Wednesday, June 23, 2010

It's about time: austerity is the new fashion in Europe

From the Washington Post: "Britain announced a far-reaching deficit-reduction plan Tuesday aimed at saving billions of dollars over the next five years, becoming the latest European nation to slash spending amid increased worries about rising public-sector debt."

It's not perfect news, though, since about one-fourth of the deficit reduction will supposedly be achieved by increased taxes, but it's a good start. The spending cuts are impressive in that they target spending programs directly, and the same thing is happening in Germany and France. "Britain's decision to cut rather than spend follows a wave of austerity packages recently unveiled across Europe, including almost $100 billion worth of cuts in Germany and public-sector pension reforms in France."

Obama, of course, cautioned the Europeans to avoid premature austerity measures since they might harm economies. The market, however, reacted to the news by boosting the value of the pound (up 13% in the past month); plus, German stocks are up about 10% in the past month, and UK stocks are up 5%. If too much spending causes huge deficits and raises fears of huge tax increases (a bad thing in the eyes of investors), then cutting back on excessive spending can only be a good thing.

This U.S. needs to join this party, and the sooner the better.

UPDATE: This party is spreading around the world to Australia: "Julia Gillard became Australia's first female prime minister after Kevin Rudd stepped aside as leader of the governing Labor Party, paving the way for the government to drop a controversial new 40% levy on mining profits that has damaged its standing in voter polls." http://online.wsj.com/home-page?mod=djemalertNEWS

Not to mention the many municipalities and states that are now being forced to look at trimming out-of-control pension obligations.

UPDATE: The WSJ has a great op-ed which summarizes the failure of Keynesian stimulus efforts around the world, and how the political tides are turning against them.

7 comments:

septizoniom said...

another excellent post.

Dr William J McKibbin said...

I disagree with austerity measures as the solution for our economy, not because austerity does not make sense, but because austerity measures fail pragmatically. National economies can "solve" their deficit problems via three means: austerity, default, or inflation. Governments will never allow a default, and the people will not tolerate austerity. That leaves monetary expansion (or "printing money") leading to inflation. More on how monetary expansion can solve our deficit issues at:

http://wjmc.blogspot.com/2010/05/using-inflation-to-reduce-public-debt.html

Recall that Hooverism (austerity) failed in the 1930's and lead to four consecutive terms of FDR (fiscal expansion). Likewise today, the demands for postmodernization are louder than ever. Austerity works for the minority with wealth alone. What America needs is a plan that works for a super-majority of the people. The time of elitism (<1% make the decisions) is long over, and the time of populism (51% makes the decisions) is now collapsing before our eyes -- pluralism (>68% make the decisions) and postmodernization (the needs of humankind and biosphere become imperatives) are the future. Looking backwards has no place in the 21st century. More at:

http://wjmc.blogspot.com/2010/06/on-postmodernization.html

Thank you for the opportunity to comment...

靖福 said...
This comment has been removed by a blog administrator.
REW said...

Scott,
I am more skeptical, primarily because I give more weight to the risk you highlighted. Austerity, in the mind of the IMF, World Bank, EU, and likely the current administration means primarily tax increases. They may find a way to reduce spending slightly, but they will focus on raising taxes, which will kill growth, and make matters worse. I fear the idea of austerity will catch on and you'll have deficit hawk republicans joining with tax and spend libtards to hike our taxes dramatically. We'll end up with the same result we see in emerging countries when they listen to the IMF tax-hike nonsense.

Scott Grannis said...

I'm encouraged because the austerity measures being considered and implemented around the world lean heavily to the spending side rather than tax increases. Cutting government spending, much of which amounts to entitlement programs that have grown like Topsy, is not really "austerity" in my book. And its very democratic, since it lets the majority of the people keep their own money rather than being forced to hand over more and more to the government. Even though a minority pays most of the taxes, everyone pays in the end, since the government is a very inefficient consumer of the economy's resources. The austerity that killed the economy in the 1930s was almost exclusively higher taxes, and I think there is a strong consensus out there now that you don't raise taxes when economic growth is weak.

Dr William J McKibbin said...

Actually, the austerity measures being considered in Euopre lean heavily on both taxes and spending cuts. The US is not the EU for many reasons. Follow the links below for details regarding how European austerities would translate into policies in the US:

http://wjmc.blogspot.com/2010/06/european-union-is-not-united-states.html

Thank you again for the opportunity to comment...

CDLIC said...

Scott,

And further to your post an article from Investor's Business Daily "Even Europe Sees What U.S. Doesn't" at http://www.investors.com/NewsAndAnalysis/Article/538296/201006231849/Even-Europe-Sees-What-US-Doesnt.aspx