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Friday, July 20, 2012

Frankel: The First World’s Fiscal Follies

Pro-cyclical fiscal policy should be avoided, "Yet many politicians in the United States, the United Kingdom, and the eurozone seem to live by it":

The First World’s Fiscal Follies, by Jeff Frankel, Commentary, Project Syndicate: ...Keynesian macroeconomic policy lost its luster mainly because politicians often failed to time countercyclical fiscal policy – “fine tuning” – properly. ... But that is no reason to follow a destabilizing pro-cyclical fiscal policy, which piles spending increases and tax cuts on top of booms, and cuts spending and raises taxes in response to downturns.
Pro-cyclical fiscal policy worsens the dangers of overheating, inflation, and asset bubbles during booms, and exacerbates output and employment losses during recessions, thereby magnifying the swings of the business cycle. Yet many politicians in the United States, the United Kingdom, and the eurozone seem to live by it. They argue against fiscal discipline when the economy is strong, only to become deficit hawks when the economy is weak.
Consider the positions taken over the last three decades by ... Ronald Reagan..., George H.W. Bush ..., Republican congressmen...,George W. Bush..., Republicans... In my view, the government spending cutbacks of the last two years are the most important reason why the economic recovery that began in June 2009 subsequently stalled in 2011.
Here ... are three generations of politicians who favored fiscal expansion during booms (1982-1989, 1992-2000, 2002-2007) and austerity during recessions (1980, 1981, 1990, 2008-09). ...
But the pattern is understandable: when the economy is booming, there is no political support for painful spending cuts or tax increases. There is a hole in the roof, but the sun is shining. Then, when the thunderstorms roll in, sinners suddenly get religion and proclaim the necessity of reforming – just when it is most difficult to fix the problem.
Historically, it used to be developing countries whose dysfunctional political systems produced pro-cyclical fiscal policies. ... But things have changed..., a majority of the governments that have pursued countercyclical fiscal policies since 2000 are in emerging-market or developing countries. They figured out how to achieve countercyclical fiscal policy during precisely the decade when so many politicians in “advanced countries” forgot.

    Posted by on Friday, July 20, 2012 at 12:24 AM in Economics, Fiscal Policy, Politics | Permalink  Comments (16)


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