The Politics of Austerity

By :: May 8th, 2012

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.


  1. Michael Bindner  ::  5:57 pm on May 8th, 2012:

    Europe’s main problem is a single currency without a single debt and a single tax to support it (and an executive to run it). They are about as good a bet as the Confederacy or the US under the Articles, however like the US, their bondholders may demand the needed changes. In the US, GDP growth has been hampered by austerity, both at the federal and state levels, as with a zero interest rate, net interest is entirely roll-over and any deficit spending above roll-over of debt would go directly into the economy. The sins of omission from not backstopping the states are as bad as the actual spending cuts. It is absolutely amazing that the delusion that deficit spending worsens the economy has been allowed by both press and academia to endure. It is just not the case. The fact that Obama bought into it in order to get compromise is also quite unfortunate.

  2. Michael Bindner  ::  6:00 pm on May 8th, 2012:

    It would disqualify Obama from a second term except for the fact that his opponent is more of an economic illiterate than he is.

  3. AMTbuff  ::  6:31 pm on May 8th, 2012:

    you never, ever, want to find yourself at the mercy of the bond vigilantes. If you don’t believe me, just ask the Greeks.

    Word! I wonder why progressives appear so insouciant about this, as if balancing the budget is not necessary except for the benefit of some rich bankers.

    As in the movie Animal House, the candidates in France offered a choice between (a) making desultory attempts to follow the rules but probably still getting kicked out of Faber College and (b) saying “nous sommes foutus” and having a toga party. Voters chose the latter. Can you really blame them? If there’s no way to win either way, why not laisser les bon temps rouler?

    Ironically, this decision could be the best for France if it accelerates the arrival of the bond crisis. The sooner the default happens (broken promises to bondholders or benefit recipients or both) the sooner the economy can resume growth.

  4. Julie  ::  12:28 pm on May 9th, 2012:

    “You never, ever, want to find yourself at the mercy of the bond vigilantes. If you don’t believe me, just ask the Greeks.”

    The comparison to Greece is handy when you want to prove your point about debt being excessive and bad, but it does not hold up in any serious way. The US and Greece are so far apart in the bond markets (own currency vs shared currency not locally controlled; huge landmass and market vs tiny market; significant world trader vs tiny – the list goes on) that parallels can only be drawn with significant caveats.

    In other words, get a grip.

  5. Robert Helbing  ::  2:31 pm on May 9th, 2012:

    There’s an easy way to avoid the bond market vigilantes. Don’t borrow money from them, and they can be completely ignored.

    But modern governments refuse to follow this strategy. Nearly every major nation borrows from the markets to pay ongoing expenses. That’s a huge mistake. Any businessman will tell you that borrowing money for capital improvements is fine. Many times the revenue or savings from the improvement will make the loan payments and then some, so you actually put money in your pocket every month rather than putting money out every month.

    But you NEVER borrow money to pay operating expenses. That puts you in the opposite position. Next month, you still have to pay those expenses, PLUS make payments on your loan. If you couldn’t make payroll this month, how can you make payroll AND your loan payment next month?

    Governments refuse to match their expenses to their revenues. That forces them onto the bond markets. If they want the cash bond buyers have, they must offer favorable terms. If they don’t, why should bond buyers bother to buy?