The National Catholic Review
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Europe’s electorates have given their answer to austerity as the way to recover from debt and recession. In council elections across Britain, in the fall of the center-right Dutch coalition government and in the Greek parliamentary elections, voters have rejected Germany’s attempt to impose austerity on the European Union. In France, President-elect François Hollande’s campaign message was simple—without growth there can be no recovery. It had the rhetorical advantage of being true. This minor revolution should provoke a reassessment of austerity in the United States, where the policy has likewise been prescribed as public debt mounts and economic uncertainty persists.

Sharp cutbacks in government spending—which would cause the loss of thousands of public sector jobs and deep reductions in social services and infrastructure spending—have been pitched as part of the counterintuitive recipe for a long-term revival of flagging national economies. Deficit hawks hope to reduce government debt and thereby encourage expansion in the private sector. But the swing to austerity, whether propelled by philosophy, as in Great Britain, or by the edicts of the credit market and the I.M.F., as in Greece, Spain and Ireland, has stifled growth while creating severe hardship for the European public.

Unemployment remains at Great Depression levels in Spain. Recession has revisited Great Britain, Italy, Belgium and the Netherlands. The Irish economy has locked up. Whole populations are taking the hit for risky banking methods and speculative housing investments. Banks have been salvaged, for the most part. But so far, they have shown their gratitude for the public bailout by resisting new capitalization requirements and government re-regulation.

There are two main problems to solve: debt and the stimulation of national economies to provide jobs. Greece, with its complex of overgenerous social spending, flagrant tax avoidance and widespread corruption, is a special problem. But for the rest of Europe, a combination of economic stimulus, budgetary restraint and revenue-raising would help.

Mario Monti, the technocratic Italian prime minister, has proposed a number of stimulus measures for consideration at the European summit in June. Reportedly he has received support from Chancellor Angela Merkel of Ger-many. That is good news. Government budget-tightening is no way to reduce deficits and debt unless workers and businesses are prosperous enough to pay down their nations’ debts with their taxes.

There remain viable options toward a more measured restoration of fiscal health in Europe by promoting job creation, tweaking monetary policy and retooling the European Central Bank. While some nations within the European Union are incapable of expansionist policies, others, Germany primarily, can embark on pro-growth strategies that will benefit the entire continent. Lagging European economies can focus on resolving longstanding problems with corruption, government waste and tax collection that can help improve their national balance sheets.

A program of fiscal reform will succeed only if the public perceives that the cure is not creating more suffering than the disease. Some economists and political leaders continue to advocate shock treatment as a path to long-term solvency—surely a desirable goal—but this approach is seldom humane and threatens to create social unrest that could jeopardize the entire program of reform. Establishing more modest fiscal goals and reasonable social boundaries—a glide path toward fiscal stability rather than an emergency hard landing—is a more practical and responsible course of action. It is more amenable to the public and hence more likely to be embraced by it.

Pro-growth politicians should create face-saving space so that the austerity advocates, recognizing the economic facts on the ground, can step back from public positions that have hardened into ideology. Despite the economic calamity of our times, European unity remains a worthy goal; the political progress and economic integration achieved in recent decades must not be allowed to backslide because of a short-term imbalance.

Voters in Europe were not endorsing Keynes over Hayek when they went to the polls; they were voting out leaders who had brought them no relief from economic uncertainty because they failed to create more jobs and improve national solvency. They are suggesting moderation in government efforts to deal with historical overspending and government deficits by prodding economies forward, not by throwing them into reverse. The voters’ instincts for change may be precisely the right strategy toward a fiscally and economically restored Europe. It would be a shame if politicians in the United States, who appear bent on repeating Europe’s recent mistakes, do not learn from the hard-earned wisdom of European voters.

Comments

J Cosgrove | 5/22/2012 - 3:00pm
Interesting, the article ends with a Keynes vs. Hayek mention.  For years it was thought that Keynes won the debate hands down and demoted Hayek to obscurity.  Keynes was feted as the smartest economist in the world/history and maybe even the world's smartest man of his time.  We are all Keynesians now some quipped. 


But somehow Hayek has made a recovery as he originally worried just what a government would do with all that spending even if it did work in the short term.  We saw the result of Keynesian economics in the 1970's in the form of stagflation and that is when Hayek started to make a come back.  But an even more devastating critique against a stimulus, government spending or investment as some want to call it is Public Choice Theory.  Just what does the government do when they get hold of that money.  The following article talks about the dysfunctional nature of government especially the more money it gets.


http://perspicuity.net/sd/pub-choice.html


You see that government workers are just like private citizens and they have a self interest, just like you and I.  And they do not necessarily pursue the public interest in their jobs but their own private self interest.  The net result is that the so called stimulus or government investment is made for their interest and not the public's.


So while maybe some form of investment is necessary to get the economy back to normal and that is what austerity is really about, it might be best to keep the government away from the way it is done and trust private self interest to find the best way.  Maybe the invisible hand works best when it is not a government official's hand.
John Bacon | 5/22/2012 - 8:24am
While I am not delusional about how easy it would be to achieve, I think the only truly viable solution to the financial troubles facing our interconnected world economies is an interconnected world society. As long as the economies remain interdependent while the solutions begin or end at the national borders no viable, long-term resolutions are possible. A unified world government or at least a global agency with legislative as well as enforcement powers is the only way to ensure that global solutions are implemented globally.
C Walter Mattingly | 5/20/2012 - 5:24pm
I'm not certain that the voters are truly voting out austerity. They are voting out cutting back on spending and perhaps voting in more spending on social programs and government investments. If those "investments" do not grow productivity which at least exceeds the true long-term rate of inflation, thereby increasing the deficit and the budget problem already of crisis proportions, then perhaps they are voting in less austerity for the moment and receiving a huge additional portion of unwanted austerity in the near future. This is very risky business.
Carlos Orozco | 5/19/2012 - 1:02pm
Two titans duke it out. An instant classic: Rep. Ron Paul versus economist Paul Krugman.

http://www.youtube.com/watch?v=izXEWZ3rZek
Mike Daniels | 5/19/2012 - 11:23am
"It would be a shame if politicians in the United States, who appear bent on repeating Europe’s recent mistakes, do not learn from the hard-earned wisdom of European voters."

What wisdom have the European voters shown exactly - that they don't want to do what is clearly an obvious solution from a reading of history?  Germany is the strongest economy in Europe because it followed the path of fiscal restraint.  This article is embarrassingly naive.  We passed a two thousand page “stimulus package” and a two thousand page healthcare bill that no one read and has produced nothing but more red ink.  Why do you feel that is the right course?

Joseph J Dunn | 5/19/2012 - 11:17am
Tipping the scales of social justice requires more than pointing out who needs help, and suggesting a short-term solution in the hope that sustainable remedies to long-term problems will emerge. Those "debt markets" that now charge very high rates of interest on Greek sovereign debt are real people concerned that the debt will not be repaid. Should trustees of university endowments, or union pension funds, or managers of bond mutual funds buy these bonds? At what rate of interest should they risk the funds in their care? Even Greek citizens are pulling their money out of their banks, for fear that the banks will not be able to return these deposits (which are loans to the bank) at a later date, or the government will seize their Euros and pay out in drachmas. Yes, austerity has its discontents. But the Greek voters' call for less austerity requires stewards of money, including the German government, to once again risk hard-earned money in the hope of eventual reform. Every euro or dollar poured into the current morass is one less dollar available for investing in innovation. These fiscal stewardship challenges for the United States are not yet so acute, but they are just as real.
Mike Evans | 5/19/2012 - 2:59am
There does seem to be a great, unfathomable chasm between those who feel a need to do something about unemployment and the ravages of the current depression and those who wish to simply blame the victims for their supposedly self-inflicted misery. Austerity measures simply make everyone worse off. I don't think they meet the criteria of Matthew 25.
Jerome Riggs | 5/19/2012 - 12:09am
This article left me shaking my head over what little sense it made. Our problems are lack of growth in the private sector and the enormous growth in the government sector. Several of the above comments are excellent. Our ever increasing debt is a result of uncontrolled government spending, whether if be for war or social services. Government provides the least efficient use of capital and is the worst choice as a major provider of social services. Our Catholic hospitals and charities are a good example of this. We should not be encumbering our children and grandchildren with such massive government debt. Simplification of our tax code would ease many of our growth problems and encourage the formation of small businesses. It would help to have a Congress that believed in making a budget and living within it, as most of us with families have found to be necessary.
William SMITH | 5/18/2012 - 4:08pm
You show an alarming lack of understanding simple economics.
Mike Evans | 5/18/2012 - 11:30am
It is very clear that the difficulties in Greece and other countries are caused by a severe lack of compliance in existing tax payments, especially by those in a position to get away with evasion. In the USA we have a large number of major corporations like GE and Apple who pay little or no income tax to either the federal or state governments. They of course, are rooting for austerity because otherwise they would pay more taxes. Our current post-Bush tax system is a give away to the prosperous and a denigration of the poor who are in need of programs and services. Instead of food stamps and rent subsidies, we provide oil subsidies, crop supports and a crippling of any efforts to overcome the foreclosure crisis. And our largest expenditures simply go to prolonging the evil and useless wars in Iraq and Afghanistan and who knows where next. We need to express a universal 'Mea Culpa."
Stanley Schardon | 5/18/2012 - 11:12am
What are "The voters' instints for change" that leads to the "right strategy toward a fiscally and economically restored Europe"? What I read and see of the protestors in the streets is a revolt against any change to their status. Whether it's the government employees, public pensioners, students, etc., nobody seems to want a change of the status quo. When individuals, a government entity, or business continually spend more than they earn or collect, it's doomed. It's not sustanable.

I'm always amused by the reaction of proposed "cuts" in government programs that only want to curtail the size of an increase. This has usually been the case in federal programs. Sometimes we're only talking about a small percentage reduction in spending of an actual increase in a particular budget.  What would happen if we capped increased government to 2% each year?

Then there is the waste in duplicate and/or overlapping programs. Most of the money"invested" in these progams so often go to the growing government employee base rather than to the people they were created to help. Look at the data on the various Job Training programs as an example. When have we ever really streamlined our government to enhance efficiency and productivity?

So far I'm not convinced that the voters in Greece are are pursuing the "right strategy."

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