Stimulus vs. austerity

Date posted: May 29, 2013

Most people are not happy with our elected leaders in Washington and their inability to come to some agreement on government spending, taxes and the national debt. Some say the reason is politics. But others say the differences are deeper than that.  N.C. State University economist Mike Walden responds.

“Well, what we’re talking about here really is that part of economics that we call macroeconomics.  There are really two parts of economics, microeconomics, which deals with buying and selling. It deals with business activity. It deals with consumer choice, etcetera. On microeconomics, I would say economists agree 95 percent of the time.

Macroeconomics is that part of economics that deals with the entire big economy all together. We’re dealing with the national economy. And quite frankly, that economics has a lot of differences of opinion between professional economists, between Nobel Prize winners.

Right now, you really have a clash between two different philosophies. You have the traditional what we call Keynesian philosophy of macroeconomics, which says that when you have a downturn in the economy, the government should be very active in spending more, cutting taxes.

They’re going to run up debt, but that’s going to be needed to stimulate the economy. That approach has really been dominant for about 80 years.

But you also have an alternative approach called austerity, which says no, cutting taxes and spending isn’t going to work. People are simply going to reduce their own spending because, for example, they might fear that taxes are going to go up in the future.

The austerity folks say the best approach is like at the household level, run a balance budget. So I would argue that these two different philosophies are actually behind a lot of the differences and clashes we see in Washington between politicians, and it’s going to take a solution or at least some compromise between those philosophies before we come to some resolution.”

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