Confidence lacking as US tries to cut its way out of recession
OPINION:Experiences in Ireland and Britain show that austerity measures do not lead to recovery
PORTUGAL’S GOVERNMENT has just fallen in a dispute over austerity proposals. Irish bond yields have topped 10 per cent for the first time and the British government has just marked its economic forecast down and its deficit forecast up.
What do these events have in common? They’re all evidence that slashing spending in the face of high unemployment is a mistake.
Austerity advocates predicted that spending cuts would bring quick dividends in the form of rising confidence and that there would be few if any adverse effects on growth and jobs – but they were wrong.
It’s too bad then that these days you’re not considered serious in Washington unless you profess allegiance to the same doctrine that’s failing so dismally in Europe.
It was not always thus.
Two years ago, faced with soaring unemployment and large budget deficits – both the consequences of a severe financial crisis – most advanced-country leaders seemingly understood that the problems had to be tackled in sequence, with an immediate focus on creating jobs combined with a long-run strategy of deficit reduction.
Why not slash deficits immediately? Because tax increases and cuts in government spending would depress economies further, worsening unemployment.
And cutting spending in a deeply depressed economy is largely self-defeating even in purely fiscal terms. Any savings achieved at the front end are partly offset by lower revenue, as the economy shrinks.
So jobs now, deficits later was, and is, the right strategy. Unfortunately, it is a strategy that has been abandoned in the face of phantom risks and delusional hopes.
On one side, we’re constantly told that if we don’t slash spending immediately, we’ll end up just like Greece, unable to borrow except at exorbitant interest rates.
On the other, we’re told not to worry about the impact of spending cuts on jobs because fiscal austerity will actually create jobs by raising confidence.
How’s that story working out so far?
Self-styled deficit hawks have been crying wolf over US interest rates more or less continuously since the financial crisis began to ease, taking every uptick in rates as a sign that markets were turning on the US.
However the truth is that rates have fluctuated, not with debt fears, but with rising and falling hope for economic recovery. With full recovery still seeming very distant, rates are lower now than they were two years ago.
But couldn’t the US still end up like Greece?
Yes, of course. If investors decide that we’re a banana republic whose politicians can’t or won’t come to grips with long-term problems, they will indeed stop buying our debt.
But that’s not a prospect that hinges, one way or another, on whether we punish ourselves with short-run spending cuts.
Just ask the Irish, whose government – having taken on an unsustainable debt burden by trying to bail out runaway banks – tried to reassure markets by imposing savage austerity measures on ordinary citizens.
The same people urging spending cuts on the US cheered.
“Ireland offers an admirable lesson in fiscal responsibility,” declared Alan Reynolds of the Cato Institute, who said the spending cuts had removed fears over Irish solvency and predicted rapid economic recovery.
That was in June 2009. Since then, the interest rate on Irish debt has doubled and Ireland’s unemployment rate now stands at 13.5 per cent.
Then there’s the British experience. Like the US, Britain is still perceived as solvent by financial markets, giving it room to pursue a strategy of jobs first, deficits later.
However the government of prime minister David Cameron chose instead to move to immediate, unforced austerity in the belief that private spending would more than make up for the government’s pullback.
As I like to put it, the Cameron plan was based on belief that the confidence fairy would make everything all right.
But she hasn’t: British growth has stalled and the government has marked up its deficit projections as a result.
Which brings me back to what passes for budget debate in Washington these days.
A serious fiscal plan for the US would address the long-run drivers of spending, above all healthcare costs, and it would almost certainly include some kind of tax increase.
We’re not serious though. Any talk of using Medicare funds effectively is met with shrieks of “death panels” and the official GOP position – barely challenged by Democrats – appears to be that no one should ever pay higher taxes.
Instead, all the talk is about short-run spending cuts.
In short, we have a political climate in which self-styled deficit hawks want to punish the unemployed even as they oppose any action that would address our long-run budget problems.
What we know from experience abroad is that the confidence fairy won’t save us from the consequences of our folly.
– ( New York Timesservice)