Europe’s Woes Prove GOP Wrong

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?

An Editor’s Pick

18 Responses to “Europe’s Woes Prove GOP Wrong”

  1. This is an excellent post! Very thoughtful and intelligent.
    I think you hit the nail on the head when you wrote:
    “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.”

    Debt reduction is a long term problem with a long term solution. Yet, very few politicians seen willing to accept this moderate statement. Even as a long term problem the solution should begin now, even if it is only a small step. If left unattended the debt could go from being a long term problem to an immediate one. Thanks for the great post.

    • Thank you. You’re right so few dare to venture into a moderate position these days needed to create substantive solutions. I agree, even though debt is a long-term problem we most certainly need to at least take some steps now to help with it down the road. One of my main arguments as to why we’ve seen the increased rates of debt accumulation over the last few years is because of the huge losses in revenue from job losses. I’d speculate that just getting people back to work will have significant impacts on the general budget deficit and national debt outlooks.

      Thank you again for reading and commenting. I read through some of your site too. Very insightful, well researched posts.

  2. To try to answer your question at the end, I think we can just look at health care and know what the answer is as to how the Republicans will react. The evidence is and has been very clear as to the cost effectiveness and efficiency of European-type health care systems yet conservatives still demonize them to the point of Americans believing they are costly and inefficient. They will stick to their guns on that and continue their assault on the bailouts and stimulus packages just like they have for so many years on health care, despite the facts surrounding the issues.

    • I think they will stick to their beliefs as well. Health care is definately a good example. There is a severe stubborn streak within the Republican Party. Of course the same could be said to an extent of the Left as well but not to the same level as is displayed by many of the new members of the GOP. Breaking free of those stubborn ideologies and moving both parties to the middle is really the only way we’re going to get balanced policies to move forward.

  3. As misguided as it was, even Bush’s Iraq War spending wasn’t a huge debt problem. It was Bush’s imbalanced economic policies that fostered the historic bubble that led to the economic disaster of 2008 that gave us the big deficit. The deficit in 2007 was just 1.2 percent of GDP, which is managable. However, as the bubble sham came crashing down in fiscal 2008, the deficit jumped to 3.2 percent of GDP. It rocketed to 10.0 percent of GDP in fiscal 2009. Republicans skew this fact by blaming Obama, even though FY09 was well under way before Obama took office. More importantly, when the Bush policies tanked the ship, tax collections plummeted. Also, food stamps and unemployment benefits automatically rose to help people weather Bush’s historical disaster.

    How do we fix it? As you allude to, the answer is simple – You stay calm and restore sound fundamentals by investing in renewables, technology, infrastructure, health, training and education so that people have jobs and are paying taxes and buying products instead of burdening the government with unemployment checks. Obama’s stimulus started us on the right track. Driven by special interests and political malice, the GOP have built up a deficit boogey man, created by their own policies, and then blocked simple and obvious solutions to solve it.

  4. As Mitt Romney continues to say President Obama is pushing the US toward European-style socialism, I ask “As opposed to American-style socialism?”

  5. As Irishman and someone who is suffering from the cuts that the Republicians want to introduce in America, I agree with you completely. The cuts are making the recession far worse and are causing great hardship among the poor. I think its fair to say most people here in Ireland would be over the moon if our economy was the same as America’s right now

    • rapn> It’s disheartening to hear more about the problems many over in Europe are facing. I find it astonishing that austerity was the chosen strategy especially when history (20th century history) shows stimulus is the most effective measure to pull economies out of recessions.
      I for one am keeping my fingers crossed for all of you over there for serious improvements.

  6. I don’t care what you say – you cannot spend your way out of a global debt crisis. Obama’s fiscal stimulus is a very dangerous gamble and seems to rest entirely on the assumption that the US economy is too big to fail… Do I really need to remind you that the White Star line claimed the RMS Titanic was unsinkable?

    The UK economy may well be technically in recession but, if the Coalition government had given in to pressure (from the irresponsible socialists who got us into this mess by selling our gold reserves and bailing out our banks) to try and spend our way out of this crisis, we would be just another European basket case like Greece, Spain, Ireland, Portugal, and France (in roughly descending order of impotency). Furthermore, if France elects a Socialist President next month, I would not be surprised to see it leapfrog its way to the front of that list within 12 to 24 months; and trigger the breakdown of the Euro/EU project.

    • Martin, I’m a bit surprised you take that position. From my research stimulus has been employed successfully during previous recessions from the Great Depression to the Great Recession. My view is, this time around at least, the massive loss in jobs reduced revenue so drastically that it resulted in the exponential debt increases we saw here in the US (budeget deficits and national debt). Stimulus is necessary in the short-term for the purposes of recovery. As that recovery builds, more people become employed again and revenues increase just because more people are employed paying regular taxes. This in itself will significantly impact the debt and deficits. Obvisously, once this happens, the debt spending will be reduced.

      So it’s not necessarily spending our way out of debt. It’s spending stablize and return the economy to its previous state which will then inturn reduce the debt as the country’s “income” returns to its previous levels.

      I think your reference to the Too Big to Fail Titantic is only part of the situation. Here it wasn’t about the US economy was too big, it was the banking institutions that unfortunately became too big. If they were allowed to fail, I truly feel we would have ended up in a depression. I do not like the fact that this was the route we had to take but it was, as I see it, our only option. Having said that, the Democrats in congress and Obama created a finacial reform designed to keep such things from happening again. It creates a process where such institutions would fall into a controlled collapse eliminating (hopefully) the need for taxpayer monies. It also, if I remember correctly, requires an account to be created in which those insitutions pay into. That money will be used to control any collapses or provide “bailouts” in the future. It’s their money not taxpayers.

      It’s not a matter of believing we (the US) are too big to fail, it’s about keeping from failing. Why is that even a question. Why wouldn’t anyone make an attempt to keep one’s economy from falling into collapse? Am I misunderstanding your point? It sounds like you’re suggesting we should have let the economy go down without even trying to fix it.

      • I agree that we may be all slaves to a small number of unelected boffins running these rating agencies but, given the undemocrativ power they wield, we simply cannot afford to have out UK credit rating downgraded.

        Like a lot of other aspects to globalised Capitalism it sucks, and it deliberately ensures its own perpetuation but, I do not see how we can buck the system and hope to survive (as a Nation I mean).


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