Does Austerity Work? Senate Panel Discusses the Impact of Deficit-Reduction Policies

WASHINGTON – The debate over the impact of austerity on the economy continues to divide both lawmakers and economists as evidenced by a Senate hearing about the fiscal and economic effects of policies designed for deficit reduction.

Last week’s hearing was convened by Sen. Patty Murray (D-Wash.), the Senate Budget Committee chairwoman, as part of her ongoing campaign to persuade Congress to reduce some of the spending cuts and bolster the economy through a combination of tax increases and spending reduction.

The panel had on hand former Treasury secretary and Harvard economics professor Larry Summers, among other economic policy experts.

Many of the proposals included in Summers’ testimony aligned with President Obama’s latest budget, in which the president called for the replacement of the sequester with a combination of tax increases and other spending cuts.

Summers, a potential frontrunner for Federal Reserve chairman, said that the automatic budget cuts known as the sequester do not make macroeconomic sense for deficit reduction. He also called for corporate tax reform and said the U.S. must take advantage of low interest rates to maintain and upgrade the nation’s infrastructure.

“This is not the time for austerity or further cutbacks,” Summers said. “A balanced approach that focuses appropriately on supporting demand in the short run while containing long run budgetary pressures in a balanced way for the medium and long term will best promote growth, best increase confidence, and best offer us the prospect that…we can be in a position to start paying down the federal debt.”

The director of the nonpartisan Congressional Budget Office (CBO) told Congress in February that sequestration will cost 750,000 jobs this year. In its May report, the CBO estimated that for 2013, in the absence of further changes to tax and spending laws, the deficit will be $200 billion smaller than the $485 billion figure projected in February. According to the report, the deficit will fall from seven percent of the economy in 2012 to 2.1 percent of the economy by 2015.

The CBO’s latest projections, Murray said, show that the case for austerity in a time of economic weakness is wrong.

“Recent changes in deficit projections have made it clear that, despite the claims of some of my colleagues—there is no short-term debt or deficit crisis,” Murray said.

Salim Furth, a senior policy analyst at the Heritage Foundation, challenged Murray’s position, arguing that tax increases harm the economy and reduce future growth. In addition, he said that most of Europe is not experiencing austerity at all.

“Since 2007, few governments have pursued anything like a comprehensive austerity agenda. Most have spent more and some have taxed more. Only three of 28 OECD countries have policies that would lead to a budget surplus and a strong economy... and 18 countries have instead expanded their deficits,” Furth said.

He said that since taking effect in March, sequestration has had no impact on overall economic growth or employment numbers in the U.S.

“Lower government spending can bring debt under control and it can promote investment and subsequent growth,” said Furth, citing research from the Organization for Economic Cooperation and Development (OECD) and the International Monetary Fund.

“The 2013 budget sequestration was fully designed policy; however, its artlessness does not outweigh the fact that it is a step in the right direction on spending,” Furth said.