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David Wessel had a great piece in the WSJ showing how G-20 leaders have changed their tune on austerity over the last five years: from bad (during the recession), to good (after the recession), to bad again (circa 2012).
Thank goodness. My colleagues Des Lachman and John Makin have written extensively on the economic costs of fiscal restraint in already weak economies.
Des Lachman recently wrote the Eurozone’s budget straitjacket has deepened recessions in its peripheral economies:
By now it is increasingly recognized that the recipe of severe budget austerity and structural reform that has been imposed by Europe’s core countries on Greece, Italy, Portugal, and Spain is not working. Indeed, there is a growing recognition that the application of severe budget austerity within a euro straitjacket is driving the European periphery’s economy into a downward economic spiral.
Beyond Europe, John Makin wrote in his new paper, “Austerity Undone,” that there’s no more need for more deficit-cutting in the US right now.
Moving forward, it is important for the US Congress to take yes for an answer to the question of whether it has already achieved substantial deficit reduction. Perhaps by accident, Congress has in fact reduced the US budget deficit by enough to enable working at long-term fiscal reform.
So is that the end of the austerity song? Policymakers are off the hook from serious structural reforms? Not quite.
Makin goes on to say that the US economy will face fiscal significant hurdles beyond the 10-year budget window:
The CBO projects a modest post-2018 rise in the debt-to-GDP ratio due largely to a somewhat-unlikely assumed rise in the interest cost on US federal debt. The US debt-to- GDP ratio will start to rise again after 2023, a signal of the still-unmet needs to reform overly generous entitlement programs and to pass tax reform (lower marginal tax rates financed by loophole closing) to boost growth.
The coming budgetary challenges are far greater than the ones “fixed” by the sequester. While the sequester’s economic impact has been nowhere near the apocalypse President Obama predicted, such a blunt and contentious fix would not have been necessary had the US kept its finances in balance in the first place.
The only way to avoid future austerity is good governance now. Let’s hope the administration and Congress undertake tax and entitlement reform before it’s too late.
Otherwise, stay tuned for austerity’s encore in 2023.
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