Is Austerity Coming to America?
June 25, 2012 1 Comment
Last week, Greek voters went to the polls for the second time in two months, acting out the climactic scene in the long-running fiscal drama playing out on the European continent. The choice faced by voters was between the establishment center-right party which promised to cooperate with other European nations and Eurozone lenders with regards to onerous austerity measures that have been imposed and the country’s leftist party which has declared the austerity measures far too harmful and has vowed to leave the Eurozone rather than implement them. The conservatives won a plurality of the vote and those begging Greece to tackle its debt exhaled.
The victory in and of itself has done little to settle the question of austerity policies on a continent whose largest economies are burdened with debt and slow growth (save for Germany). Voters in France and, prior to this election, in Greece have taken opportunities to elect socialist platforms that reject austerity measures in an environment of slow growth while others, such as Great Britain, have continued to insist that austerity in necessary to ease the burden of debt and to allow for growth in the private sector necessary for recovery in economies still crippled by the financial crisis. In the United States, whose debt burden is not as severe as European countries but is still close to unsustainable, Republicans swept in to office in 2010 on a popular mandate to cut government spending drastically. Governor Romney has promised to send a bill to Congress cutting non-defense discretionary spending by 5% (about $20 billion) on his first day in office. President Obama in turn, has warned that austerity measures are “risky” when growth is slow and can lead to “a downward spiral” where instead of reducing the debt, austerity can grow it and hurt growth. The so-called austerity experiment has not yielded a definitive answer although both sides of the issue insist that recent events have proven their theories correct.
Decisions about austerity will have to be made soon here in the US. Economists are rightly starting to warn that the United States faces a worrisome “fiscal cliff” at year’s end. The blunt spending cuts mandated by the 2011 compromise on the debt ceiling — and the failure of the “super-committee” that followed — along with across-the-board tax increases (i.e. the expiration of the “Bush tax-cuts”) would essentially shave off at least 4% of GDP if Congress does nothing between now and December 31st. Some of the biggest areas hit are sure to be education (at all levels), research and development, and spending on infrastructure. All of these areas are considered key to job growth and start-up growth, and US economic competitiveness overall. If the debate about austerity has yet to be settled, its importance has only increased and will continue to do so; austerity’s potential consequences and the consequences of allowing debt to grow both affect key areas of economic competitiveness in ways to serious to ignore.
Posted by: Sean Norris
Sources: The New York Times, National Public Radio, Forbes