The world’s rich countries are now conducting a dangerous experiment. They are repeating an economic policy out of the 1930s — starting to cut spending and raise taxes before a recovery is assured — and hoping today’s situation is different enough to assure a different outcome.
In effect, policy makers are betting that the private sector can make up for the withdrawal of stimulus over the next couple of years. If they’re right, they will have made a head start on closing their enormous budget deficits. If they’re wrong, they may set off a vicious new cycle, in which public spending cuts weaken the world economy and beget new private spending cuts.
On Tuesday, pessimism seemed the better bet. Stocks fell around the world, over worries about economic growth.
Longer term, though, it’s still impossible to know which prediction will turn out to be right. You can find good evidence to support either one.
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