Steven Thomma and Kevin G. Hall at McClatchy take notice of the debate between deficit reduction and economic growth, with too many political leaders on one side, and economists who know what they’re talking about on the other.
The economist among the world leaders, Indian Prime Minister Manmohan Singh, joined President Barack Obama in warning against scaling back too quickly, though. Nobel Prize-winning economist Paul Krugman on Monday called the summit’s goals a mistake and warned that policy blunders could plunge the world into a depression.
Prodded by European leaders frightened by a debt crisis in Greece, the leaders of the world’s top economies met through the weekend in Canada and promised to cut deficits in half by 2013 and stabilize their debt by 2016.
They brushed aside objections from Singh, Obama and others that scaling back too quickly risks choking off a fragile recovery and creating a global recession. They added, however, that boosting growth remains the top priority and built in loopholes for each country to cut spending and raise taxes as it deems necessary.
It shouldn’t surprise that virtually the only world leader to stand on the side of growth and not Hooverism was the economist among the bunch. And Singh has a lot of backup within his profession. Here’s Joe Stiglitz talking about George Osborne’s first austerity budget in Britain:
“The problem was that, in the US, the stimulus wasn’t big enough,” he says. “Too much of it was in tax cuts. And when they gave money to the banks they gave it to the wrong banks and, as a result, credit has not been restored – we can expect a couple of million or more homes to be repossessed this year than last year – and the economy has not been restarted.” Instead of producing a consensus that the government should have done more, it has created disillusion that the government can do anything, Stiglitz says.
The result is that, following the attacks by the financial markets on Greece and then Spain, everybody is now in a mood of retrenchment. “It’s not just pre-Keynesian, it’s Hooverite,” he says. By which he means governments are not just refusing to stimulate, they are making cuts, as Herbert Hoover did in the US in 1929 – when he turned the Wall Street Crash into the Great Depression. “Hoover had this idea that, whenever you go into recession, deficits grow, so he decided to go for cuts – which is what the foolish financial markets that got us into this trouble in the first place now want.”
It’s quite incredible to see these countries around the world with a knife to their own throats. Instead of redirecting spending to useful purposes that can grow the economy, around the world we see severe cuts, the kind that cause riots and strikes. The brutality of the enterprise is really astounding. And not only is it cruel, it doesn’t work:
Nearly two years ago, an economic collapse forced Ireland to cut public spending and raise taxes, the type of austerity measures that financial markets are now pressing on most advanced industrial nations.
“When our public finance situation blew wide open, the dominant consideration was ensuring that there was international investor confidence in Ireland so we could continue to borrow,” said Alan Barrett, chief economist at the Economic and Social Research Institute of Ireland. “A lot of the argument was, ‘Let’s get this over with quickly.’ ”
Rather than being rewarded for its actions, though, Ireland is being penalized. Its downturn has certainly been sharper than if the government had spent more to keep people working. Lacking stimulus money, the Irish economy shrank 7.1 percent last year and remains in recession.
This downturn in the economy has led to lower wages, more unemployment and HIGHER DEFICITS as revenues dry up.
Rhetorically speaking, the White House understands this. Jared Bernstein’s Financial Times op-ed strikes the right balance for the most part, with any fiscal sustainability coming far off in the future, and job creation being the key to that fiscal sustainability. But look to their actions: the freeze in discretionary spending, the recent halt to $20 billion in executive branch IT programs, the deficit commission. They’ve talked a good game about deficits, but they have followed Hoover’s primrose path.