Can the United States and Europe cut their way to economic prosperity? Probably not.
Posted Monday, June 14, 2010, at 12:06 PM ET
If British voters thought they had replaced the dour visage of Labour Prime Minister Gordon Brown with an optimistic one in fresh-faced Tory David Cameron, they were sadly mistaken. On June 7, the new PM Cameron brought down the hammer, telling the British public that the most urgent issue ahead "is our massive deficit and our growing debt. How we deal with these things will affect our economy and our society, indeed our whole way of life." With a deficit set to top 11 percent of gross domestic product this year, and a debt of $1.12 trillion and rising, Cameron prescribed a harsh regimen of spending cuts and possible tax increases. Tony Blair's motto was "Cool Britannia." Cameron's is likely to be "Austerity Now!"
At first, most developed economies responded to the global financial crisis in 2008 and '09 with stimulus: They increased government spending and cut taxes. John Maynard Keynes provided the playbook: In slack times, the government needs to fill in for diminished private demand. But 2010 is shaping up to be a year of parsimony. To win support for an international bailout, Greece enacted a tough package of budget cuts and tax increases. Spain's left-wing government at the end of May slashed civil-servant pay by 5 percent and froze pensions—even though one in five Spaniards is out of work. Recently, German Chancellor Angela Merkel unveiled a $144 billion package that would raise taxes on airline flights and cut defense spending and public works—and Germany's deficit is a manageable 5 percent of GDP. "We can't have everything we want if we are to shape the future," Merkel said.
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