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European Fiscal Crisis Could Shape Debate Over U.S. Economy

Posted by on Apr. 28, 2012 at 9:26 AM
  • 11 Replies

European Fiscal Crisis Could Shape Debate Over U.S. Economy

Luke Sharrett for The New York TimesRepresentative Paul D. Ryan says his budget plan is an effort to stave off painful austerity steps.

Mitt Romney effectively wrapped up the Republican presidential nomination. Newt Gingrich said he would drop out. President Obama stumped through key swing states. But there’s a case to be made that the developments this week with the greatest long-term meaning for American politics took place across the Atlantic, not in Washington or New Hampshire or Iowa.

On Politics

The Times’s political editor on 2012.

In Britain, the economy lapsed into a double-dip recession, a result in part of a strict fiscal austerity plan imposed by the conservative government. And political tremors swept across the Continent as the European Union engaged in a fierce battle over whether Germany is demanding excessively deep budget cuts in the effort to keep debtor countries from financial collapse.

At a minimum, Europe’s woes could create another headwind for the United States economy. More broadly, events there, as distant as they might appear to voters here, have a direct bearing on the central debate in the presidential campaign, over the size and role of government and the degree and timing of deficit reduction necessary to forestall a long-term fiscal crisis.

But whichever side of the ocean you are on, few topics are more ideologically divisive than fiscal policy, so it’s no surprise that left and right are drawing very different conclusions from what is happening.

From one perspective, the European experience provides yet more evidence that trying to slash budget deficits too aggressively can backfire in a big way when economies in most nations remain fragile.

Britain’s austerity experiment in particular has been judged by economists to have been ill-timed and poorly constructed at best. It is a reminder, in the consensus view, that the basic tenets of Keynesian economics – primarily, that government spending plays a key role in maintaining demand when the private sector is struggling in a severe financial crisis — remain as valid as ever.

In the United States, the British experience is being held up, by Democrats and mainstream economists, as an object lesson in the risks inherent in aggressive short-term budget-cutting amid signs that the recovery could be losing traction again.

However flawed the stimulus plan Mr. Obama pushed through Congress more than three years ago, fiscal policy has helped the United States generate stronger growth rates coming out of the recession than Britain or the euro zone countries.

“The U.K. made a stupid mistake,” said Ian Shepherdson, an economist at High Frequency Economics. “Theoretically, the U.S. is in a less-bad situation than the U.K. to deal with fiscal tightening – but less-bad does not mean good.”

From another perspective, the European upheaval is a warning that cleaning up the mess from chronic over-borrowing is a long and deeply painful process, both economically and politically, and that the best option is to clamp down on government profligacy before it gets out of hand.

To many Republicans, Europe today represents what will happen to the United States if it does not act now to rein in spending, cut taxes and free businesses from many of the costs of regulation.

“What we’re seeing here is what happens when politicians make so many empty promises to their citizens, and then they turn into broken promises when they can’t keep spending other people’s money,” said Representative Paul D. Ryan of Wisconsin, the Republican chairman of the House Budget Committee.

Mr. Ryan’s recent budget proposal embodies the conservative view that shrinking government in an immediate and substantial way will clear the way for more robust private sector growth and remove the threat of the United States being brought down by a mountain of debt.

“We’re trying to pre-empt austerity,” Mr. Ryan told Jonathan Weisman of The Times on Thursday. “We want to prevent that bitter kind of European austerity mode which is what we will have if we have a debt crisis: austerity round after austerity round after austerity round, cutting benefits to current seniors, cutting people in the safety net, raising taxes, slowing down your economy, making it harder for youth to get employed and get careers. That’s what you do after a debt crisis hits.”

Yannis Behrakis/ReutersTo Republicans, the woes of Greece and other nations show dangers of excessive spending.

The problems facing Greece and the other most deeply troubled European economies are different from what is facing the United States in many ways, including scale. The United States, unlike, Europe, faces little immediate pressure from financial markets and has the ability to operate its fiscal and monetary policy in tandem, while European governments gave up direct national control of monetary policy when they agreed to adopt a common currency.

But the comparisons to Britain, which stayed out of the currency union and now has a government very much in synch philosophically with the Republican Party in Washington, are far more direct in both political and economic terms.

Mr. Ryan’s plan proposes roughly the same scale of deficit reduction as is being sought by the British government. The British budget calls from reducing that nation’s deficit from a current level of 8.3 percent of gross domestic product to 1.1 percent in five years, while the Ryan plan would bring the deficit in the United States from 7.6 percent of G.D.P. to 0.9 percent over the same period purely through spending cuts.

Mr. Obama’s budget proposal, which cuts spending more gradually than the Ryan plan, has a goal of reducing the deficit to 2.5 percent of G.D.P. in five years.

To Democrats and economists outside the partisan wars, the results in Britain leave little room for argument. Austerity in the short run, they say, does not strengthen economies still recovering from severe credit crunches of the sort that sent the United States into its deepest downturn since the Great Depression.

Conservatives, in a familiar echo of a long-running domestic argument, say the problem with the austerity plan put in place by Prime Minister David Cameron’s coalition government in Britain is not that it was ill-timed or too aggressive, but that it relied too heavily on tax increases.

About a third of its deficit reduction comes from higher revenues. Mr. Ryan’s plan contains no tax increases, and Mr. Obama calls for tax increases to make up about a third of his deficit reduction plan.

“The problem with the British consolidation was too much tax increase,” said Kevin A. Hassett, an economist at the American Enterprise Institute who co-authored a study
concluding that successful fiscal tightening plans tend to be those that rely on spending cuts for at least 80 percent of deficit reduction.

If there is any shared lesson from Europe, it is that the United States cannot afford to let the clashes over budget cutting in the short term keep it from finding some consensus on how to begin addressing the mounting long-term costs of supporting an aging population. At some point, the two parties will have to reach some kind of compromise to fix the imbalances looming in the decades ahead – something Mr. Obama and House Speaker John A. Boehner came tantalizingly close to achieving last year.

“It’s not an issue of whether the U.S. has to go through a fiscal consolidation,” said Domenico Lombardi, a senior fellow at the Brookings Institution and president of the Oxford Institute for Economic Policy. “It’s a matter of devising an appropriate pace at which the U.S. can credibly and sustainably consolidate.”

by on Apr. 28, 2012 at 9:26 AM
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Replies (1-10):
JakeandEmmasMom
by Gold Member on Apr. 28, 2012 at 10:12 AM
1 mom liked this

 

From one perspective, the European experience provides yet more evidence that trying to slash budget deficits too aggressively can backfire in a big way when economies in most nations remain fragile.

Britain’s austerity experiment in particular has been judged by economists to have been ill-timed and poorly constructed at best. It is a reminder, in the consensus view, that the basic tenets of Keynesian economics – primarily, that government spending plays a key role in maintaining demand when the private sector is struggling in a severe financial crisis — remain as valid as ever.

I thought this was interesting here.  Keynsian economic policy has really taken a beating the last few years.  I know a lot of people try to compare our situation with Greece, but I think this article makes a good point about how we are really more like Great Britain.  Too much cutting too soon can really backfire.  I agree that the key is to find the right amount of cuts at the right pace.

godotherightthi
by on Apr. 28, 2012 at 10:50 AM

 Except we can't even agree on what a cut is - even Ryan's plan just slows down the rate of our deficit, it doesn't really address the deficit issue.

Mamawto4
by Bronze Member on Apr. 28, 2012 at 4:57 PM

If we could agree on what a cut was, or an increase is for that matter, if we just held everything at today's levels or gave very modest 1-2% increases (real increases, not gov't increases) we wouldn't have to cut anything, and would be out of debt within 15 - 20 years.

Meadowchik
by Gold Member on Apr. 28, 2012 at 5:21 PM
1 mom liked this

"Conservatives, in a familiar echo of a long-running domestic argument, say the problem with the austerity plan put in place by Prime Minister David Cameron’s coalition government in Britain is not that it was ill-timed or too aggressive, but that it relied too heavily on tax increases.

About a third of its deficit reduction comes from higher revenues. Mr. Ryan’s plan contains no tax increases, and Mr. Obama calls for tax increases to make up about a third of his deficit reduction plan.

“The problem with the British consolidation was too much tax increase,” said Kevin A. Hassett, an economist at the American Enterprise Institute who co-authored a study
concluding that successful fiscal tightening plans tend to be those that rely on spending cuts for at least 80 percent of deficit reduction."

Europe cut spending and relied too heavily on tax increases.  It is true that government spending and tax increases inhibit growth under normal circumstances...it makes sense that it doesn't promote growth in a recession, either.  What is needed is the right combination to allow natural growth to occur--that is essentially people expanding their businesses, spending private money, producing and growing.

"We have a moral responsibility to not spend more than we take in." -Mitt Romney 2012

Visit Mitt Romney for President, CafeMom Group

shimamab
by on Apr. 28, 2012 at 5:41 PM
I agree that a balance of policies need to be a part of the solution. Hopefully the two parties will find a way to compromise regardless of "pledges" signed to not increase taxes in any form or the idea that any cut to social programs automatically spells doom. Sadly, these are the types of things that a prez has limited influence over so the upcoming election, no matter the outcome, will not force this compromise to happen. Letters to your reps/senators and voting for candidates who are willing to work across the aisle is the only hope...IMHO ;)
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jesusismyfriend
by Member on Apr. 28, 2012 at 5:44 PM
1 mom liked this

There will be no debate.  Once one goes it will be like dominoes that affect the whole world.  It will affect us.  I do beleive that it will lead to a one world currency and bank.

mommygiggles317
by Silver Member on Apr. 28, 2012 at 6:54 PM

This just proves to me that the way capitalism is done has and needs to change. Globalization is real... America is part of a larger global economy. What happens here has an affect on the rest of the world and what happens abroad affects us too... As I stated before on another post, capitalism has to evolve, it has to mature. People tend to forget that capitalism rose off the backs and out of the blood of the least amongst us: the poor, the slaves, the uneducated... not just here in America but all over the world. Capitalism has grown as large as it could and now it is spreading out... there has to be a way to promote capitalism, promote competition, promote individual success, but, in a way that is responsible both here and abroad... just my opinion...

love you signExercising Knowledge, Wisdom and Understanding...

mommygiggles317
by Silver Member on Apr. 28, 2012 at 6:56 PM
1 mom liked this


Quoting jesusismyfriend:

There will be no debate.  Once one goes it will be like dominoes that affect the whole world.  It will affect us.  I do beleive that it will lead to a one world currency and bank.

Sometimes I wonder if that's the plan...

love you signExercising Knowledge, Wisdom and Understanding...

JakeandEmmasMom
by Gold Member on Apr. 28, 2012 at 6:57 PM

 

Quoting jesusismyfriend:

There will be no debate.  Once one goes it will be like dominoes that affect the whole world.  It will affect us.  I do beleive that it will lead to a one world currency and bank.

 Given that the fact that they are partially blaming the fact that so many countries were on a single currency for the current crisis, what makes you think that?  Moving to a single worldwide currency would only create bigger issues and make our economies even more dependent upon one another than they already are.

TruthSeeker.
by CM Junkie on Apr. 28, 2012 at 6:58 PM
1 mom liked this

 

From another perspective, the European upheaval is a warning that cleaning up the mess from chronic over-borrowing is a long and deeply painful process, both economically and politically, and that the best option is to clamp down on government profligacy before it gets out of hand.

To many Republicans, Europe today represents what will happen to the United States if it does not act now to rein in spending, cut taxes and free businesses from many of the costs of regulation

 I could not agree more.

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