The Best Policy for the Sovereign Debt Crisis
Jürgen Stark, executive board member of the European Central Bank, said on Wednesday that restoring sustainability to the public finances was “even harder for the UK, the US and Japan”.
As Tyler Cowen says, the key point is to recognize that we are not as rich as we thought we were. I think what is needed is for every deficit-plagued government to lower public sector salaries by ten percent until the crisis blows over.
The worst thing that could happen is that cutting wages could reduce aggregate demand through Keynesian channels. But gosh, look at some of the alternatives: sovereign defaults, bank runs, cuts in public sector jobs? A cut in public sector pay is probably the least unpalatable option.