Austerity is ushering in a global recession(Read article summary)
When the world's economic powers are slipping toward a global recession, tighter austerity is not the answer.
Not only is the United States slouching toward a double dip, but so is Europe. New data out today show even Europeâ€™s strongest core economies â€“ Germany, France, and the Netherlands â€“ slowing to a crawl.
Weâ€™re on the cusp of a global recession.
Policy makers be warned: Austerity is the wrong medicine.
Germany grew at an annualized rate of just half a percent last quarter, down from 5.5 percent in the first quarter of the year. France didnâ€™t grow at all.
Whatâ€™s going on in Europeâ€™s core? Partly itâ€™s a loss of confidence due to debt crises in the periphery. But thatâ€™s hardly all.
Europe depends on exports â€“ especially to Asia, India, Latin America, and the United States. But exports to China and other emerging markets have been dropping. China, worried about inflation, has pulled in the reins on its sizzling economy. Brazil has been pulling back as well.
And as the United States economy sputters, exports to America have been slowing.
But chalk up a big part of Europeâ€™s slowdown to the politics and economics of austerity. Europe â€“ including Britain â€“ have turned John Maynard Keynes on his head. Theyâ€™ve been cutting public spending just when they should be spending more to counteract slowing private spending.
The United States has been moving in the same bizarre direction. Cutbacks by state and local governments have all but negated the federal governmentâ€™s original stimulus, and no one in Washington is talking seriously about a second. The pitiful showdown over increasing the debt limit has produced the opposite: a Rube-Goldberg-like process for capping spending rather than increasing it, and a public thatâ€™s being sold the Republican lie that less government spending means more jobs.
Yes, governments on both sides of the Atlantic are deeply in debt. But policy makers on both sides seem to have forgotten that economic growth is the most important tonic.
Public debt has meaning only in relation to a nationâ€™s GDP. When more people are working, more companies are profiting, and economies are expanding, revenues pour into national treasuries.
When economies stop growing or contract, the opposite occurs. Economies can fall into vicious cycles of slower growth, lower tax revenues, spending cuts, and even slower growth.
Thatâ€™s what weâ€™re seeing now.
Whatâ€™s worse, nations are so intertwined that when every major economy is slowing the cumulative effect is larger.
With anemic growth in America and Europe, the Japanese economy comatose, and emerging markets (including China) pulling in their reins, the vicious cycle could become worldwide. If global demand for goods and services continues to fall behind the potential supply weâ€™ll see unemployment rise further and growth slow even more â€” especially in Europe and the U.S.
Central banks may try to reverse this course. Ben Bernanke and company at the Fed have committed themselves to near-zero interest rates for the next two years (not exactly a rousing endorsement of Americaâ€™s economic prospects in the near term). Given the sharp slowdown in Germany, the European Central Bank might now feel some pressure to lower interest rates there â€“ or at least delay the next increase.
But when growth is slowing so dramatically and unemployment is already high, monetary policy canâ€™t possibly do it alone.
Without an expansionary fiscal policy, low interest rates have little effect. Companies wonâ€™t borrow in order to expand and hire more workers unless they have reasonable certainty theyâ€™ll have customers for what they produce. And consumers wonâ€™t borrow money to spend on goods and services unless theyâ€™re reasonably confident theyâ€™ll have jobs.
Fiscal austerity is the wrong medicine at the wrong time.