As Sequester Looms, U.S. Set To Repeat Europe's Austerity Mistake

U.S. Set To Repeat Europe's Austerity Mistake

“Insanity,” as Albert Einstein is said to have once remarked, “is doing the same thing over and over again but expecting different results.”

The results of Europe’s experiment in fiscal shock therapy are in: austerity has failed, and failed miserably. The eurozone club of 17 countries is now plagued by mass unemployment –- 26 percent and rising in Spain and Greece –- and a prolonged drought in demand. Recession-hit Italy is in the grips of a political crisis; neo-Nazis have been elected to parliament in depression-hit Greece.

Outside the eurozone, the UK economy last week lost its prized triple-A credit rating, having been battered and humiliated by a double-dip recession.

Why then is the United States Congress committed to repeating Europe’s economic mistakes? Some people on this side of the Atlantic are in disbelief as our American cousins seemingly undermine themselves with a succession of politically-inspired yet macroeconomically-illiterate stunts -- from the "supercommittee," to the "fiscal cliff," to the latest legislative Americanism, the "sequester."

The latter is a series of automatic, across-the-board spending cuts, scheduled to kick in on Friday, totalling $85 billion (£56 billion) this year and $1.2 trillion over the next 10 years. The timing of the sequester is odd: just as Europeans have begun to turn their backs on collective, frontloaded austerity measures -- both the European Commission and the OECD have softened their stance on growth-choking spending cuts across southern Europe in recent months -- the Americans seem to have embraced them.

The repercussions of an austerity-induced double-dip recession in the U.S. –- still the world’s biggest and most important economy, by some distance –- could be global. “We were just beginning to feel that the Americans were pulling Europe out of austerity and now they’re going to plunge us all back in it,” says a gloomy Ann Pettifor, director of PRIME Economics and one of the few British economists to have predicted the 2008 financial crash. “The fact is that further [U.S.] contraction is going to crash the global economy.”

Not everyone, however, is as pessimistic as Pettifor. “My sense is that the direct impact of the sequester has been somewhat exaggerated,” argues Jonathan Portes, director of the UK’s National Institute for Economic and Social Research (NIESR). “I’d be surprised if it immediately kicks the U.S. back into recession –- it won’t be the end of the world for them, let alone for us.”

However, Portes, a former chief economist at the UK government’s Cabinet Office and one of this country’s leading critics of austerity, adds: “Obviously, anything that chokes off the U.S. recovery is bad news for us Europeans –- both in the UK and in the eurozone.”

It isn’t just the economic theory coming out of Capitol Hill that bewilders so many European policy-makers; it’s the politics. The sequester “confirms the view that the U.S. is incapable of dealing with [this problem], that the U.S. government is paralysed,” Portes tells The Huffington Post UK. From a European perspective, he says, the U.S. Republican Party “is no longer a responsible party of government in a basic, public finance sense, in terms of making things add up.”

It is also far to the right of its European sister parties. Republicans may say they want austerity but they loathe and recoil from any and all tax rises as a means of bringing down deficits. It is a position that has raised eyebrows in conservative circles across the EU. The center-right prime minister of Spain, Mariana Rajoy, announced a €65bn (£51bn) austerity package in the summer of 2012 that included a 3 percent rise in the sales tax. In October 2012, the centre-right PSD government in Portugal introduced an austerity budget that included a new tax on financial transactions and big increases in property and income taxes.

Here in the UK, the Conservative-led coalition has opted for a deficit reduction plan based on a 4:1 ratio of spending cuts to tax rises. In its very first “emergency budget," in June 2010, value-added tax (VAT) was raised to 20 percent and capital gains tax on high earners was upped from 18 percent to 28 percent.

Europe, suffice to say, lacks a Grover Norquist.

But the most important lesson for the U.S. Republican right and its Tea Party outriders is that austerity is self-defeating – even from a deficit-hawk perspective.

Consider the empirical evidence out of the eurozone. “[T]he sharp austerity measures that were imposed by market and [European] policymakers’ panic not only produced deep recessions in the countries that were exposed to the medicine, but also that up to now this medicine did not work,” wrote academic economists Paul De Grauwe and Yuemei Ji, on Feb. 21 on the Vox website. “In fact it led to even higher debt-to-GDP ratios, and undermined the capacity of these countries to continue to service the debt.” (De Grauwe, incidentally, is not just a professor of economics at the LSE but also a former adviser to EU Commission president Manuel Barroso.)

“When America sneezes,” goes one of the oldest clichés in global politics, “the world catches a cold.” So what happens to the rest of the world –- and, in particular, Europe –- if and when the American economy goes into cardiac arrest? Will eurozone countries such as Spain and Italy be dragged down deeper into depression? Will the UK –- “umbilically linked to the U.S. through our financial systems,” in the words of one leading British economic commentator -- be pushed into an unprecedented triple-dip recession?


The sequester, however, isn’t set in stone; the cuts to government spending are reversible –- even after they’ve been triggered on March 1. There is still time for U.S. political and financial elites to learn the lessons of Europe’s “controlled experiment” in austerity. Or, says Ann Pettifor, they could look at their own not-too-distant past for some guidance.

“I would remind Americans what happened in 1937, when [Franklin] Roosevelt made exactly the same mistake,” she tells HuffPost UK. “The US economy started to recover so he decided to cut spending -- and suddenly everything plunged backwards and he had to reverse course.”

President Obama and House Speaker John Boehner (R-Ohio), over to you.


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