May 17, 2012
By Kim R. Holmes, Ph.D.
A new economic buzzword is on the loose. "Austerity" is meant to describe the spending cuts by governments in Europe. Such "austerity" is much reviled by newly elected French President Francois Hollande and by the radical parties elected in Greece. American liberals don't like it either. Washington Post columnist Eugene Robinson calls austerity a "dangerous, self-defeating intellectual fad." The New York Times' Paul Krugman claims austerity is to blame for Europe's economic problems.
The critics of "austerity" have it backward. What has brought Europe's economies to the brink is not fiscal responsibility; it is high taxes and out-of-control spending. These critics are playing a dishonest game, setting up false straw men, hiding data, and using misleading rhetoric to confuse the public.
While spending has been reduced marginally in Greece and Spain, it has not been cut in France. Nor has it dropped in Britain. Even in the cases where it has come down, we are talking about getting to what spending was in 2008. I don't recall any massive social dislocation back when government spending was controlled by the socially minded Labour government in Britain. Despite all the supposed spending cuts, these countries still spend more today than they did during pre-recession times.
There is an "austerity" program in Europe, but it is not what you think. Most of the governments in Europe have raised taxes. Britain, for example, raised the top tax rate to 50 percent in 2010, while Italy has raised sales taxes. From 2011 to 2012, 40 percent of the fiscal consolidation in Europe came from new taxes. As any economist worth his or her salt knows, taking money out of the economy through higher taxes during a recession is a growth killer.
The anti-austerity fad is driven by the same evidence-dismissing mindset that has beset Keynesian economics for decades. President Obama's "stimulus" program failed to grow the American economy out of the recession. And yet Keynesians like Mr. Krugman say the reason is that the government did not spend enough money, despite the $3.9 trillion added to the debt since Mr. Obama took office.
In a counterfactual assertion that befits the ideologue more than the economist, Mr. Krugman cleverly sets up an argument he thinks is not disprovable. If failure can always be explained away by claiming that not enough money was spent, then he can never be proven wrong. There's always some mythical amount of spending that will save the day. The evidence of failure doesn't matter.
We have seen this old movie many times. It's the worn-out matinee feature where supposed "austerity" caused the Great Depression. The only problem is that's not what happened. Under Herbert Hoover, government spending expanded, and then rose sharply in 1932. The Great Depression was driven not by spending "austerity," but by the Fed's reaction and lack of foresight as well as trade protectionism. The massive spending of World War II temporarily turned America into a war economy, but its demobilization unleashed the best run of free economic growth in human history.
The austerity argument is a sleight of hand. It is intended to deflect attention from the high-spending, debt-producing, and high-taxing policies that caused Europe's economic weakness in the first place. It's the old trick of accusing your opponents of causing what you have caused. Europe's economic crisis came from decades-long high spending policies of European welfare states, yet now they want to pretend that the only cure - fiscal responsibility - is the culprit.
Good luck, because that trick won't work. There actually is a choice between "austerity" and "growth," but it's not what the critics think. The real choice is between more government spending and higher taxes that slow growth, or lower taxes, debt reduction, and structural reforms that stimulate prosperity.
First Appeared in The Washington Times.
Kim R. Holmes, Ph.D.
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