As I pointed out yesterday, Europe, which has chosen a program of economic austerity as its path out of the Great Recession, saw its economic growth stall last year, and even contract during the fourth quarter, whereas the US, which has chosen a path of mild economic stimulus, is seeing its economy grow. In fact, there was more good news today, with weekly new jobless claims hitting the lowest mark in four years.
So what of our ballooning deficit? Will the Europeans, having taken their medicine, ultimately laugh all the way to the bank as the US economy collapses under the weight of our debt? That's what the Republicans argue as they push their agenda of dramatic spending cuts. But before adopting the austerity program that is currently strangling the economies of Europe, Republicans might want to look back to the economic policies of their patron saint, Ronald Reagan, for a glimpse of the virtues of priming the pump.
When Reagan proposed dramatically slashing taxes during the 1980 presidential campaign, particularly on businesses and high-earners, Democrats and many economists howled. But while Dems argued that his plan would slash revenue and balloon deficits, Reagan and his economic advisers responded not to worry—lower taxes would stimulate the economy, producing even higher revenues. In effect, we would outgrow the deficit.
George H.W. Bush dubbed it "Voodoo Economics" before later defending it as Reagan's VP.
So how'd it work? Republicans insist swimmingly. In fact, the budget was ultimately balanced and briefly moved into surplus during the Clinton administration, a period of economic bliss Republicans like to claim was entirely due to the hard work and vision of St. Ronald.
Whatever. Credit who you want. The point is, implicit in the cult-worship of Reagan and his economic policies is the acknowledgement that one can prime the pump through deficit spending enough to eventually outgrow the accumulated debt. So... if deficit-causing tax cuts can stimulate the economy, why not deficit-causing spending? And as long as interest rates and inflation remain low, how is Obama's stimulus agenda really any different than Reagan's, when it comes to pumping money into the economy at the expense of the budget?
Whether government spending or tax cuts is a more efficient stimulus tool is another discussion (although I think the stronger argument is for the former). Either way, economic growth cures all. And it's hard to see how one can possibly achieve short term economic growth through the European-style austerity programs the Republicans advocate.