What conclusions can be drawn from the IMF study?
Note that that while growth, spending cuts, and tax increases can all contribute to lowering the debt, they can also be mutually exclusive. Growth is inconsistent with excessive spending cuts and large tax increases. Note also that a little inflation can be a good thing.
The article uses Britain’s austerity response to its debt after World War I as an example of how not to do things.
Apparently, the lesson from Britain’s experience was not learned. A regimen of austerity is being imposed on the high-debt countries of Spain, Ireland, Italy, and Portugal by their wealthier Eurozone partners, and the option of currency devaluation is not available to them.
Paul Krugman has been arguing long and loud that austerity in a falling growth scenario is madness. He has been suggesting what is essentially a monetary policy response to ease the situation. A bit of austerity combined with a bit of growth and a little inflation is how to address the problem. Stimulus in the strong countries causes growth throughout the sector plus a little inflation. Applied for several years, this would bring down the debt costs and the debt in the affected countries without the severe disruptions caused by austerity alone. Krugman would seem to have history on his side—and also The Economist.
What does history tell us about countries like the United States?
The article suggests that the more recent experiences of Belgium, Italy, and Canada may be more relevant in this era.
A little growth, a little austerity, and a little inflation can do wonders.