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May 21, 2012

Policy Choices: Austerity or Austerity

As my predictions of new recession threats (appearing in this space last week) seem more ominously accurate, I think it useful to clarify the reasons for the problem in Europe, the policy choices available and how this relates to economic challenges in the United States.

There is a debate in Europe about an austerity package.  Austerity in this context is a euphemism for asking public employees to delay retirement with nearly full pay and benefits until they are in their late 50s or asking college students to pay upwards of 15 percent of their college costs. Oh the humanity! As shocking and inhumane as this sounds, these steps toward austerity are not what has caused Europe's recession.  On the contrary, because it has not yet been enacted, the real fear is that austerity will be rejected at the polls and economic mayhem will ensue. This has caused the recession in Europe, a run on Greek banks and more economic woes worldwide.

Policy makers have few tools to stem this recession.  In less abnormal times, tweaking interest rates, cutting taxes or boosting infrastructure spending might dampen the short-term effects of a downturn. Whether or not these are wise policies is an interesting matter but irrelevant in current circumstance.  Any such efforts are apt to disappoint in a world already awash in government spending.  The plain reality is clear—austerity is coming to Europe, either as a planned and thoughtful exercise or through fiscal ruin.  To be sure, there will be some makeshift policies to help growth, but nothing will derail austerity nor meaningfully soften the recession.

Similar problems loom at home.  In California, this year's deficit is now projected to be $16 billion, nearly double the January forecast.  This is not due to low taxes, but to businesses and households fleeing the state.  The California deficit is just under 1.0 percent of its economy.  In Greece, it is 1.5 percent.  Greece's unfunded debt is an astonishing $10,800 per capita; California's is $13,500 and Illinois' is $12,500 per resident. Austerity looms for many American states as well.  It is worth noting that Indiana's per capita unfunded liability is around $2,200 per capita, a tractable figure that leads to our nearly perfect credit rankings.

The world did not become so by accident.  Promising things you cannot deliver is a tried and true route to electoral success among unsophisticated voters, at least in the short run.  I hold much hope that at some point folks see plainly enough the effect of doing more of the same, and vote accordingly. 

The big changes that necessarily face the developed world are simply that we've promised too much, to too many, for too long.  Pension obligations for workers cannot be met by perhaps 40 states and nearly every town and county.  They will have to pony up huge sums of money to fund pensions for teachers, firefighters, police officers and parks maintenance workers, or slash their benefits. In most places they must do both, and it is time to acknowledge it. 

Link to this commentary: https://commentaries.cberdata.org/624/policy-choices-austerity-or-austerity

Tags: recession, incentives, bailout and debt


About the Author

Michael Hicks cberdirector@bsu.edu

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University. Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.

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