By Gross, Daniel
Newsweek , Vol. 155, No. 25
Prime ministers--Economic policy
Government spending policy--Evaluation
Economic conditions--Political aspects
Inflation (Economics)--United States
Public expenditures--Political aspects
Byline: Daniel Gross
How politicians worldwide are buying votes by cutting spending.
If British voters thought they had replaced the dour visage of Labour Prime Minister Gordon Brown with an optimistic one in fresh-faced Tory David Cameron, they were sadly mistaken. On June 7, the 43-year-old Cameron brought down the hammer, telling the British public that the most urgent issue ahead "is our massive deficit and our growing debt. How we deal with these things will affect our economy and our society, indeed our whole way of life." With a deficit set to top 11 percent of gross domestic product this year, and a debt of $1.12 trillion and rising, Cameron prescribed a harsh regimen of spending cuts and possible tax increases. Tony Blair's motto was "Cool Britannia." Cameron's is likely to be "Austerity Now!"
At first, most developed economies responded to the global financial crisis in 2008 and 2009 with stimulus; they increased government spending and cut taxes. John Maynard Keynes provided the playbook: in slack times, the government needs to fill in for diminished private demand. But 2010 is shaping up to be a year of parsimony. To win support for an international bailout, Greece enacted a tough package of budget cuts and tax increases. Spain's left-wing government at the end of May slashed civil-servant pay by 5 percent and froze pensions--even though one in five Spaniards is out of work. Recently, German Chancellor Angela Merkel unveiled a $144 billion package that would raise taxes on airline flights and cut defense spending and public works--and Germany's deficit is a manageable 5 percent of GDP. "We can't have everything we want if we are to shape the future," Merkel said.
We're not hearing that kind of rhetoric in the U.S. yet, but the new austerity has crossed the pond. Even though unemployment remains at 9.7 percent, the House of Representatives in May scaled back a proposed jobs bill out of concern for the deficit. President Obama recently called for federal agencies to identify cuts of up to 5 percent in 2012. States and cities are slashing budgets and raising taxes. Around the world, what economist and columnist Paul Krugman has called "the pain caucus" is in the ascendancy.
Different countries are joining the caucus for different reasons. Many, especially slow-growing, highly indebted countries in Southern Europe (Spain, Italy, Portugal) see austerity as a way to avoid the fate of Greece. Others are reacting to fears of stimulus-induced inflation. In fact, with enormous unused capacity in the developed economies, signs of inflation are scarce. "To say that we need policies now to fight a global outbreak of inflation is like arguing that we need policies now to guard against the imminent alarming spread of the North Polar ice cap," says University of California, Berkeley, economist Brad DeLong. …