Austerity

Should Europe Continue Austerity? Join the Debate at US News with Veronique de Rugy

|


Reason columnist and Mercatus Center economist Veronique de Rugy is participating in a debate about austerity and Europe over at US News & World Report's website.

Austerity is a concerted effort to reduce the debt-to-GDP ratio, either through cutting spending, raising taxes, or a mixture of the two. Here's the set-up at US News:

In light of the constant string of bad economic data, many European leaders have changed course away from austerity, the spending cuts and tax increases that were meant to stem the continent's crisis and ignite confidence in the eurozone's ability to deal with its problems. Instead, several countries – including France, Spain and Poland – have received permission to ditch their budget targets and run bigger deficits in an attempt to boost job creation. (But they are still being forced to adopt labor market reforms.)

In the pages of Reason and elsewhere, de Rugy has argued forcefully that cutting spending makes sense for a host of reasons and is a preferred action especially in uncertain and rotten economic times. Here's a snippet from her piece:

While the finding that spending cuts are more effective at achieving debt reduction is not controversial, there is still significant debate about the short-term economic impact of fiscal adjustments. There are, however, some clear lessons:

1) Expansionary fiscal adjustments are possible.

2) While fiscal adjustment may not always trigger economic growth, spending-based adjustments are much less costly in terms of output than tax-based ones. In fact, when governments try to reduce the debt by raising taxes, it is likely to result in a deep and pronounced recession, making the fiscal adjustment counterproductive. Thus, we shouldn't be surprised by theimpact that tax-revenue based austerity has had in Europe.

3) These expansionary fiscal adjustments are more likely to succeed when they are accompanied by growth-oriented policies such as labor and goods market liberalization. Monetary policy was also proven to facilitate the spending cuts. Countries such as Germany and Finland, and other more recent examples such as Estonia and Sweden, have managed both debt reduction and some level of growth.

Read the whole thing.

US News' "Debate Club" includes other writers, such as Dean Baker of the Center for Economic and Policy Reserach and David Callahan of Demos (both strong anti-austerians). Read through the offerings and then vote for whomever you think is most convincing.