European Austerity in Perspective

By May 1, 2012, 8:31 AM Author's Blog  

Attempts to rein in government spending necessarily have unpleasant side effects.  Thus the Dutch government collapsed amid budget talks to control the deficit.   And British national output appears to be shrinking.

Keynesians and advocates of the Obama administration’s colossal budget see this as vindication for unrestrained government spending. But in fact what we see in Europe is a very unfortunate consequence of past unrestrained spending.

Let’s look at it this way. Government largess acts as a short-term stimulant. Politicians and the groups they cater to become addicted to this quickie pick-me-up. Addicts, of course, tend to want more and more of the stuff that makes them feel oh so wonderful. Now, countries like the Netherlands and Britain are trying to kick the habit. Not surprising that the process is painful.

One can argue about the timing of the policies. In the middle of a debt crisis – largely brought on by government profligacy – may not have been the best time to revert to austerity. This is like a druggie who has broken his leg. He has to get free of his drug but he might wait a bit for the leg to mend before going cold turkey. Adding stress to an already stressful situation does not help the human body. The same goes for the economic body.

But the fact remains that there is a long-term underlying problem caused by politicians lavishly spending other people’s money and future generations’ credit to buy themselves power.

In 1977 James Buchanan and Richard Wagner pointed out that Keynes and the Keynesians removed the institutional and moral barriers to deficit spending. This freed politicians to spend without limit and rack up debt.  Yes, Keynes himself argued for deficit spending during recessions only, to be balanced by surpluses in good economic times. But in effect he destroyed the controls on spending and debt.

Governments at every level squandered immense resources and created mind-boggling liabilities, with the result that Europeans and no doubt eventually Americans face painful retrenchment.  It behooves Keynesians to recognize their handiwork in enabling a dreadful addiction. Instead, they interpret the pain they’ve caused as evidence of how right they are.

What is the long-term solution? Daniel Mitchell points out a Swiss law that limits central government spending, approved by a large majority of voters in 2001.  This law does not require the budget to be balanced every year but ties spending increases to growth in average revenue over a number of years. Government spending in Switzerland is at 34% of gross domestic product; in the US it is 41%.

Representative Kevin Brady of Texas has introduced legislation in Congress containing a  requirement similar to the one in Switzerland. One question is whether the bill can garner enough political support. Another, even more fundamental, question its whether it would really rein in government spending in the US.

Kicking a bad habit is notoriously hard. But not doing so makes for future misery. The sad spectacle of Europeans going cold turkey should be an incentive to keep government within bounds.

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