Anyone frustrated with the drawn out economic recovery here in the US should cast a gaze across the Atlantic for a view of how it could have been. In the European Union we have a unique opportunity to catch a glimpse of where this country would be had we chosen the path of severe spending cuts rather than a road stabilized by economic stimulus.
Throughout Obama’s presidency his economic policies have been relentlessly criticized. Even now, as the recovery strengthens, many claim the economy is improving despite Obama’s policies or that recovery would have been faster without the government’s constant interference. The problem with these claims is there’s simply no way to verify them, there is no way to test the alternatives. The only empirical data available are from actions already taken. All too often in the social sciences like economics, one has to rely on models which attempt but cannot fully account for the multitude of variables in the real world. Researchers, unfortunately, cannot directly experiment on actual economies which leaves statistical modeling as the best, and only, alternative. That is until now.
Europe’s problems have provided economists a opportunity of sorts. They have offered up a unique chance to compare two sides of the economic ideological coin, a chance to see the results of both strategies tested on the real world and played out upon the same economic crisis stage. Unfortunately for one side in particular, the findings do little to validate their position.
In order to shore up their financial situation, Europe chose to focus on their accumulating debt which grew significantly during the Great Recession. The EU decided on the austerity route, drastically cutting spending similar to the plans presented by the congressional Republicans in the US. They felt attacking the national debt was the prudent manner in which to stabilize their economies and place them on the path to fiscal recovery. The problem with this tactic is its misplacement of priorities. Debt reduction is a long-term goal requiring long-term policies inappropriate for addressing the short-term needs of an economy precariously balanced on a thin fiscal ridge. Solutions designed to bolster the EU’s collective economies was essential during those critical recovery years and that required government intervention and investment, it required government stimulus.
Unfortunately for Europe, the problems created by the misplaced priorities are now evident. In his assessment this past weekend CNN’s Fareed Zakaria, discussed the dismal outlook for the EU. A recent US poll indicated people are still frustrated with the pace of the recovery but Zakaria, who just returned from Europe, says, “…they think America is booming.”. Compared to the eurozone’s less than 1% growth and Spain’s official entry into a double-dip recession, the United State’s estimated 2-3% growth this year nurtures an economic certainty Europeans have yet to experience.
While Europe employed across the board spending cuts and tax increases to curb their debt, conservatives in the US demanded massive spending cuts and additional tax cuts. As we have seen in Europe, and to a lesser extent here in the US, those cuts in government spending sent people to the unemployment lines, which further reduced tax revenue and consumer spending. Decreased consumer spending reduced demand for goods and services which in turn reduced private sector hiring and overall confidence in the economy. The US received a taste of what the eurozone’s debt reduction strategy felt like during the debt ceiling debacle this past summer.
When the debt ceiling battle began heating up in May of 2011 the private sector had been creating thousands of jobs for 12 consecutive months. By June that job growth had slowed, and continued to through September, due in large part to congressional gridlock and Tea Party freshmen threats to allow default if spending cut demands were not met. With the subsequent downgrade of the US’s credit rating and poor economic predictions, economists’ concerns for a potential double-dip recession grew.
After a better than expected 4th quarter and strong 2012 opening, the double-dip recession worries eventually faded. Now, the US is on track for stable growth as unemployment drops and hiring continues, with a number of states improving faster than the national average.
However, even with the straightforward evidence at hand, the Paul Ryans and Mitt Romneys of the political world continue to pursue the path of austerity. Both versions of Representative Ryan’s fiscal plans and all 3 of Mitt Romney’s base their budget balancing on cuts to much needed social and safety net programs in order to pay for additional tax cuts for the highest earners and significant increases in defense spending, all of which places added financial burden on the middle and poor classes.
Europe’s economic system is often used by the GOP as a derisive comparison for Democratic economic policies but this time that system may contain a lesson in humility the Republican Party should take to heart. Europe is proof positive that austerity as an economic recovery strategy does not work. The question is now, will this experience produce a little soul searching, a tail between the legs moment for the Republican Party or will they continue to ardently adhere to their fiscal ideology in stubborn denial of real world evidence?
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