May 30, 2013
Dean Baker
Debate Club (U.S. News & World Report), May 30, 2013
See article on original website
Over the last two and a half years governments across Europe have engaged in a cruel social experiment. They began to pursue a policy of austerity even though their economies were still mired in the recession that resulted from the housing bubble’s collapse.
The theory was that reducing government deficits would somehow inspire private investment and increase consumption. Even though laying off public employees and raising taxes would slow demand, the argument was that the confidence inspired by lower deficits would lead to a large increase in demand from the private sector.
This theory has been shown wrong. When firms saw less demand due to the government cutbacks, they didn’t increase investment; instead, they reduced it. And it turns out that smaller government deficits didn’t turn consumers into sudden spendthrifts.
The result has been a surge in unemployment across Europe. The unemployment rate for the euro zone as a whole is over 12 percent. Spain and Greece, the worst hit countries, have unemployment rates of more than 25 percent, with youth unemployment rates over 50 percent. The lost output across Europe is running into the trillions of dollars.
Rarely have countries suffered from so much self-inflicted damage. The recipe for restoring these economies to full employment has been known for more than 70 years: Governments just need to increase demand.
Ideally this will be done in ways that boost long-term growth through investments in infrastructure, education, and research and development. However, governments can also pursue policies that quickly put people back to work, such as youth job programs.
They can also follow the successful path of work sharing that has allowed Germany to lower its unemployment to almost 5 percent even though its growth has been no better than that in the United States. It makes far more sense to subsidize shorter workweeks than to pay unemployment benefits to people who are not working at all.
The data have shown the austerity advocates to be completely wrong. There are no economic obstacles to restarting Europe’s economy. The only obstacle is the political one created by powerful interest groups and politicians who do not want to own up to their mistakes. This should not be a basis for making tens of millions of people across Europe continue to suffer unnecessarily.
