!VAR HAGENDOORN

The Stimulus Austerity Debate Once More

In less than a year the debate over fiscal stimulus has switched to a debate over fiscal austerity. As I argued before and as many economists, columnists, politicians and journalists fail to realize, in times of declining tax revenues keeping government spending at the same level amounts to fiscal stimulus.

Those who favour fiscal austerity claim that it will inspire confidence that governments will be able to meet their financial obligations in the future. Really? What difference are the interest payments on extra debt now going to make on the long-term budget?

Those who favour fiscal stimulus assume that the deficits and interest payments will be offset by the wealth created through the stimulus measures. This is true only if one assumes a multiplier greater than one and all other things being equal. But all other things are only ever equal in theory.

We do not know what the future holds, we do not know what the world will look like 5 or 10 years from now, we do not know what environmental, economic or political challenges lie ahead. There are countless untold stories of which, 10 years from now, people will wonder why no one realized what was happening.

The debate is often framed in a few variables: deficits, interest rates, inflation, jobs. To reduce the world economy to these or a handful of other variables is ridiculous.

To repeat: I am neither for nor against either fiscal stimulus or fiscal austerity measures. The debate should be over what society one wants to live in and how that can be achieved and financed. Framed this way I think countries such as Singapore, Qatar and Abu Dhabi are more on track than the U.S. and various European countries. Of course in the long run governments should have a balanced budget. I think everyone would agree that it would be foolish if, following a natural disaster, governments would shut down schools and hospitals in order to maintain a balanced budget. This is because education and healthcare are considered public goods. So why cut on education, healthcare and infrastructure now?