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Worldwide fiscal crisis: fact or fiction?

John T. Harvey

Prosperity pundits and policymakers throughout the world are calling for drastic reductions in government budget deficits. Their fear is that the weight of accumulating debt will lead to disaster as it drives up interest rates, causes inflation, and forces defaults.

What may appear to be reasonable policy today, they caution, will bring catastrophe in the not-too-distant future. The groundswell of fear is so great that it has generated grass-roots campaigns and political movements calling for budget balancing.

These are not the only voices, however. Just as vehement are those arguing that the real danger lies not in increas- ing, but reducing deficits and debt levels. They say that government spending is, by definition, private sector earning and that warnings regarding national bankruptcies are based on a flawed understanding of modern fiscal budgeting and financial markets.

They point to the unemployment and stagnation that is created by austerity programs as evidence of what reducing spending and raising taxes really accomplishes. Who is right and who is wrong is not just an academic matter but one of practical and fundamental importance. If the budget-balancers are correct, then the unemployment rates of 25% in Greece, 23% in Spain, 13% in Portugal, and 10% in Ireland are simply the short-run price paid for a stronger

future. If they are wrong, however, then not only are millions of people suffering needlessly, but the very foundation of political democracy and international cooperation is being threatened.

[In my view ] … there is no fiscal debt crisis. That so many believe there to be one is a consequence of the economics discipline’s increasing irrelevance, particularly when it comes to macro- economics and economic policy.

As [US economist] L. Randall Wray observes, economists actually know less about government budgeting today than they did fifty years ago. This causes no direct problem for those standing in front of classrooms and publishing papers and earning tenure at universities around the world. Not so for the citizens of the affected countries, however. The world is faced with enough problems already without the economists fabricating one. It is high time that we put the myths to bed and started basing policy on fact and not fiction.

Source: Harvey, John T. (2016) “Worldwide Fiscal Crisis: Fact or Fiction?” World Economic Review, 7, pp. 1-2.

John Harvey is a Professor of Economics at Texas Christian University. He specializes in international monetary economics and macroeconomics.

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