Austerity Is Overrated

by Stuart Shapiro

Nobel Prize winning economist Joseph Stiglitz is arguing that the U.S. and European focus on reducing deficits is misguided until the economy improves.

Unfortunately, the New Year’s resolutions made in Europe and America were the wrong ones. The response to the private-sector failures and profligacy that had caused the crisis was to demand public-sector austerity. The consequence will almost surely be a slower recovery and an even longer delay before unemployment falls to acceptable levels. There will also be a decline in competitiveness. While China has kept its economy going by making investments in education, technology, and infrastructure, Europe and America have been cutting back.

It makes us all feel good to say we should balance our budgets and live within our means.  Well, all of us except the least fortunate who will suffer the most under such a program.  In the long run, deficits and debt are certainly a concern, and long-term measures to stabilize them are worthwhile.  But as Galbraith famously quipped, “In the long run, we’re all dead.”  We have to get through the short run in order to have the luxury of worrying about the long run.  And in the short run, our top two priorities should be spending on investment goods like infrastructure, education, and research and spending to care for those most hurt by the financial crisis.  Even if it increases the deficit.

By: Stuart Shapiro

Stuart is a professor and the Director of the Public Policy
program at the Bloustein School of Planning and Public Policy at Rutgers
University. He teaches economics and cost-benefit analysis and studies
regulation in the United States at both the federal and state levels.
Prior to coming to Rutgers, Stuart worked for five years at the Office
of Management and Budget in Washington under Presidents Clinton and
George W. Bush.