The European economy continues through its “Perils of Pauline” drama. The latest positive news, European Central Bank chair Mario Draghi’s “whatever it takes” statement last week, afforded the U.S. stock market its customary 48 hours of euphoria. Whether the market will continue walking on air this week – or more importantly, will have good reason to in the weeks and months to come – is uncertain.
However, other economic news is less than favorable. The economy has apparently lost the momentum that it showed last winter and early spring. Growth in the second quarter has clocked in at only 1.5 percent, which does not meet Federal Reserve chair Ben Bernanke’s criterion of supporting improvement in the labor market. Even if the good news from Europe should stand up, the U.S. economy may already have drifted below stall speed, and be heading for an outright downturn. If we are anywhere close to that point, the economy may soon need a boost.
For economists, one of the most unfortunate pieces of fallout from recent political developments has been the demonization of the word “stimulus.” It always is difficult to communicate to the public that, yes, things have improved at a frustratingly slow pace, but were it not for a particular policy intervention, things would have been worse still. A policy that makes things less bad should be called a success, but to the non-specialist public, because things are worse than they once were, or worse than expectations, that policy usually is deemed a failure.
The title of this post refers not to our new blog – whose purpose is explained here– but rather to the fiscal issue itself. Why do we care so much, when some others believe that the public debt is just a diversion?
The basic fact is that just about anyone or any group can accumulate so much debt as to become non-viable. If actual and potential creditors conclude that a borrower cannot service his, her or its debts, then credit flows cease. Those borrowers, which had relied on borrowing to finance their daily operations, can no longer operate. Because they cannot service their debts, they default and go out of business. It has happened to households. It has happened to business firms. And it has happened to entire nations – with the proviso that nations sometimes can pay their debts by printing so much currency that its value plummets, in a process widely known as hyperinflation.
Even short of that extreme, households, businesses and nations can become so heavily indebted that the cost of servicing their debts inhibits their ability to perform their fundamental missions. Their stakeholders suffer. For households, the result can be poor nutrition, inadequate health care, and stress. For businesses, it can be reduced wages that drive away the best workers, or inadequate investment that leads to inferior products or to a cycle of higher costs that still further constrain investment. A nation can suffer much like a household or a business: inadequate, crumbling infrastructure; poor nutrition, health care and education for many in the population; and even declining national security.
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