Predictably, the European welfare state crisis is making its way into the presidential campaign. So far, this influence is limited to ill-informed rhetoric. Using Bill Clinton as its talking head, the Obama administration is attacking Romney for being a herald of European-style austerity in America. From the Wall Street Journal:
Former President Bill Clinton, fundraising in New York City with President Barack Obama at his side, said congressional Republicans and presidential hopeful Mitt Romney have “adopted” Europe’s economic policies. “Their economic policy is austerity and unemployment now, and then a long term budget that would explode the debt when the economy recovers so the interest rates would be so high, nobody would be able to do anything,” Mr. Clinton said to a crowd of about 50 at fundraising event Monday for Mr. Obama’s re-election campaign.
This is yet another iteration of a widespread misunderstanding of what austerity is. Too many people in America seem to believe that spending cuts and austerity are the same thing. This is of course complete nonsense; anyone who would like to learn more about what austerity is may start by reading this paper.
You can say a lot of things about Romney’s policies – I have, e.g., raised questions about his 59-point plan – but one thing is absolutely clear: he is not the herald of austerity in America. If anyone will bring that fiscal disease ashore, it is the current occupant of the White House. (Listen up you Romney campaign workers!) To understand why, let’s begin with distinguishing between two different types of spending cuts with profoundly different effects on the economy. The first type of cuts aims to preserve government spending programs; these are the austerity cuts. The second type is designed to permanently, structurally reduce the size of government; these are the cuts that promote economic freedom.
These two types are mutually exclusive. The best way to understand why is to look at the motives behind the cuts. Austerity cuts, agian, serve a purpose that is entirely different from the purpose behind the structural budget cuts. They are designed to reduce the cost of existing entitlement programs by reducing, e.g., the level of income compensation in a retirement system (think Social Security) or the amount of services provided through a government-funded health insurance plan (think Medicaid). Taxpayers get less back for the same amount of taxes which means that government has not at all reduced its presence in the economy; on the contrary, it has increased its net drainage on the economy.
Sometimes these cuts are coupled with higher taxes, which aggravates the drainage. Europeans have experienced this over and over again in the past 30 or so years.
Legislators take to austerity cuts when their welfare state has grown too big to fit the economy. The symptom of this fiscal obesity is a budget deficit. They try to close the deficit by cutting spending, but since they want to preserve the welfare state they keep their spending programs in place. In countries with socialized health care government preserves its position as the single payer – it just reduces the amount of health care you can get for your tax money.
Austerity cuts do not work. They aggravate the problems that the cuts were designed to solve. Since the Democrats are the ones who want to preserve the American welfare state – a fact clearly spelled out in their alternative to the 2013 GOP budget – and since the American welfare state is morbidly fiscally obese, it is they, not Romney, who will bring austerity to America.
Romney backs the “Paul Ryan” budget, which is clearly not an austerity budget. On the contrary, the 2013 GOP budget which was designed in large part by Paul Ryan, is a very first step toward structural reforms to the American welfare state. These cuts actually represent a way for America to avoid the European austerity trap.
The Romney camp is well advised in taking the fight with the Obama camp over austerity. This is a golden opportunity for Romney to explain to the American people what the fundamental, ideological differences are between him and Obama: while Obama wants to preserve the welfare state, Romney wants to structurally reform it to give less room to government and more room to economic freedom, self determination and the opportunity society.
By the way, if President Clinton wants to talk about how Europe affects America, he has much more serious issues to address. The real European problem for Obama and Romney is very disturbing and will present America with an entirely new foreign policy challenge in the next few years.
But that’s another story.