Is a Vote Against Austerity Enough?


The voters in France and Greece have rejected the parties of austerity. But it is not yet clear that the party of growth can deliver the recovery that the citizenry wants. On both sides of the Atlantic, the obstacles are more political than economic.

In Europe the conventional wisdom, enforced by Germany and the European Central Bank, still holds that the path to growth is budget restraint. Unfortunately, the more that budgets are tightened, the more economies shrink and the more revenues fall. No large economy has ever deflated its way to recovery.

Meanwhile, frustrated voters in nation after nation are turning away from the center-left and center-right parties that support the European project. Only governments can resolve the economic crisis, but governments are losing legitimacy with their citizens. With fragmentation of protest comes political paralysis and deepening recession, and the cycle worsens.

All over Europe, left parties are making gains, but because of the multiple vetoes in the EU and the fragmentation of national politics, they may not be able to produce fundamental change.

Greece has been unable to form a government because voters have rejected the center-right and center-left parties that agreed to austerity. New elections are now in the offing, and the anti-austerity Syriza party is almost certain to emerge as the largest, but without enough seats to govern.

 In Germany, an anti-politics party called the Pirates is polling around 8 percent—and could keep the opposition Social Democrats from willing next year’s election. In France, fragmented protest may prevent the newly elected president, Francois Hollande, from gaining a majority in the upcoming June parliamentary elections.

A real recovery policy would elevate the challenge to the European level. Bonds sold and guaranteed by the EU could provide debt relief to beleaguered economies that can’t sell their national debt. Some small nations have large deficits, but European investment funds on a large scale could provide needed public investment and stimulus. European-wide financial regulation could take the profit out of speculation against sovereign debt.

But those policies are out of favor. Austerity still rules, and there is little that a single nation can do. If Hollande tries to defy the austerity consensus, other EU leaders will undermine French policies and hedge funds will attack French bonds.

Europe has backed into a dilemma that recalls the American Articles of Confederation. The central government—the EU—is fragmented and too weak to address an escalating economic crisis. Any single nation can veto major policy changes. The default position is to stick with austerity.

Before the current version of the EU, individual nation states were strong enough to harness markets and to address a crisis. But the same globalized money markets whose excesses caused the financial crisis are now far more powerful than a confederation of weakened states.

In the American variant of this story, we have a strong national government but growth policies are blocked both by wrongheaded ideas and by political obstructionism. Despite fierce debate on the details, a bipartisan consensus puts budget cuts ahead of jobs and recovery. 

President Obama’s 2013 budget projects $4.4 trillion in deficit reduction over a decade. House Republicans want $5.3 trillion. But since belt-tightening in a weak recovery depresses growth and reduces revenue, the projected debt targets are a fantasy.

The Peter G. Peterson Foundation, which has committed a billion dollars to promote austerity, has just held the third of its annual Budget Summits. Speakers from former President Bill Clinton on down reinforced the preposterous message that fiscal discipline is the road to recovery.

If a very conservative Republican Party wins the November election, a prime reason will be that the failure of government to promote a more robust recovery has discredited government itself.

Consider history’s greatest case study—the economics of World War II. In 1939, despite renewed GDP growth, U.S. unemployment was stuck around 14 percent. Then came the most effective unintended recovery program ever.

Annual wartime deficits exceeded 20 percent of GDP for four straight years. Unemployment melted away to less than 3 percent. The economy grew by 48 percent in four years.

Mercifully, in 1945 there was no Bowles-Simpson Commission fretting about the debt ratio in 1955. The Roosevelt and Truman administrations doubled down on public outlays—the GI Bill, the Marshall plan, construction of homes and highways. High postwar economic growth caused the debt ratio to shrink from 122 percent in 1945 to under 30 percent by 1972.

The war and postwar were not merely Keynesian. As economists Carmen Reinhart and Kenneth Rogoff have noted, the 1940s also saw “repression” of private finance. The banking sector was tightly regulated so government could finance the war debt cheaply. Regulation also compelled banks to finance the real economy rather than just enriching themselves.

The war was no blessing for Europe—but the post-war miracle was. A key, underappreciated element was massive debt relief. In defeated Germany, the Allies declared 93 percent of the Nazi era debt—of over 670 percent of GDP—null and void. In 1950, the German Federal Republic enjoyed a debt ratio of about 10 percent, far less than that of the war’s victors (Chancellor Merkel, note that act of mercy). The rentier class lost, but Europe’s rising tide soon lifted all boats including the yachts.

An improbable economic boom was built on three pillars: Generous restructuring and write-off of old debts whose collection would have killed recovery; new social investment to rebuild purchasing power; and salutary constraint of finance.

Those policies were mainstream in the 1940s and 1950s. Today, because ideology and politics have shifted right, those policies are fringe. However, they were correct then, and correct now.

The lesson for today’s trans-Atlantic economies:

First, we need public investment to make up for depressed private purchasing power. The U.S. the public debt ratio, around 70 percent of GDP, is well below its World War II peak. We could easily spend another $500 billion a year over the next three years on advanced public infrastructure—about 3 percent of GDP per year. The money would cycle back into the private economy, and higher growth would reduce the debt ratio over time.

In the EU, though some smaller countries have high debt ratios, Europe as a whole has room for fiscal expansion. Economists like Joseph Stiglitz also speak of a “balanced budget multiplier.” If governments increase taxes on the well-to-do and spend that money on public investments, the budget deficit doesn’t increase, but the economy gets a stimulus.

Hollande’s proposed millionaire tax could help finance a growth program. So could financial transaction taxes. Europe has done much better on infrastructure than the US, but it could use the new investment. Europe’s Green parties are promoting a Green New Deal.

The second need is debt relief—for small countries and for households with underwater mortgages. In the US, though banks have gotten immense aid, the failure to refinance depressed mortgages undercuts housing values, household net worth and consumer spending. In the E.U. debt restructuring with low interest Euro-bonds could take the austerity pressure off nations like Greece, Portugal, Ireland and damp down pressure against others.

Last, the banking system should be reined in, as in the 1940s. Today’s protracted recession was caused by excess speculation, and is being prolonged by speculation against sovereign debt. A combination of taxation and regulation could take the profit out of speculative abuses and compel banks to a return to a constructive economic role.

These policies are necessary economics to avoid a prolonged slump, but are well outside what passes for mainstream debate. Before we can change the economics, we need to broaden the pubic discourse and the politics.

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