Austerity or growth? How to React to a Crisis


Austerity or growth? Worry about the debt or create jobs? These are two questions that economists and politicians are debating. The voters in the recent French election, voters in the upcoming U.S. presidential election, the people in the streets of Athens, Madrid and elsewhere are answering these questions in their own way. Behind these choices are serious attitude differences about what to do in a crisis.

Austerity amounts to turning inward, not being confident that by reaching out and spending more wealth will be created. The assumption behind austerity is pessimistic and negative: doing less will do more; cutting taxes will lead to more liquidity which will lead to more spending which will create more jobs. Those who favor austerity tell us: "We are in a crisis; there is a large debt; government spending got us there, therefore reduce government spending.".

Growth, on the other hand, says that we should be confident, reach out and spend more. If we are in an economic crisis it is not because we have spent too much, but that we have not spent enough. If the government spends more to create jobs, consumers will have more money to spend which will help businesses which will increase wealth by increasing tax revenues which will reduce the debt. To make money you have to spend money.

The difference in attitude between these two economic theories can be seen not just in the recent economic crisis but also in relations between Russia and the West. Vladimir Putin has recently been re-elected president of the Russian Federation. Instead of congratulating him right away as he did with Francois Hollande, President Obama took several days to call the newly elected leader of the world's ninth largest economy, sixth largest by purchasing price parity, not to mention the holder of huge oil and gas reserves as well as a considerable stockpile of nuclear weapons. Relations between the United States and Russia are not going well. The U.S. ambassador has been coldly welcomed in Moscow. Differences over missile shield placements continue to simmer. The United States did not reach out.

What to do? Austerity or growth? President Obama hesitated to call. Mr. Putin responds by announcing he will not attend the G-8 meeting at Camp David May 18-19. President Putin will certainly not be attending the upcoming NATO summit in Chicago May 20-21 since the NATO-Russia partnership is going nowhere. Turn inward or outward? Reach out or not when there is a crisis?

The Great Depression began, we are often reminded, when countries stopped trading with each other. In other words, by turning inward behind protectionism, countries made the situation worse. What we are seeing economically as well as politically is similar. Instead of moving forward, reaching outward, countries are turning inward and then hiding behind patriotism. While the world is becoming more and more interdependent, attitudes are becoming more and more nationalistic and protectionist.

And it is not just International Geneva - the Rome of Multilateralism - which will suffer the consequences.




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  • Yes, but thank God for the tradition of Camp David summits- great people can listen, safe from politics and its dirt.

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