The Great False Choice

The debate is raging among policy makers, economists, and even among members of the Federal Reserve, about whether more stimulus is needed to boost the U.S. economy or whether policymakers should begin focusing on government debt reduction. Olivier Blanchard, chief economist at the IMF, recently wrote on “the great false choice-stimulus or austerity” in the Financial Times.

Blanchard points out that there is actually no necessary conflict between restoring both fiscal sustainable budgets and maintaining support for the economy.Withdrawing fiscal and monetary support for the economy could risk sending the feeble recovery back into a tailspin, while failing to address structural debt problems could result in slower growth for decades, similar to Japan’s experience.Short-term support is needed, especially for jobs and housing programs, areas of the economy that have been hit the hardest. Long-term reforms are also needed, especially in social security, Medicare, and defense spending, along with the overall need to make government more efficient overall.

Andy Xie is a Shanghai based economist and former Morgan Stanley chief economist for the Asia-Pacific region.He maintains that what really ails the U.S. is our declining competitiveness within the global economy. Perhaps our biggest problem is that not enough is being done to correct our competitive deficit in core technologies, manufacturing base, and the education and skill set of our labor force. Minnesota State Fair goers might appreciate his summary analysis:”The global economy is like fried ice cream-If you don’t act fast, it turns into a mess.”

Bush-era tax cuts expire at year-end and November elections are looming.Policymakers are between a rock and a hard place. They must come to grips with both the need to support the economy in the short-term while still addressing long-term budget and competitive reforms.This will be a tough balancing act. Let’s hope things don’t get messy.

Have a great day!

Bob