Fiscal Fibs and Follies

BERKELEY – Across the globe, the debate over fiscal consolidation has the distinct sound of two sides talking past one another.

On one side are those who insist that governments must move now, at all cost, to rein in budget deficits. Putting public finances on a sustainable footing, they argue, is essential to reassure financial markets. If concerted efforts are taken to balance budgets, confidence will be bolstered. And if confidence is bolstered, consumption and investment will rise.

In this view, cutting deficits will be expansionary. As evidence that this is not merely a hypothetical possibility, advocates of fiscal consolidation point to cases like Denmark in the early 1980’s, Ireland in the late 1980’s, and Finland in the 1990’s.

On the other side are those who insist that additional public spending is still needed to support demand. Private spending remains weak, not least where continued high unemployment has led consumers, concerned about future prospects, to pocket their wallets.