4) What great debate is taking place in Europe and the United States regarding the impact of budget-cutting fiscal policy? What type of fiscal policies did the conservative government in Britain and the countries of the euro-zone pursue? How did it work? Explain. What was the fiscal policy adopted by the Obama Administration in the U.S.? How did the U.S. economy perform relative to Europe? What are the lessons from what happened in Europe and the U.S.? Explain.

The debate taking place in Europe and the United states regarding the impact of budget-cutting fiscal policy is whether the best way to recover the economy is through fiscal tightening of the government budget or if the aggressive budget-cutting tactics harm fragile economies. Britain and other countries in the European Union employed fiscal policies of austerity by increasing taxes and cutting budget. They have not had a good effect, with their economy recovering much slower than that of the U.S., which did not implement the same austerity measures. In the U.S., the Obama administration adopted a fiscal policy which was much more gradual and less aggressive than those applied in the European Union countries. The U.S. did much better than those countries in Europe, leading many economists to believe that the austerity measures implemented in the European Union are not an efficient or effective measure to combat the recession.  However, some people say that this is not proof that these measures don’t work, but that they were just implemented wrong such as tax increases instead of government budget cuts.

2) What do the moralizers say is the answer to our debt problems? Explain. What is wrong with their analysis that states that debtors must tighten their belts? How can debt problems create employment problems? What is a practical way out of debt induced employment problems? Explain. Which side is winning the political debate over debt? Explain.

Moralizers say the answer to our debt problems is “belt tightening” by the government, people living within their means, and people paying off their own debts. The problem with debtors tightening their belts is that if they are not spending, there is no one to replace that spending, and the economy will remain in a slump. If no one spends more, the overall income falls, depressing the economy and keeping unemployment high.  By refusing to support debt relief, they are keeping unemployment high. A practical way out of debt induced employment problems is for the government to spend when the private sector refuses to, to raise overall income and raise employment. Also, there needs to be debt relief implemented so that those in debt can pay back their debts in a way that is manageable and time-efficient to eliminate the debt overhang. The side calling for belt tightening measures is winning the political debate because most people are unaware of the real issues and causes, and what needs to be done. Most people do not understand very much about economics, so when politicians sell them an idea and it sounds good, they accept it at face value instead of questioning why it might not be the best measure.