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Death to Austerity
Posted on May 7, 2012
Economic austerity is a dangerous, self-defeating intellectual fad. Perhaps I should say that’s what it was, given Sunday’s election results in Europe. Perhaps I should also say good riddance.
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On Sunday, French voters elected Socialist Party candidate Francois Hollande as president, ousting center-right incumbent Nicolas Sarkozy in what amounted to a referendum on Sarkozy’s embrace of austerity.
Sarkozy and German Chancellor Angela Merkel agreed on a common policy of budget cuts and partial “reform”—a euphemism for “dismantling”—of the welfare state. This, they decided, was the way to return Europe to prosperity and save the European Union’s common currency, the euro, from collapse.
But on Sunday, even Merkel got a message from voters: Her party was punished in local elections in the northern German state of Schleswig-Holstein, where it appeared that a center-left, anti-austerity coalition would end up in control.
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One obviously bad option would have been to withdraw from the euro, default on a mountain of debt and slowly climb back from a deep economic depression. Officials in Athens decided to go with a worse option—stay with the euro, impose draconian austerity, muzzle anyone who utters the word “default”—that also sent the country into a deep economic depression with no apparent way out.
Yes, one lesson from the Greek experience is that there are limits. There is a point at which deficits become too large, debt too crushing and social spending too generous. The lifestyle a nation enjoys must bear some relationship to what that nation produces.
But another clear lesson is that austerity has to be seen as a means, not an end. The goal is to recover from the massive blow inflicted by the global financial meltdown and return to prosperity. This may involve a measure of austerity—but definitely requires considerable economic growth, which should be policymakers’ first priority.
The reason is simple: If you can get the economy growing again, all other aspects of the crisis become more manageable. Debt and deficits shrink as a percentage of national output. Unemployment declines, as does the need for social spending.
But putting a chokehold on government spending at a time when economies are just sputtering back to life—as the austerity fetishists have tried to do in Europe, and as Republicans solemnly pledge to do in the United States—is monumentally self-defeating. Governments end up magnifying the constituent parts of the economic crisis, not minimizing them.
In Britain, the economy was growing when Prime Minister David Cameron took office two years ago. Adhering to the platform of his Conservative Party, Cameron took the austerity route with a host of gloom-and-doom budget cuts. Now unemployment is rising and the economy appears to be slipping back into recession. Nice job, Tories.
That loud chorus of “Duh!” you just heard came from the many leading economists who have been screaming at political leaders for years now that we’ll never cut our way out of this economic slump and instead must grow our way out. It is obvious that deficits, debt loads and entitlement spending have to be brought under control—but equally obvious that the necessary adjustments should be made when the economy is going great guns, not when it’s gasping for air.
It should be noted that there are some economists who disagree. They argue that draconian cuts in government spending will somehow awaken the animal spirits of private-sector executives, entrepreneurs and financiers. They further argue that austerity is needed to combat the scourge of inflation, although the best term to describe inflation in today’s economy is “imaginary.”
Mitt Romney and the GOP subscribe to the pro-austerity view. They are of course entitled to their opinion, even if it happens to be wrong. I sincerely wish them all the electoral success their ideological allies are having across the Atlantic.
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