Austerity Risk

Governments across the globe responded to the financial crisis in 2008 by throwing money at the problem. Some economists say that those tactics helped stave off a repeat of the Great Depression, but their legacy has been a backlash against public spending that has pushed austerity to the forefront of economic policy debate throughout the developed world. And this new fiscal course is jeopardizing any hopes of a true global recovery, according to a report by the United Nations economic think tank.

"The current obsession with fiscal tightening in many countries is misguided, as it risks tackling the symptoms of the problem while leaving the basic causes unchanged," concludes the annual report of the UN's Conference of Trade and Development. "In virtually all countries, the fiscal deficit has been a consequence of the global financial crisis and not a cause."

The cause, states the report, was a combination of factors related to a malfunctioning financial sector, and current policies are failing to address this in a serious manner. The result may be a much longer recovery period than necessary-or worse. "The diversion of attention away from the underlying causes and towards so-called fiscal profligacy...increases the risk of stalling, or even reversing, economic recovery."

Given the deficit situations in the United States and many EU nations, it is understandable that the public and lawmakers would see any further spending as mortgaging their economic future. But this UN repudiation on the current course suggests that the greater risk may be doing nothing.