May 4, 2012
The Austerity Misdirection
Fixed exchange rates are especially unforgiving of welfare states that destroy their ability to create wealth
You might think there exists, among onlookers to Europe's struggles, a debate between fans and critics of austerity. There's not.
Across the spectrum, most have believed from the beginning that it was a very bad idea to squeeze economies with higher taxes and sharply reduced outlays to pay back debts that were unpayable.
Almost universal has been agreement that policy should focus on cutting debt, even if it means default, and restoring growth, not squeezing blood from a stone.
What difference has existed is the old difference between Keynesians and their critics. Keynesians advocate (even in the circumstances) increased government borrowing and spending as the way to restore growth. Their supply-side critics favor tackling impediments to growth with more efficient tax codes, deregulation and privatization of state-owned assets.
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