Seeing as even most liberals are on board with the whole “Stimulus now, but deficit reduction in the future” formulation (leading, unfortunately, to rash proposals to cut Medicare and Social Security in exchange for short term stimulus) this bracing dose of the truth from economist Richard Koo is very welcome:
Arguing need for longer-term fiscal consolidation is irresponsible
The insistence that fiscal consolidation is necessary in the longer term is like the doctor who, faced with a patient who has just been admitted to the intensive care ward, repeatedly questions the patient about his ability to afford the treatment. This is both lacking in decency and irresponsible.
If the patient loses heart after learning the cost of the treatment, he may end up spending even longer in the hospital, leading to a larger final bill. Completely ignoring the policy duration effect of fiscal policy and constantly insisting on longer-term fiscal consolidation was what prolonged Japan’s recession.
For instance, it was because Japan’s policymakers refused to give up the medium-term fiscal consolidation target of achieving a primary fiscal balance by 2011 that the government stumbled from fiscal stimulus to fiscal retrenchment and back again and, ultimately, was unable to meet its fiscal targets even once in the last 20 years.
That is why Japan’s recession lasted as long as it did and why the nation’s debt has risen to some 200% of GDP.
With some notable exceptions, most people still believe that that there will be a hangover of debt which will have to be dealt with at some point. But the confidence fairy died some time back and the only other reason for worrying about it at this point is to get some Shock Doctrine benefits out of the current situation. But as Koo points out, this actually hurts the economy even more.
If there is any psychology involved in economics, and one has to believe there is, then this constant fearmongering about the debt makes people even more nervous about the future than they already are — and cutting government spending on programs they will need makes it worse. The government should just keep it simple. They just aren’t all that good at finessing all these messages and policies about “sacrifice” and “stimulus” and are turning this situation into a massive case of free floating anxiety. So perhaps they should just return to the old fashioned “first things first” — stimulate the economy and get people back to work. When that’s done, the government can take a fresh look at revenues and spending in a healthy economy and make whatever decisions need to be made. Selling off tomorrow’s security in exchange for today’s prosperity is what got us into this mess in the first place.