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Growth vs. Austerity: The Phony Choice

May 4, 2012 5 minute Read by James K. Glassman

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%, rather than the current 2% , 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% 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 will 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 where 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.


Author

James K. Glassman
James K. Glassman

James K. Glassman is the Founding Executive Director of the George W. Bush Institute and the interim Director of the Military Service Initiative.

He served as undersecretary of state for public diplomacy and public affairs from June 2008 to January 2009, leading the government-wide international strategic communications effort. Among his accomplishments at the State Department was bringing new Internet technology to bear on outreach efforts, an approach he christened “Public Diplomacy 2.0.”

From June 2007 to June 2008, Glassman was chairman of the Broadcasting Board of Governors (BBG). He directed all non-military, taxpayer-funded U.S. international broadcasting, including Voice of America, Radio Free Europe, and Alhurra TV.  Glassman was a senior fellow at the American Enterprise Institute in Washington, D.C., from 1996 to 2008, specializing in economics and technology.

He has been moderator of three weekly television programs: Ideas in Action and TechnoPolitics on PBS and Capital Gang Sunday on CNN.

Glassman has had a long career as a journalist and publisher. He served as president of Atlantic Monthly, publisher of the New Republic, executive vice president of U.S. News & World Report, and editor and co-owner of Roll Call, the Congressional newspaper. Between 1993 and 2004, he was a columnist for the Washington Post and the International Herald Tribune and continues to write regularly for Kiplinger’s Personal Finance and Forbes. Shortly after graduating from college, he started Figaro, a weekly newspaper in New Orleans. His articles on finance, economics, and foreign policy have appeared in The New York Times, The Wall Street Journal, the Los Angeles Times, and various other publications.

Glassman has written three books on investing, and in April 2012 was appointed to the Investor Advisory Committee of the U.S. Securities and Exchange Commission. He was formerly a member of the Policy Advisory Board of Intel Corporation and a senior advisor to AT&T Corporation and SAP America, Inc.

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