Portugal's government has just fallen in a dispute over austerity
Irish bond yields have topped 10 percent 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
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
Why not slash deficits immediately? Because tax increases and cuts
in government spending would depress economies further, worsening
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
So jobs now, deficits later was and is the right strategy.
Unfortunately, it's 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
How's that story working out so far?
Self-styled deficit hawks have been crying wolf over U.S. 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 America. But the truth is that rates have fluctuated,
not with debt fears, but with rising and falling hope for economic
recovery. And with full recovery still seeming very distant, rates
are lower now than they were two years ago.
But couldn't America 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
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 America cheered. "Ireland
offers an admirable lesson in fiscal responsibility," declared Alan
Reynolds of the Cato Institute, who said that the spending cuts had
removed fears over Irish solvency and predicted rapid economic
That was in June 2009. Since then, the interest rate on Irish debt
has doubled; Ireland's unemployment rate now stands at 13.5 percent.
And then there's the British experience. Like America, Britain is
still perceived as solvent by financial markets, giving it room to
pursue a strategy of jobs first, deficits later. But 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
A serious fiscal plan for America would address the long-run drivers
of spending, above all health care costs, and it would almost
certainly include some kind of tax increase. But we're not serious:
any talk of using Medicare funds effectively is met with shrieks
of "death panels," and the official G.O.P. position - barely
challenged by Democrats - appears to be that nobody should ever pay
higher taxes. Instead, all the talk is about short-run spending
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. And here's what
we know from experience abroad: The confidence fairy won't save us
from the consequences of our folly.
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