Europe’s austerity economics is plunging the continent into recession. But the U.S. isn’t far behind. Here, first-quarter growth slowed largely because of cuts in government spending.
And early next year, additional spending cuts go into effect along with a tax increase on the middle class. There’s no chance the U.S. economy will be fully mended by then, so the next president (whoever it is) is likely to find himself in an austerity-induced recession.
Austerity mavens in Europe and America are forgetting two big truths. First, the real goal isn’t simply to reduce the deficit — it’s to lower the deficit as a percentage of GDP. Spurring growth is paramount. So cutting government spending when consumers and the private sector are holding back removes the last remaining source of demand. It makes things worse.
A large debt with faster growth is preferable to a smaller debt sitting atop no growth at all. And infinitely better than a smaller debt on top of a contracting economy.
What I call “austerical” policy makers also overlook the social costs. Cutting spending when unemployment is high doesn’t just worsen unemployment; it also removes the public services and safety nets people depend on when times are tough.
This can lead to political upheaval. Last week, the Dutch prime minister was forced out. In the upcoming French election, Nicolas Sarkozy could well be unseated by a socialist. Across Europe, fringe parties on the left and the right are gaining ground.
Such social and political instability is itself a drag on growth, generating more uncertainty about the future.
Policy makers in the United States and in Europe should abandon austerity economics. Instead, they need to set targets for growth and employment. And not cut government spending until those targets are met. Only then adopt austerity.
It may be too late for Europe, but it’s not too late for us. There’s no reason we have to follow Europe off the austerity cliff.