The leading proponent for deficit spending to overcome the slump in the world’s economy is the USA. The Federal Government is currently spending four dollars for each three dollars of income, thus about one-fourth of its expenditures comes from borrowed funds. Fortunately Uncle Sam now borrows at very low rates, about 1% so this borrowing is really not a big burden. The rationale for doing this is that “pumping” funds from deifict spending into the economy will induce stronger growth and thus increase employment. This is usually referred to as “Keynesian economcs” so named after British economist John Maynard Keynes.
The leading proponent of using austerity measures, i.e. cut government spending and lower government debt, to overcome the economic slump is Germany. German Chancellor Angela Merkel has become the face of austerity in all the European Union nations since she has insisted on other countries adopting the same austerity measures in order to borrow from the Eurozone financial institutions. She has actually been burned in effigy during anti-austerity measure demonstrations in such places as Greece and Spain.
So how have these two totally opposite approaches done in overcoming the worldwide recession that still grips most of the developed world? The US has managed to stop the financial meltdown of 2008 and arrest the slide down of our economy in 2009. However, our economic growth rate over the last three years as been in the 1-2% range, well below the 3% considered by most econmomists necessary to restore our economy to “full employment,” usually placed at 5% unemployment. And unemployment has remained stuck at about 8% for the last three years. Moreover, the US federal deficit is running at over 6% of the nation’s annual economy and total debt stands at near 100% of the economy.
The Germans have also managed to stop the financial “meltdown” and arrest the economic slide down. But they now enjoy economic growth in excess of 3% and unemployment at just over 5%, what we would call in the US “full employment.” And in the process it has reduced its government debt as a percentage of its economy, about 60%, and lowered its government deficit to under 3% as required by Eurozone rules.
Clearly Germany has done better than the USA in restoring its economy to good health. Now I would not conclude that therefore austerity is a better route to economic recovery than is deficit spending but the comparison does merit closer examination.
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I see another blogger writing that “austerity” is a wrongheaded approach to the economic slump trumpeted by those who would hold down the middle class. My series simply demonstrates that the leading proponent of austerity, as a way to overcome the recession and grow, is Germany led by its much criticized Chancellor Angela Merkel. The results, Germany enjoys a current growth rate of over 3% while the US stumbles along at 1-2%. Germany has an unemployment rate around 5% while the US is around 8%. I say it is time to reevaluate hoary Keynesian models and look for what really works, be it austerity or whatever.
Germany may be doing OK but the rest of Europe is not.
Then tell me why the Euro is gaining in value against the dollar? And the countries that are not doing as well as Germany are resisting the austerity measures being imposed by Germany in order to obtain loans from the Euro wide financial institutions.