A Question of Timing: What America Can Learn from the Revolt in Europe

Who’s an economy for? Voters in France and Greece have made it clear it’s not for the bond traders.

Referring to his own electoral woes, Prime Minister David Cameron wrote Monday in an article in the conservative Daily Telegraph: “When people think about the economy they don’t see it through the dry numbers of the deficit figures, trade balances or inflation forecasts — but instead the things that make the difference between a life that’s worth living and a daily grind that drags them down.”

Cameron, whose own economic policies have worsened the daily grind dragging down most Brits, may be sobered by what happened over the weekend in France and Greece – as well as his own poll numbers. Britain’s conservatives have been taking a beating.

In truth, the choice isn’t simply between budget-cutting austerity, on the one hand, and growth and jobs on the other.

It’s really a question of timing. And it’s the same issue on this side of the pond. If government slices spending too early, when unemployment is high and growth is slowing, it makes the debt situation far worse.

That’s because public spending is a critical component of total demand. If demand is already lagging, spending cuts further slow the economy – and thereby increase the size of the public debt relative to the size of the overall economy.

You end up with the worst of both worlds – a growing ratio of debt to the gross domestic product, coupled with high unemployment and a public that’s furious about losing safety nets when they’re most needed.

The proper sequence is for government to keep spending until jobs and growth are restored, and only then to take out the budget axe.

If Hollande’s new government pushes Angela Merkel in this direction, he’ll end up saving the euro and, ironically, the jobs of many conservative leaders throughout Europe – including Merkel and Cameron.

But he also has an important audience in the United States, where Republicans are trying to sell a toxic blend of trickle-down supply-side economics (tax cuts on the rich and on corporations) and austerity for everyone else (government spending cuts). That’s exactly the opposite of what’s needed now.

Yes, America has a long-term budget deficit that’s scary. So does Europe. But the first priority in America and in Europe must be growth and jobs. That means rejecting austerity economics for now, while at the same time demanding that corporations and the rich pay their fair share of the cost of keeping everyone else afloat.

President Obama and the Democrats should set a clear trigger — say, 6 percent unemployment and two quarters of growth greater than 3 percent — before whacking the budget deficit.

And they should set that trigger now, during the election, so the public can give them a mandate on Election Day to delay the “sequestration” cuts (now scheduled to begin next year) until that trigger is met.

This post originally appeared at Robert Reich’s Blog and is posted with permission.

4 Responses to "A Question of Timing: What America Can Learn from the Revolt in Europe"

  1. barf   May 7, 2012 at 7:12 pm

    what do you mean "it's not for the bond traders." they don't even pay any taxes in Greece! Before "giving them all that money" was that simple fact even considered? I say yes "and that's why all the money ended up in Switzerland and Germany." That's not the bond traders! Those are called GERMAN BANKS. So i put it to you Mr. Important Person: "NOW WHAT?"

  2. Aint No   May 8, 2012 at 1:19 am

    The trigger's a pretty good idea. Give Obama some cover, the idiot.

  3. DiranM   May 8, 2012 at 2:37 am

    Although I am GOP and small government, I can agree with your economic arguments living in Greece and from a corporate finance background. Austerity has resulted in a massive increase of Greek public debt and deterioration of capacity to service it. Greece is almost a text book case of Fisher debt deflation. It also shows where 'pretend and extend' and Ponzi debt pyramids lead.

    Of course, Greece is in the strait jacket of an unsound and failing currency union and it is only salvation is to 'break the gold standard' and move back to national currency.

    The US is a much more complex case with a national currency, large productive base, proper central bank and much better economics team than the European Union.

  4. Percy Blakeney   May 8, 2012 at 3:03 am

    What humbug…as confirmed by OECD data there has been very little austerity to date with most European governments expenditure higher now than it was back in 2008.
    What has happened though is taxes have gone up and there have been no structural reforms undertaken.
    One thing we can all be confident of though is that the politicians and officials will always make the wrong decisions for the right reasons.