Tornado Alley (PROG)

[StephanieVanbryce]

The Wrong Message on Deficits

June 9, 2010

The whip-deficits-now fever is running hot on both sides of the Atlantic. In Europe, politicians are understandably spooked by investors dumping government bonds in the wake of the Greek meltdown. But the sudden fierce enthusiasm for fiscal austerity, especially among stronger economies, is likely to backfire, condemning Europe to years of stagnation or worse.

The United States is running the same very high risk. Democrats have soured on job creation and economic stimulus in favor of antideficit rhetoric, which Republicans have long seen as the easy road to discontented voters in a confusing election year.

At a hearing on Wednesday, the Federal Reserve chairman, Ben Bernanke, said job creation and financial-stabilization programs were essential to stop recession from becoming depression, but he also called for “a strong commitment to fiscal responsibility in the longer run.” The emphasis in that statement should be on that “longer run,” but we fear many politicians weren’t listening for nuance.

The economic crisis isn’t over. Nearly 1 in 10 workers is still unemployed in the United States and in the European Union. Germany, Europe’s most robust economy, suffers 7 percent unemployment. In Spain, it is nearly 20 percent. Still, the German government plans to cut its budget deficit from 5 percent to 3 percent of gross domestic product by 2013. The Spanish government promised to cut to 6 percent from 11.2 percent. The new British government promised to take an ax to spending when it proposes its budget on June 22.

The enthusiasm for budget cutting has spread beyond the United States and Europe. A meeting last week in South Korea of finance ministers from the Group of 20 large economies applauded deficit-reduction talk.

The Obama administration has warned that the new austerity drive could undercut economic recovery and has pressed the case that stronger countries, such as Germany, should not slam on the brakes. In a letter to G-20 colleagues, Treasury Secretary Timothy Geithner warned that budget cutting won’t work “unless we are able to strengthen confidence in the global recovery.”

Weak European governments cannot ignore investors dumping their bonds, and they will eventually have to curb their gaping budget deficits. But for everybody to slash public spending when growth is faltering and unemployment remains stubbornly high risks undercutting the goal of fiscal probity by slowing economic growth and reducing tax revenues.

The global recovery is already faltering. China’s economy is losing momentum. The United States’ is slowing. If budget cutting depressed economic growth, the reaction from investors would be no less brutal than their current attack on European bonds.

The problem calls for a varied response. Some countries, such as Spain or Portugal, may have to drastically cut their budgets if they don’t want to lose their access to capital markets. But countries such as Germany, Britain and the United States have space to spend.

Interest rates on German and U.S. bonds remain low. Rates on British debt also are very low, reflecting better growth prospects than those of the countries that use the euro. For them, the best policy should be to take advantage of the cheap money to spend more, not less.

Deficits will have to be reduced once the recovery gains more traction and unemployment recedes. Right now, for the most robust economies — the United States, Germany, Britain, Japan — slashing budgets is the wrong thing to do.

http://www.nytimes.com/2010/06/10/opinion/10thu1.html?hp