I agree with Republicans. I agree that the United States should not let itself become the next Greece.
Hence, I agree that we should not indiscriminately slash government spending on the unfounded assumption that austerity fuels prosperity.
Critics argue that there cannot be economic growth without fiscal austerity. Really? Where in fact is this true? Is this true in the United Kingdom? To your right, you will see a graph of GDP growth in the United Kingdom over the last four years. Notice the dip in GDP growth in the 3rd quarter of 2010 following the implementation of Chancellor of the Exchequer, George Osborne’s austerity measures. The UK treasury downgraded its economic outlook for 2011 from 1.7% to 1.5%. Does this smell like prosperity? I think not.
In pre-election debates last year, Gordon Brown lashed out at David Cameron and the Tories for threatening to sink the UK economy back into recession. The now defunct Labour leader's cries were loosely headed by the "sweeping" victories of the Conservative Party in parliamentary elections last spring. What has become of the economic policies of the Conservative - Liberal Democrat coalition?
Inflation rose to 4.4% at the end of 2010. There will be ever increasing demands by proponents of of tight monetary policy to increase interest rates to prevent an inflationary spiral. Unsurprisingly, austerity is not fueling growth. Rising inflation will force the government to raise the interest rates, thereby, increasing the costs of borrowing, which would in turn diminish demand and further sink the economy as the private sector lags to fill the gap left by diminished government spending.
Let us now venture across the pond. Republicans would have you believe that austerity is the only option. Without austerity, they argue, the bond markets would make the financing of the United States government impossible. Further, Republicans highlight that without austerity there cannot be any increase in business investment in the economy. If the government were to make broad-based and deep cuts to spending and investment, the private sector would fill the gap to re-stimulate the economy and lead us on the road to economic recovery.
After the IMF and EU-led bailout of the Greek economy and the implementation of austerity measures and budget cuts, did the Greek economy rebound into the heights of Aristotelean Athens? The GDP figures for the past six quarters sure aren't supportive of this argument.
This, however, is not something new we seen from the Republican party and the ideological right in the United States. Austerity breeds prosperity is just another in long line of empirically unsupported arguments coming out of the Right Wing. And there are many: Alan Greenspan, et al. - financial de-regulation leads to economic growth. The Laffer Curve - lowering taxes increases government revenues. The Neo-Conservatives - overthrowing Sadaam Hussein is necessary to win the Global War on Terror. As Paul Krugman reiterates, let us not fall for this new "ignorance wrapped in a fallacy."
Republicans have told us time and time again that without austerity, the bond market "hawks" that forced borrowing rates to go up across Southern Europe and Ireland will swoop the shores of the United States. These hawks are nowhere to be seen. Interest rates remain at historic lows. Core inflation in February rose slightly to 1.1%. These bond vigilantes have yet to take on US Treasury Bills as their next victim. But, as Republicans would argue, the threat alone is sufficient to shore up defenses. We cannot fall prey to the bond vigilantes and we must appease their advisers, Moody, Fitch and S&P.
I, for one, am thoroughly unimpressed by the arguments for fiscal restraint. Surely, I, along with those who see the negative, immediate effects of austerity, are not calling for an opening of the flood gates of government spending. Simply, we are stating that it is unnecessary to so adamantly seek the retraction of government spending during a recession of such magnitude as this one. I urge policymakers and the American public to look towards Greece and the United Kingdom as examples, not of fiscal restraint, but the Hooverville consequences of slash and burn government spending.
Of course austerity has an immediately negative impact on the economy. Taking money away from an economy is going to result in lower output, it's just math. The problem arises when austerity comes unannounced or irrationally. If a government fails to announce the timeframe and extent to which it plans on reducing spending the market will respond severely to the change. However not only does austerity reduce debt in countries, some of its pain can be alleviated through careful government planning. Reduction in government spending (beyond its income) is usually a good thing. While I admit deficit spending can help assist an economy during a recession, it will likely result more pain down the road in the form of hefty interest payments and higher taxes to finance them.
ReplyDeleteSecretary of the Treasury Timothy Geithner gave an excellant talk at the Council of Foreign Relations last week that I recommend you watch. In it he highlights that any cuts in government spending should be broad-based and comprehensive, not to only 12% of the budget - as the recently agreed budget proposal only addressed.
ReplyDeleteCutting our future - education, R&D, infrastructure, etc. - might shore us up temporarily now, but at what expense. I agree with you we need to tackle our long-term fiscal problems. Let's take a step forward by eliminating the Bush-era tax cuts for all citizens - a large portion of the current account deficit.
I think the priorities should be to first return to full employment and then address the deficit in a broader-based, longer-term cutting scheme. Only by having a large portion of the population contributing to revenues will we be able to meet or fiscal challenges.
All in all, I was merely trying to point out that in the near-term, interest rates are low, credit ratings are stable, debt to GDP ratio manageable. We are not Greece, Iceland or Ireland - let us not behave like them.