Voters in France and Greece have tossed out their incumbents and vented their unhappiness with poor economic performance. The mainstream media and the Left are interpreting this as a rejection of “austerity,” with the latter applauding the outcome and arguing that the U.S. needs to follow suit.
Not so fast.
Already capital markets are evincing their skepticism that Europe will get its manifest fiscal and banking problems under control without strong budgetary leadership from France and a continued dedication to executing a U-turn in Greece. Jittery capital markets are not good news for anyone, the U.S. included. U.S. exports and growth have already been damped by the European slowdown. A full-scale rejection of budgetary sanity in Europe would lead to capital-market revolt, with strong negative consequences for the U.S.
A spending spree in Greece or France would be damaging enough. But hardline French opposition to Germany in enforcing Europe-wide fiscal consolidation and reform would send the message that greater Europe is going the way of Greece, would likely spell the end of the euro, and spawn financial panic. As in 2008, Wall Street meltdown would spell a Main Street shutdown.
It would be even worse for the U.S. to follow suit. The federal budget has not had any austerity. True, the discretionary spending binge has been halted and there are promises to spend less in the future. But overall spending continues to grow and there have been no serious cutbacks to date. For the largest, most prosperous economy on the globe to accelerate toward a debt crisis would be disastrous.
More importantly, the goal should be reform, not austerity. The fundamental problems in the federal budget are driven by the large entitlement spending programs: Medicare, Medicaid, Obamacare, and Social Security. There are smaller, but important, problems in other entitlements like food stamps, insurance programs, financial regulation, and housing assistance.
As fate would have it, the European elections coincide with the House moving toward a vote on a “reconciliation bill” that would replace the January 2013 sequester with reduced mandatory spending. This, as it turns out, is exactly the right thing to do.
First, it replaces austerity with reform. The sequester would impose an across-the-board cut in discretionary spending — the annual appropriations. That is the definition of austerity.
Second, it replaces bad policy — thoughtless across-the-board cuts — with thoughtful, sound policy improvements. Getting the same budget impact with better policy should be the goal.
Third, it reforms programs largely by ensuring that outlays are targeted on their intended beneficiaries. At a time when budgetary resources are necessarily tight, no elected official should support loopholes that permit people to game the system and compete with rightful beneficiaries for assistance.
Finally, it does some of the work the supercommittee was supposed to accomplish. Recall that the August 2011 debt-limit deal created a supercommittee that was intended to find reductions in mandatory spending totaling $1.2 trillion over the next 10 years. The sequester was created as an enforcement mechanism — a spending-reduction method so undesirable that the committee would not fail. With President Obama essentially on vacation, the leadership vacuum meant that the committee failed, and the sequester looms. It is fitting to undo the sequester and replace it with mandatory-spending reforms that cut outlays.
Europe has problems, but it would be a mistake to pin them on austerity. It would be catastrophic to draw the conclusion that the U.S. should re-open the spending spigots. Instead, the focus must remain on reforms to entitlements and other mandatory-spending programs to control the projected spending explosion, while targeting benefits effectively to deserving beneficiaries.