The Broader Market

by Jordan Eizenga

The recent G-20 meeting in Toronto, Ontario has demonstrated that, in the current politico-economic climate, cutting spending is more fashionable than continuing stimulus programs.  The G-20 released a statement showing collective resolve to cut government deficits in half by 2013.  As Paul Krugman noted in today’s New York Times, this announcement demonstrates a failure of policy.  With deflationary pressures mounting and unemployment at stubbornly high levels, the prospect of governments across the globe cutting spending is worrisome. 

The reason for concern is that the end of stimulative programs will likely exacerbate unemployment, stunt job growth and hurt aggregate demand.  It will do little for the long term unemployed who stand to be left behind by any modest recovery that takes hold.  In fact, in many nations, contractionary fiscal policy will manifest itself in the reduction in unemployment insurance (UI) and welfare benefits.  This will mean large numbers of the jobless being left out in the cold, with no money to spend.  Indeed, the United States’ Congress has already demonstrated this tendency; this past month, the House voted down a bill that would have extended UI benefits – despite the fact that unemployment is a function of a lack of demand for labor rather than a lack of able bodied individuals willing to supply their labor.

The question, therefore, is what gives?  Why would governments across the globe engage in such counter-productive policy?  The standard argument is that nations, having witnessed the Greek debt crisis, want to avoid a similar scenario in their homelands.  Greek profligacy, it is argued, has been severely punished by the investment community, which demands rising yields to take on the risk of owning Greek debt.  The problem with this argument is that Greece has continued to be punished by the bond market despite its imposition of very strong austerity measures.  Thus, the Greek situation seems to suggest the opposite point: cutting spending during a recession only makes things worse (and the investment community seems to recognize this fact).

While the motivations for such a bold policy move remain unclear, its likely outcome is easily discernible: the jobless will stay that way for quite some time and will struggle to find meaningful work, while the meager assistance they receive from public coffers dwindles away.  A failure of policy, indeed.