Austerity on the Defensive

Bill Gross at the AT&T Pebble Beach National Pro-Am in 2007

Photo by Michael Cohen/Getty Images

Bill Gross, manager of the giant bond fund PIMCO, struck a Krugmanian note talking to the Financial Times over the weekend saying “the UK and almost all of Europe have erred in terms of believing that austerity, fiscal austerity in the short term, is the way to produce real growth. It is not. You’ve got to spend money.” And know José Manuel Barroso, the president of the European Commission, says austerity is no longer the answer to what ails Europe.

That comes atop the growing realization that the academic research bolstering the austerity drive was confused, at best.

I’ll note for my part that the really smart strategy is to sidestep the debt accumulation debate with helicopter money. That is to say you print up a bunch of money and mail it to people. Or else you orchestrate a close operational equivalent, like have the central bank finance a VAT cut in Europe or a payroll tax cut in the United States. Then you see what happens. Operating in tandem with the austerity debate for a long time now has been a frustratingly pointless debate over the extent to which developed economies are facing supply-side (“structural”) versus demand side (“cyclical”) constraints to growth. Unlike many macroeconomic questions, this is one that can actually be investigated. You print up a lot of money with the explicit objective of boosting economywide nominal spending, and then you see how much of the boost comes in the form of higher output and how much in the form of higher prices. I’d be shocked if the answer wasn’t “some of both,” but the only way to know how much of which would be to try it.