This reporter echoes what I have been saying for months. Austerity now is equivalent to providing a catalyst for a depression. We must gradually cut government spending only when we have economic recovery. Moreover we must only cut wasteful spending while investing in infrastructure. A tax increase is also warranted for the to 2.5% of the population whose wealth accumulation is actually a drag on the economy (I will justify that statement in a later post).
Austerity has suddenly become the universally prescribed cure for the fallout from the financial collapse. If widely adopted, it will prove worse than the disease.
The price of the rescues of Greece, Spain and Portugal will be brutal deflation. The International Monetary Fund, which supposedly learned from its earlier mistakes of imposing austerity on already damaged economies, is back in cold-bath mode, demanding higher taxes and dramatically reduced spending as its pound of flesh.
The European Central Bank and key leaders of the E.U. are promoting economic pain as the price of relief. Here at home, President Obama has sworn off serious new outlays for jobs or aid to the states, and is using his fiscal commission to pursue a bipartisan consensus on spending cuts and higher taxes.
The nations of the European Union are being treated as the object lesson in the costs of profligacy. This is supposedly what happens when you provide decent social benefits to regular people. In fact, most of Europe had reasonably well-disciplined budgets until a made-on-Wall-Street economic crisis took down their economies.
The budget deficit here and overseas does need to return to a more moderate level — after we get an economic recovery. But the problem with the austerity treatment during a recession is that if everyone tightens their belts at once, there is nobody to buy the products; the economy shrinks and repayment of debt is even more arduous. As John Maynard Keynes famously wrote, "The patient does not need rest. He needs exercise."
You don’t have to be a Keynesian to recognize that the economics of belt-tightening is a fool’s errand in a recession.
With the exception of a few smaller nations, the large deficits in the OECD countries are not the result of fiscal profligacy, but of revenue losses caused by the downturn. And in the case of Greece, supposedly the poster child for profligacy, the new Socialist Papandreou government is having to clean up after the fiscal finagling of its conservative predecessor. Greece certainly needs tax reform to make sure that so many of its very wealthy do not hide their assets. It does not need general austerity.
The US has been spared this phase of the crisis so far, because the Federal Reserve has been willing to be buyer of last resort of all manner of securities, including government debt. This remedy is far from ideal, and it needs to be wound down as soon as recovery comes, as well as combined with structural reforms. But the Fed rescue certainly beats a total collapse
In Europe, by contrast, this rescue act is far more difficult politically and institutionally. Sovereignty is divided along nations pursuing their own self-interests, a fledgling E.U. and a central bank that lacks either the Fed’s full powers, its history, or its self-confidence.
But Europe had better come through this test as a more unified and politically effective system or we will all suffer. This is no time for skeptics of the Euro or the E.U. to be gloating.
In fact, the Germans and the French have put their self-interest aside, and have pushed for a rescue plan that prevents default on government bonds and benefits Europe’s less affluent nations. With aid to Greece monumentally unpopular, German Chancellor Angela Merkel was willing to lose a key state election in order to prevent a Euro collapse This statesmanship is admirable — but the austerity demands are not.
Robert Kuttner: Get a Grip: Austerity Does Not Produce Prosperity