Debate: How To Fix The Economy

Jim Randle | Washington
May 16, 2012

French and Greek voters, angered by austerity efforts, are the latest to push European governments out of power. Although cuts in government spending and services are deeply unpopular and cause economic problems, those who favor austerity say government budget deficits are worse. Economic experts are debating both sides of the issue.

Austerity measures angered many Greeks, including some who threw gasoline bombs and rocks at police.

They protested plans to cut government spending on services and raise taxes in a bid to repay loans. Those loans were needed to make up for deficits when government spending exceeded revenue. .

Nobel prize-winning economist and author Paul Krugman says austerity is the wrong way to go. "We have had an unprecedented fall in public employment, unprecedented cutback in purchases of goods and services," he said.

George Mason University scholar Verinoque de Rugy says Japan’s experience shows that government spending increases costs but not growth.

"They have, for years and years and years, tried to get out of their recession, or their slow or non-growth, through spending and spending and spending and being in debt and that has not worked," De Rugy said.

During recessions, many governments spend money on public infrastructure to create jobs and spur long term growth. But De Rugy says, if government spending boosts demand and growth during recessions, it should not be needed when the economy is strong.

"In times of boom or economic growth, government should be cut. The size of government, government spending, should go down. And that never happens," De Rugy said.

German Chancellor Angela Merkel says governments that spend more than they take in must eventually pay back the loans they use to cover their deficits. Austerity advocates argue that, without spending cuts, lenders will lose confidence they will be repaid. That lost confidence could mean future loans will be unavailable or expensive.

Merkel’s opinion is important here because Germany is Europe’s largest economy and the main contributor to the emergency loans used to bail out economically troubled neighbors.

But Krugman says austerity has failed. "We have had one hell of an experiment in austerity and the results are in.... Austerity has been contractionary with a vengeance,” he said.

Some voters in Germany may share Krugman's views. Merkel's political party lost a state election recently where arguments about spending and austerity were part of the political debate.