The article Spain Proves that Austerity can never “Ensure” a Balanced Budget is by William K Black.
Austerity can never “ensure” meeting a budget target. Austerity means some combination of raising revenues and reducing expenditures. A severe recession produces large budget deficits by causing an enormous drop in tax revenues and a material increase in spending, e.g., in payments to the unemployed who are unable to find work. As the 25% unemployment rate demonstrates, Spain is in a depression. A recession typically occurs when private sector demand becomes so inadequate that the economy contracts and cannot employ large numbers of workers seeking jobs.
Reducing government expenditures during the recovery from a severe recession can cause public sector demand to decrease. Raising taxes during the recovery from a severe recession can cause private sector demand to fall. Both austerity measures can make the recession worse (or throw the economy back into recession). If the recession becomes more severe, austerity can cause the budget deficit to grow. Austerity can never “ensure” that the national budget deficit will fall. The assumption that it can do so ignores the dynamic interaction of the economy, fiscal policy, and the budget.
If the American public fails to learn this lesson, they might elect Mitt Romney who will surely bring this type of disaster to our shores. It is too bad, that the American people have already forgotten the disaster of 2008 from which the Obama administration rescued us. If it weren’t for the fact that Mitt Romney’s candidacy seems to be toast even before the convention, I would fear that we need something worse than 2008 for the American public to really get the picture. Maybe with 25% unemployment and breadlines stretching down Main Street in every city and town, Americans would get the picture faster than the people in Spain seem to be getting it.