Austerity is ushering in a global recession
Not only is the United States slouching toward a double dip, but so is Europe. New data out today show even Europe鈥檚 strongest core economies 鈥� Germany, France, and the Netherlands 鈥� slowing to a crawl.
We鈥檙e on the cusp of a global recession.
Policy makers be warned: Austerity is the wrong medicine.
We all know about the weaknesses in Europe鈥檚 鈥減eriphery鈥� 鈥� Greece, Ireland, Spain, Portugal, and Italy. But the drop in Europe鈥檚 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鈥檛 grow at all.
What鈥檚 going on in Europe鈥檚 core? Partly it鈥檚 a loss of confidence due to debt crises in the periphery. But that鈥檚 hardly all.
Europe depends on exports 鈥� 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鈥檚 slowdown to the politics and economics of austerity. Europe 鈥� including Britain 鈥� have turned John Maynard Keynes on his head. They鈥檝e 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鈥檚 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鈥檚 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鈥檚 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鈥檚 what we鈥檙e seeing now.
What鈥檚 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鈥檒l see unemployment rise further and growth slow even more 鈥� 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鈥檚 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 鈥� or at least delay the next increase.
But when growth is slowing so dramatically and unemployment is already high, monetary policy can鈥檛 possibly do it alone.
Without an expansionary fiscal policy, low interest rates have little effect. Companies won鈥檛 borrow in order to expand and hire more workers unless they have reasonable certainty they鈥檒l have customers for what they produce. And consumers won鈥檛 borrow money to spend on goods and services unless they鈥檙e reasonably confident they鈥檒l have jobs.
Fiscal austerity is the wrong medicine at the wrong time.
