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Is
Austerity Crushing Europe?
by J.D.
Foster, Ph.D.
May 21, 2012
Numerous
governments across Europe have embarked on strict austerity programs.
Europe is
also sliding into a deep recession, with some countries already
essentially in
deep depression. Are the two phenomena related? Is the austerity
exacerbating
the economic downturn? Yes and no, and the yes should be no surprise.
For
context, recall that the Obama Administration was greeted by a global
financial
contagion and the Great Global Recession. The budget deficit was
already rising
rapidly as tax receipts fell, thus creating a powerful countercyclical
force,
according to standard Keynesian theory. Obama concluded that more was
better,
and so was launched a giant spending surge of one massive binge and a
series of
lesser excesses.
The
economic theory guiding this policy was traditional and
straightforward: too
little private demand. So, the theory goes, government had to create
new demand
for goods and services. The theory also completely failed, as all
attempts at
fiscal alchemy must. Government cannot create new demand in an economy;
government can only move the existing demand around within the economy,
with a
little job loss due to the frictions of heightened inefficiency thrown
in for
good measure.
The money
Obama spent was not plucked out of thin air. The federal government
borrowed
the money through the financial markets, thus reducing
dollar-for-dollar the
amount of lending that would otherwise have supported private demand.
The federal
budget deficit went from 3.2 percent of the economy in 2008 to 10.1
percent in
2009. If the Keynesian theory had any validity whatsoever, under such a
massive
impulse the U.S. economy should have shot out of the recession like a
rocket.
It sputtered like a damp firecracker.
Now, under
pressure from Germany, credit markets, and fear of an imploding euro,
much of
Europe is pursuing the Obama stimulus strategy but in reverse, slashing
spending and raising taxes. As Europe’s recession unfolds, many are
pointing to
austerity as a prime cause.
In one
respect this is completely incorrect, which is obvious enough when
viewing
Europe through the lens of the recent experience in the U.S. Obama’s
spending
surge created debt but not prosperity. Europe’s spending cuts are
slowing the
rise in debt but are not responsible for economic contraction. The
spending
cuts are necessary, and painful, but have no more to do with the
recession than
the upcoming Eurocup 2012 soccer championship.
The part of
austerity that is exacerbating the recession is the tax hikes—no
surprise—which
in this case are more self-defeating than usual. Raising taxes on
income,
property, and final sales (the value added tax), all distort the
economy, some
more than others, often reducing or even wiping out the profitability
of
various business ventures.
In a strong
economy with more opportunities to adapt, the immediate damage done by
some of
these tax hikes may be modest, and so government can expect some pickup
in
revenues along with the pickup in joblessness. In Europe’s economy
today,
workers and businesses can adapt only by going idle, and so there is
little or
no pickup in revenues to justify the increase in unemployment.
The only
conceivable reason for Europe to even consider raising taxes is to
reduce the
amount of government spending that must be cut to hit their deficit
targets.
Understandable, perhaps, but self-defeating, as the tax hikes feed the
recession, which whacks at tax revenues, thus sustaining the deficits.
Europe’s
recession has many causes, too many to list here. But reducing the
footprint of
government spending is not one of them.
Source:
blog.heritage.org
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