Austerity vs. stimulus

Date posted: July 4, 2012

Perhaps the biggest debate in the country now is what to do to boost the economy. There appears to be two distinct sides. One is called austerity, and it calls for balancing the federal budget and reducing the deficit mainly by changing spending. The other argues for just the opposite by having the government spend more money and worry about the debt later. N.C. State University economist Mike Walden puts these two clashing recommendations in perspective.

“We do have, right now, if you read ideas from various economists and policy makers, a really wide divide between smart people about what we should do about the economy. The notion of austerity, I think, is based on the idea that one of the things holding back the economy right now, people are uncertain. They worry, for example, about the debt. They worry that that high debt is going to mean higher taxes down the road. And so, therefore, they’re simply not spending more money, because on one hand they need to save that money to pay the higher taxes in the future. And so the solution from that point of view is for the federal government, in particular, to have a fiscal plan that reduces the burden of the debt, have the federal government to communicate to the population, ‘Hey, taxes are not going to go up,’ et cetera. So, that would be the austerity formula.

“But the other side — I mean, you can’t get much farther away — you have folks that are saying, ‘No, that’s not the problem. The problem is that people are, yes, they are uncertain and that means they’re not spending, but there’s nothing that’s going to trigger them to spend. Therefore you have to have the federal government trigger that spending through stimulus spending.’

“That may actually, these folks say, require the federal government actually borrowing more money and adding to the debt. They argue that, yeah, it would be nice if that stimulus was coupled with a long-run plan to deal with the debt, but they argue right now the big problem is people just aren’t spending and you have to have the federal government come in there and take that place and spend money.

“So, you’re absolutely right. We have a big difference of opinion between economists on this. And until we choose one or the other, I think we’re going to continue to have debates rather than action.”

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