On July 19, Pew released a poll which found that Americans now favor deficit reduction over fiscal stimulus by a 51 percent to 40 percent margin.
In a July 15 interview, former Federal Reserve Board chairman Alan Greenspan urged that all of the Bush tax cuts be allowed to expire at the end of the year, as scheduled under current law. While recognizing that this will slow growth somewhat, he believes that it is more important to reduce the deficit.
Also on July 15, the Organization for Economic Cooperation and Development published a report comparing three fiscal scenarios: business as usual, fiscal consolidation, and fiscal consolidation with structural reforms. Although the OECD report clearly favors the last option, the data it presents show little impact on growth among the three options. For the US, GDP growth in 2021-25 would be 2.3 percent pear year under option one, 2.6 percent per year under option two, and 2.5 percent per year under option three.
In a July 13 commentary, University of California, Berkeley, economist Barry Eichengreen argued that fiscal consolidation is highly unlikely to be beneficial in the G20 countries in the current economic environment. It may, however, benefit smaller countries by improving confidence and reducing interest rates.
In a July 7 commentary, economist Giancarlo Corsetti supports fiscal consolidation because the fiscal multiplier is very low except under crisis conditions, which have now passed.
In a July 1 paper, some International Monetary Fund economists looked at the long-run and short-run effects of fiscal consolidation. They find that the short-run pain is more than offset by long-run gain, and the pain can be minimized by making the consolidation as credible as possible.
The July issue of the European Central Bank’s Monthly Bulletin contains an essay that is highly critical of fiscal stimulus. It says that fiscal consolidation is a better approach.
A July working paper from the European Central Bank argues that the stimulative effect of government spending on short-term growth has fallen over time. In the 1980s, the multiplier was greater than one (raising GDP by more than $1 for every $1 spent), but now is only 0.5 (raising GDP by only 50 cents for every $1 spent). The cause of the decline is that government debt crowds out private borrowing.
In a June 24 post, IMF economists Oliver Blanchard and Carlo Cottarelli listed ten commandments for fiscal consolidation in advanced economies.
In a June 18 research note, JPMorgan Chase economist Silvana Dimino looked at Canada’s fiscal consolidation in the 1990s, which saw the budget deficit reduced by six percent of GDP over a five year period. The study points out that Canada was able to accomplish this feat because of special circumstances that do not exist in the US today: money was tight so the central bank had considerable room to cut rates, and a decline in the Canadian dollar led to a big rise in exports to the U.S., which was then in the midst of the tech boom.
Note: I previously posted links on fiscal consolidation on June 7, and published a column about it on July 2.
Bruce Bartlett is an American historian and columnist who focuses on the intersection between politics and economics. He blogs daily and writes a weekly column at The Fiscal Times. Read his most recent column here. Bartlett has written for Forbes Magazine and Creators Syndicate, and his work is informed by many years in government, including as a senior policy analyst in the Reagan White House. He is the author of seven books including the New York Times best-seller, Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy (Doubleday, 2006).
