MARGARET WARNER: And now two perspectives on the wisdom of austerity measures to solve debt crises.
Simon Johnson, former chief economist for the IMF, is a professor at the MIT Sloan School of Management and a fellow at the Peterson Institute for International Economics. Mark Weisbrot is co-director of the Center for Economic Policy and Research, a liberal think tank.
And welcome to you both.
SIMON JOHNSON, Peter G. Peterson Institute for International Economics: Thanks.
MARGARET WARNER: Let’s just start with the broad question.
For a debt-strapped country, like Greece, a debt-strapped country, do austerity — an austerity regime, a combination of tax hikes and deep spending cuts, does it work?
SIMON JOHNSON: It’s painful. There’s no question about it. And you’re seeing that right now in Greece.
But, sometimes, unfortunately, it’s unavoidable. You can argue about the pace of the austerity. We can perhaps find a better way to do it. You can have more financial support from outside the country. But when you’re in the kind of situation that Greece is in, it’s very hard to find any alternative that doesn’t involve some austerity.
MARGARET WARNER: Mark Weisbrot.
MARK WEISBROT, Center for Economic Policy and Research: Well, I think there are always alternatives.
If your doing something that is deepening your recession, and your unemployment has doubled, your economy is predicted to shrink just as much next year as last year, and you’re making these massive budget cuts and tax increases, there is an alternative.
MARGARET WARNER: But are you saying it doesn’t work?
MARK WEISBROT: Yes, it doesn’t work.
Well, I think — and I Simon would agree, too, and most economists would say that, in the short run, if you cut taxes — if you raise taxes and cut spending during a recession, you’re going to make the economy worse. So, the only argument for it is the one that he made, that there’s no other alternative.
But they do have an alternative. You know, Argentina, for example went through the same thing for three-and-a-half years, and it didn’t work, and they ended up defaulting on their debt, and the economy shrank for one more quarter, and they did quite well. Over the next six years, the economy grew 63 percent.
MARGARET WARNER: Before we get into all the alternatives, let me just ask a little bit more about an austerity regime.
And, Simon Johnson, how — if fewer people are working, which is certainly the case in Greece, though not in Britain, but if fewer people are working, and, therefore, they’re paying fewer taxes, how can you — how can the government actually grow its way out of a deficit?
In other words, what does Greece’s example tell us? I mean, they have had, what, now two years of straight recession.
SIMON JOHNSON: Look, there’s nothing good or commendable about the Greek experience. It is horrible for all the people involved.
But when you have had a country that has massively overspent and borrowed heavily from foreigners to finance their overspending, you have two choices. Either get the foreigners to lend you even more money, if you can persuade anyone, private or official, to do that — congratulations — or you have to cut back on your spending.
And cutting back on your spending means some private cutbacks and, in the case of Greece, where the government have massively over expanded, you need to have some government cuts. It’s very, very unpleasant, but hard to avoid.
MARK WEISBROT: Well, the alternative is going to happen, actually. There is going to be a default of some sort and a restructuring of the debt. So the question is why do they have to go through all this punishment now?
What’s the point of putting them through years of high unemployment, all the social costs associated with that, and all the cuts, and all the pain and cutting health care spending? And if they’re going to default anyway, why not arrange that now? The markets believe they’re going to default.
And I think everybody, except the European Central Bank, probably believes it.
MARGARET WARNER: Is there an argument to be made, though, that the Greeks were living way beyond their means, that these kinds of cuts would be necessary no matter what?
MARK WEISBROT: Well, obviously, there was a problem with tax collection there. But, really, if you look at it, most of what they’re going through is the same as the other weaker economies in Europe — Portugal, Spain, Ireland.
It was caused by the recession and the financial crisis of 2008 and 2009. So, you know, would their debt have been sustainable if that hadn’t happened? Maybe. But the point is they’re in that situation. You know, for an individual, we have bankruptcy, right?
So, for a country, there should be a way to get out of it. They have to get out of it by growing.
MARGARET WARNER: Simon Johnson, let’s look at Britain, because what does its experience tell you? Its growth actually has dipped since the austerity measures came in, though they’re still growing.
SIMON JOHNSON: Well, certainly, the fiscal contraction in the U.K. has slowed growth, no question about it.
What one should expect, though, and what they’re betting on is that the Bank of England will make monetary policy easier. And they’re also hoping that the pound will depreciate.
Remember, Greece is locked into the Eurozone. They can’t move the exchange rate. Now, maybe that is a bad idea. Maybe they shouldn’t have made that decision 10 years ago, but they made that decision. The U.K. is not bound in the same way. So they have some extra wiggle room there, and that is going to help them a lot.
MARGARET WARNER: Now, is there a lesson in this, which is, timing is everything? In other words, when you decide to undergo deep spending cuts and raising your taxes, it might work if you don’t have your back against the wall, as Greece does? Is timing important here?
SIMON JOHNSON: I think everyone is in favor of fiscal responsibility, which includes, sometimes, you have to raise taxes and, sometimes, you have to bring spending under control. That is true of all countries.
If the financial markets turn against you, if interest rates go up, as they’re going up, for example, this week in Italy, then, all of a sudden, you say, oh, my goodness how is Italy going to continue to finance its big budget deficit, the fact that it needs to borrow in order to keep the government operating?
They need to have some austerity. Will they do a little bit early, get ahead of the game, calm the markets down, or will they wait until things get out of control? That’s the big question.
MARGARET WARNER: And you’re saying, in the past, that’s — that’s where it has worked?
SIMON JOHNSON: Fiscal responsibility works. We have built stable, well-functioning democracy on the basis of fiscal responsibility, not having runaway budget deficits. And so fiscal responsibility is the ultimate in anticipating and preventing the need for austerity.
MARGARET WARNER: So, what about the British example? That’s what they’re trying to do, get ahead of this curve.
MARK WEISBROT: Well, as Simon said, they had — they do have — they have their own currency, so that helps.
But, more importantly…
MARGARET WARNER: But they haven’t devalued.
MARK WEISBROT: Well, the currency is a lot lower than it was two or three years ago, and that has helped them.
And, in fact, the economy has been flat for the last two quarters. And if…
MARGARET WARNER: A slight uptick.
MARK WEISBROT: Well, for the six-month period, it’s about flat. And it would have shrunk if not for the net exports. So that’s related to the fall in the currency.
But, more importantly, they have control over their monetary policy, which these other countries don’t because the European Central Bank control it. And they also — Greece is being forced to adopt policies that really shrink the economy.
Imagine if we were — you know, we had already cut our deficit by $800 billion, and then we were going to cut another or raise taxes for another $1.7 trillion over the next few years, and lay off another 20 percent of the federal work force after already getting rid of 10 percent.
I mean, this place would be a real mess. That’s what they’re doing in Greece. And I think there are a lot of alternatives that are better than that.
MARGARET WARNER: So, going back to Mark Weisbrot’s original point, do you think Greece will ultimately have to either — default, either in a hard way or a soft way, renegotiate the terms, or just get out of the Eurozone and devalue?
SIMON JOHNSON: Well, I certainly think there will be some sort of orderly restructuring of their debts. In fact, I have been calling that — for that for several years. I’m in favor of that.
But the problem is they need to borrow money in order to stay just where they are. If they go to, let’s say, the Argentina scenario, where they say, we’re not going to pay any of our debts, they still have a deficit. And they can’t finance a deficit. They have to do more fiscal contraction than in this current very horrible scenario that they’re in right now.
The basic political problem in Europe is the Germans will not lend them any more money. If the Germans are willing to hand them 200 billion euros, yes, a lot of these options are available. But they’re not. And the IMF doesn’t have the money and shouldn’t make that kind of decision, including with U.S. taxpayer money. So, the Greeks don’t have good alternatives.
MARGARET WARNER: Quick retort on that.
MARK WEISBROT: Well, actually, technically, if they did stop debt payments, if they stopped interest payments and some principal, they would be — they wouldn’t have to borrow, actually. So, they would have a problem with the default. It would be a big mess, but they wouldn’t necessarily have — be dependent on borrowing at that point.
SIMON JOHNSON: No, they still — they still have a primary — they still have a primary deficit.
They need financing in order to keep the government going in this — very difficult circumstances. They have made a big fiscal adjustment, don’t get me wrong. The Greeks have done a lot. The Greeks have felt a lot of pain. But, unfortunately, they don’t have many other good choices.
MARGARET WARNER: All right, we have to leave it there.
Thank you both very much, Simon Johnson, Mark Weisbrot.
MARK WEISBROT: Thank you.