On Austerity, Learning The Wrong Lessons From Europe

Europe Austerity 2


As the US presidential election draws closer and the political debate rumbles on, I find myself becoming increasingly frustrated by those voices on both the left and the right, who seek to hold up the example of “Europe” (that homogenised, cohesive whole) as Exhibit A in an attempt to win their economic policy argument.

I am talking about the ongoing “austerity/stimulus debate” – whether America should make drastic and immediate cuts to public spending in order to tackle large government budget deficits, or whether even higher levels of government spending are required in the short term to spur economic growth, before deficit-tackling measures are undertaken at some point in the future.

When talking about these issues, both Democrats and Republicans are playing fast and loose with the truth, and doing the American people (at least those who have already tuned in to the election-year political coverage) a disservice in the process.

On the left, it is fashionable to point at Europe and exclaim that austerity policies are not working because “Europe” has drastically scaled back government spending, and yet is experiencing either a very tepid recovery or an outright double-dip recession. A typical example, from The Washington Post:

Europeans are rebelling against austerity. That’s the read on Sunday’s elections in Greece and France. But why do voters loathe austerity? Perhaps because, as economists have found, efforts to rein in budget deficits can take a wrenching toll on living standards, especially in a recession.

In a recent paper for the International Monetary Fund, Laurence Ball, Daniel Leigh and Prakash Loungani looked at 173 episodes of fiscal austerity over the past 30 years. These were countries that, for one reason or another, cut spending and/or raised taxes to shrink their budget deficits. And the results were typically painful: Austerity, the IMF paper found, “lowers incomes in the short term, with wage-earners taking more of a hit than others; it also raises unemployment, particularly long-term unemployment.”

The left-leaning media across the pond is also keen to seize on this narrative, as the following opinion piece from The Guardian deftly demonstrates:

Third, the president should make it clear he won’t allow government spending cuts to take precedence over job creation. He won’t follow Europe into an austerity trap of slower growth and higher unemployment. While he understands the need to reduce the nation’s long-term budget deficit, he should commit to vetoing any spending cuts until the unemployment rate in the US is down to 5%. Instead, he should commit to further job-creating investments in the nation’s crumbling infrastructure – pot-holed roads, unsafe bridges, inadequate pipelines, woefully-strained public transportation, and outmoded ports.

Finally, Obama should make sure Americans understand the link between America’s fragile recovery and widening inequality. As long as so much of the nation’s disposable income and wealth goes to the top, the vast middle class lacks the purchasing power to fire up the economy. That’s why the so-called “Buffett rule” he has proposed – setting a minimum tax rate for millionaires – needs to be seen as just a first step toward ensuring that the gains from growth are more widely shared. He should vow to do more in his second term.

Such an economic strategy – forcing banks to help distressed homeowners, stopping oil speculation, boosting spending until unemployment drops to 5%, and fighting to ensure economic gains are widely shared – is critical to jobs and growth. It’s the mirror image of Europe’s failed austerity policies.

These arguments do not stand up to scrutiny for several reasons, many of which are well articulated in this piece from Forbes:

The trouble with Europe’s post-crisis budgets, then, isn’t so much that they’ve increased taxes. It’s that they haven’t meaningfully cut spending. “Following years of large spending increases,” Veronique de Rugy explains, “Spain, the United Kingdom, France, and Greece — countries widely cited for adopting austerity measures — haven’t significantly reduced spending since 2008.” De Rugy points to data that shows those countries “still spend more than pre-recession levels,” with France and Britain making no cuts, and Italy increasing spending in 2011 “more than the previous reduction” between 2009 and 2010. Without significant, substantial cuts, tax increases alone don’t amount to austerity. Yglesias is correct that tax hikes can contribute to austerity. What tax hikes cannot do, however, is be austerity. Tax hikes are neither necessary nor sufficient for an austerity program.

Inconsistent though it may be with the liberal worldview in the US, this is very true. Government spending, by many measures, is actually higher than pre-recession levels in Britain and other countries. The so-called “austerity” that everyone is wailing about is nothing more than a reduction in the rate of increase in government spending. Furthermore, as anyone living in Britain can easily attest, many of the “austerity” measures have been tax increases, and not spending cuts – which also does little to support the liberal view that draconian spending cuts have stymied an economic recovery.

Also missing from the left-wing take on austerity is an understanding of the fact that, unlike the US, European economies grappling with anaemic growth or double-dip recession do not have the good fortune to be underpinned by the world’s primary reserve currency. It is much easier to enact a large scale stimulus programme while retaining the confidence of the global bond markets if your currency is the US dollar, a fact that is glossed over by many people, including some in the Obama administration who hold up Europe as a cautionary tale of what happens if you fail to meet economic downturn with government stimulus.

The Washington Post reports:

“The situation in Europe is slowing things down,” Obama told donors at the New Amsterdam Theatre. At the home of hedge fund executive Marc Lasry, Obama said that Romney and congressional Republicans favored an austerity plan that would “drastically shrink government,” hurting job growth and middle-income Americans.

“That is fundamentally different from our experience in growing this economy and creating jobs,” Obama said.

Where Obama was subtle, not drawing a direct line between Europe’s approach and Romney, Clinton was not.

The former president said Republicans were adopting “the European economy policy.”

As a European watching the American political debate unfolding, it frustrates me to see such sweeping statements and generalisations being made about other countries, and seeing their actions and policy stances mischaracterised without even the pretence of trying to understand them – and this applies to both sides of the political aisle. I also fear that it does not do much to dispel the false but common notion that most Americans are insular and lacking any real understanding of the world beyond their borders.

This stereotype, where true, is unfortunate enough to the extent that it applies to the general population, but even more concerning when it manifests itself in current and would-be future political office holders.


The Hypocrisy of Mitt Romney – Government Spending Edition


I missed this when it happened last week, but it appears that during an extended interview with Mark Halperin, Mitt Romney managed to fastidiously lay multiple bundles of high explosive around the foundations of his own economic policy arguments, retreat to a not-very-safe distance, press the plunger and bring the whole thing crashing down around him, revealing his public stance to be the glib, opportunistic sham that it is, with hardly anyone – least of all the interviewer – noticing a thing.

I only found out after being cross-linked through Charles Pierce’s blog at Esquire, where he documents the exchange as follows:

Halperin: Why not in the first year, if you’re elected — why not in 2013, go all the way and propose the kind of budget with spending restraints, that you’d like to see after four years in office?  Why not do it more quickly?

Romney: Well because, if you take a trillion dollars for instance, out of the first year of the federal budget, that would shrink GDP over 5%.  That is by definition throwing us into recession or depression. So I’m not going to do that, of course.


I then picked up the thread when Jonathan Chait jumped on Romney in his piece in the New York Magazine:

Of course! Romney says this as if it’s completely obvious that reducing the deficit in the short term would throw the economy back into recession, even though he and his party have been arguing the opposite case with hysterical fervor. Republicans have committed themselves to Austrian economic notions and other hoary doctrines justifying the position that reducing deficits is a helpful way out of a liquidity trap.

I’ve thought that this represents primarily a case of self-delusion in the cause of political self-interest, as opposed to conscious cynicism: Republicans understood that bigger deficits would spur faster growth and reduce their chances of regaining power, so they found themselves more persuaded by theories suggesting bigger deficits wouldn’t really help. But if they had really converted to this belief, wouldn’t there be even a tiny bit of wailing about Romney’s open endorsement of Keynesianism? It’s not as if conservatives have been shy about holding his feet to the fire when he expresses some tiny deviation from their position. Yet I have noticed zero conservative complaints about Romney’s big fat wet kiss to John Maynard Keynes, which suggests their level of actual devotion to this position borders on nil.

It really does take a special kind of nerve – or else just the realisation that he can be a completely convictionless politician and change his public statements to suit the political mood without ever, ever suffering significant fallout – to execute this kind of 180-degree U-turn in a televised interview, and expect to get away with it.

Aside from revealing an important truth about what a Romney administration would actually do were he to win the election, it also demonstrates a total contempt for his supporters, some of whom he must know actually believe that he will take the immediate and drastic action to balance the federal budget that he still promises in his attacks on President Obama.

What a man.