The Failure of Austerity

The Failure of Austerity

The eurocrisis fully exposes the folly of deficit mania in a time of recession. So why are the GOP candidates still oblivious?


A man walks in front of demonstrators from the communist-affiliated trade union PAME during a protest against anti-austerity measures in Athens February 22, 2012. REUTERS/John Kolesidis

“We are headed to a Greece-type collapse,” GOP presidential candidate Mitt Romney has warned repeatedly, while indicting President Obama’s stimulus plan. Romney promises to slash spending and balance the budget, which he claims will unleash growth.

The advocates of austerity, both here and in Europe, argued that cutting spending and reducing deficits would revive slumping economies. The irresponsible—which in their view includes those on welfare or receiving other government services, but not the banks—would be disciplined, which would reassure investors and “job creators,” who would start hiring again. With an added refrain about the need for deregulation, this mantra is chanted ceaselessly by Republicans.

President Obama resisted, but in Europe, the austerians, led by Angela Merkel in Germany and David Cameron in Britain, won the day. Unfortunately, what New York Times columnist Paul Krugman aptly derided as the “confidence fairy” failed to show up. It turns out that businesses lacked customers, not confidence. And the countries that followed the austerians’ advice have been sinking into recession or worse ever since. Unemployment is soaring (in Spain and Greece youth unemployment is nearing 50 percent) and 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 as Maria Margaronis illustrates on page 11, the ruin inflicted on Greece is threatening its democracy, as riots and resistance spread.

Portugal offers the best example of the folly. The Portuguese have done everything the IMF and the EU asked in exchange for a $103 billion bailout last May. Spending was slashed and deficits were reduced. Yet Portugal is even deeper in the hole. The austerity has only increased its debt, as it has spread more suffering. (It and other euro countries are also hampered by the straitjacket of a single currency, which doesn’t allow depressed economies to devalue or borrow in a sovereign currency, as Washington can—just one of many reasons Romney’s comparison of America to Greece is absurd.)

The United States has fared better, with its economy enjoying slow growth and jobs beginning to reappear. But even here the austerian fallacies were destructive. The president’s advisers, fearing criticism from the deficit hawks, proposed an initial recovery plan they knew was too small. The stimulus stopped the economic free fall 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 little was done for homeowners, the biggest victims of Wall Street’s excesses. By the end of 2009 the president, in an attempt to placate the austerity caucus, was in full retreat, calling for what became his deficit commission, advocating a freeze on federal salaries and embracing a premature turn toward deficit reduction.

But Obama wisely resisted the extremist Republican push for harsh spending cuts. Last year’s “grand bargain” luckily fell apart because of the GOP allergy to raising taxes on anyone, at any time, for any reason. And the president used the showdown over the Bush tax cuts to gain support for payroll tax cuts, extending unemployment insurance and other stimulus measures. So the United States has returned to growth, while Europeans pay the price for austerian folly.

In Europe, official opinion is slowly be-
ginning to recognize that the prescribed medicine isn’t working, with the IMF warning of the dangers of premature budget cuts. Public opposition is growing too; the conservative leaders of Germany and Britain are facing increasingly formidable opposition at home, and the current favorite in the French presidential elections this spring, Socialist François Hollande, and Italian Prime Minister Mario Monti have called for a new focus on growth.

In the United States, meanwhile, even Congressional Republicans, chastened by their plummeting poll numbers, have retreated, recently agreeing to extend the payroll tax cut for another year without forcing budget cuts to pay for it. Yet Romney and his rivals for the GOP nomination remain blissfully oblivious, as they continue to call for deep cuts that would threaten the fragile return to growth. Since they’ve failed to learn the lessons of the Great Depression, there’s no reason to think they will absorb the lesson of Europe’s lurch back into recession. Their hysterical claim that the United States is verging on Greek-like collapse should, if anything, stand as a warning against the very austerity they would inflict on us.

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