Sorry Liberals, End of Austerity Only Highlights the Fialure of Tax Hikes

The era of austerity appears to be coming to an end. As Neil Irwin writes for the Washington Post:

“The ECB appears set to hop on the easy money train in its meeting on Thursday. And it wouldn’t be shocking if, either this week or in a future month, the ECB seeks out some more innovative tool to funnel loans to the smaller businesses that are being frozen out from getting credit. The institution that most eagerly embraced austerity and tight money three years ago, in other words, is inching away from it as well.”

This is a huge policy shift, and one that should not be overlooked. The problem is that nobody, especially on this side of the Atlantic Ocean, seem to quite understand what austerity is.

Mark Blyth, writing in Foreign Affairs, highlights the crux of the misunderstanding in an article attempting to show the development, and ultimate unraveling, of the idea that austerity could fix Europe. Blyth defines austerity as “the deliberate deflation of domestic wages and prices through cuts to public spending” in order to “reduce a state’s debts and deficits, increase its economic competitiveness, and restore what is vaguely referred to as “business confidence.”

Yea, that covers about half of it. Somewhere along the line austerity came to be associated solely with spending cuts. That’s not only a wrongheaded definition, it’s a dangerous misunderstanding that threatens to permanently color the policy debate. And frankly that’s exactly what liberals like Paul Krugman want when he writes a column like this:

“Those of us who have spent years arguing against premature fiscal austerity have just had a good two weeks. Academic studies that supposedly justified austerity have lost credibility, hard-liners at the European Commission and elsewhere have softened their rhetoric. The tone of the conversation has definitely changed.

. . . So this seems like a good time to offer a sort of refresher on the nature of our economic woes, and why this remains a very bad time for spending cuts.”

Yes, framing the so-called failure of austerity as solely a failure of spending cuts makes it sound like conservatives are on the losing end of the fiscal argument. But what agenda-driven individuals like Krugman and others purposely neglect to mention is that European austerity is defined mostly by tax hikes, not spending cuts.

Indeed, not a single country in the Eurozone is spending less as a percentage of GDP than it did five years ago. By contrast, the average tax burden has increased 5 percent in the three years from 2007 to 2010. To highlight the disparity, calculations done by Mercatus Center scholar Veronique de Rugy found that for every 1 euro of spending cuts there have been 9 euro worth of tax increases!

Is it really all that surprising that a one-two-punch of higher spending and soaring taxes is enough to knock an unstable economy into a recession? Especially when the countries that comprise the Eurozone lack certain policy tools given its status as a result of being in a monetary union?

To answer my own rhetorical question – no, it’s not surprising in the slightest. Higher taxes are bad for business, especially in a recession, as President Obama has himself admitted. But liberals are doing everything they can to disassociate taxes from the notion of austerity because it seriously impinges on their big-government ambitions.

You see, taxes take money out of the economy just like spending cuts do – only in an even more harmful way since you’re taking dollars out of the private sector which carry a higher economic multiplier. Yet somehow liberals want to be able to continue to push for tax hikes, as they successfully did earlier this year with the expiration of some of the Bush-era rates, while blaming Republicans for any economic contraction that results. Part of that strategy is an attempt to brand the failing austerity policies of Europe as solely a consequence of spending cuts.

That’s not true. That’s not right. And conservatives shouldn’t stand for it.