How Austerity Could Fail Its Way Into US Hearts and Minds

Marshall Auerback compares the job numbers in the US to those in Europe and asks why the US is doing so much better (or failing less miserably).  One of the differences he highlights is the zealous dedication to fiscal austerity in Europe, compared to the relatively half-hearted, passive observance of doctrine in the US.

For people operating on the basis of loose stereotypes about the differences between the US and Europe, this has perhaps turned out to be surprising.  You might have assumed that Europe’s more expansive social welfare systems would be accompanied by more progressive approaches to fiscal or monetary policy.  But as Matt Yglesias observes, Europe is awash in some pretty conservative ideas about macroeconomic policy:

… the American right has lately fallen out of love with both J.M. Keynes’ fiscal stimulus ideas and Milton Friedman’s monetary stimulus ideas. Tussle between these two has dominated practical policymaking for decades in the United States, but if conservatives were to cast their eyes toward Europe they’ll find a continent where these ideas about demand-side management get short shrift.

(To muddy the waters a bit, due in part to the strength of the aforementioned social welfare supports the default fiscal policy stance in Europe is actually more expansionary than in the US.  More robust automatic stabilizers in Europe make a “do nothing” policy more fiscally expansionary, even while official or discretionary European policy is dedicated to deficit reduction and tight money.  In the US you have almost the reverse:  automatic stabilizers play less of a role in counteracting recessions, while official policy—in the White House, if not Congress—continues to feature calls for more discretionary stimulus.)

To add a cute little twist to this tale, the dismal failure of these contractionary policies in Europe could, perversely, help entrench the American right and its ideas for some time.  If Europe collapses outright or even continues to limp along, the US recovery is likely to get bogged down, which in turn makes the election of a Republican President in 2012 more likely.  And as Ezra Klein points out, if more robust catch-up growth emerges in the US some time in the next five years, the person sitting in the Oval Office, and his policy message, will get most of the credit.  So the abysmal practical failure of a set of policy ideas in Europe could actually end up entrenching those same ideas on this side of the pond.