The Politics of Austerity

Europe is undergoing a massive political upheaval. You may have noticed.

Caught in the wake of deep recession, painfully high unemployment, bank failures, and growing demands for fiscal austerity by the bond markets, governments across the continent are collapsing.

In November, voters in Spain dumped a Socialist government for the conservatives. Last weekend in France, voters replaced conservative President Nicolas Sarkozy with a Socialist. In the past year, governments have fallen in Portugal, Italy, and Denmark, just to name a few. In Greece, voters tossed out just about everyone and at the moment the nation has no government at all. In Britain, PM David Cameron’s ruling conservatives are polling at about 32 percent

It is easy to look at all this and see a massive rejection of fiscal austerity. Certainly, many Democrats in the U.S. take that message even as they fret over a multinational “throw the bums out” tidal wave (There are some exceptions such as Russia, where the bums enjoy the unfettered ability to rig elections).

But is the left in the U.S. right, er, correct? Is the lesson from Europe that deficit reduction is a loser and the key to political success is short-term economic growth? If it is, Republicans may find themselves on the wrong side of history in the coming election.

I suspect, however, that the story is more complicated than that. In Europe, economy is in worse shape than here, spending cuts are deeper, and tax increases steeper.  We are not Europe, at least not yet.

For instance, overall unemployment in the European Union averages 10.1 percent, two full percentage points higher than here. In Spain it is a staggering 23 percent. In Greece, nearly 21 percent.

It is the same story with taxes. Ireland has raised its Value Added Tax rate to 23 percent. Spain has raised its VAT to 18 percent. In the U.S., GOP rhetoric notwithstanding, we have been cutting taxes throughout the Obama years, not raising them.

And spending cuts? The sort of budget cutting going on in Europe is far more draconian than what the U.S. has seen. In Greece, for instance, government spending as a share of the economy is projected to drop by nearly 6 percentage points from 2009 to 2012. By contrast federal outlays in the U.S. are expected to fall by about 2 percent of GDP over the same period, nearly all from the expiration of one-time spending programs such as the TARP and other stimulus.

Even the 2012 House Republican budget would have made relatively modest cuts. For example, it would have reduced all discretionary spending by about $40 billion from 2011 levels—a cut of about 0.4 percent of GDP.

Am I suggesting that austerity could be a winning campaign platform in the U.S.? Hardly. Even in the best of times, Americans oppose most spending cuts(with the exception of foreign aid and “earmarks”) and favor raising taxes on only rich people (of whom there are, conveniently, relatively few).

But the parameters of the fiscal debate are far narrower here than in Europe, and the economy is much healthier. Oddly, the only true short-term austerity budget on the table is the end-of-the-year do-nothing option. That’s where congressional gridlock lets the 2001/2003/2010 tax cuts expire, the automatic spending cuts Congress approved in 2010 kick in, and Congress fails to increase the debt limit.

But short of that, there is only real lesson for us to learn from the recent European experience:  The U.S. needs to fix its long-term budget problem as soon as it can, and on its own terms. Because you never, ever, want to find yourself at the mercy of the bond vigilantes. If y0u don’t believe me, just ask the Greeks.