The IMF recently released a paper that “investigates the short-term effects of fiscal consolidation on economic activity in OECD economies”. NY Times columnist Paul Krugman, commented on the paper, claiming that it puts another nail in the coffin of “expansionary austerity”. The IMF paper, which appears thoroughly well-researched and cogently presented, does provide compelling evidence that the short-term (3 year) effect of fiscal consolidation is slightly “contractionary”, and Krugman is correct to chastise those who would claim otherwise. Imagine that you were had debt, and decided that you wanted to reduce your debt level. Intuitively, your efforts to reduce your debt would not result in an increase in your ability to make additional purchases, and a similar somewhat effect is at work the first few years after a government makes the same decision.
The decision to reduce government debt is not a quick fix to transient economic malaise, but rather, it needs to be a long-term, conscious decision to limit the role of government in a country’s economic activity, and, perhaps more importantly, the burden placed on future generations. Properly used, debt is a lever, allowing you to do more than otherwise possible. Based on my expected future earnings power, I might choose to incur debt to purchase a home. It is, ultimately my responsibility to ensure that my level of debt is matched by my expected earnings power, although I suppose that I could leave my children to pay the remainder of my debts.
It seems somewhat unfair to me, however, to burden my children with the excesses of my lifestyle. As I indicated in a , I believe that we are entering a different era. I believe that society is undergoing enormous changes as older generations pass on, and that our children will bring new ideas about how they wish to live, and I want them to have the freedom to do so, regardless of what choices they ultimately make regarding the kind of world they want.