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Austerity strategy is fatally flawed

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Published : 2012-05-11 19:40
Updated : 2012-05-11 19:40

European elections over the last few days dealt a stunning blow to austerity, one of most profoundly mistaken economic policies propounded in modern times.

The French voted President Nicolas Sarkozy out of office. In Greek parliamentary elections, anti-austerity parties triumphed. The same held true for local elections in Britain and elsewhere.

For several years now, German politicians and technocrats, primarily, have directed their profligate southern European neighbors to impose brutal austerity to counter the continent’s continuing debt crisis. This was the price for German assistance ― and neatly fit the German state of mind. In German, the word for debt is the same as the word for guilt.

The truth is, that’s exactly what some congressional Republicans are also demanding, to bring down America’s growing debt ― even as the United States economy continues to struggle. The Republicans just aren’t calling their plan “austerity.”

Day after day, senior economists continue inveighing against austerity strategies. But none of these people seem capable of explaining in plain, simple language why imposing austerity now is utterly foolhardy ― in fact, just plain stupid. Consider a typically obtuse economist’s phrase, this one from Germany, whose economists describe austerity as “expansionary fiscal contraction.” Is it any wonder hardly anyone really understands?

Here’s what it means in clear, unambiguous language: Under austerity plans, governments must radically reduce their spending. How do they do that? They buy fewer goods and reduce government services.

Well, manufacturers sell those goods, people provide the services. When the government cuts back, the companies and manufacturers lose significant income. So they have to lay off large numbers of workers. That reduces the government’s income-tax revenues, raises the nation’s unemployment rate and increases unemployment-benefit payouts.

All of that ricochets through the economy. Other businesses suffer, too, because consumers have less money to spend. In Greece, more than 60,000 retailers have closed, throwing even more people out of work, including the retailers’ suppliers ― and on and on.

Austerity programs drive weak economies directly into recession. It’s just that simple. And that’s exactly what’s happening in Europe. So far, 12 of Europe’s 27 nations have fallen into recession. Spain and Britain are only the two most recent states to join that list, while several others are teetering. And if the tea-party types in Washington have their way, that’s exactly what will happen here.

With Sarkozy’s loss, 11 European heads of state have been driven out of office largely because they embraced austerity programs. The Dutch government just fell over a proposed austerity plan.

In Europe right now, the continent-wide unemployment rate stands at 10.9 percent ― the highest in 15 years. In Spain, the “leader,” 23.6 percent are unemployed. As serious as those problems are, they aren’t the only ones. Across southern Europe, primarily, dozens of people who have fallen into economic desperation are shooting and hanging themselves. Authorities have recorded scores of suicides.

Others are holding vast, angry rallies, like the ones across Europe on May Day. All of that certainly shattered still another of the Germanic arguments for austerity: to build confidence in the nations and their economies. That one clearly isn’t working.

In fact, as Joseph Stiglitz, the Nobel Prize-winning American economist, aptly put it recently, “Europe is heading to a suicide” because “there has never been any successful austerity program in any large country.”

The United Nations’ International Labor Organization, in a new report, predicts that 6 million more people worldwide will lose their jobs by year’s end ― “primarily in Europe” because “the narrow focus of many Eurozone countries on fiscal austerity is deepening the job crisis.”

Francois Hollande, the French president-elect, is calling for what he calls “growth” policies instead. Generally that means spending stimulus money (as the Bush and Obama administrations did in the U.S.) so that the economy will grow and begin producing more tax revenues that can then be used to pay down the debt.

In the U.S., the Obama administration argues that its stimulus spending in 2009 and 2010 staved off an even more serious economic contraction. While that seems logical, the assertion is unprovable. But imagine where the U.S. would be today if instead he had imposed a harsh austerity plan.

In Europe, German Chancellor Angela Merkel still refuses to accept that her policy prescription has been a cataclysmic failure. On Monday she insisted that “the fiscal pact” calling for austerity “is not negotiable.”

Certainly, domestic politics are helping define her position. But millions are suffering; scores are dying. In Berlin, and Washington, it’s time to wake up, look around and change your stance.

By Joel Brinkley

Joel Brinkley, a professor of journalism at Stanford University, is a Pulitzer Prize-winning former foreign correspondent for the New York Times. ― Ed.

(Tribune Media Services)

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