Fire & Ice: Current Economic Policy Prescriptions, and Why They Fail

Some say the world will end in fire,

Some say in ice.

From what I’ve tasted of desire

I hold with those who favor fire.

But if I had to perish twice,

I think I know enough of hate

To say that for destruction ice

Is also great

And would suffice.

—Robert Frost, Fire and Ice, 1920.

Current global macro-economic policy is veering between two strategies: Fiscal austerity, or fiscal spending.

The first camp—fiscal austerity—argues that governments should cut spending, and perhaps even raise certain taxes, so long as those taxes do not harm general economic productivity. The rationale is, the sovereign debt has to be reduced now, as one day, there will be no more buyers for all the debt that’s being floated by countries. When that day comes, the countries will be broke—and broke countries often go up in revolutionary flames.

The second camp—fiscal spending—argues that cutting back and/or raising taxes in the middle of a slowdown is the sure path to macroeconomic suicide. To their way of thinking, the economic slowdown means lower aggregate demand. So the advocates of fiscal spending argue that to cut spending now would further depress aggregate demand—which would further slow down the economy, turning the situation into a vicious cycle: The dreaded Deflationary Death Spiral Freeze-Out. Therefore, to quote Cheney: Fuck the deficit. Rather than tighten its belt, the government should step in and spend more, so as to maintain the level of aggregate demand in the economy, until such time as it is once again back on its feet and able to expand without fiscal stimulus.

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