Sunday, April 29, 2012

Perhaps They Should Be Restive

Something about these paragraphs manages to capture all of the current wrong thinking.

The country’s economic problems have become the epicenter of Europe’s debt crisis in recent weeks as investors worry over Spain’s ability to push through austerity measures and reforms at a time of recession and mass unemployment.

The cuts are aimed principally at slashing the government’s deficit from 8.5 percent of economic output to the maximum level set by the European Union of 3 percent by 2013. For this year the goal is 5.3 percent.

With the economy shrinking and the population restless, there are concerns that the government will not meet its targets and will be forced to seek a financial rescue as Greece, Ireland and Portugal have done before.

When your unemployment rate is 25%, that is your problem. Nothing else. You should not be thinking about any other problems. There is no mechanism such that "cutting government spending" will lead to an improved fiscal outlook. There is, however, a mechanism such that "more jobs" will lead to an improved fiscal outlook. Fix the recession, fix the economy, fix any fiscal issues. There is no way to fix the fiscal issues in isolation.