For years now, economists like Paul Krugman have been criticizing countries in Europe for engaging in too much austerity during the downturn — that is, enacting tax increases and spending cuts while their economies were still weak.
But after this week’s fiscal cliff deal, the United States is now on pace to engage in about as much fiscal consolidation in 2013 as many European nations have been doing in recent years — and more than countries like Britain and Spain.
A back-of-the-envelope calculation suggests Congress has enacted around $336 billion in tax hikes and spending cuts for the coming year, an austerity package whose total size comes to about 2.1 percent of GDP. (That’s merely the size of the cuts and taxes; it’s not necessarily the effect on growth.)
This includes the expiration of the payroll tax cut, which will raise about $125 billion this year. It includes $68 billion in scheduled cuts to discretionary spending from the 2011 Budget Control Act. It includes $24 billion in new Obamacare taxes and $27 billion in new high-income taxes. And it includes about $92 billion from the now-delayed sequester cuts — assuming that these either take effect or are swapped with other cuts.
Of course, the United States would be facing much, much more austerity if Congress had done nothing about the fiscal cliff this week and all the Bush tax cuts had expired. But even after the deal, we’ve still got the payroll tax increase and an array of spending cuts coming down the pike. Those aren’t minor. And economists expect them to exert some drag on the economy, even if it’s unclear exactly how much.
So how does the sheer scale of the U.S. austerity program for 2013 compare to what European countries have been doing over the past few years? We can get an approximate sense by looking at this paper from the European Trade Union Institute on the size of Europe’s various fiscal consolidation programs. A few comparisons:
Fair warning: These comparisons are far from perfect—finding a common baseline is tricky, and not all austerity measures have an equivalent effect on growth. But a few broad points stick out.
Thursday, January 3, 2013
Brad Plumer @ WaPo Wonkblog:
Robert Kuttner @ American Prospect:
Beyond yesterday’s narrow escape from the dreaded fiscal cliff are … more cliffs. President Obama and Congress averted one fiscal calamity of tax-hikes-for-all only to face even steeper cliffs—the sequester, the debt ceiling, the Social Security shortfall, ad infinitum. It is a fiscal Wizard of Oz, an extended odyssey with perils on every side.
Some, like our colleague Robert Reich, have argued that it would have been better to “go over the cliff”—let tax hikes briefly take effect on everyone, thus increasing pressure on Republicans—rather than to make this agreement.
Mercifully, Obama backed off any “grand bargain.” The deal was a defeat not only for the Republicans but for the Fix the Debt corporate gang. It spared the economy cuts in Social Security or Medicare (for now).
But on the other side of the ledger, it included no agreement to raise the debt ceiling. The impact of the automatic “sequester” of $120 billion in other spending cuts was postponed only 60 days. These issues will now have to be negotiated separately.