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Simon Johnson: Fiscal Austerity and America’s Future

by Simon Johnson
Read Simon Johnson's full article at the New York Times.

... The financial crisis may be behind us, but the link to the likely intense debate this fall regarding fiscal policy is direct. We are told that fiscal austerity requires outright and immediate further cuts in the benefits previously promised to people at the federal, state and local level.

Never mind that this is simply not true - at least in the form currently presented (here are a primer on short-term issues and another on the longer-term perspective). A vocal class of people - including some at the upper end of the income distribution - incessantly insist that entitlements must be cut while refusing to address the real causes of both our recent surge in government debt (the financial crisis, caused by perverse incentives in the financial system) and the genuine longer-term issues we face (which are about controlling the future increase in health-care costs, not cutting the level of benefits today).

The self-described fiscal conservatives really cannot be taken seriously. In the financial reform debate, they either didn't show up or preferred to keep the existing system in place, and they refuse to put serious health cost-control measures on the table.

If the "conservatives" don't really want to reduce the shocks that have caused government debt to explode recently - or to deal with the underlying, longstanding health-care cost issues in a reasonable fashion - what exactly is going on?

That's a question they should answer for themselves, and hopefully they will be pressed on this in public debates during the campaign for November's elections. But there is a striking similarity between the longstanding stated intention to "starve the beast" (meaning to press for reduction in government by creating binding constraints, like a perceived crisis) and what we are seeing play out today.

And there is very real danger that this strategy will work, in the sense that the contours of a coming "fiscal crisis" - what will be discussed and how the issues are framed - will largely be structured by scaremongers who wish to cut pensions and health-care benefits for middle Americans in the years ahead and who will work hard to keep meaningful tax reform off the table.

People who push for this view are not being fiscally responsible, and they are well down the road to exacerbating developing world-type problems in the United States - and to creating the conditions for another financial crisis.

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