Coordinated investment as an alternative to doubling down on austerity’s failure

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).


  • Ptracy_4

    I have questions with
    which I hope someone can please help me. If the money for stimulus is borrowed,
    why is any stimulus generated? Wouldn’t the borrowed money have been spent on
    consumption or investment anyway? If not, what would have happened to it? And
    if the borrowed money does produce stimulus, why not get the money through
    taxes instead?

    Thank you.

  • Justin Holt

    To Ptracy,

    Stimulus money according to Modern Money Theory is not borrowed. It is created by the Treasury electronically. Thus, it does not come from a pool of current funds. So stimulus spending, that is state spending buys assets and provides incomes. Also, if one taxes and spends as opposed to just  deficit spending this has less of a stimulus effect since we slow the economy by taxing and try to speed up the economy by spending. It’s like having the heat and the AC on at the same time. See this blog for more info: http://bilbo.economicoutlook.net/blog/?p=332

  • Steven Nagourney

    US IP is already turning downward
    on a year-over-year percentage change basis Industrial production is still off 5% from its peak and no higher than in 2005.Adding to the recessionary woes of 2012 will be a retrenchment in capital spending.  Accelerated depreciation of 100% was permitted for all capital expenditures provided the items purchased were installed by 12/31/11.  This year the accelerated depreciation drops to 50%, resulting in a dramatic increase in the after-tax cost of such outlays.  If the past is any guide to the present, businesses have worked this one-year tax gimmick to their advantage, just as they did previously.  Firms looked into 2012, and in some cases even further, and pulled those outlays into 2011.  This creates an artificial boom/ bust cycle which will be evident in 2012.  The 100% accelerated depreciation pertained to all sorts of capital goods from passenger cars and light and heavy trucks, on the low tech side, to sophisticated computers and related equipment, on the high tech side.  Therefore, the flat fourth quarter expenditure level should give way to a sharp decline in the first half of 2012. This weakness would have occurred regardless of the other factors influencing capital spending, but with exports faltering and corporate profit margins being squeezed, the fall- off in business investment is likely to be sharper than the normal expiration of such a transitory tax benefit. Therefore, the 2012 recession will be caused by the combination of retreating capital spending, lower consumer spending growth, declining exports, and a spending drag from all levels of government.