A couple of years ago, the terms "too big to fail" and "bailout" were the trendy buzzwords. Currently, the in word seems to be "austerity." On both sides of the Atlantic, public officials and media pundits are debating the need for "fiscal austerity programs," i.e., shrinking government deficits by increasing tax revenues and/or reducing expenditures.
The term "austerity" is problematic. It connotes sacrifice and deprivation. While austerity programs include cutbacks in some people's lifestyles, it seems odd to say that learning to live within one's means is a sacrifice. What some call austerity is simply the recognition of reality: A society cannot chronically consume more than it produces.
Favoring austerity are those worried that today's budget deficits and national debts, if not corrected, will trigger an economic catastrophe through a sovereign debt crisis (i.e., the inability of governments to find buyers for their bonds). Opposing it are those who profess concern about the economic hardship that would be endured by innocent victims, and-or those who believe that the right economic policy is for governments to increase spending and budget deficits even more than they already have.
Traditionally, "austerity programs" have been International Monetary Fund bailouts of heavily indebted, virtually bankrupt Third World governments. For governments to obtain a loan, the IMF has required them to get their fiscal affairs in order by reducing their budget deficits.
Today, by contrast, we find that some of the wealthiest countries in the world require "austerity programs." But the dangerous indebtedness of Portugal, Ireland, Italy, Greece and Spain has deflected our attention from the United States' comparable degrees of debt and deficits. We, too, are in danger of a sovereign-debt and currency crisis.
We should be ashamed and alarmed that we are even talking about "austerity programs" for the United States. The very fact that we are doing so means that we have lapsed into a Third-World- style quagmire of fiscal incompetence and over-indebtedness. Like a banana republic, we have allowed a self-serving political class to spend tax dollars and borrowed funds to buy popularity.
Uncle Sam has behaved like someone earning $40,000 per year who -- with the help of borrowing -- has been spending $60,000 per year. Such a person has to consume less than $40,000 to be able to serve his or her debt obligations. So it is with Uncle Sam.
In recent years, our government has gone on a spending binge. As a result, today's economy is sluggish and severely hung over. We've been belting down doubles, but economists like Paul Krugman say that the cure for our fiscal hangover is to start chugging triples. No thank you.
Other pundits on the left are calling for tax increases instead of spending cuts. Their primary goal is the redistribution of wealth, and so they object to the alleged unfairness of spending cuts. This raises the issue of whether existing government payments to individuals ever were fair. There isn't space to debate this now, but the overriding problem is this: If federal spending isn't cut significantly, we will end up with a financial crisis and economic crack-up that will cause more economic pain for more people, including those that the redistributionists claim to want to help.
It is clear what we must do: slash government spending. Tax rates should not be raised while we are in this weakened economic condition.
What some call austerity is simply a return to fiscal sanity and economic reality. We cannot continue to spend more than we produce. The adjustments will be painful, but the longer we wait, the more painful those necessary adjustments will be.
The blame for the pain caused by austerity belongs, not to those who make the politically difficult decisions to cut spending, but to those in the past who made politically facile decisions to spend beyond our means. They are the ones who got us into this mess.
Hendrickson is an adjunct faculty member, economist and contributing scholar with The Center for Vision and Values at Grove City (Pa.) College.