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Nobel Economists Back Austerity Amid Budget Cuts

Nobel-prize winning economists including Robert Mundell, Reinhard Selten and Myron Scholes favor tough austerity measures to tackle deficits in Europe and the U.S. amid debt crises that shook the euro and saw the world’s largest economy lose a triple-A rating.

The Nobel winners, meeting in Lindau, Germany and St. Gallen, Switzerland at a four-day symposium, said “draconian” measures were needed in economies from the U.S. to Greece, to tame debt levels even as global growth cools.

While U.S. Federal Reserve Chairman Bernanke signaled yesterday that the central bank still has the tools to stimulate the domestic economy, he stopped short of saying when or if policy makers would deploy them. Instead, Bernanke said fiscal sustainability must be “urgently addressed” while not endangering the fragile economic recovery.

“We need a real discussion over entitlements,” said Scholes, who won the prize in Economic Sciences in 1997 for his work on derivatives pricing. “If Obama had gotten on his bus the day he was elected and said ‘these are the things we are going to do,’ then it would have been a lot better.”

The U.S. economy grew more slowly from April through June than first estimated, Commerce Department data showed yesterday 90 minutes before the Fed chief’s address. That capped the weakest six months of the economic recovery that began in mid-2009. Gross domestic product gained at a 1 percent annual rate, versus the earlier estimate of 1.3 percent.

‘Credible Plan’

President Barack Obama signed a plan to raise the federal debt limit on Aug. 2, the deadline to avoid a possible default, after months of wrangling with Congress. The deal would make $2.4 trillion in deficit cuts over 10 years.

“Acting now to put in place a credible plan for reducing future deficits over the longer term, while being attentive to the implications of fiscal choices for the recovery in the near term,” serves the objectives of stimulating growth and reducing debt, Bernanke said in Jackson Hole yesterday.

In Europe, Spain’s two main political parties agreed to enshrine the principle of budget discipline in the constitution amid a debt crisis that has seen three EU-IMF funded bailouts, engulfed Spain and Italy and menaced France.

Robert Mundell, whose work on currency areas aided the foundation of the Euro, said the situation in Europe is “very dangerous” and the single currency could “go down the drain” if politicians didn’t act to contain the crisis.

‘Draconian Methods’

Greece, Mundell said, now needs “draconian methods to attack entitlements in welfare spending, to cut back on things that cause the problem.”

“In the short and medium term I don’t deny it might be easier to have high deficits,” Selten said in an interview. “But I think that the difficulties are greater in the long run than if you restrict it now. At some time it has to be stopped.”

At the same time, fellow Nobel laureate Joseph Stiglitz argued that as the chances the U.S. economy will go back into recession are “very high,” austerity policies are misguided, and go “exactly in the wrong direction.”

“The most important way to address the deficit is to get America back to work, to get the economy back to full employment,” Stiglitz told journalists on August 25.

“There has to be stimulus, there has to be spending. Monetary policy is not likely to be very effective,” Stiglitz said, countering calls for further rounds of Quantitative Easing by the Federal Reserve.

Expansionary Activity

Stiglitz, a professor of economics at Columbia University, also argued that countries in the euro area including Germany should reverse their budget-cutting drives or risk falling back into recession.

“If Germany and other countries which have the capacity to engage in expansionary activity would do it, that would help those parts of Europe where they face constraints,” he said.

With the yields on Spanish and Italian bonds rising to records this month, prompting the European Central Bank to reactivate its bond-buying program, austerity in Europe has in the last month received renewed impetus.

Italian Prime Minister Silvio Berlusconi pledged to balance the budget in 2013, a year earlier than planned, to bolster confidence in his country’s 1.8 trillion euro ($2.6 billion dollars) debt load.

“For too long we have forsaken long-term gains for short-term gratification,” German Finance Minister Wolfgang Schaeuble said at the close of the event. “Our economies are in the process of deleveraging, to be put back on the path of sustainable growth.”

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