Along with the cherry blossoms, hordes of bureaucrats descended on Washington for the spring meeting of the World Bank and the International Monetary Fund (IMF). The meeting concluded with, among other things, a communique from the International Monetary and Financial Committee urging the United States and the European countries, including the United Kingdom, to keep the money spigots flowing and ease up on austerity.
The question, though, is: What austerity? Whatever the policies implemented by the debt-racked, recession-prone countries, public austerity isn’t among them, as government spending has not, in fact, declined in most countries. Expansive monetary policy has pushed interest rates to historic lows, and neither the European Central Bank, nor the Federal Reserve has been able to make that translate into economic growth and the kind of job creation that would really put a dent in unemployment levels. Despite the years of stagnation, the IMF continues to cling to the belief that governments can spend and borrow their way out of the crisis caused by reckless spending and borrowing, and blame austerity for the continued stagnation.
Governments on both sides of the Atlantic (with the laudable exception of Canada and some of the Baltic states) have pushed for tax increases, while promising spending cuts that fail to materialize. In effect, these countries have implemented what my Mercatus colleague Veronique de Rugy has termed “private austerity,” as taxpayers are stuck with the burden of higher taxes, with little to no reduction in the size of government spending, deficits or debt that public austerity would entail. The result is stagnation, as an increasingly burdened private sector struggles to grow and create the jobs needed so desperately. These countries are going to remain mired in stagnation, or even recession, until they undertake real fiscal reform, which significantly reduces the burden of government on taxpayers.
The United Kingdom is likely to be the most immediate victim of the delusion that nonexistent austerity is responsible for the current recession in that country. Prime Minister David Cameron and Chancellor of the Exchequer George Osbourne are already dealing with the fact that Fitch is the second rating agency to downgrade their country from the coveted AAA. Soon, they are going to be facing demands from the IMF to ease up on austerity, likely in the next few weeks.
Austerity? Government spending in the United Kingdom has not declined. It rose from $521 billion, and 34.5 percent of gross domestic product in 2000-01, to just over $1 trillion and more than 45 percent of GDP in 2011-12. While government spending is expected to dip slightly in 2012-13, it is projected to rebound to $1.1 trillion, and 44.4 percent of GDP the following year, and continue increasing thereafter. Furthermore, other than a brief dip from 2008 to 2010, tax revenues have increased and are projected to keep increasing in absolute terms. The policy in place is not austerity, defined as sustained cuts in government spending — it is private austerity, in which taxpayers disgorge more to the government, leaving fewer resources for private consumption and investment, which, in turn, chokes job creation.
The situation is not much better on this side of the Atlantic. While sequestration is being blamed for all kinds of ills, the Congressional Budget Office points out in its latest report that the actual cuts this year amount to a grand total of $44 billion from planned spending of $3.8 trillion — little more than 1 percent of the entire federal budget. This rather small cut comes from a budget that has remained stuck above historical levels as a result of the funding of bailouts and the stimulus under the American Recovery and Reinvestment Act.
The stimulus failed to achieve its goals. It even failed to get infrastructure projects off the ground that were arguably low-hanging fruit. We have had easy money and interest rates close to zero. Neither fiscal stimulus, nor easy money was enough to lure businesses worried about regulatory burdens and other uncertainties into undertaking the investment needed to return the economy to a growth path, and create jobs at the level needed to bring down joblessness from its current elevated level.
Expansive fiscal and monetary policies punish the thrifty today as the return on savings declines with interest rates. It also hurts future generations, who will be stuck with paying off the debts incurred by today’s profligacy. There is increasing evidence that policies that rely on higher taxes — that is, private austerity — rather than spending cuts — so-called public austerity — are far less likely to achieve fiscal sustainability. The IMF’s continued misplaced faith in such policies as a solution to the problems confronting nations on both sides of the Atlantic will only perpetuate the current widespread stagnation.
Nita Ghei is policy research editor at the Mercatus Center at George Mason University.