So the voters of Europe have spoken, and surprise, surprise: they are not too keen on fiscal austerity. France’s president, Nicolas Sarkozy, became the first incumbent to lose since 1981. In Greece, the mainstream parties that have been happily participating in the country’s national suicide were soundly rejected by the electorate (who finally had a say on the country’s economic course after being the unwilling recipients of a European Union/International Monetary Fund-sponsored financial coup d’etat over the last several months).
Governments in Europe have been caught up in the fiscal austerity narrative that the neo-liberals imposed on failing economies everywhere. They believe that if they demonstrate misguided “fiscal responsibility” through the maniacal pursuit of a budget surplus, the electorate will reward them for being good managers. However, as the Greek and French elections vividly demonstrate, the electorate is more concerned about real income growth and employment opportunities and they are clear that the current strategy is undermining both.
What Europe’s technocratic elites fail to grasp is that it is folly to pursue a budget surplus at a time when the economy is slowing. In a weak economy, what economists call “automatic stabilizers” kick in (payments like unemployment benefits) to keep things from going into freefall. When the government has to make those kinds of emergency expenditures, and people are out of work, tax revenue plunges. So budget deficits are to be expected, and trying to pursue cuts in the face of that reality is very irresponsible fiscal management. One would think that American politicians would take note. And yet precisely the opposite lessons are being drawn in the US.
In the US, there has been much discussion recently of what’s known as the “fiscal cliff.” That’s what we may be headed over on the first day of 2013, when the Bush-era tax cuts revert back to previous levels, and the more than $1 trillion in arbitrary budget cuts Congress approved last year are scheduled to begin. Some would call the policies that have produced this scenario “responsible fiscal management.” I would argue that it would represent a self-inflicted wound of historic proportions. Even the International Monetary Fund has expressed such grave concerns that lawmakers will drive over the cliff that it ranks the possibility as a threat equal to that posed by the European debt crisis.
In the US, it might be sensible to get some kind of balance between high income earners and the 99 percent. But it isn’t a matter of taxing the rich more to get the funds to reduce the deficit. Deficit reduction should not be an object of policy, period. The urgent problem is that we need to support the demand for goods and services in our economy. If we pursue budget cuts that take money out of the pockets of consumers, then people stop spending, businesses stop hiring, and we get into the death spiral that has played out so tragically in European countries.
The macroeconomic urgency at present is to escape the austerity mindset and get growth going. In fact, it is only because of those “horrible” budget deficits which policy-makers continue to describe as “unsustainable” that the US continues to grow at all (in stark contrast to the Eurozone). Policy abominations such as those pushed by Alan Simpson and Erskine Bowles, who call for so-called “entitlement reform,” are exactly the opposite of what is required for a healthy economy. Reaching into the pockets of hard-working people does not drive economic growth — and at some point, when they are squeezed beyond endurance, the people will push back.
It is clear that the US fiscal stimulus — the trillions spent in response to the financial crash — supported the confidence of businesses and consumers. While I am not a supporter of the way the Obama administration chose to spend the stimulus funds (excessively supporting the financial sector), the fact remains that there was an attempt to limit the damage of the collapse in private spending, and that attempt likely averted a much greater catastrophe. But if we return to an obsession with the federal budget deficit, we will exacerbate the problem which is truly hampering the economy — the high unemployment rate.
It is only political ineptitude at present that is saving the US economy — because if the Republicans could have their way, the austerity programs would be accelerating more than is obvious from the recent GDP data release, which showed 2.2 percent growth for the first quarter of 2012.
Not so in Europe. The Euro experiment has largely failed to meet the needs of the people who use it. The misconceived currency union has torn apart any sense of common purpose in Europe, with the wealthier north now driven persistently against the poorer south. The crisis has conclusively proven that the common currency zone is incapable of withstanding significant negative demand shocks without imposing massive costs on the less advantaged and without extraordinary intervention (bailouts, massive ECB bond purchases, etc.) that actually exacerbate today’s crisis, because they are invariably tied to the conditionality of further economic austerity.
The very fact that austerity is being widely advocated will generate the conditions that will see it fail as a growth strategy. Austerity means that income is withdrawn from an economy. That, in turn, means that consumers and businesses have less overall spending power. Businesses, for example, understandably lay people off when their customers stop buying products and services. Contrary to what Republicans try to tell us, the reason we lost millions of jobs almost all at once back in 2008 wasn’t because all of a sudden all those people decided they’d rather collect unemployment checks than work. The reason all those jobs were lost was because sales collapsed.
It’s very simple: when sales go down, jobs are lost, and when sales go up, jobs go up, as business hires to service all its new customers. If governments continue to pursue austerity, yet more unsold inventories will appear and firms will start to lay off workers because the production level is too high relative to demand. By contrast, if the national government can step in to fill the “spending gap,” then products are sold and firms are happy to keep the employees that created them. And guess what else? Tax revenues will go up and the deficits will go down.
Unlike the European Monetary Union (where nations surrendered their respective fiscal sovereignty when they gave up their national currencies to join the Eurozone), the US still is a sovereign state and so we have the flexibility to create fiscal policies that stimulate the economy. We could introduce WPA-like programs that would put Americans back to work building infrastructure and other much-needed improvements tomorrow if we summoned the political will to do so. The message is coming in loud and clear in Europe. We’ve reached fiscal austerity endgame, whether Europe’s elites recognize it yet or not. The clock is now ticking. Will the US pay heed?