Anyone following the depressing economic news out of Washington, London and Brussels knows that during 2009 the United States and several other countries implemented fiscal expansion to counter the catastrophic effects of the international financial crisis (see UN, World Economic Situation and Prospects 2010, page 20, for list of fiscal stimulus packages for 55 developed and underdeveloped countries).  Insufficient though these stimuli may have been in the developed countries, the countercyclical fiscal interventions provoked an ideological debate far stronger than the mild and transient recoveries they fostered.  Initially implicit and now explicit in the stimulus debate is an ideological confrontation over the role of governments in capitalist economies.  As a result the political implications of the stimulus packages are at least as important as the economic outcome they generate.
            In continental Europe, most notably in Germany, the objections to fiscal expansion have featured dire (and bogus) warnings about the reaction of "capital markets" to increased public deficits and debt.  Indeed, Germany provides an interesting variation on the debate.  The possibility that its economy might expand at two percent in 2010 has prompted squeals of delight from the rampant right throughout the world, which attributes this recovery to their much-desired fiscal austerity.  They certainly are correct on the "austerity" part, which has been suffered by the German working class in the form of stagnant real wages over two decades.  However, it is not clear that beggar-thy-neighbor policy of wage compression would be a successful recovery program for the global economy.
            In both the United States and the United Kingdom, the debate has quickly turned ideological, with the right wing seizing the opportunity to reassert the atavistic argument that markets are self-regulating and public intervention is the source of all economic evil.  Especially in the United States, the weakness of recovery has become part of the right wing narrative:  the crisis itself resulted from government guarantees to the banking sector that encouraged reckless financial practices, and sluggish recovery is the natural consequence of excessive government expenditure.
            As many have pointed out (Krugman being the best known), the US stimulus of 2009 was insufficient to do more than arrest the decline of the economy and prevent unemployment rising above ten percent.  An article in The New York Times by Peter Goodman (29 August) nicely complements the right wing narrative by describing the meager measures of the Obama governments as "an aggressive regimen of treatments", and provides us with the ominous warning that "any proposed curative could risk adding to the national debt".  
            On the chance that the reader might not appreciate the full horror of additional debt, Mr. Goodman reminds us that "the dramatic expansion of the debt…has increased fears that one day creditors like China and Japan might demand sharply higher interest rates" on US government bonds.  Strangely enough, quite the opposite has occurred with interest rates on US bonds lower in 2010 than 2009 which Goodman actually notes ("investors are flooding into government savings bonds, keeping interest rates low").  However, this does not stop him from concluding that now and in the future "policy makers cannot deliver any meaningful intervention".

Economic Theory

Political Economy

Other policy reports