When the housing bubble burst in 2006, U.S. policy makers looked to Japan for clues about what to do — and not do — in response. Now their attention is shifting to Europe as America gets set to follow that region with a concerted attack on its budget deficit.
Among the lessons being drawn: Dont put off budget action until the financial markets demand it. Big, immediate cuts arent always the best way to reduce deficits. And central bankers should be ready to try to offset the economic impact of any fiscal contraction.
The lesson of Europe is, dont wait until youre in a crisis to act. Do it now, said Alice Rivlin, the founding director of the Congressional Budget Office in Washington. The other lesson is that austerity is not a good prescription for weak economies.
The stock market would benefit if the U.S. avoids the year- end so-called fiscal cliff and reaches a deal to put the deficit on a downward path, said Jack Ablin, who helps oversee about $65 billion of assets as chief investment officer at BMO Private Bank in Chicago.
A credible plan would build confidence among investors, he said.
David Cote, chairman and chief executive officer of Morris Township, New Jersey-based Honeywell International Inc., agreed. Should lawmakers be able to sketch out an agreement by the start of 2013 to cut the deficit
by $4 trillion over 10 years, then you end up with markets looking at that and going, Oh my God, these guys can govern, he said in an Oct. 25 interview with Bloomberg Television.
Automatic Cuts
