What Europe — and the U.S. — Should Be Doing

From “Hey, Not So Fast On European Austerity,” Christina D. Romer, NYT:

“The result is that austerity is uniquely destructive right now.  Indeed, because of the harsh effect of budget cutting on growth, debt-to-GDP ratios in Europe have continued to rise.

“The core of a more sensible approach is to pass the needed budget measures now, but to phase in the actual tax increases and spending cuts only gradually — as economies recover.  To use economists’ terminology, the measures should be backloaded.

“They should also be specific — no more deficit targets without specifying how they’ll be  achieved.  Instead, lay out right now whose taxes will be raised and what spending will be cut.  And specify when the measures will take effect — either along a set schedule, or tied explicitly to indicators of economic recovery.

[C]ountries that are not in distress, both inside and outside Europe, could help by stimulating their own economies.  For example, Germany has a relatively modest long-run deficit and an enormous trade surplus.  A tax cut for German consumers would raise domestic growth at a time when it’s anemic, and increase imports from its neighbors, helping them to grow as well.

“What about the United States, which faces a terrible long-run budget problem, but no immediate threats from the bond market?  The best policy here is to combine the backloaded consolidation I’m recommending for troubled countries with the short-run stimulus I’m advocating for countries like Germany.  We could enact something like the Bowles-Simpson plan to reduce the deficit sharply over 10 years, and include in it more near-term investment in infrastructure, education and scientific research.”

Dream on, Christina.  Angela Merkel is not about to listen to you, and neither is Mitt if he is elected.  If President Obama wanted to take your advice, you’d still be Chairwoman of his Council of Economic Advisers.

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