July 1 2010
Both sides in the row over stimulus v austerity exaggerate, but the austerity lobby is the more dangerous
Economic policymaking, like hemlines, has fads. Last year the leaders of the G20 group of big economies led a global Keynesian boost, pledging fiscal stimulus worth a combined 2% of world GDP to prop up demand. At their most recent gathering, in Toronto on June 26th-27th, the club’s rich-world members pledged “at least” to halve their deficits by 2013. Though they left themselves wiggle room, the change of tone was clear. Thanks to Greece’s sovereign-debt crisis, which has terrified politicians, stimulus is out and deficit reduction is in.
The trend has been most noticeable in Europe, where every big economy has spelled out spending cuts or tax increases in recent weeks. But it is evident everywhere. Japan’s new prime minister, Naoto Kan, has pushed a debate about raising the consumption tax to the top of the campaign for the upper house of parliament. In America, Congress’s fears about the deficit have thwarted the Obama administration’s efforts to pass a new mini-stimulus.
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