No Time for Wrong Steps: Elections around the world must concentrate on the subtle dance between austerity and growth
Elections often turn on the state of the economy, especially in hard times. When growth and jobs are down, voters throw out incumbents—whether Spanish leftists, French rightists, or Dutch centrists. The United States is no exception.
Economic performance depends to a considerable extent on economic policy. The Great Depression was intensified by poor monetary policy, tax increases, and protectionism. Likewise, loose U.S. monetary policy in the middle of the past decade helped set the stage for the Great Recession.
The outcomes of two related policy battles hold the key to the economic and political outlook in both the United States and Europe. The first is between “austerity” and “growth”—that is, short-term deficit reduction and additional fiscal stimulus. The second involves long-run structural issues: slowing the growth of government spending, reforming taxes, and increasing labor-market flexibility.
Take the austerity battle first. Many people on the left, on both sides of the Atlantic, argue that more, not less, government spending is required to lift their economies out of recession. People on the right believe that governments’ top priority should be fiscal consolidation. In Europe, large deficits and exploding debt-to-GDP ratios have alarmed creditors and provoked political tension. In particular, Germany demands more fiscal belt-tightening from heavily indebted southern European countries, whose unions (and voters) reject further austerity. American political leaders confront the same problem of debt and fiscal sustainability, although the United States thus far has avoided the bond market’s wrath.
The struggle over structural issues also bridges the Atlantic. In Europe, raising the retirement age for public pensions and shrinking government employment would curtail welfare-state excesses. America once seemed content to stop well short of the European social-welfare model; voters sent this signal when they elected Ronald Reagan to the presidency in 1980. But the current president and his congressional allies have rejected the consensus that government should be only a last resort for those in need. President Obama and his allies favor greater dependence, for both individuals and firms, on entitlement programs and other public spending, targeted tax breaks, regulations, and loans.