james185_Gabe GinsbergGetty Images_stimuluscheck Gabe Ginsberg/Getty Images

Back to Austerity?

For every burst of euphoria about the potential of government spending, there is an inevitable reversion to fiscal consolidation and tighter restrictions. If the public is demanding an expansion of the state, the task for policymakers is to determine not how much to spend, but how best to spend it while the opportunity lasts.

PRINCETON – Economic and financial policymaking tends to move like a pendulum. Euphoria about the potential of government action is usually followed by backlash, disillusion, and lowered ambitions. “Can-do” rhetoric gives way to “mustn’t-do” restrictions and rules. That is where many advanced economies are now: After a period of feelgood spending, there is growing pushback against government expansion.

Previous reversals of the policy pendulum are now remembered as historical turning points. Consider the 1970s, which began with massive confidence that governments could tackle every problem with Keynesian demand management. The turn came in 1976, when British Prime Minister James Callaghan conceded, in a speech to the Labour Party Conference, that, “We used to think that you could spend your way out of a recession ... I tell you in all candour that that option no longer exists.”

The following decades featured a new orthodoxy focused on deficit reduction, debt limits, and fiscal rules. As British Prime Minister Margaret Thatcher stressed in the 1980s, “there is no alternative” – a slogan that would be echoed by German Chancellor Angela Merkel during the eurozone debt crisis.