Opinion and Economic Analysis

HICKS: Policy choice boils down to austerity or austerity

May 19, 2012

As my predictions of new recession threats (appearing in this space last week) seem more ominously accurate, I think it useful to clarify the reasons for the problem in Europe, the policy choices available, and how this relates to economic challenges in the United States.

There is a debate in Europe about an austerity package. Austerity in this case means asking public employees to delay retirement with nearly full pay and benefits until they are in their late 50s or asking college students to pay upwards of 15 percent of their college costs. Oh, the inhumanity!

As shocking and cruel as they sound, these steps toward austerity are not what has caused Europe’s recession. On the contrary, because austerity has not yet been enacted, the real fear is that it will be rejected at the polls and economic mayhem will ensue. And that has caused the recession in Europe, a run on Greek banks, and more economic woes worldwide.

Policymakers have few tools to stem the recession. In less abnormal times, tweaking interest rates, cutting taxes or boosting infrastructure spending might dampen the short-term effects of a downturn. Whether these are wise policies is an interesting matter but irrelevant in current circumstances. Any such efforts are apt to disappoint in a world already awash in government spending.

The plain reality is clear: Austerity is coming to Europe, either as a planned and thoughtful exercise or through fiscal ruin. To be sure, there will be some makeshift policies to help growth, but nothing will derail austerity nor meaningfully soften the recession.

Similar problems loom at home. In California, this year’s deficit is now projected to be $16 billion, nearly double the January forecast. That is not due to low taxes, but to businesses and households fleeing the state.

California’s deficit totals slightly less than 1 percent of its economy. Greece’s is 1.5 percent—and its unfunded debt is an astonishing $10,800 per capita; California’s liability is $13,500 and Illinois’ is $12,500. Clearly, austerity looms for many American states as well. (It is worth noting that Indiana’s per capita unfunded liability is around $2,200, a tractable figure that leads to our nearly perfect credit rankings.)

The world did not become this way by accident. Promising things you cannot deliver is a tried-and-true route to electoral success among unsophisticated voters, at least in the short run. I hold much hope that at some point folks see plainly enough the effect of doing more of the same, and vote accordingly.

Simply put, we’ve promised too much to too many for too long.

About 40 states and almost every town and county cannot meet pension obligations for their workers. So they will have to pony up huge sums of money to pay retired teachers, firefighters, police officers and parks workers, or slash their benefits. Most places must do both, and it is time to acknowledge that.•

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Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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