THERE is talk of recovery, but little reason for optimism. Government action may have cushioned the initial impact of the recession, but the long-term economic consequences of borrow and spend policies have yet to be felt.
The problems are perhaps most severe in America. President Obama's spending spree – in the name of economic recovery – means that this year about half the money the Federal Government spends will be borrowed.
Not satisfied with the worst debt levels since the Second World War, the President is embarking on a whole host of expensive programmes to subsidise healthcare, boost education and protect the environment.
At a cost of $787bn, his Recovery and Reinvestment Act is the largest stimulus package in history. Much of this money will be used to fund social programmes and environmental schemes that will require further outlays to keep them going.
This follows eight years of Keynesianism under George W Bush, who increased public spending, strengthened the government's role in the economy and allowed debt levels to spiral.
He did little to tackle the growth of America's welfare state. And as the baby-boom generation hits retirement age, there is now a big question mark over the future funding of existing healthcare and pension schemes.
As a result of Bush and Obama's profligacy, the US budget deficit is likely to reach an unprecedented $1.6 trillion for 2009, and there appears to be no realistic strategy to bring it under control.
Such high levels of government borrowing will have a devastating effect on the prospects for sustainable recovery. They will damage the productive part of the US economy by crowding out investment in the private sector. And before long they will lead to higher taxes and interest rates, as the government is forced bring its debt levels under control. This prospect will inevitably undermine economic confidence and deter the business investment that drives growth.
A new study by the Institute of Economic Affairs (IEA) suggests that in this regard there are strong parallels with the policy mistakes made during the Great Depression.
In the 1930s, another Democrat President, Franklin D Roosevelt, launched the "New Deal" in response to economic crisis. He increased government spending, ran huge deficits and launched an interventionist industrial policy which had eerie similarities to that of fascist Italy. Dramatic tax rises were also implemented, with the top rate of income tax eventually reaching 90 per cent.
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