Governments have routinely responded to any form of financial trouble by tightening the near term fiscal stance, while failing to address their long term sustainability problems. This, according to almost all economists who have opined on the subject, is precisely the wrong way around, but that has not stopped them. It now seems most unlikely that this trend will be reversed, short of a second leg of recession. Furthermore, self inflicted policy failings in the US and the eurozone in recent weeks have resulted in financial stress and widening credit spreads. This has tightened monetary conditions much more than the ECB and the Fed intended when they started to press the “exit” buttons in Q2.
The inability to even keep long-term and short-term issues straight in a conversation is mind-boggling. Hiking mass transit fares while cutting services is not some kind of close substitute to dealing with the projected increases in the cost of health care. It’s not just small relative to the scale of the real fiscal issue, it’s completely irrelevant. A form of short-term pain that has no benefit over the long-term.
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