Last week’s report in the Daily Telegraph gives us a clearer picture of the damaging effects of austerity on economies and budgets throughout Europe, and may serve as a harbinger of things to come in the US. Fortunately, Tuesday’s presidential election may have saved the nation from the draconian budget measures promoted by Mitt Romney and the Republicans, but that doesn’t mean we don’t have plenty to learn from Europe’s mistakes. As Szu Ping Chan writes of a report issued by Britain’s National Institute for Economic and Social Research:
The respected think-tank said that Britain’s debt to gross domestic product (GDP) ratio will be 4.85 percentage points higher by 2013 because of the spending cuts… introduced by the Coalition government. The think-tank said that while in “normal” economic times, fiscal consolidation would lead to a fall in Britain’s debt pile, central banks were already at the limit of what they could do to offset the impact of cuts through loose monetary policy and quantitative easing.
Few in the US are arguing that big deficits are not a problem in the long term, but the plans championed by Romney and House Republicans, most notably Romney’s running mate, Rep. Paul Ryan (WI), would likely disrupt our fragile (although strengthening) economic recovery. As we’ve seen happen in Greece, Ireland, Italy, and Great Britain, big cuts to domestic spending by the government inhibits short term economic growth, reduces employment, and drives down revenues. Much like Europe’s central banks, the Federal Reserve has and continues to do all it can to promote growth through low interest rates, meaning that if huge federal spending cuts are imposed here, there will be nothing to fall back on to keep the nation out of recession. More from Chan’s report:
“Not only would growth have been higher if such policies had not been pursued, but debt-to-GDP ratios would have been lower,” said Niesr economists Jonathan Portes and Dawn Holland… In Greece, where cumulative spending cuts and tax increases from 2011 to 2013 will amount to around 10pc of GDP, austerity will increase the country’s debt burden by 32.4 percentage points, according to the Niesr… The IMF also said that efforts to slash deficits and debt may have actually hurt growth because they were too widespread and had been implemented too quickly.
Let me reiterate that: cutting the budget actually increased deficits throughout the EU. If America is going to tackle it’s long term debt and deficit problems, it will require a balanced approach implemented over the long term. No doubt there is wasteful spending to be found and cut out of popular domestic programs like the Departments of Education, Health and Human Servces, Housing and Urban Development, or the Environment Protection Agency, the National Science Foundation, NASA, food stamps, or unemployment benefits, but gutting domestic discretionary spending (which is less than 1/5 of the federal budget) in a way that Republicans have proposed would be a disaster. Not only would it deprive future generations of the benefits of these services and research, but we would likely bring the country back into recession all while INCREASING deficits and the debt. The budget must be balanced by making structural changes to entitlement programs (again, over the long term), military spending, and even… wait for it… tax increases. We’ve got to learn from the mistakes made across the Atlantic and avoid austerity at all costs.