U.S. News & World Report: U.S. policymakers: Don’t learn the wrong lessons from Europe’s austerity program

June 1, 2012

U.S. policymakers: Don’t learn the wrong lessons from Europe’s austerity program
By Lenwood Brooks
As seen in U.S. News & World Report 

Lenwood Brooks is policy director of Public Notice, an independent, nonpartisan, nonprofit dedicated to providing facts and insight on the economy and how policy affects our financial well-being.

When French President Nicolas Sarkozy was ousted by his socialist opponent Francois Hollande on May 6, the verdict from opinion leaders was swift and certain:  France’s election results represented a sure repudiation of Europe’s strategy of government budget cutting to restore the economy.

But a closer look at how austerity has actually played out in Europe tells a much different story—and offers a lesson for American policymakers.

The austerity agenda, critics have it, in which debt-laden governments have slashed services and social programs, has angered European voters. Worse yet, the critics claim, it’s not working, as European nations that have followed this supposedly vicious austerity program are struggling with non-existent growth and slipping back into recession.

And their solution is entirely predictable: austerity critics call for additional debt-fueled stimulus spending, despite the fact that trillions have already been spent to kick-start the European economy, to little effect.

However, it turns out that those blasting Europe’s experience with spending restraint omit some critical facts.

Contrary to what you may have heard, spending cuts have largely been lacking in Europe’s economic crisis response. Instead, in most European nations, austerity has mostly taken the form of higher taxes. We shouldn’t be surprised Europe is struggling: when you raise taxes in a weak economy, it has a negative effect on investment and economic growth.

In fact, most countries in Europe are spending more today than they did before the 2008 crash, according to financial reports from the European Commission, the European Union’s executive arm. Yet austerity critics want to attribute the sluggish European economy entirely to spending cuts. France and the United Kingdom, for example, have made virtually no effort to cut spending; they’ve seen spending increase nearly every year over the last decade.

Many European nations have embraced the so-called “balanced approach” strategy, meaning a combination of tax increases and spending cuts. Unfortunately, that approach has disappointed; those nations that have followed a purer course of spending restraint, like Estonia, have seen superior growth. On the other hand, while countries like Greece and Italy have cut some spending, they’ve undermined their progress by raising taxes at the same time.

Moreover, that “balanced approach” is rarely all that balanced: in most cases, tax increases have been larger and more quickly implemented than spending cuts. For example, only about 30 percent of the budget cuts the U.K. had slated to go into effect between 2010 and 2015 have been implemented, according to a May 14 report in the Wall Street Journal. The tax hikes, however, are securely in place.

Critics of “austerity” would have you believe Europe is suffering because they have embraced radical frugality, cutting public spending and turning away the poor and needy. The evidence proves that’s not true.

Yes, European nations are struggling with economic woes, but those woes don’t stem from spending restraint—they stem from a broad variety of factors, including high levels of taxation, fractious E.U. politics and the hard demographic realities of an aging population demanding greater levels government support.

Austerity critics hope to derive lessons for the U.S. from the other side of the Atlantic, but they overlook critical differences between the U.S. and Europe.

For one, most American voters have a more skeptical view of government spending. In polling conducted last month by The Tarrance Group for my organization, Public Notice, respondents expressed little confidence in the federal government’s fiscal management skills, estimating that 47 percent of every federal dollar is wasted.

Moreover, when the pollsters asked about the president’s proposal to raise taxes on wealthier taxpayers, 54 percent said they believe the government will simply use the new revenue to increase spending, rather than paring debt and deficit spending. Americans are skeptical of the government’s ability to borrow and spend our way to prosperity—an appropriate and healthy skepticism that appears less evident among European voters.

American and European voters do have one thing in common: both are fed up with incumbent politicians who seem unequal to the task of meeting today’s economic challenges.

U.S. policymakers should understand that restoring fiscal sanity to the federal budget is an urgent priority, despite what the austerity critics would have you believe. By their lights, no amount of government spending will ever be enough. For those of us who will have to foot the bill for their debt-fueled delusions, that’s very worrisome indeed.

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