His latest policies promise to cut federal spending by 20 percent in four years – without any defense cuts and with tax rate cuts alongside cutting unspecified deductions. This is austerity with a punch – along European lines. The trouble is: we have a real time experiment in how austerity in a depression doesn't reduce debt but increases it:
Europe is choking off its own recovery by insisting on premature austerity. The first mistake was to agree on unrealistically tough deficit-reduction targets. The second mistake was—rather, is—to insist on compliance with those targets even though they are doing serious damage to Europe’s economy…
Europe’s most indebted countries don’t have the financial wherewithal to stimulate their economies, but creditor nations such as Germany do. Instead, they are joining in the austerity—compounding the problem instead of alleviating it. Germany managed to slash its budget deficit to 1 percent of GDP last year.
No country can run big budget deficits forever. But by aiming for fiscal rectitude when the economy is weak, Europe is causing an economic contraction that depresses tax revenue, forcing governments to cut spending even further in a lethal downward spiral.
I believe in serious cuts to defense and entitlements, alongside Bowles-Simpson scale tax reform and revenue enhancement, as the way to get back to fiscal sanity. But I am sane enough to realize that doing that two years ago would have been counter-productive. A depression is the one time you can allow spending to increase without worrying about debt. Europe is proving this. When do you shift gears? Only when the recovery is well under way – and even then, backloading serious entitlement cuts makes the most sense. But Romney seems to be doubling down on the European model, not the American one – as a way to cement his fiscal conservatism with the base. It doesn't reduce the debt; it can actually increase it.
The Dish 