August 17, 2012
A New York Times article on “Europe’s lost decade” could have easily had a headline like this. The piece talks about the high unemployment and weak growth across the euro zone, but never notes the obvious cause, major cutbacks in government spending and tax increases. The predicted result of such austerity measures is a contraction in demand.
This is even more likely to be the outcome of austerity in the euro zone than in the United States, since the private sector is a smaller share of the economy. (If the private sector is two-thirds of the economy, then it must expand by 1.5 percent to make up a 1 percentage point drop in GDP. If it’s 50 percent of the economy, then it has to grow by 2.0 percent to make up for a 1 percent drop in GDP.)
At one point the article implies that austerity would somehow help to promote growth, telling readers:
“Leaders in Brussels and European capitals have pledged to improve budgetary discipline, remove government obstacles to growth and strengthen the banking system by establishing a common regulator at the E.C.B.”
This one seems to be telling us that further budget cuts (i.e. “budgetary discipline”) would somehow boost demand.
Only at the very end of the article does the piece acknowledge that deficit reduction could be hurting growth:
“Some of the decline in euro zone economic output reflects lower government spending, as political leaders struggle to cut national deficits.”
Really?
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