Madam Zelda! Madam Zelda! Is it true this house is haunted?
What Lies Ahead in 2011?
Joseph E. Stiglitz, Project Syndicate
2010-12-13
The gravest threat (and “downside risk facing the global economy”) comes from the wave of austerity sweeping the world, as governments, particularly in Europe, confront the large deficits brought on by the Great Recession, and as anxieties about some countries’ ability to meet their debt payments contributes to financial-market instability.
The outcome of premature fiscal consolidation is all but foretold: growth will slow, tax revenues will diminish, and the reduction in deficits will be disappointing. And, in our globally integrated world, the slowdown in Europe will exacerbate the slowdown in the US, and vice versa.
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I am not so bullish on Europe and America. In both cases, the underlying problem is insufficient aggregate demand. The ultimate irony is that there are simultaneously excess capacity and vast unmet needs – and policies that could restore growth by using the former to address the latter.
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In both Europe and America, the free-market ideology that allowed asset bubbles to grow unfettered – markets always know best, so government must not intervene – now ties policymakers’ hands in designing effective responses to the crisis. One might have thought that the crisis itself would undermine confidence in that ideology. Instead, it has resurfaced to drag governments and economies down the sinkhole of austerity.
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or deja vu?