The Bogey of Fiscal Stimulus

NEW YORK – After the economic disaster of 2008-2009, people are understandably wary of the devastation that yet another financial crisis can wreak. But the likelihood of another crisis is quite small, and its adverse impact would be far less devastating this time around, as there are no more massive credit or asset bubbles to burst.

That has not stopped pundits and the media from exaggerating such fears, distracting from greater efforts to overcome protracted stagnation for much of the developed world, which will inevitably drag down economic recovery elsewhere, especially in developing countries.

The current favorite bogeyman is public debt. Much is being made of high levels of sovereign debt on both sides of the Atlantic, and in Japan. As the economics commentator Martin Wolf has noted, “The fiscal challenge is long term, not immediate.” Likewise, while Japan has the highest debt-to-GDP ratio among rich countries, this is not a serious problem because the debt is domestically held. And Europe’s debt problems are now widely acknowledged to be due to ill-conceived aspects of European integration.

The international community has, so far, failed to develop effective and equitable arrangements for restructuring sovereign debt, despite the clearly dysfunctional and problematic consequences of past international public-debt crises. This prevents timely debt workouts when needed, effectively impeding recovery.