How to Avoid the Austerity Trap But Still Deal With the Budget Deficit
Monday, May 28, 2012
We now know austerity economics is bad for weak economies facing large budget deficits. Much of Europe is in recession because of budget cuts demanded by Germany. And as Europe’s economies shrink, their debts become proportionally larger, making a bad situation worse.
The way to avoid this austerity trap is to get growth and jobs back first, and only then tackle budget deficits.
The U.S. hasn’t yet fallen into the trap, but it could soon. Last week the non-partisan Congressional Budget Office warned we’ll be in recession early next year if the Bush tax cuts end as scheduled on January 1, and if more than $100 billion is automatically cut from federal spending, as required by Congress’s failure last August to reach a budget deal.
Predictably, Capitol Hill is deadlocked. Democrats refuse to extend the Bush tax cuts for high earners and Republicans refuse to delay the budget cuts.
If recent history is any guide, a deal will be struck at the last moment – during a lame-duck Congress, some time in late December. And it will only be to remove the January 1 trigger. Keep everything as it is, the Bush tax cuts as well as current spending, and kick the can down the road into 2013 and beyond.
Which means no plan for reducing the budget deficit.
I’ve got a better idea — a different kind of trigger. Instead of a specific date, make it the rate of growth and employment we should reach before embarking on deficit reduction.
Say 3 percent growth and 5 percent unemployment. At that point the Bush tax cuts automatically expire, the wealthy pay a higher rate, and $2 trillion in spending cuts begin.
This way we avoid the austerity trap that Europe has fallen into. And we get on with the long-term job of taming the budget deficit when the economy is healthy enough to do so.