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Fly Now, Pay Later

Fiscal policy gone wild.

12:00 AM, Feb 27, 2010 • By IRWIN M. STELZER
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Any hope for an export-led recovery seems to be receding as European growth stalls, several countries are being forced to institute austerity programs, and turmoil in the market for sovereign debt drives interest rates higher. Even China, which American businessmen have for decades seen as a huge potential market for their products, is reining in credit to cool the economy, and persists in an import-unfriendly set of policies.  

All of this has produced an important change in policies. Scrooge has become Lady Bountiful: The International Monetary Fund, long famous for prescribing austerity as the medicine for ailing economies, now warns that it is too soon to start reining in budget deficits. Bernanke more or less agrees, although he wants the U.S. to begin formulating plans to reduce the structural deficit once anti-recession spending winds down. This is music to the ears of politicians such as Barack Obama and British Prime Minister Gordon Brown, both presiding over massive deficits, both facing elections, both unwilling to cut spending just yet, if ever.

The rating agencies and investors in sovereign debt are less enchanted with the newly blessed profligacy, and it may well be that in the end the bond markets will dictate policy by forcing interest rates up to growth-stifling levels unless the government cuts its deficit. Recall that James Carville, one of Bill Clinton’s advisers, frustrated at his inability to get his spending programs adopted, lamented, “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”  

For now, it is safe to assume that the government will keep on spending, deficits will continue rising, and the Fed will keep interest rates low. That delicious, heady cocktail of loose fiscal policy -- congress is busily drafting more stimulus bills as you read this -- and easy monetary policy will, Bernanke says, produce growth of 3 percent - 3.5 percent this year, and 4 percent next year. With little inflation. Rather like the old airline slogan, “Fly now, pay later.”

Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).

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