The age of austerity
We have entered the Age of Austerity. It’s already arrived in Europe and is destined for the United States. Governments throughout Europe are cutting social spending and raising taxes — or contemplating doing so. The welfare state and the bond market have collided, and the welfare state is in retreat.
The ultimate hope is to buy time. Effective deficit cuts, it’s argued, will spur economic growth by reassuring bond markets that debt levels are sustainable and justifying lower interest rates. That’s also the theory of new British Prime Minister David Cameron, who has proposed shrinking government spending by a sixth by 2015.
Austerity is transforming economics and politics. The Age of Entitlement was about giveaways; the Age of Austerity will be about take-backs. The Age of Entitlement was about maximizing economic growth; the Age of Austerity will be about minimizing economic reverses. Similar dilemmas confront most advanced societies. Even Germany’s government debt as a share of the economy is large (73 percent in 2009).
Governments are caught in a vise. Without unpopular spending cuts and tax increases, unmanageable deficits may choke their economies. But those same spending cuts and tax increases also threaten economic growth. The United States is not exempt. Low American interest rates mean bond markets haven’t yet turned on us. We need not threaten the recovery by immediately slashing budget deficits. But we do need to act convincingly to curb future deficits. Austerity can’t be fun, but how painful it will be is still partially up to us.