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Austerity and Prosperity

The question being asked again and again to almost every guest on Bloomberg radio in the past few weeks is: should we turn toward fiscal prudence or should we stimulate the economy no matter how large the deficit will be? The answers split, though it’s hard to estimate exactly at which proportion. To us ordinary bloggers, this question is more familiar from the posts like: “Krugman’s Insanity, And The Hard Mathematical Truth” or “Laffer Loses His Mind“. As the danger that two famous economists had lost their mind on this problem troubled me I decided to check if my brain is still operational and dig a little bit myself. The key to this discussion is the assumption that there is a right way to fix the economy while the opposite decision will lead into disaster. And my goal is to check this premise. Why the austerity is necessary Prudence is always good. Any family running a 10% budget deficit is doomed, so why not the government? We have the Japanese example where 20 years of fiscal stimulus produced a government debt of 200% of GDP and now it seems the options they have are far worse than 10 years ago. They had a long program […]