America s profligacy  the fact that the world s richest country could not live within its means was often criticized. But perhaps the world should be thankful, because without American profligacy, there would have been insufficient global aggregate demand.

America s profligacy the fact that the world s richest country could not live within its means was often criticized. But perhaps the world should be thankful, because without American profligacy, there would have been insufficient global aggregate demand.

No leading country in world history has persistently maintained a negative saving rate. Trade deficits with China or any other country are part of the price that America pays for its unbridled profligacy.

This is the wrong cure for the eurozone crisis. The Merkel doctrine holds that the crisis is the result of government profligacy, so only a hard balanced budget rule can prevent such crises from recurring.

Perhaps worse, some also spent more than they could easily repay, given their economies declining long term growth potential because of the aging of their populations. Such profligacy has led to levels of debt that will become unsustainable if we do not act.

And Greece s profligacy was epic. In the run up to its debt crisis in 2010, the government s primary budget deficit (the amount by which government expenditure on goods and services exceeds revenues, excluding interest payments on its debt) was equivalent to an astonishing 10 of national income.

Democrats have even managed to beat the Republicans on their own turf. Thanks to the profligacy of the current Bush administration (and the prudence of the Clinton administration), average Federal spending as a proportion of GDP under Republican presidents now exceeds that under Democrats during the measured period.

During the era of Ponzi style growth, capital flows were channeled by commercial banks into a frenzy of consumption and by the state into an orgy of suspect procurement and outright profligacy. To ensure that this time is different, Greece will need to reform its social economy and political system.

Not only is QE s ability to jumpstart crisis torn, balance sheet constrained economies limited it also runs the important risk of blurring the distinction between monetary and fiscal policy. Central banks that buy sovereign debt issued by fiscal authorities offset market imposed discipline on borrowing costs, effectively subsidizing public sector profligacy.

Anemic government spending, not profligacy, has been a major factor behind the economy s lackluster recovery. According to a recent report by the Congressional Budget Office, large spending cuts by state and local governments and, more recently, a significant reduction in federal spending have contributed to the unusual and prolonged weakness of aggregate demand.

To be sure, the economic mess created in Greece the result of government profligacy, official corruption, and widespread tax evasion merited some international assistance. And the IMF did impose conditions on its loans to Greece including fiscal austerity, privatization, and structural reform of its pension and tax systems most of which were necessary to address the country s insolvency.

Any system creates winners and losers. In Argentina and Venezuela, the winners are those who have preferential access to foreign exchange, those who benefit from the government s profligacy, those who can borrow at the negative real interest rates that lax policies create, and those who do not mind waiting in long lines to buy rationed items.

Content yourself with the company of those who supplicate their Lord morning and evening, desiring His Face, and do not lose sight of them, desiring the glitter of the life of this world. And do not obey him whose heart We have made oblivious to Our remembrance, and who follows his own desires, and whose conduct is mere profligacy.

Content yourself with the company of those who supplicate their Lord morning and evening, desiring His Face, and do not lose sight of them, desiring the glitter of the life of this world. And do not obey him whose heart We have made oblivious to Our remembrance, and who follows his own desires, and whose conduct is mere profligacy.

If a debt crisis results from government profligacy and mismanagement, rather than from a market failure, it is true that the central bank should not intervene. If, however, the crisis results from a coordination failure among investors when each investor refuses to roll over the government s debt for fear that others will do the same, leading to a default monetary policy can play an important role.

While rainy day funds that accumulate in boom years are used to deal with temporary revenue shortfalls, the states general obligation borrowing is limited to capital projects like roads and schools. Even a state like California, seen by many as a poster child for fiscal profligacy, now has an annual budget deficit of just 1 of its GDP and a general obligation debt of just 4 of GDP.

That story might have invited some gossip outside of Greece, but it gained little purchase on international attention until the end of 2009, when the market for Greek debt started to become increasingly unsettled, with rising interest rates causing further problems for the government. This augmented news reports about Greek profligacy, and thus closed a negative feedback loop by attracting intensifying public interest, which eventually fueled crises in other European countries.

There is little doubt that the suffering that Greeks have had to endure for the last five years is mainly attributable to the fiscal profligacy and poor public management of a procession of Greek governments. But as most analysts, including at the IMF, now agree, the troika s approach was also deeply flawed, as it emphasized wage and income cuts, while neglecting the reform of product markets and the dismantling of harmful public and private oligopolies.