Home' Policy Magazine : Policy Vol 33 - No 1 Contents VITO TANZI
POLICY • Vol. 33 No. 1 • Autumn 2017
depressed’ economies. High levels of public debt
would not create difficulties because the anticipated
high growth rates would melt the debt.
Given these assumptions, it would be ‘stupid’
(Stiglitz’s term10) to worry about fiscal deficits
and public debt. ‘Austerity’ policies, such as those
adopted in Italy and Spain or forced on countries
like Greece, are considered counterproductive. The
large space that the media gives to highly vocal
economists such as Stiglitz who hold these views
gives the impression that they now reflect the views
of the economic profession. However, many leading
economists do not share them.
As a result of the new theories, some research
in the fiscal area has become more creative and less
intuitive or convincing to those who do not share
the same paradigm. Paul Krugman,
and to a more
guarded extent Larry Summers and some others,
have argued that traditional or orthodox economic
rules no longer apply when economies are ‘deeply
depressed’ and when ‘liquidity traps’ are present.
Some empirical studies have generated results that
orthodox economists find highly questionable
and hard to accept. The latter have had increasing
difficulties in understanding the channels and
mechanisms that can create the huge multipliers
and claimed large growth outcomes.
Public debt and its impact on economic
Various papers have advocated expansionary fiscal
policies and slower paces of fiscal consolidation in
countries with high fiscal deficits and large public
debts. At the beginning of the Global Financial
Crisis (GFC), some economists set the tone for
the policies that advanced countries should follow
to deal with the GFC. An important International
Monetary Fund (IMF) paper in 2008 called for the
adoption of large, expansionary and sustained fiscal
14 Various countries introduced policies
that, in 2009-2010, increased their fiscal deficits
to extraordinary and clearly unsustainable levels.
The fiscal stimulus packages were withdrawn when
the money budgeted for them was spent. However,
the deficits remained very large. In 2012, in the
Group of Seven (G7) countries, they averaged over
6% of GDP but some economists defined them
‘Austerity’ has come to describe the
policies of countries that did not maintain fiscal
deficits at the extraordinary levels of 2009-2010.
These criticisms imply that the more prudent or
orthodox policies followed after the introduction of
the large ‘fiscal packages’ of 2009 were too restrictive,
and that countries should have maintained the large
fiscal stimuli. As interpreted in a 2015 IMF study,
the current fiscal and economic conditions of many
countries would justify and allow them to introduce
additional and sustained fiscal expansionary policies.
These would be different from the time-limited
packages theorised by Keynes and expected to
operate through the action of reasonably-estimated
Very large fiscal multipliers are now assumed18
and operate over much longer time periods.
in the views of economists behind these new pro-
spending theories, large expansionary fiscal policies
should be sustained for much longer periods to
fight stagnation. These economists seem to believe
that we are now in a different fiscal world where old
rules no longer apply.
The world risks drowning in an enormous pool
of public—and private—debt if the recommended
policies fail to generate the fast rate of growth that
those who propose them hope they will generate.
In a 2015 report, McKinsey & Company provided
useful statistics on public and private debt in the
world. Some of these statistics are reported in Table
1 overleaf. The total debt in the world has never
been so high. The report warned that ‘high debt
levels . . . have historically placed a drag on growth
and [have] raised the risk of financial crises that
[can] spark deep, economic recessions’.
In a recent book, I argued that large and growing
disequilibria in the public finances of many
European countries—some hidden by questionable
and non-transparent fiscal accounts, or by faulty
data—made the GFC, imported into Europe from
the United States after the sub-prime meltdown,
more severe than it would have been.
These economists seem to believe that we
are now in a different fiscal world where old
rules no longer apply.
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