Will the U.S. Follow Europe’s Austerity Lead?

BY Paul Solman  December 16, 2010 at 2:05 PM EDT

Paul Solman answers questions from the NewsHour audience on business and economic news most days on his Making Sen$e page. Here’s Thursday’s query:

Name: Sharon McDonnell

Making Sense

Question: Paul, I apologize if I missed a step in the unfolding narrative but I’d like your help. Are the economic woes in U.K. and France necessitating significant cuts and policy changes due to the recession– or should I say facilitated by the recession? Is the global recession primarily due to the actions of Wall Street and bankers in the U.S. (and fueled by our societal-level debt habits)?

I am trying to understand if the crises in the U.K. and France are part of the ripple effect of the recession with each country doing what they think necessary to contain the losses and make sure they are solvent. Are these choices and disciplined measures ones that we are avoiding now but likely inevitable?

I am so very sorry we do not have a larger serious discussion about the role of government and what our priority needs are for spending. In fact I am completely baffled how people that want to rescind Social Security and some health care coverage believe that someone at 80 years of age is supposed to not end up on the street. It would help me enormously to hear what a Republican plan is for persons that cannot afford medical care, nursing homes or cost of living. It seems that making sure these are covered for the “deserving” former worker is far down the list. A congressman the other day was appalled at the price of pensions for “prison guards” — do they believe pensions are bad or just that somehow prison guards shouldn’t get them? But, I guess my real hope is to understand how the woes and belt-tightening in U.K. and France and others are essentially a part of the larger global recession started here in the U.S. or if it was inevitable. And, won’t we end up having to make many of the same choices? Thank you.

Paul Solman: This question came in about a month ago. Since then, the austerity headlines in Europe have shifted to Ireland, Greece and Spain. But let me assure you: their woes were not made in America. Real estate booms and deficit spending were the story, much as ours was. England and France aren’t collateral casualties either.

Riot police are attacked by petrol bombs during clashes Wednesday in Athens; Photo by Aris Messinis/AFP/Getty Images._

The global recession in the developed economies was the aftermath of a global boom, fueled by low interest rates, Asian lending and regulatory insouciance. Blame it on it the central banks (I wouldn’t); blame it on the Chinese (maybe a little); blame it on a global culture that figured we can have it all. Who wouldn’t want to keep that game going?

Problem is, we couldn’t. In hindsight, almost everything seems (to use your word) “inevitable,” Ms. McDonnell. Before the fact, however, very little does. Even a Ponzi scheme need never come a cropper, so long as everyone keeps playing. Suppose everyone in the world invested with Bernie Madoff, for example.

But in fact, no boom lasts forever. Economies, like the people that make them, seem congenitally prone to ups and downs. The higher you fly, the farther you tend to fall.

So yes, the cutbacks triggered by economic woes in the U.K., Ireland, Greece, and Spain and in many states here in America, were caused by the global recession. And yes, to the extent that we lived beyond our means and made promises we can’t keep (Medicare, Social Security), both the U.S. and France will probably, in your words, “end up having to make many of the same choices.”

Those choices need not toss 80-year-olds into the street. Taxing the already comfortable and other reasonable fixes could go a long way toward shoring up social security. What about a VAT or other consumption tax?

As to “prison guards,” let me save the answer for the next post.

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions _Follow Paul on Twitter._