Economics, International economy

The changing tune of austerity (and why 2023 could bring an encore)

Image Credit: Shutterstock

Image Credit: Shutterstock

David Wessel had a great piece in the WSJ showing how G-20 leaders have changed their tune on austerity over the last five years: from bad (during the recession), to good (after the recession), to bad again (circa 2012).

Thank goodness. My colleagues Des Lachman and John Makin have written extensively on the economic costs of fiscal restraint in already weak economies.

Des Lachman recently wrote the Eurozone’s budget straitjacket has deepened recessions in its peripheral economies:

By now it is increasingly recognized that the recipe of severe budget austerity and structural reform that has been imposed by Europe’s core countries on Greece, Italy, Portugal, and Spain is not working. Indeed, there is a growing recognition that the application of severe budget austerity within a euro straitjacket is driving the European periphery’s economy into a downward economic spiral.

Beyond Europe, John Makin wrote in his new paper, “Austerity Undone,” that there’s no more need for more deficit-cutting in the US right now.

Moving forward, it is important for the US Congress to take yes for an answer to the question of whether it has already achieved substantial deficit reduction. Perhaps by accident, Congress has in fact reduced the US budget deficit by enough to enable working at long-term fiscal reform.

So is that the end of the austerity song? Policymakers are off the hook from serious structural reforms? Not quite.

Makin goes on to say that the US economy will face fiscal significant hurdles beyond the 10-year budget window:

The CBO projects a modest post-2018 rise in the debt-to-GDP ratio due largely to a somewhat-unlikely assumed rise in the interest cost on US federal debt. The US debt-to- GDP ratio will start to rise again after 2023, a signal of the still-unmet needs to reform overly generous entitlement programs and to pass tax reform (lower marginal tax rates financed by loophole closing) to boost growth.

The coming budgetary challenges are far greater than the ones “fixed” by the sequester. While the sequester’s economic impact has been nowhere near the apocalypse President Obama predicted, such a blunt and contentious fix would not have been necessary had the US kept its finances in balance in the first place.

The only way to avoid future austerity is good governance now. Let’s hope the administration and Congress undertake tax and entitlement reform before it’s too late.

Otherwise, stay tuned for austerity’s encore in 2023.

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4 thoughts on “The changing tune of austerity (and why 2023 could bring an encore)

  1. I’ve found austerity to work well and regularly in the businesses I have been involved in. The reason it works is that it involves a concerted efforts to eliminate things (and people) that have poor economic returns. Unfortunately government’s definition involves eliminating air traffic controllers rather than seizing the opportunity to stop doing things that are utterly unproductive — like spending $1.20 (after compliance costs) to get $1.00 in taxes that they then send to people who claim to be disabled or to buy weapons systems that the military doesn’t even want.

  2. I would love the author or the gentlement he quotes to let us know which times specifically are good for austerity. Also, define austerity as a metric we can measure.

    • It is a shame that AEI has moved so much towards the pro-big-government side that it no longer pretends that prudence is necessary. Had their researchers looked to history they would have seen how austerity works far better than stimulus that tries to prevent it. When faced with a collapse in economic activity as malinvestments had to be liquidated President Harding stood aside and let the market do its job as he cut government spending and taxes. The market corrected the errors and new investment activity by the private sector created a boom. Hoover and FDR tried to prevent a decline and wound up turning a recession into a Great Depression.

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