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Wednesday, February 23, 2011

"Budget Cuts Don’t Bring Prosperity"

Austerity is the wrong answer:

Why Budget Cuts Don’t Bring Prosperity, by David Leonhardt, Commentary, NY Times: ...Germany’s economic growth surged in the middle of last year, causing commentators both there and here to proclaim that American stimulus had failed and German austerity had worked. Germany’s announced budget cuts, the commentators said, had given private companies enough confidence in the government to begin spending their own money again.
Well,... the German boom didn’t last long. With its modest stimulus winding down, Germany’s growth slowed sharply late last year, and its economic output still has not recovered to its prerecession peak. ...[T]he United States — where the stimulus program has been bigger and longer lasting — ... would now need to suffer through a double-dip recession for its gross domestic product to be in the same condition as Germany’s.
Yet many members of Congress continue to insist that budget cuts are the path to prosperity. The only question in Washington seems to be how deeply to cut federal spending this year. ...
The ... problem, however, is the fragility of the economy. Gross domestic product ... is still growing too slowly for companies to be doing much hiring. States, of course, are making major cuts. A big round of federal cuts will only make things worse. ...
Without the government spending of the last two years — including tax cuts — the economy would be in vastly worse shape. Likewise, if the federal government begins laying off tens of thousands of workers now, the economy will clearly suffer.

That’s the historical lesson of post-crisis austerity movements..., no matter how morally satisfying austerity may be, it’s the wrong answer. ... Our recent crisis serves up the same lesson. Germany isn’t even the best example. ...Germany’s turn to austerity has not been radical. Britain’s has been radical, with a tax increase having already taken effect and deep spending cuts coming. Partly as a result, Britain’s economy is now in worse shape than Germany’s.

“It’s really quite striking how well the U.S. is performing relative to the U.K., which is tightening aggressively,” says Ian Shepherdson, a Britain-based economist..., “and relative to Germany, which is tightening more modestly.” ...

For the sake of the economy, the best compromise in coming weeks would be one that trades short-term spending for medium- and long-term cuts. ... By all means, though, don’t follow the path of the Germans and the British just because it feels morally satisfying.

Millions of people remain unemployed. Until labor markets improve, job creation should be the first priority of Congress.

    Posted by on Wednesday, February 23, 2011 at 12:24 AM in Budget Deficit, Economics, Fiscal Policy | Permalink  Comments (77)


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