The tone of the G20 communique on stimulus and sustainability of public finances has sparked a lively debate in the blogosphere.

First, here’s the offending language — at least offending to some:

The global economy continues to recover faster than anticipated, although at an uneven pace across countries and regions. However, the recent volatility in financial markets reminds us that significant challenges remain and underscores the importance of international cooperation. The G20’s strong policy response to the crisis has played a pivotal role in restoring growth and we stand ready to safeguard recovery and strengthen prospects for growth and jobs. We welcome the determined actions taken by the European Union, the European Central Bank and the IMF. We will pursue well coordinated economic policies. The recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, growth-friendly measures, to deliver fiscal sustainability, differentiated for and tailored to national circumstances. Those countries with serious fiscal challenges need to accelerate the pace of consolidation. We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions. Within their capacity, countries will expand domestic sources of growth, while maintaining macroeconomic stability. This will help ensure ongoing recovery. In addition, structural reforms, development policies, particularly supporting the poorest countries, and ongoing efforts to refrain from raising trade and investment barriers and resist protectionist measures are required. Monetary policy will continue to be appropriate to achieve price stability and thereby contribute to the recovery.

Paul Krugman sees in the statement a call to austerity and an end to fiscal stimulus, labeling it as “Utter folly posing as wisdom. Incredible.” Henry Blodget blogged twice today (link and link) asking both sides to defend their positions. To the Krugman crowd, he asked how we get out of the hole we’re digging and to the austerity purveyors he suggested they needed to defend the implications of their proposed course for economic growth in the short-term. Brad DeLong then took Blodget to task for faulty math. A lively debate.

While I’m open to the Krugman Keynesian arguments, I think that reality has to some degree overtaken theoretical economics. Countries like Greece, Ireland, probably Spain and I suspect more to come have run up against the hard realities of markets. It’s fine to argue that more debt is the best tonic for an ailing economy and that given enough of a dose growth will cure the disease, but if the financiers of those countries no longer feel inclined to buy into that theory then austerity and probably debt default become the operative realities.

To that extent, I think that Krugman etal. are missing the point. The fact that the G20 recognizes that some countries have to bite some bullets needn’t and doesn’t foreclose the pursuit of stimulative policies by economies like the US. No one, I think, would argue that in the short-run we still have room to run. But, Blodget is right to ask, that if we don’t pursue austerity now then when and how.

It’s important to remember that fiscal and monetary stimulus are theoretical concepts. They have been used before with both positive and mixed to negative results and certainly in the past recession the evidence is far from overwhelming that the money we have expended has had a commensurately positive effect. More of the same is to my mind a hard position to defend.

Despite the warnings of economic ruin that will come from the pursuit of austerity, we do not know with any degree of certainty that indeed that is what will transpire. It’s logical to assume that the short-term pain will be severe. What we don’t know is what will follow. It may well be that a Greece or Ireland emerges as a lean tiger with a populace fiercely determined to never go back to where they came from. You could argue that the crucible of the Depression forged a generation or two whose work and saving ethic led to the incredible success of this country after the War. There’s more to economic prosperity than just graphs, charts and equations.

I’ll go this far with Krugman and his fellow travelers. An austerity program for the US and most other large economies is probably not the best call at this juncture. Further stimulus, barring a hideous retrenchment, should however be off the table and we need to start talking about some serious measures to get our house in order in the very near future.