Much debate about the pros and cons of austerity in the papers since France and Greece voted its proponents out of office. David Brooks and Paul Krugman put forth opposing views in The New York Times regarding the impact of austerity in America, and Mark Taibbi explains it to the rest of us in Rolling Stones magazine.
First, a quick “Austerity 101” lesson with the help of Investopedia:
Definition of Austerity: A state of reduced spending and increased frugality in the financial sector. Austerity measures generally refer to the measures taken by governments to reduce expenditures in an attempt to shrink their growing budget deficits.
Austerity measures are generally unpopular because they tend to lower the quantity and quality of services and benefits provided by the government. Beginning in 2009, several nations were forced to embark on unprecedented austerity measures. These measures were necessitated by budget deficits that soared to record levels because of actions these countries took to stimulate their economies following the massive credit crisis and global recession of 2008.
As for the pundits:
David Brooks, New York Times, 5-8-12:
The cyclicalists rail against what they see as American austerity-mongers who resist new borrowing. They really rail against the European ones. They see François Hollande’s victory in France as a sign that, in Europe at least, the pendulum might finally be swinging from austerity to growth.
Other people — some on the left but mostly in the center and on the right — look at the cyclicalists and shrug. It’s not that they are necessarily wrong to bash excessive austerity. They’re simply failing to address the core issues.
The diverse people in this camp — and I’m one of them — believe the core problems are structural, not cyclical. The recession grew out of and exposed long-term flaws in the economy. Fixing these structural problems should be the order of the day, not papering over them with more debt.
Paul Krugman, New York Times, 5-6-12:
What is true is that Mr. Hollande’s victory means the end of “Merkozy,” the Franco-German axis that has enforced the austerity regime of the past two years. This would be a “dangerous” development if that strategy were working, or even had a reasonable chance of working. But it isn’t and doesn’t; it’s time to move on. Europe’s voters, it turns out, are wiser than the Continent’s best and brightest.
What’s wrong with the prescription of spending cuts as the remedy for Europe’s ills? One answer is that the confidence fairy doesn’t exist — that is, claims that slashing government spending would somehow encourage consumers and businesses to spend more have been overwhelmingly refuted by the experience of the past two years. So spending cuts in a depressed economy just make the depression deeper.
Mark Taibbi, Rolling Stones, 5-8-12
It was previously assumed that everybody but the actual financial services sector would have to pay, but voters in Europe now are refusing to go along, sparking a wave of eye-rolling editorials in the financial press. Even David Brooks got into the act today, penning a lugubrious editorial about the errant political instincts of the populist masses here and abroad.
Markets all over the world freaked out over the prospect of having ignorant European voters meddling in the recovery process the geniuses of the high finance world had already painstakingly laid out for them. The model for economic progress in the financial bubble era, after all, is supposed to go something like this:
1. Let banks inflate massive asset bubbles with the aid of cheap or even free government cash, and tons of leverage;
2. Before it all explodes, carve out gigantic sums for bonuses and compensation for the companies that inflated those bubbles;
3. After it explodes, get the various governments to bail those companies out;
4. Pay for it all by slashing services to what’s left of the middle class.
Krugman again, this time addressing Brooks’ structural deficiency theory:
Paul Krugman, New York Times, 5-8-12
How do you assess stories about what’s going on in the economy? You can go with your prejudices, of course. You can turn to detailed econometric evidence — although my experience is that essentially nobody, including the econometricians, is convinced by that sort of thing. But the way I usually try to do it is to ask whether the available facts fit the “signature” the story seems to imply — that is, do we see the general pattern that the argument would suggest we’d see?
Next week “Inflation 101.”