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August 19, 2010
The Financial Times is hosting a debate on the new austerity on the new austerity which they've constructed in terms of austerity v stimulus. This is a debate in economics in which the stimulators say the danger lies in spending too little and the austereians from spending too much. Each side also has their own economic champion: the stimulators follow the banner of Nobel Prize-winning economist Paul Krugman, while the austereians are forming up behind the recently reformed former Fed Chairman Alan Greenspan.
In a recent Wall Street Journal editorial Greenspan argued that the best economic stimulus would be for the world’s leading debtors (the United States, U.K., Japan, Italy, et al) to rein in their budget deficits, a strategy dubbed “austerity” by the press. Greenspan explains that because lower deficits will restore confidence, diminish the threat of inflation, and allow savings to flow to private-sector investment rather than public-sector consumption, the short-term pain will lead to gains both in the mid- and long-term. Rather than redistributing a shrinking pie, this approach allows the pie to grow. Greenspan’s austereian view has been echoed loudly in the highest policy circles of Berlin, Ottawa, Moscow, Beijing, and Canberra.
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I don't understand why anyone would take Greenspan seriously on economic matters, since he showed himself to be so spectacularly clueless over the GFC.