Stimulus vs. austerity: USA vs. Europe

Posted: Tuesday, October 26, 2010

The following editorial first appeared in the Los Angeles Times:

In the grand global experiment now under way as countries try to cope with the economic downturn, Europe and the United States are going in opposite directions. As the Obama administration and Congress have pumped up government spending to stimulate the economy, European countries have launched austerity programs to try to bring their crushing budget deficits under control. Time will tell which economic strategy is more successful, but meanwhile, one thing is becoming clear in Western capitals from Washington to Athens: No matter what national leaders do to try to solve the crisis, they'll suffer politically.

The British government on Wednesday announced $128 billion in spending cuts over four years, reductions that will be felt by retirees, government employees, welfare recipients and even the queen. In France, a far more modest proposal to increase the minimum retirement age by two years, to 62, has sparked the worst strikes and rioting since 2006, despite widespread acknowledgment that the reform is urgently needed to put the country's public pension system on a sustainable footing. Many other European countries also have been forced to make painful spending reductions.

Much has been written about the competing economic theories at play. The Obama administration is influenced by the ideas of John Maynard Keynes, who preached that heavy government spending is needed during downturns to keep the economy afloat until markets stabilize. Washington has been trying to get Europe to do the same, but it has chosen a more free-market, Chicago School approach instead, fearing a repeat of the debt crises experienced by Greece and Ireland. Moreover, European countries have less access to capital than the United States and thus can't sustain U.S.-style deficits.

Whether you respond with stimulus or austerity, though, you're going to make people mad. In France, President Nicolas Sarkozy has seen his approval rating plunge below 35 percent, and polls show that as much as 71 percent of the French people support the strikers who are shutting down oil refineries and burning schools in response to his common-sense reforms. Though few other European countries can match France when it comes to civil unrest, leaders such as German Chancellor Angela Merkel, Spanish Prime Minister Jose Luis Rodriguez Zapatero and Italian Prime Minister Silvio Berlusconi have seen their popularity plummet after announcing steep spending cuts. In the United States, meanwhile, anger over the rising deficit created by stimulus spending is helping to fuel disdain for President Obama and his party that could end Democratic control of Congress in November.

The stimulus was no magic bullet, but in the long run we suspect voters will realize that it headed off a far worse economic crisis. Nevertheless, planning for a little austerity-meaning efforts to pay off the debt the government has accumulated - wouldn't be a bad idea on this side of the pond.

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