Roubini: Fiscal Follies

Political problems stand in the way of the economic policies we need, and may even result in counterproductive policy responses: 

Fiscal Follies, by Nouriel Roubini, Commentary, Project Syndicate: Note: Project Syndicate posted this too soon and has since removed the Stiglitz and Roubini articles from its site. They have also asked me to remove the articles until they are reposted. [The link no longer works, but it's in the Google cache.]

[The article makes the case that against the premature movement toward austerity.]

Austerity is already here. In the US, as Larry Summers points out, the sum of total and private debt has been declining as a result of consumer deleveraging (increased saving and reduced consumption in order to pay debts and rebuild damaged balance sheets):

Even with all the fiscal measures of the last several years, total borrowing in the American economy has failed to grow for the last 2 years. That is the first two year period since the Second World War when total borrowing in the U.S. economy has not increased.

Let me be clear: Even with our deficits, the amount of extra debt is less than the amount of reduced borrowing in the private sector.  Increased federal borrowing has offset, but only partially, deleveraging in the private sector.

Or, to say it another way, the stimulus package was not large enough to fully offset the decline in aggregate demand brought about by deleveraging and other causes. Thus, we shouldn't be surprised that, instead of helping the economy bounce back toward full employment, the stimulus package merely slowed the fall.

There's something else we shouldn't be surprised about. Since more help is needed now than we'll get from the poorly targeted tax agreement, and since that help won't be forthcoming from Congress -- we'll be lucky to prevent deficit reduction over the next year -- the boost to employment from the tax agreement will be much, much smaller than needed to change the expectation of a very slow climb back to full employment.