The advocates of austerity — here and in Europe — have argued that cutting spending and reducing deficits, even with interest rates already near zero, would revive the economy. The irresponsible — other than the banks — would be disciplined. This would reassure investors and “job creators,” and they would invest and start to hire again. With an added refrain about deregulation, this remains the mantra chanted ceaselessly by Republicans.
In the United States, President Obama resisted, but in Europe, austerians — led by Angela Merkel in Germany and the new Tory government of David Cameron in Britain — won the day. But what New York Times columnist Paul Krugman justly derided as the “confidence fairy” didn’t show up. Turns out businesses lacked customers, not confidence. And the countries that followed that advice have been sinking into recession or worse ever since. Unemployment is soaring — in Spain and Greece youth unemployment is at 50 percent; poverty is spreading. According to one important indicator — changes in GDP since the recession began — Britain is faring worse than it did during the Great Depression. And to add insult to injury, Moody’s, the bond rating service, has cut the ratings on the debt on six European countries — including Italy, Portugal and Spain — as Europe’s economy contracted last quarter.
Portugal offers the best example of the folly. The Portuguese have done everything that the International Monetary Fund and the European Union asked in exchange for a $103 billion bailout last May. Spending has been slashed and deficits reduced. Yet Portugal is going deeper in the hole. The ratio of its debt to its economy — or gross domestic economy — has gone up, not down — from 107 percent when the bailout took place to a projected 118 percent next year.
It’s not that its deficits have exploded, but its economy has shrunk. Portugal’s austerity has added greatly to human misery and suffering, while its fiscal progress sinks.
In comparison, the United States has fared better, with its economy enjoying slow growth and jobs beginning to reappear. But even here the austerian fallacies had ruinous effect. The president’s initial recovery plan was too small. It stopped the free fall of the economy but did not make up for the collapse of consumer demand and the drastic cuts in state and local government spending and employment. Wall Street was saved, but virtually nothing has been done for homeowners, the biggest victims of Wall Street’s excesses.
Instead of coming back for more recovery money, the White House tried to placate the fury of the austerity caucus. By the end of 2009, the president was calling for what became his deficit commission, advocating a freeze on federal salaries and embracing a premature turn toward deficit reduction.
But the president wisely resisted the Republican push for harsh spending cuts. The so-called “grand bargain” luckily fell apart as a result of the Republican allergy to raising taxes on anyone at any time. The president used the showdown over extending the Bush tax cuts to gain support for the payroll tax cut, the extension of unemployment insurance and other stimulus measures. So the United States continued to grow, while Europeans suffer the price of the austerian folly.
In Europe, official opinion is slowly beginning to recognize the medicine prescribed isn’t working. The International Monetary Fund — and ironically officials at the credit rating agency Standard and Poor’s — have warned of the dangers of premature severe cuts. Two weeks ago, the European Union convened a summit on jobs and growth. The conservative leaders of Germany and Great Britain are facing increasingly formidable opposition. The odds-on favorite for the French presidency in May, the Socialist Francois Hollande and the new Italian Prime Minister Mario Monti have called for a new focus on growth.
Even congressional Republicans, chastened by plummeting standing in opinion polls, have retreated. They recently agreed to extend the payroll tax cut for another year, without forcing cuts to pay for it.
Yet Romney and his rivals for the GOP nomination remain blissfully oblivious. They continue to call for deep cuts in spending that would lay waste to jobs, threatening the slow growth we have. With their having failed to learn the lesson of the Great Depression, there is no reason to think they will absorb the lesson of Europe’s lurch back into recession. But their exaggerated hysteria about the United States verging on a Greek-like collapse is, if anything, a caution about the very austerity they would inflict upon us.