Tuesday, July 6, 2010

Global economic policy: Austerity alarm | The Economist

I liked the beginning of this piece from The Economist, so I thought I would share it with you. In my opinion, it is a pretty good description of where we are now in the economics cycle:

ECONOMIC policymaking, like hemlines, has fads. Last year the leaders of the G20 group of big economies led a global Keynesian boost, pledging fiscal stimulus worth a combined 2% of world GDP to prop up demand. At their most recent gathering, in Toronto on June 26th-27th, the club’s rich-world members pledged “at least” to halve their deficits by 2013. Though they left themselves wiggle room, the change of tone was clear. Thanks to Greece’s sovereign-debt crisis, which has terrified politicians, stimulus is out and deficit reduction is in.

Global economic policy: Austerity alarm | The Economist

I think the reason I like this paragraph is that it captures the tone of the most recent G-20 meeting. Last year, political leaders reveled in the idea that they were making statesmen-like judgments in the midst of the economic downturn. This year, however, the vigilantes have arrived in the bond market, throwing a major scare into these same leaders, and forcing them to adopt a Calvinist approach to fiscal woes.

The Economist's piece goes on to suggest that a more reasoned, rational economic approach will yield the best results. Providing some sort of direct fiscal stimulus, together with structural reforms in entitlements programs, should yield the best long-term results. The only question is whether the popular will can be summoned, or whether we will continue to lurch between easy and tight fiscal policy.