The debate over fiscal policy has reached a fork in the road. One way leads to maintaining or increasing the fiscal stimulus. This column argues that policymakers should take the other path. This would mean phasing out government expenditure while phasing in social protection programmes at the risk of a double-dip recession but potentially resulting in a more vibrant economy.
The current US fiscal policy debate often starts from the assumption that the subprime crisis has brought about a “lack of demand”. From that premise, policies that increase demand look appealing. Fiscal expansion ranks first in line, particularly if the economy is caught in a “liquidity trap” in which conventional monetary expansion runs out of steam (see Krugman 2008). High public debt may become a problem, but the concern is swiftly dismissed by arguing that it will be addressed when full employment returns.
One can blame the G7 for incompetent financial supervision, but few would criticise them for the rapid and decisive action taken by their central banks and fiscal authorities after the crisis materialised.
Oil, metals, and now food prices are heading to the sky with a virulence that is hard to rationalise on the basis of world output growth – not even on the basis of China’s and India’s fast growth, let alone the expected global slowdown. This phenomenon has been accompanied by much higher transaction volumes in […]
Volatility has sharply declined in Emerging Markets (EM) since the nerve-wracking heights of August 1998, when it reached a staggering 300 basis points (measured by EMBI’s intra-month standard deviation). Recent market volatility in the US sub-prime mortgage market and the April-May 2006 shakeup brought memories of 1998, when the Russian default sent the risk premium […]