Austerity is ushering in a global recession
When the world's economic powers are slipping toward a global recession, tighter austerity is not the answer.
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When economies stop growing or contract, the opposite occurs. Economies can fall into vicious cycles of slower growth, lower tax revenues, spending cuts, and even slower growth.Skip to next paragraph
Robert is chancellor’s professor of public policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Clinton. Time Magazine named him one of the 10 most effective cabinet secretaries of the last century. He has written 13 books, including “The Work of Nations,” his latest best-seller “Aftershock: The Next Economy and America’s Future," and a new e-book, “Beyond Outrage.” He is also a founding editor of the American Prospect magazine and chairman of Common Cause.
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That’s what we’re seeing now.
What’s worse, nations are so intertwined that when every major economy is slowing the cumulative effect is larger.
With anemic growth in America and Europe, the Japanese economy comatose, and emerging markets (including China) pulling in their reins, the vicious cycle could become worldwide. If global demand for goods and services continues to fall behind the potential supply we’ll see unemployment rise further and growth slow even more — especially in Europe and the U.S.
Central banks may try to reverse this course. Ben Bernanke and company at the Fed have committed themselves to near-zero interest rates for the next two years (not exactly a rousing endorsement of America’s economic prospects in the near term). Given the sharp slowdown in Germany, the European Central Bank might now feel some pressure to lower interest rates there – or at least delay the next increase.
But when growth is slowing so dramatically and unemployment is already high, monetary policy can’t possibly do it alone.
Without an expansionary fiscal policy, low interest rates have little effect. Companies won’t borrow in order to expand and hire more workers unless they have reasonable certainty they’ll have customers for what they produce. And consumers won’t borrow money to spend on goods and services unless they’re reasonably confident they’ll have jobs.
Fiscal austerity is the wrong medicine at the wrong time.
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