Joseph Stiglitz: Fiscal conservatism may be good for one nation, but threatens collective disaster

[marmar]

from the Independent UK:



Joseph Stiglitz: Fiscal conservatism may be good for one nation, but threatens collective disaster
Tuesday, 15 June 2010


What is unambiguously clear about the European economies, including that of the UK, is that if they all decide to cut their borrowing, slash spending and raise taxes, and do so at the same time, growth will be lower than it otherwise would have been. It means that there will be fewer people in work than would otherwise have been the case, and, because tax revenues will be depressed and unemployment benefit payments higher, the improvement in budget deficits will be much less than hoped for. It a classic Keynesian paradox; what is good for one nation can be disastrous for all. There is a risk that the European economy will go into a "double-dip" recession. Although obviously important, that doesn't matter so much as the big picture: stagnant economies poised on the edge of deflation.

In the US, the forces of conservatism are also at work, although there are more voices, mine included, arguing for continuing public investment in the economy. Larry Summers, the President's economic adviser, and Tim Geithner, the Treasury Secretary, are also keen on maintaining support for the recovery. There is a limited job creation Bill going through Congress. But the fiscal conservatives do seem to be gaining ground, which adds to the risk of a global weakening of all the advanced industrial economies.

What I detect as being especially dangerous in Europe right now are the cuts in the wages of public sector workers. This so-called "internal devaluation" is based on the idea that prices and wages can both move down together. Whether that happens or not, what will not move down is the value of the debts incurred by households in countries such as Ireland and Spain. So, with a lower salary and the same mortgage and consumer debts, many families will, I fear, default on their debts. In these already highly indebted states, that could place much more stress on the banking system, and make the banks even more cautious and unwilling to extend credit, which would add another twist to the downward spiral.

That brings me to another weakness in Europe and in the US – the continuing fragility in the banking system. There has been a certain amount of forbearance for questionable accounting practices when it comes to the banks, and they are simply more leveraged – they owe more – and have less capital than they claim. The recapitalisation of the banks we saw in 2008 and 2009 has not been as successful as we hoped in terms of the growth of credit, especially bank lending to small and medium-sized enterprises. A repeat of the extreme credit crunch that hit the world when Lehman Brothers collapsed is less likely than a continuation or even exacerbation in the restricted flow of lending. If economies go into a new recession or just stagnate as a result of simultaneous budget cuts, then that again will add to the banks' problems through bad debts. There is also the danger of "contagion", where the sovereign debt crisis in Europe becomes transmitted to the real economy via the financial system. ...........(more)

The complete piece is at: http://www.independent.co.uk/opinion/commentators/joseph-stiglitz-fiscal-conservatism-may-be-good-for-one-nation-but-threatens-collective-disaster-2000517.html

[Demeter]

1. Not to Worry--There Won't Be Any Fiscal Conservatism

The only nation that really practices such is Cuba.

The rest will merely select victims and starve them, creating the ever richer and the ever poorer, until the revolution, when the people find a Chavez-type to lead them out of debt and the claws of the IMF.

[Jefferson23]

2. Thanks for posting, Stiglitz is one of several who SHOULD HAVE

been asked by Obama to directly help craft reform. They guy is brilliant, the right kind of brilliant.