‘Austerity’ Promotes Growth, Government Spending Doesn’t

Tue, May 15, 2012

U.S./World News

Let the great debate begin—no, not the one between President Barack Obama and former Gov. Mitt Romney, but between fearless free market economist and Mercatus scholar Veronique de Rugy and big government advocate and Nobel Prize winning economist Paul Krugman. The question: Does the failure of European “austerity” measures mean the United States should eschew concerns about reckless spending and instead renew our romance with big spending, spiced this time with serious tax increases?

Readers of this column were treated before to the intellectual slugfest that went on between these two (with Krugman getting a strong assist from Jonathan Chait) regarding the relative progressivity of the U.S. tax code. As you can read here, despite Krugman and Chait’s devolution to nasty name-calling, de Rugy beat them like a drum.  As Atlantic Magazine’s columnist Clive Cook boldly stated, on this matter de Rugy was right and they were wrong.

[See a collection of political cartoons on the European debt crisis.]

But what about the failure of so-called “austerity” programs in Europe? Let’s start with defining what so-called experts mean when they use the term: In this framework, austerity could mean reductions in spending, tax increases, or both. The core debate surrounds the implication that fiscal austerity means draconian reductions in spending. Hence the “happy dance” engaged in by liberal economists who really, really do not want the United States to reign in federal spending. As de Rugy points out, however,

Austerity packages are mischaracterized as only made of spending cuts.  However, in most cases austerity measures have been a mix of spending cuts and tax increases.  In fact, for Europe as a whole, tax revenue increases were a much larger component  than spending cuts.

Without getting too much into the weeds, Mercatus economist Matt Mitchell compiled a list of 21 peer-reviewed papers that have shown that the most successful approaches to lower debt without harming the economy tend to be heavily tilted toward spending reductions. As de Rugy’s chart indicates, many countries were doing the diet equivalent of claiming significant spending reductions when in reality they were still ordering the Big Mac and Fries—they just stopped saying, “Supersize it.” 

[A European Primer: What Does Austerity Look Like?]

Why does this matter to the United States? Because national elections allow us to choose between two paths: Do we penalize a struggling economy with significant tax increases in the name of decreasing the deficit? Or do we continue to wrestle with spending that first went out of control under President Bush and continues on that irresponsible path today? 

Interestingly, according to a Resurgent Republic study, even Americans who are somewhat open to tax increases don’t seem to believe that money will be used to reduce the deficit (only 28 percent).  In fact, they seem to have a very firm grasp on how unreliable our elected officials can be. To wit, 64 percent of registered voters polled think that any additional revenue brought into the government through tax increases will be spent on other programs. 

[Check out political cartoons on the economy.]

Given the current sad state of the country, with workforce participation down, underemployment a serious problem, only half the college graduates able to get jobs, and (personally the most terrifying) kids moving back in with their parents after college at one of the highest levels it has been in years, we should be focusing on how to achieve prosperity for the greatest number of Americans. Historically, that path has been one of smaller government, less regulation, and free trade. Throwing around broad generalizations or labels such as “austerity” only serves to obscure the real issue: government over-spending. Layering punitive new taxes on top of  rampant spending would add economic insult to injury and fail to reduce any of the most troubling trends in our economy.  In other words, empty-nesters may become a rare species.  



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