In the ford between the need to reduce public debt and boost growth, the tug of war between economists of the opposite persuasion is dragging the economic policy of European countries and the United States a little in one direction and just as little in the other. In the ranks of those who give priority to supporting aggregate demand, even in the presence of high public and private debt, there are two Nobel winners who are actively featured in the international press, Joseph Stiglitz awarded in 2001 and Paul Krugman in 2008.
What have these economists been writing for months in the New York Times, the Financial Times and dozens of other newspapers around the world that systematically translate their articles? They say the consensus on the priority of fiscal consolidation is based on a bias and an illusion. The prejudice is revealed by the absence of empirical confirmation of the thesis that the fiscal contraction has expansive effects because it restores confidence in the markets. There have certainly been cases, writes Krugman, in which economic growth has followed spending cuts and tax increases, but they have always been situations in which the negative effects of the fiscal contraction have been offset by other factors that are not in the field today. . For example, an increase in the trade surplus, which evidently is not a strategy that can be pursued (and above all implemented) by all countries simultaneously. If we look at Ireland, Latvia and Estonia, which have had to implement spending-cutting policies on a staggering scale, we have only to see that the result is the collapse of economic activity and employment to Great Depression levels.
The illusion is that fiscal contraction is the answer to the crisis in which Europe finds itself, while the reality is that the medicine of austerity will bring with it lower growth and lower tax revenues, Stiglitz repeats over and over again. And he advises all those who hear that "fixing the public finances" is the top priority (no one obviously denies that it must be done, at some point) to stop and think. What at first sight seems healthy realism is actually a magical belief according to which invisible actors punish us if we behave badly, but if we behave well there is a good fairy to reward us.
At the onset of the crisis it seemed that everyone was convinced that they had learned the lessons of the Great Depression and the long Japanese stagnation. Now it is understood – Stiglitz's judgment is merciless – that one has not really learned anything. Stimulus packages were weak and poorly crafted, banks were not forced to lend more, and market sentiment remained negative. Recently it has finally begun to understand that Greece, Italy and Spain need to grow to solve their problems, but it is still hard to see that this impulse can only come through the support of aggregate demand. The examples that Stiglitz gives are those of investment in research, education and health, but they are only indications that need to be specified by looking for concrete content for government action. But the tug of war must end with the step forward in this direction.
