Garett Jones - Economist at George Mason University. Follow him on Twitter: @GarettJones
"Stimulus now, austerity later." Sounds like good economic policy, whatever your political leanings. If you're on the right, you want tax cuts now, if you're on the left, you want government spending to get the economy moving.
If the promises of politicians were credible, that just
might be a practical policy. But it's
not. In practice, the path to austerity
involves some tough love.
I'll abuse the term "austerity" here a bit to talk about the great Federal Reserve Chairman Paul Volcker, appointed by President Carter. When Volcker battled 10% inflation in the early 80's, he didn't say, "I'll bring inflation down slowly over a half a decade." Instead, he raised short-term interest rates by 10% (!), which caused a massive recession and 10% unemployment. That got banks to slow down their lending, it got workers to take pay cuts, and it got businesses to slow down their price hikes.
That's how we got the excellent 3% inflation rate of the rest of the Reagan years. It took a major, upfront sacrifice: And business leaders, unions, and banks alike got the message: The age of high inflation was over. For the first time in years, the Federal Reserve had regained its credibility as an inflation fighter.