The EU’s extreme version of budget cutting has pushed the European economy ever deeper into its worst recession since World War II. The United States, pursuing a bipartisan target of $4 trillion in budget cuts over a decade, is mired in an economy of slow growth and inadequate job creation. Our government’s failure to give debt relief to indentured college students and underwater homeowners functions as a multitrillion-dollar twin drag on a feeble recovery. The smart money knows just how weak this economy is. Federal Reserve Chair Ben Bernanke had only to suggest that he might nudge interest rates up a bit, and markets panicked.
In the election of 1952 my father voted for Dwight Eisenhower. When I asked him why he explained that “FDR’s debt” was still burdening the economy—and that I and my children and my grandchildren would be paying it down for as long as we lived.
I was only six years old and had no idea what a “debt” was, let alone FDR’s. But I had nightmares about it for weeks.
Yet as the years went by my father stopped talking about “FDR’s debt,” and since I was old enough to know something about economics I never worried about it. My children have never once mentioned FDR’s debt. My four-year-old grandchild hasn’t uttered a single word about it.
Yesterday afternoon at the National Press Club (the standard Washington venue for events that need a little class), the Committee for a Responsible Federal Budget—a bipartisan debt-reduction group—rolled out its “Fix the Debt” campaign, an attempt to push deficit reduction to the top of the congressional priority list. It's hard to overstate the extent to which this was an almost stereotypical gathering of Beltway deficit scolds.
Europe’s top politicians, led by German Chancellor Angela Merkel, seem determined to repeat the same mistakes over and over again. Last weekend, the financial crisis seemed to be contained for the moment when the Germans and the European Central Bank agreed to commit 100 billion euros through the European Union’s (E.U.) rescue funds to recapitalize Spain’s faltering banking system. The Spanish government bargained hard, and won an agreement that the bailout would not be tied to new austerity demands of the sort imposed on Greece and Portugal.
BRUSSELS—Depending on whose narrative you believe, the deepening economic crisis in Greece proves (a) that the dysfunctional and dissolute Greeks just couldn’t get their act together and keep the reform commitments that they made in exchange for debt relief from the European authorities; or (b) it only proves that austerity breeds more austerity.
Cut public spending and wages, and raise taxes in a recession, and you just dig yourself a deeper hole. Since only about 20 percent of the Greek economy is exports and less than 40 percent of export costs are wages, slashing wages just doesn’t produce much of a bounce, especially when the rest of Europe’s economy is contracting too.
Europe’s leaders emerged far apart at their summit dinner in Brussels Wednesday night. They could not even agree on relatively easy measures to contain the escalating crisis, such as Eurobonds or a greater role for the European Central Bank (ECB).
But at the core of the crisis is an issue that Europe’s leaders are even more reluctant to take on—the ease with which hedge funds and other speculators can drive a small economy into the ground.
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.
After days of intense negotiations during which its membership in the eurozone seemed to hang by a thread, Greece finally reached an agreement today on the measures that will accompany the new loan package from its European partners and the International Monetary Fund.
The most you can say about Indiana Governor Mitch Daniels response to the State of the Union is that it was better than Bobby Jindal’s attempt in 2009.
To be fair, responding to the State of the Union has never been an easy task. The president has the advantage of pomp, circumstance, and ritual. At best, the opposition party can present a simulacra of these things—see Virginia Governor Bob McDonnell’s response in 2010—and hope that the actual message is strong enough to reach viewers.
Jeff Madrick, the author most recently of Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present (Knopf), exchanges questions and ideas with Thomas Byrne Edsall, whose book The Age of Austerity: How Scarcity Will Remake American Politics (Doubleday) is out this week.
Madrick: Your book places the current extreme partisanship in its critical economic context. There are cultural and religious conflicts in America, but it is economic scarcity that underlies much of our political paralysis. Is that so—scarcity lately more than culture? And scarcity has tended to favor conservatives?
Congress had debt on the brain in 2011—fights over the debt ceiling, the Supercommittee, the Bush tax cuts, and voucherizing Medicare—but it amounted to just talk. It was a weird issue to focus on in the year before a big election, since most voters find unemployment and the general economy more important problems to tackle than the federal deficit. And, it turns out that this obsession with the debt was a bad idea for more than Congress' approval rating.