The Austerity Trap
New York Times.
In Monday night’s presidential debate, Mitt Romney echoed other Republican politicians, saying that under President Obama’s economic policies, the United States is “heading toward Greece.” Mr. Romney was invoking Greece apparently to make the point that deep and swift budget cuts are needed in the United States to avoid a debt crisis.
That bizarre comment, sadly, is no surprise in a campaign that has parted ways with the facts. The president’s budget, as scored by the Congressional Budget Office, would stabilize the ratio of federal debt to the economy over 10 years.
What is more disturbing is that the comment displays willful ignorance about the lessons of Greece, and such ignorance can only lead to bad policy decisions at home. The lesson that should be learned from Greece is that its fiscal mess has been made far worse by severe budget cuts.
New data from the European Union, released on Monday and analyzed in The Times by Landon Thomas Jr. and David Jolly, show that countries that have most ruthlessly cut their budgets — Greece, especially — have seen their overall debt loads increase as a share of the economy.
The data provide objective support for what has been clear to just about everyone except pro-austerity German officials and deficit-crazed Republican politicians. Namely, deep government budget cuts at a time of economic weakness are counterproductive, complicating, if not ruining, the chances for economic growth.
The new European statistics also dovetail with a recent analysis by economists from the International Monetary Fund. They found that budget cutbacks are much more damaging to economies recovering from recession than has been previously believed. The reason is that with interest rates stuck near zero, there is no room to lower them when fiscal policy is tightened, and thus no way to offset the pain of budget cutbacks.
If governments push ahead anyway with deep spending cuts, the result is only more economic weakness without the hoped for budget improvement. That has been the case in Greece and other nations of Europe, like Ireland, Portugal, Spain and Britain. If Republican policies to slash government programs while excessively cutting taxes were carried out here, the United States would experience a similar effect.
Taken together, the Greek experience and the recent European research, show that for the United States, a “grand bargain” on the deficit should include two main parts: spending in the near term to boost the recovery, coupled with tax increases, and spending cuts to reduce the deficit as the economy regains its health.
Mr. Obama is better positioned than Mr. Romney to deliver that agenda. Mr. Obama could make his jobs plan, introduced last September but blocked by Congressional Republicans, part of the budget package to be negotiated after the election, when politicians must agree on tax increases and spending cuts to avoid the so-called fiscal cliff.
Mr. Romney’s agenda is missing a direct focus on jobs, foolishly relying instead on high-end tax cuts and deregulation to help the recovery. And he and his party continue to insist on premature deficit reduction that, in a fragile economy, is the real road to Greece.