Austerity Is Dead: Can Someone Please Tell Paul Ryan and His Deluded GOP Cohorts?
Photo Credit: A.M. Stan
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Most of the recent economic data out of Europe has been exceedingly grim. A record high number of workers across the Eurozone are unemployed. Economies are shrinking. Debts are rising.
The anecdotes, though, are even worse. Hospitals are asking patients to supply their own syringes due to lack of funds. Trees on public land are being cut down by workers desperate for firewood to warm their homes. An entire generation of young workers is going to experience lower wages for the rest of their lives, due to years of being unemployed while in their 20s.
At this point, it’s safe to say that Europe’s response to the financial crisis of 2008 and its ensuing recession has failed. Austerity packages that were meant to jumpstart business investment and reduce what were viewed as unsustainable debt loads have instead crippled growth and caused untold amounts of human misery.
America, meanwhile, eschewed austerity for stimulus in the wake of the ’08 crisis. The result has been a return to slow, steady, if not overwhelming growth. But for Republicans in Congress, who constantly warn about the menace of the European social safety net, European austerity is a model to be emulated. And their insistence on cutting government spending no matter its effect on growth is bad news for the fragile economic recovery.
Here Comes Ryan, Again
With the so-called fiscal "cliff" firmly behind them and debt ceiling sufficiently punted away for a few months, House Republicans are turning their attention back to the federal budget process. House Budget Committee Chairman Paul Ryan (R-WI), fresh off his failed run for the vice-presidency, plans to release a budget that will balance in 10 years. Such a move, according to the Center for Budget and Policy Priorities, will require cutting one-sixth to one-third of most of the federal government, depending on how Ryan structures it.
But in the shorter term, congressional Republicans are planning to use a few pending deadlines to secure deep cuts in government spending. For instance, the current round of funding for the federal government expires in March, giving Republicans leverage to push for reductions. “The CR [Continuing Resolution]– it’s one of the areas where there is indeed an absolute deadline. Washington and Congress respond to crises and deadlines, and we need to address the spending side of the equation,” said Rep. Tom Price (R-GA).
Ryan himself has also said that the $1.2 billion in spending cuts known as the “sequester” are going to go into effect that same month. “I think the sequester’s going to happen, because that $1.2 trillion in spending cuts, we can’t lose those spending cuts,” Ryan said. The sequester will knock 0.7 percent off of economic growth in 2013, according to MacroEconomic Advisers.
The GOP is also agitating for $69 billion in new discretionary spending cuts that it hopes to trade for cuts to entitlements and the social safety net. All of this would be in addition to the $1.5 trillion in spending cuts ($2.5 trillion in total deficit reduction) to which President Obama has already agreed since Republicans took back the House in 2010.
What Austerity Hath Wrought
To see the effect such austerity can have, the GOP (and some Democrats) only needs to gaze across the Atlantic. Austerity measures have run the gamut in Europe, from mass public sector layoffs to increases in the retirement age, and of course, billions of dollars in spending cuts and tax increases. So what has Europe received for its efforts?
According to the latest data from Eurostat, Europe’s official statistics office, 18.8 million workers in the Eurozone and 26 million across the European continent are out of work. Spain leads the pack with a 27 percent unemployment rate and 6 million jobless workers. Youth unemployment in Spain is a whopping 55 percent. In Italy, 11 percent of workers are unemployed, including 38 percent of young workers. The story is the same across most of the continent.
Paired with these sky-high unemployment rates has been extremely weak economic growth. In 2012, the Eurozone officially fell into its second recession in three years, and the continent has seen four consecutive quarters of either no growth or contraction. Even the supposedly mighty German economy shrank in the fourth quarter of 2012.
And Europe didn’t even get any debt reduction for its efforts. In fact, according to Eurostat, European countries had a collective debt load of 90 percent of gross domestic product (GDP) in the third quarter of 2012. Three months earlier, that number stood at 89.8 percent. One year earlier, it was 86.8 percent. So Europe’s debt is rising, despite all of its austerity efforts. "The cause behind the slight increase is no longer a growing debt pile, but a shrinking gross domestic product," Ulrich Kater, an economist with Germany's DekaBank, told the Associated Press.
Those Other Conservatives
Perhaps no country should provide as stark a warning to the GOP as the United Kingdom. David Cameron and his conservative government came into office with much fanfare, and Republicans immediately wanted the U.S. to follow in the U.K.’s footsteps regarding the budget. “We need a budget with a bold vision – like those unveiled in Britain and New Jersey; one that reduces both the size of the deficit and the size of the government,” wrote the Senate Budget Committee’s ranking member, Sen. Jeff Sessions (R-AL), two years ago this month.
The U.K. cut public investment by half over the last three years, even as the cost of government borrowing hit historic lows. Fast-forward, though, and the U.K. is not a shining example of fiscal discipline, but an economy on the edge. One more quarter of contraction and Britain will officially enter a triple-dip recession. The only positive growth in the U.K. over the last five quarters came courtesy of the London Olympics, hardly a sustainable strategy. As John Lanchester wrote in a scathing piece in the London Review of Books, the U.K.’s austerity push has almost entirely backfired:
In June 2010, in his first budget, [UK finance minister George] Osborne said the structural deficit was 4.8 percent, and that with three years of reduced spending, the figure would be down to 1.9 percent. So how’s that going? Well, by the end of those three years, after £59 billion of tax rises and spending cuts, the figure is set to be 4.3 percent. Even that number was achieved only thanks to a kitchen sink’s worth of special inputs.
According to research by the National Institute of Economic and Social Research, “Britain's stagnating economy has left it in worse shape at this point of its recovery than it was during the Great Depression.”
The IMF's Mea Culpa
Even economists who backed Cameron and Osborne’s austerity push have abandoned ship and called for a change of course. “If I were Chancellor at this point, I would alter the plan, I would stop the cuts to public investment and I might even seek to increase it,” said Roger Bootle, managing director of Capital Economics and an Osborne backer. “The key thing is to try and get the private sector to spend its money and that may require a bit of government spending to prime the pump.”
A much higher profile about-face came courtesy of the International Monetary Fund. Top researcher Olivier Blanchard and staff economist Daniel Leigh found that the IMF has been severely underestimating the negative effects of austerity. “We find that a 1 percentage point of GDP rise in the fiscal consolidation forecast for 2010-11 was associated with a real GDP loss during 2010-11 of about 1 percent, relative to forecast,” they wrote, admitting that the IMF’s push for countries to rapidly reduce debt was misguided and detrimental.
The International Labor Organization agreed, writing in a recent report that “by implementing such austerity measures without regard to the broader global economic outlook, the strategy proved self-defeating as several major economies embarked on similar deflationary policies at the same time, thereby reducing aggregate demand both at home and abroad.” In layman’s terms: austerity isn’t working, especially when all of Europe does it at once.
As Rep. Jerrold Nadler (D-NY) explained, the U.S. and Europe are engaged in a real-time experiment regarding economic policy and the outcome at this point leads to just one conclusion. “If you grasp the economics of the economic recoveries from 2007 in Europe and the United States, they matched until 2010, when [Europe] start[s] to collapse,” he said.
There’s a good case to be made that the U.S. deficit is already coming down too fast, closing at its quickest pace since World War II. Three hundred and fifty progressive economists signed a letter warning that jobs, not austerity, is the most pressing U.S. economic need, and that quick deficit reduction will likely be counterproductive. A conservative scholar at the American Enterprise Institute also warned that “If fiscal austerity is applied too rapidly, US growth will drop and the debt-to-GDP ratio will rise, boosting the nation’s debt burden. The lessons from Europe and Japan are that austerity, per se, is not the way to move to a sustainable fiscal stance,” he wrote.
In the academic world, at least, the debate over austerity seems to be at an end. But if the GOP has its way, austerity will come to America in a big way in 2013. Hopefully, we don’t all need to start stocking up on syringes and firewood.