Fiscal Cliff Solutions: Are We About to See European-Style Austerity?


There still seems to be much confusion about the fiscal cliff (or, as I prefer, austerity crisis), which prevents us from properly organizing our thoughts about the ways to overcome the crisis and ultimately to move beyond this fiscal impasse.

There are a few different dimensions to the fiscal cliff: deficit reduction, long-term economic growth, and the ever-present political jockeying of both parties to gain some advantage over the other (not to mention mollifying their various constituencies). The problem with the fiscal cliff is that it does too much to alleviate the issues of one dimension (deficit reduction), while taking a serious toll on another dimension (economic growth), and surely it is only a matter of time before new economic growth problems become new political problems (not to mention general public sentiment toward tax increases). The balancing act of fiscal cliff deliberations is how to achieve some progress on deficit reduction, of which there are many avenues, while averting shocks to the economy. Further, there is a political reality that must also be addressed through the negotiation and in the final agreement.

First we must tackle the relationship between deficit reduction and economic growth. For many years, fiscal conservatives have taken great pains in advocating the need for austerity measures in order to get our fiscal house in order. Austerity is the process of reducing government expenditure, and is used to reduce deficits and slows the growth of the national debt. Deficit hawks (or austerity hawks) have argued that dramatically reducing government spending will actually promote economic growth as "confidence" increases and the public and investors, correspondingly, view future economic conditions more favorably.

Noah Smith points out that the arguments that conservatives have offered against the positive effects of stimulus are the same arguments that should reassure conservatives that the effects of the fiscal cliff should be negligible. These arguments have been swiftly pushed aside during the fiscal cliff debate. All of Washington is in agreement: the fiscal cliff is an impending disaster that must be avoided. Some might wonder why conservatives are against committing to the fiscal cliff as the smorgasbord of austerity that they were looking for.

Why the change of mind? If conservatives are looking for austerity measures to bring down the deficits that they are so dearly worried about, why is it that, as Suzy Khimm reports, “both sides appear to be embracing an argument that’s been rather contentious in recent years: that fiscal stimulus boosts short-term economic growth and budget cuts hurt it”?

Admitting as much brings into question conservative anti-stimulus arguments and their approach to deficits as a whole. Either we can and should spend more in the short-term to generate economic growth — and the job creation that follows — or we shouldn’t because changes in government spending do not affect changes in economic growth.

There is a reason why I prefer the phrase "austerity crisis" over "fiscal cliff," and it lives within the relationship of the dimensions described above. The fiscal cliff is an austerity crisis because it commits us to substantial contractions of government spending in a short period of time, which will have negative effects on economic growth and likely cause a recession. Those who decry the Keynesianism of the Obama administration must admit that it is rather Keynesian to worry about the effects of the fiscal cliff.