U.S. News: Tug of War on Timing for Belt-Tightening
Facing ballooning debt, the U.S. is conducting a real-time experiment in tightening government budgets in a fragile economy.</br></br>There is widespread agreement the U.S. needs to tighten its belt in the long run, but debate is heating up over whether it is wise to cut budgets with the economy growing so slowly.</br></br>Liberals say the turn toward austerity -- at the federal, state and local level -- is creating what economists call "fiscal drag," slowing an already slow economy. Conservatives counter that the size of the current and future deficits is creating so much uncertainty -- and such deep fears of long-term tax increases -- that it is dragging down the economy even in the short run.</br></br>The dilemma was captured by Federal Reserve Chairman Ben Bernanke Friday, when he called for putting debt "on a sustainable path" while warning against the "creation of fiscal headwinds for the current recovery."</br></br>Conventional macroeconomic analyses, built on the foundation laid by John Maynard Keynes and his followers, suggest austerity measures are hurting.