How Austerity Is Ushering in a Global Recession

world economic recessionNot only is the United States slouching toward a double dip, but so is Europe. New data out today show even Europe’s strongest core economies – Germany, France, and the Netherlands – slowing to a crawl.

We’re on the cusp of a global recession.

Policy makers be warned: Austerity is the wrong medicine.

We all know about the weaknesses in Europe’s “periphery” – Greece, Ireland, Spain, Portugal, and Italy. But the drop in Europe’s core is dizzying.

Germany grew at an annualized rate of just half a percent last quarter, down from 5.5 percent in the first quarter of the year. France didn’t grow at all.

What’s going on in Europe’s core? Partly it’s a loss of confidence due to debt crises in the periphery. But that’s hardly all.

Europe depends on exports – especially to Asia, India, Latin America, and the United States. But exports to China and other emerging markets have been dropping. China, worried about inflation, has pulled in the reins on its sizzling economy. Brazil has been pulling back as well.

And as the United States economy sputters, exports to America have been slowing.

But chalk up a big part of Europe’s slowdown to the politics and economics of austerity. Europe – including Britain – have turned John Maynard Keynes on his head. They’ve been cutting public spending just when they should be spending more to counteract slowing private spending.

The United States has been moving in the same bizarre direction. Cutbacks by state and local governments have all but negated the federal government’s original stimulus, and no one in Washington is talking seriously about a second. The pitiful showdown over increasing the debt limit has produced the opposite: a Rube-Goldberg-like process for capping spending rather than increasing it, and a public that’s being sold the Republican lie that less government spending means more jobs.

Yes, governments on both sides of the Atlantic are deeply in debt. But policy makers on both sides seem to have forgotten that economic growth is the most important tonic.

Public debt has meaning only in relation to a nation’s GDP. When more people are working, more companies are profiting, and economies are expanding, revenues pour into national treasuries.

When economies stop growing or contract, the opposite occurs. Economies can fall into vicious cycles of slower growth, lower tax revenues, spending cuts, and even slower growth.

That’s what we’re seeing now.

What’s worse, nations are so intertwined that when every major economy is slowing the cumulative effect is larger.

With anemic growth in America and Europe, the Japanese economy comatose, and emerging markets (including China) pulling in their reins, the vicious cycle could become worldwide. If global demand for goods and services continues to fall behind the potential supply we’ll see unemployment rise further and growth slow even more — especially in Europe and the U.S.

Central banks may try to reverse this course. Ben Bernanke and company at the Fed have committed themselves to near-zero interest rates for the next two years (not exactly a rousing endorsement of America’s economic prospects in the near term). Given the sharp slowdown in Germany, the European Central Bank might now feel some pressure to lower interest rates there – or at least delay the next increase.

Robert ReichBut when growth is slowing so dramatically and unemployment is already high, monetary policy can’t possibly do it alone.

Without an expansionary fiscal policy, low interest rates have little effect. Companies won’t borrow in order to expand and hire more workers unless they have reasonable certainty they’ll have customers for what they produce. And consumers won’t borrow money to spend on goods and services unless they’re reasonably confident they’ll have jobs.

Fiscal austerity is the wrong medicine at the wrong time.

Robert Reich
Robert Reich’s Blog

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Comments

  1. James says

    Sorry, man. . . “Austerity” is the only medicine that will cure what ails us. . .

    Keynes was a dimwit, and other dimwits following the course he plotted has led us to ruin – more of the same isn’t going to do anything but hammer the throttle.

    Economic growth is only a small portion of what needs to be done – MASSIVE spending cuts are also necessary. I mean, come on – a responsible person doesn’t apply for a new credit card when they’ve maxed out those they already have. . . they cut out the luxuries & tighten their belts.

    The sole reason for a lack of economic growth is the Government. Who knows what counter-intuitive, thought-lazy scheme the Government is going to pull next? How can anyone be expected to allocate resources when they have no idea what sneaky, underhanded stunt is coming tomorrow which could cause all of their hard work to be flushed down the commode?

    You article read like it came straight out of the Welfare Rat’s Handbook – minus the poor spelling and bad grammar.

    • ScottyJ says

      Yes, James you are a good speller and your grammer is wonderful. However you don’t seem to have much of a grasp on the fact. The decline in America has come under the policies of Supply Side Economics. The transfer of wealth since the 80’s, the decline in labor unions, by any measure supply side economics…trickle down…horse oats and sparrow, whatever you choose to call is have when ever tried in this country has lead to ruin from this country. Maybe I’m wrong show me when it has worked.

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