Austerity

With spending cuts being the only thing that Republicans in Congress will discuss – having taken further changes in the tax code off the table – it is clear that a new austerity program is the GOP priority, job one if you will forgive the pun. If history is our teacher and the recent mistakes of failed policies in other developing nations a valuable lesson for American lawmakers, perhaps it is time to see the results of the policies that the GOP is championing under the guise of fiscal responsibility. Thus, it is valuable to look carefully at the impact of austerity measures adopted all across Europe, most of which has now returned to recession by any economist’s measure. The International Monetary Fund had long championed this belt tightening as a necessary evil, but their forecasters seem to have completely missed the boat in anticipating the very harsh impact of such policies on the Continent.

“IMF top economist Olivier Blanchard issued an ‘amazing mea culpa’ for failing to foresee how austerity measures would undermine economic growth. ‘Forecasters significantly underestimated the increase in unemployment and the decline in domestic demand associated with fiscal consolidation,’ Blanchard and co-author Daniel Leigh, a fund economist, wrote in a paper on growth forecast errors. The authors essentially admit that they failed to consider important factors about how regions might react to austerity in times of financial crisis when they advised IMF austerity policy.” Salon.com, January 4^th. So negative growth (recession) is expected to continue into 2013 as well. To put it mildly, most of Europe is miserable.

If you are lucky enough to live in the Nordic economic powerhouses, unemployment is not so bad –unemployment is lowest in Austria (4.5%), Luxembourg (5.1%) and Germany (5.4%). But God help you if you are in one of the countries that were forced as the price of a European bailout package to adopt very stringent cutbacks in government spending. The Eurostat report released on January 8^th showed staggering unemployment with massive increases in 2012 in the softest European economies: “The highest increases [in unemployment] were registered in Greece (18.9 per cent to 26.0 per cent between September 2011 and September 2012), Cyprus (9.5 per cent to 14.0 per cent), Spain (23.0 per cent to 26.6 per cent) and Portugal (14.1 per cent to 16.3 per cent).” Sofiaglobe.com, January 8^th.

If you are entering the job market, the statistics create a world of despair and hopelessness. “The youth unemployment rate was 24.4% in the eurozone [countries who have accept the euro as their currency], and 23.7% in the wider European Union. Youth unemployment - among people under 25 - was highest in Greece (57.6%), followed by Spain (56.5%).” BBC.co.uk, January 8^th.  Overall, the unemployment numbers are moving in the wrong direction. “This is a slight rise on 11.7% for the 17-nation [eurozone] region in October. The rate for the European Union as a whole in November was unchanged at 10.7%... More than 26 million people are now unemployed across the EU. For the eurozone, the number of people without work reached 18.8 million said Eurostat, the official European statistics agency said.” BBC.

Having cut taxes and elected to fight two wars at the same time, the last Republican administration took a Clinton-era budget surplus and created a deregulated escalation into astronomical budget deficits that could not be stopped even after the economy collapsed. That was GOP fiscal responsibility then. Today, they seem hell-bent on a policy sure to tank growth. In a time of wavering and inconsistent consumer confidence (and hence consumer demand), the government has been the demand-side generator that has kept this nation going. And as I have pointed out many times before, looking at raw deficit-reduction numbers without comparing these numbers to their impact on GDP is not the relevant measure of success.  If the GDP falls into recession, that the deficit has come down may in fact make little difference… except that a reduced GDP makes it even harder to repay the deficit that still exists.

And so this battle for deficit reduction is nothing more than a policy battle of the role of government. The deficit reduction argument is simply an excuse to reconfigure the United States and its priorities the way the GOP wants to reconfigure our nation. They gave us a deficit pattern that continues to this very day… and now they want to use their Bush-era failed policies as an excuse to implement a new level of polices seemingly equally destined to fail… Although if you totally ignore history and the clear results of parallel policies in Europe, you might buy into slogans that seem to make sense of the proposed cuts under the guise of “fiscal responsibility” and face the dire consequences. Or you could simply face facts. Pick one. They are mutually exclusive.

I’m Peter Dekom, and facing facts can be exceptionally painful when your entire policies and priorities are based on false assumptions.