Deficit Hawks Reemerge As Crisis Debate Rages On

Remember the deficit hawks? The critics of blown-up government spending finally took center stage last week, after staying largely in the shadows as countries around the world threw hundreds of billions of dollars, euros and yuans at their banks and economies to help stave off the worsening recession. In Washington, fiscal conservatives in the U.S. Senate voted down a $15 billion bailout for Detroit automakers. In Britain, the opposition Tories unleashed fresh attacks on Prime Minister Gordon Brown for his $30 billion "fiscal stimulus." Shadow Chancellor George Osborne ridiculed the centerpiece of Brown's plan, a temporary 2.5 percent cut in the national sales tax, as an "expensive and ineffective" measure that would only leave British taxpayers with a "bombshell" of debt. The Tories took their cue from remarks made in this magazine last week by German Finance Minister Peer Steinbrück, that Britain—and, by implication, other big spenders around the world—was "tossing around billions" in a "breathtaking" switch from supply-side economics to a "crass Keynesianism." Brown, in turn, lashed back at both the Tories and Steinbrück, saying they were out of step with mainstream thinking on what's needed to fight the crisis.

Few argue that government should not be spending in the crisis. Germany itself has put together a $41 billion spending plan on top of its $670 billion bank bailout. Instead, the dispute centers on effectiveness and timing. The key choice facing politicians is whether to wait and let the current stimulus programs take hold, even as the economy continues to deteriorate, or move much more quickly and boldly, even at the risk of bloated deficits. The Germans argue for waiting—and for having some dry powder left if the crisis takes a turn for the worse. Of course, politics play a role, too. Germany's leaders may be arguing for fiscal rectitude now, but with a national election coming up in September 2009, sources close to Steinbrück suggest they are also trying to keep their policy options open for a hotter phase of the campaign. In America, some of the harshest bailout critics were lawmakers from Southern states, where foreign carmakers have their factories, which could get hurt.

The Germans and Brits, at least, appear to be meeting in the middle now as they recalibrate their positions after last week's row. British Foreign Secretary David Miliband told the BBC last week that each country in Europe should be free to pass policies to suit its circumstances, soothing German worries that they, as the EU's traditional paymaster, will be asked to fund a giant pan European stimulus. German Chancellor Angela Merkel will meet with her cabinet in early January to discuss further steps to support the German economy, which is now expected to contract by 2 percent next year. The rhetoric might cool down again, but the argument over when to act, how and how boldly will remain.