This post has been corrected. See below for details.
The idea of expansive government and greater spending to prop up a still flagging economy has gotten little support this election year.
But two economists issued a warning Monday of a renewed recession if the government continues to restrict spending — particularly with the sharp tax increases and spending cuts scheduled for early next year.
“American austerity is precisely the wrong policy at precisely the wrong time,” Dimitri B. Papadimitriou and Greg Hannsgen wrote in their paper comparing American economic strategies with those in Europe. “Austerity policies can only make a recession worse, as government layoffs and wage cuts undermine already-weak consumer demand, investment and tax revenues.”
Papadimitriou is president of the Levy Economics Institute at Bard College in New York. Hannsgen is a research scholar at the institute.
Their paper deals with conservative U.S. economic policy, in general, but specifically warns against the precipitous $500 billion in tax increases and budget cuts schedule to take effect Jan. 2. Congress and President Obama approved the actions as part of an earlier deal to raise the debt ceiling.
Both political parties in the U.S. agreed to the austerity measures. And Republican presidential nominee Mitt Romney warns against expansive spending that he says will put American on “the road to Greece.”
The two academics disagree, saying that Greece and other European nations have exacerbated their fiscal problems by clamping down on spending when their economies had already stalled. They called those actions a “fiscal trap.”
They described the trap as a "cycle that moves from a decline in demand to falling tax revenues, which in turn engender spending cuts and tax increases. Spending cuts and tax increases undercut the economy further, and the cycle continues.”
President Obama has said he is confident that he and Congress will work out a deal after next week’s election — and before the new Congress is sworn in later in January — to stave off the tax increases and cuts. But the president and congressional Republicans have disagreed on how to proceed, with Obama insisting on tax increases for the wealthiest Americans and Republicans demanding only budget cuts.
[For the record, 1:28 p.m. Oct. 29: An earlier version of this post incorrectly said that President Obama wants tax cuts for the wealthiest Americans.]
Papadimitriou and Hannsgen called for repealing the so-called budget “sequester,” without finding equivalent offsets in the federal budget. They also recommended maintaining a holiday on payroll taxes and increasing government spending “appropriately and responsibly when the economy contracts.”