There's good reason everyone's talking about what to make of the projected record-breaking $1.6 trillion budget deficit. It could curb American power abroad and it may be met with some dubious budget gimmicks. But it's hardly clear what we should do. The question, in fact, is so vexing that it's split two British financial titans--financial historian and Harvard professor Niall Ferguson and renowned Financial Times columnist Martin Wolf. Ferguson argues that the United States urgently needs to tighten its fiscal policy or risk becoming the next Greece, but Wolf argues that course would prove a "grave error."

Ferguson, writing in the Financial Times, warns that the theory that deficit spending saved us is about to be tested:

What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch. Deficits did not “save” us half so much as monetary policy – zero interest rates plus quantitative easing – did. First, the impact of government spending (the hallowed “multiplier”) has been much less than the proponents of stimulus hoped. Second, there is a good deal of “leakage” from open economies in a globalised world. Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect.
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Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven”. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.

Ferguson goes on to paint an economically apocalyptic picture:

On reflection, it is appropriate that the fiscal crisis of the west has begun in Greece, the birthplace of western civilization. Soon it will cross the channel to Britain. But the key question is when that crisis will reach the last bastion of western power, on the other side of the Atlantic.

Wolf, however, disagrees with Ferguson's dire depiction. He doesn't deny the need to rein in spending at some point, but now is certainly not the time:

If these [crisis-hit] governments had decided to balance their budgets, as many conservatives demand, two possible outcomes can be envisaged: the plausible one is that we would now be in the Great Depression redux; the fanciful one is that, despite huge increases in taxation or vast cuts in spending, the private sector would have borrowed and spent as if no crisis at all had happened. In other words, a massive fiscal tightening would actually expand the economy. This is to believe in magic.

Wolf also rejects Ferguson's comparison to Greece. Sure, high-income countries hold unsustainable fiscal positions. But, he says,

The US is not Greece. Moreover, a massive fiscal tightening today would be a grave error. There is a huge risk – in my view, a certainty – that this would tip much of the world back into recession. The private sector must heal. That, not fiscal retrenchment, is the priority.

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