balanced-budget fundamentalism

Oxford University economist Simon Wren-Lewis writes on his blog that balanced-budget fundamentalism – the belief that government budgets must be balanced, regardless of the state of the economy – is stronger in Europe than it is in the United States. This should worry Europeans because “fundamentalism … that denies the principles of macroeconomics … is doing people immediate harm”.

Europeans, and particularly the European elite, find popular attitudes to science among many across the Atlantic both amusing and distressing. In Europe we do not have regular attempts to replace evolution with ‘intelligent design’ on school curriculums. Climate change denial is not mainstream politics in Europe as it is in the US (with the possible exception of the UK). Yet Europe, and particularly its governing elite, seems gripped by a belief that is as unscientific and more immediately dangerous. It is a belief that fiscal policy should be tightened in a liquidity trap. ….

There is now almost universal agreement among economists that tightening fiscal policy tends to significantly reduce output and increase unemployment when interest rates are at their lower bound: the debate is by how much. ….

They still teach Keynesian economics in Europe, so it is not as if the science is not taught. …..

So why does ‘balanced-budget fundamentalism’ appear to be more dominant in Europe than the US. …. I suspect a big factor is just recent experience.

The US never had a debt funding crisis. The ‘bond vigilantes’ never turned up. In the Eurozone they did, and that had a scarring effect on European policymakers that large sections of the policy advice community can play to, and which leaves those who might oppose austerity powerless. That is not meant to excuse the motives of those that foster a belief in balanced budget fundamentalism …. The difference between fundamentalism that denies the concept of evolution and fundamentalism that denies the principles of macroeconomics is that the latter is doing people immediate harm.

Simon Wren-Lewis, “Balanced-budget fundamentalism“, Mainly Macro, 18 August 2014.

HT Mark Thoma.

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