Paul Lachine

The Crisis of Fiscal Imagination

Greedy banks, bad economic ideas, incompetent politicians: there is no shortage of culprits for the economic crisis in which rich countries are engulfed. But when future generations place our leaders in historical perspective, they will most likely reproach them, above all, for their lack of institutional imagination.

CAMBRIDGE – Greedy banks, bad economic ideas, incompetent politicians: there is no shortage of culprits for the economic crisis in which rich countries are engulfed. But there is also something more fundamental at play, a flaw that lies deeper than the responsibility of individual decision-makers. Democracies are notoriously bad at producing credible bargains that require political commitments over the medium term. In both the United States and Europe, the costs of this constraint on policy has amplified the crisis – and obscured the way out.

Consider the US, where politicians are debating how to prevent a double-dip recession, reactivate the economy, and bring down an unemployment rate that seems stuck above 9%. Everyone agrees that the country’s public debt is too high and needs to be reduced over the longer term.

While there is no quick fix to these problems, the fiscal-policy imperative is clear. The US economy needs a second round of fiscal stimulus in the short term to make up for low private demand, together with a credible long-term fiscal-consolidation program.

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