World leaders from the U.K.’s David Cameron to Naoto Kan of Japan are betting they can deliver fiscal austerity without derailing economic prosperity. History suggests they may be right.In case you haven't been paying attention, Europe has been mired in a serious economic crisis stemming from the various European nations' overwhelming sovereign debt loads and their perceived inability to service this debt going forward. Of course, Greece has made headlines, but there are many others including the so-called PIIGS (Portugal, Italy, Ireland, and Spain). Recently, interbank interest rates have spiked as fears mount over European banks' exposure to this sovereign debt.
As the crisis has spread, two schools of thought appear to have emerged among modern intellectuals. One side argues that these countries need to embrace "austerity", i.e., decrease spending, increase taxes, or otherwise do anything to lessen the level of indebtedness and increase the ability to service their debt. The other side, spurred on by Keynesian economists, argues that the government needs to spend even more and even be willing to print money to sustain or increase "growth." "Who would argue something so ridiculous?" you ask:
In other words, Obama is urging them to do more of what has just led them to the brink of ruin. Enter the empiricists:
...President Barack Obama is pressing for more stimulus, not less, in the U.S. as he prepares to meet Cameron, Kan and other Group of 20 counterparts at a summit in Toronto June 26-27.
“We must be flexible in adjusting the pace of consolidation and learn from the consequential mistakes of the past, when stimulus was too quickly withdrawn and resulted in renewed economic hardships and recession,” Obama wrote in a June 16 letter to G-20 leaders.
Governments have proven they can spur expansion by focusing their belt-tightening on spending cuts rather than tax increases, according to studies by Harvard University professor Alberto Alesina and Goldman Sachs Group Inc. economists Kevin Daly and Ben Broadbent.Note that these academics admit that they simply "don't quite get it," i.e., they do not understand how siphoning money from productive projects and pissing it down the sewer, known as a government's budget, does not lead to growth. Yeah, that's a real head scratcher. (p.s. I'm available to give a presentation...)
“There have been mountains of evidence in which cutting government spending has been associated with increases in growth, but people still don’t quite get it,” Alesina said in an interview. He made a presentation to European finance chiefs on the topic during their April meeting in Madrid.
Of course, these countries need to "tighten their belts" and decrease spending. But, consider what Europeans mean by "austerity" or the donning of "hair shirts." According to this article:
Gasp! The retirement age being raised to...62! Nooooo! Europe's definition of "austerity" can be likened to an alcoholic believing that cutting back to a case a day is a form of rehab. Well, one case is less than three, at least according to empirical studies.
Greece, as part of its broader austerity plan, has committed to bringing the minimum early retirement age up to 60 for everyone. And pension benefits for many will be reduced if they're claimed between 60 and 65.
In France, 60 is the kick-off point for most people to collect full pensions if they've worked 40 years. Those who started work in their teens can collect benefits as early as 56. But there is a proposal to raise the age to 62. French unions last week expressed their displeasure with the idea in a nationwide strike.