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Growth vs. Austerity: The Phony Choice

Article by James K. Glassman May 4, 2012 //   5 minute read

Much of the reporting and analysis about the European economy portrays a stark choice. Here, for instance, is the Financial Times on the election in France: “Moser Manuel needed only a single word to explain why he had voted for François Hollande, the Socialist frontrunner in France’s presidential election: “Growth.” For the 50-year-old business manager, Mr Hollande’s promises to boost activity in France’s struggling economy contrasted favourably with the austerity offered by Nicolas Sarkozy, president since 2007.” We’re beginning to hear echoes of the same dichotomy in the United States as well. Should we accelerate the pace of federal spending and grow, or should we cut spending for the sake of a small debt but a more tepid economy? It’s a phony choice. At the Bush Institute, we are delighted to see growth once again enter the economic discussion – rather than such phrases as “job creation,” which implies that government needs to get out there and hire people (or make sure the private sector does). Growth in the range of 4 percent, rather than the current 2 percent, must be the goal. If it’s achieved, then unemployment will fall sharply and so will the deficit and debt, as government revenues rise and outlays to help the poor fall. How to get growth? One way is by cutting government spending. It’s true that more spending can sometimes give a short-term boost to the economy, but in the medium- or long-term this approach simply does not work, as I predicted it would not when the stimulus was enacted in the United States in 2009. There are many reasons that brute-force Keynesianism does not work. One is Milton Friedman’s 1957 permanent income hypothesis, which gives individuals credit for recognizing that, when government spends, they eventually have to pay in higher taxes and reduced income – and, in anticipation, they are reluctant to spend today. Here’s a good description and update. Then, there is the empirical evidence, which economist Kevin Hassett of the American Enterprise Institute assembles in the chapter he has written in the Bush Institute’s book, The 4% Solution, which will be published by Crown in July. He examines the research and concludes: “The reported findings support the point that an expenditure-based fiscal consolidation would successfully address the debt problems of the country and contribute to the journey toward sustainable 4% growth. “ Any list of measures that will move America toward 4 percent growth must include reducing federal spending. Hassett notes that the research indicates that reducing entitlement spending is the best approach since many – perhaps most – younger Americans don’t believe the government won’t honor Social Security and Medicare obligations anyway. Expect to hear more about the growth vs. austerity choice if, as the Congressional Budget Office and most economists expect, U.S. growth continues to stagnate. The argument will be that the 2009 stimulus wasn’t big enough, and we need to spend much more. In public policy, framing is powerful. Who wouldn’t prefer growth to austerity? But the real framing is growth vs. non-growth. Austerity, or more accurately a reduction of government to a realistic size, lines up on the growth side of the ledger, as does more sensible regulation, more domestic energy development, policies that encourage the best and brightest immigrants to come to this country, and tax reform that lowers marginal rates, broadens the base by eliminating preferences, and applies to consumption rather than to income and investment. Too many Europeans fail to understand that growth derives from creating an environment when private enterprise is free to thrive and where people get to keep their own money and decide what to do with it. Europe is misleading itself. Americans shouldn’t succumb. This post was written by James K. Glassman, Founding Executive Director of the George W. Bush Institute.