Former British Prime Minister Gordon Brown has a terrific piece in today’s Washington Post on European policymakers’ “fundamental miscalculation: a wrong-headed conviction, widely held across Europe, that if austerity is failing, it is because there is not enough of it.”
The failure of the “expansionary austerity” hypothesis has been growing increasingly apparent for quite some time, most recently highlighted by the euro zone economy falling back into contraction in the fourth quarter of 2011. More and more countries—including Italy and Spain—are projected to slide back into full-blown recessions. Via Ezra Klein, it’s clear to see that industrial production indices in the U.S. and the euro zone were closely tracking one-another until starkly diverging in the summer of 2011: U.S. production has continued to rebound and European output has fallen markedly.
But beyond this fiasco, Brown’s policy prescription is worth highlighting. Along the lines of advanced economies’ central banks coordinating monetary loosening and liquidity infusions during the financial crisis, Brown proposes coordinated fiscal expansion: “Europe and America should expand investment in infrastructure.” Now that would actually begin to address the global aggregate demand slump. This isn’t just Brown taking cheap political shots at Prime Minister David Cameron; this is sound macroeconomics. A massive U.S. public infrastructure project ($1.2 trillion) is also favored by prescient economist Nouriel Roubini, who similarly pegged “a front-loaded fiscal austerity that will sink us in a severe recession,” as the worst economic policy idea currently being floated.
Congress should be learning from Europe’s experience before we stray too far down the austerity path, as federal fiscal policy is all too set to do (state and local governments have already been down this path for years).