The elusive creditability problem

Creditability like trust is often elusive. Once it is lost, it is hard to regain. The EU, UK, Japan and US governments are losing creditability and prices suggest that little they say can get it back. The lack of creditability means that investors will not commit for any length of time to an investment program. The animal spirits of optimism cannot work.

The EU may have the biggest creditability problem. If they stick to their commitments of austerity, they will be voted out of office. Hence, with each election there will be less creditability. Any compromise with voters causes a pull-back from any existing policies, so there is little that can be done to show creditability.  The government cannot be trusted, or they can be trusted not to follow-through on their plans once faced with opposition. So is there a solution?

A workable solution is an attempt at fiscal flexibility through short-term spending or investment subject to pre-commitment to future cuts. This has been tried but has not be successful at giving voters clarity of the choices. The fiscal flexibility approach means borrowing more at low rates. It also means flexibility at cutting expenditures on some programs while spending more on job creation. Entitlement cuts with government investing could work, if there is a framing of cuts to long-term programs in exchange for shorter-term job creation and growth. 

In Europe, the creditability problem is more structural and requires even more work. The structure does not allow for strong policy choices. In fact, because the US does not have structural problems with federalist government, it should be able to overcome the problems of creditability more easily.