Debt Panic as Strategic Misrepresentation in Management of Government Fiscal Stress and Crisis

Abstract

The theme of this article is that for reasons related more closely to politic incentives rather than fiscal reality there is a tendency among some policy makers to make wrong choices in attempting to manage fiscal stress and crisis, preferring to use more easily negotiated "quick fixes" such as across-the-board cuts in spending for programs that do not contribute much to deficits and debt. In fact such cutting usually makes the fiscal situation worse rather than better because they reduce economic growth in the private sector needed to pull out of debt and economic recession (Bureau of Economic Analysis, 2012). Typically, such budget reductions result in increased unemployment as public sector jobs are cut, further reducing revenues to government while increasing unemployment insurance cost of government. Fiscal stress is defined as when revenues fall short of expenses but a government or other public entity in debt remains able to obtain loans to finance current operations and debt restructuring, albeit at increasingly higher level of interest while they participate in some form of debt restructuring. Fiscal crisis occurs when governments no longer can get loans and are not able to sell their debt in financial markets at any price. This article examines US fiscal stress conditions and management approaches and then compares the US experience to that of the European Union and the Eurozone. It explains that while there is genuine need for changes in fiscal policy, such changes should be proposed, analyzed thoroughly, negotiated and implemented carefully over time rather than yielding to political expedience using debt panic as a means of forcing the adoption of quick but unworkable approaches to resolution of the real problems that cause both short and longer-term fiscal stress.