right, then a premature "exit" from deficit spending risks pushing the economy back into recession.
This is one of the lessons we should have learned from America's experience in the Great Depression; it is also one of the lessons to emerge from Japan's experience in the late 1990s. As the global economy returns to growth, governments should, of course, have plans on the drawing board to raise taxes and cut expenditures. The right balance will inevitably be a subject of dispute.
Principles like "it is better to tax bad things than good things" might suggest imposing environmental taxes.
The financial sector has imposed huge externalities on the rest of society. America's financial industry polluted the world with toxic mortgages, and, in line with the well-established "polluter pays" principle, taxes should be imposed on it.
Deficits to finance wars or give-aways to the financial sector lead to liabilities without corresponding assets, imposing a burden on future generations.
(The author is university professor at Columbia University and recipient of the 2001 Nobel Prize in Economics. Copyright: Project Syndicate, 2010.www.project-syndicate.org)
But despite protests by the yesterday's proponents of deregulation, who would like the government to remain passive, most economists believe that government spending has made a difference, helping to avert another Great Depression.
Spending, especially on investments in education, technology, and infrastructure, can actually lead to lower long-term deficits. Banks' short-sightedness helped create the crisis; we cannot let government short-sightedness - prodded by the financial sector - prolong it.
Faster growth and returns on public investment yield higher tax revenues, and a 5 to 6 percent return is more than enough to offset temporary increases in the national debt. A social cost-benefit analysis (taking into account impacts other than on the budget) makes such expenditures, even when debt-financed, even more attractive.
Finally, most economists agree that, apart from these considerations, the appropriate size of a deficit depends in part on the state of the economy. A weaker economy calls for a larger deficit, and the appropriate size of the deficit in the face of a recession depends on the precise circumstances.
It is here that economists disagree. Forecasting is always difficult, but especially so in troubled times. What has happened is (fortunately) not an everyday occurrence; it would be foolish to look at past recoveries to predict this one.
Yet, even with large deficits, economic growth in the US and Europe is anemic, and forecasts of private-sector growth suggest that in the absence of continued government support, there is risk of continued stagnation.
The risks are asymmetric: if these forecasts are wrong, and there is a more robust recovery, then, of course, expenditures can be cut back and/or taxes increased.
But if these forecasts are right, then a premature "exit" from deficit spending risks pushing the economy back into recession.
This is one of the lessons we should have learned from America's experience in the Great Depression; it is also one of the lessons to emerge from Japan's experience in the late 1990s. As the global economy returns to growth, governments should, of course, have plans on the drawing board to raise taxes and cut expenditures. The right balance will inevitably be a subject of dispute.
Principles like "it is better to tax bad things than good things" might suggest imposing environmental taxes.
The financial sector has imposed huge externalities on the rest of society. America's financial industry polluted the world with toxic mortgages, and, in line with the well-established "polluter pays" principle, taxes should be imposed on it.
Deficits to finance wars or give-aways to the financial sector lead to liabilities without corresponding assets, imposing a burden on future generations.
(The author is university professor at Columbia University and recipient of the 2001 Nobel Prize in Economics. Copyright: Project Syndicate, 2010.www.project-syndicate.org)
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