01/09/2013 12:06 pm ET Updated Mar 11, 2013

Are Austerity and Budget Cuts the Solution to the Current Economic Crisis?

It now looks like the last minute compromise between Democrats and Republicans on tax rates at the end of 2012 has only postponed the "fiscal cliff" by a few months. Once again Republicans in the House of Representatives are planning to block authorization of a new federal debt limit unless there are substantial cuts in social service programs.

To help high school students better understand the underlying economic issues I prepared a "mock debate" between Alan Greenspan, chairman of the U.S. Federal Reserve from 1987 to 2006, and Paul Krugman, New York Times columnist, professor of Economics at Princeton University, and a recipient of the Nobel Prize in Economics. Greenspan has endorsed new austerity measures including broad budget cuts to stabilize the U.S. economy and bring down the national debt. He compares the U.S. economy to a household that no longer balances earning and spending so the family spirals deeper and deeper into debt. Krugman thinks the analogy is a false one and argues that governments must actually spend more and go into debt to stimulate growth when national economies are slumping.

I like this "face-off" format because it supports skills emphasized in the new national Common Core Standards. Students are required to read complex non-fiction text, to analyze and contextualize the documents, to compare and contrast the arguments, and to arrive at, express, and write about their conclusions. I also like using articles from the Wall Street Journal and The New York Times as a literacy measure for high school graduation.

Students should read the two excerpts and answer and discuss the following questions.

1. How do Greenspan and Krugman agree or disagree about the causes of the current economic problems?
2. What do they see as necessary solutions to the current economic problems?
3. In your opinion, why do they discuss an analogy between governments and households?
4. Which of these two positions makes the most economic and political sense to you? Explain.

Are austerity and budget cuts the solution to the current economic crisis?


In the 1950s U.S. federal budget deficits were no more politically acceptable than households spending beyond their means. Regrettably, that now quaint notion gave way over the decades, such that today it is the rare politician who doesn't run on seemingly costless spending increases or tax cuts with borrowed money. A low tax burden is essential to maintain America's global competitiveness. But tax cuts need to be funded by permanent outlay reductions. The current federal debt explosion is being driven by an inability to stem new spending initiatives. Having appropriated hundreds of billions of dollars on new programs . . . it is very difficult for Congress to deny an additional one or two billion dollars for programs that significant constituencies perceive as urgent. The federal government is currently saddled with commitments for the next three decades that it will be unable to meet in real terms . . . We cannot grow out of these fiscal pressures . . . We must avoid persistent borrowing from abroad. We cannot count on foreigners to finance our current account deficit indefinitely. Only politically toxic cuts or rationing of medical care, a marked rise in the eligible age for health and retirement benefits, or significant inflation, can close the deficit. I rule out large tax increases that would sap economic growth and accordingly achieve little added revenues . . . The United States, and most of the rest of the developed world, is in need of a tectonic shift in fiscal policy. Incremental change will not be adequate. In the past decade the U.S. has been unable to cut any federal spending programs of significance.


The financial crisis [in 2008] led, through several channels, to a sharp fall in private spending: residential investment plunged as the housing bubble burst; consumers began saving more as the illusory wealth created by the bubble vanished, while the mortgage debt remained. And this fall in private spending led, inevitably, to a global recession . . . [A]n economy is not like a household. A family can decide to spend less and try to earn more. But in the economy as a whole, spending and earning go together: my spending is your income; your spending is my income. If everyone tries to slash spending at the same time, incomes will fall -- and unemployment will soar . . . [G]overnments needed to step in, spending to support their economies while the private sector regained its balance. And to some extent that did happen: revenue dropped sharply in the slump, but spending actually rose as programs like unemployment insurance expanded and temporary economic stimulus went into effect. Budget deficits rose, but this was actually a good thing, probably the most important reason we didn't have a full replay of the Great Depression. But it all went wrong in 2010. The crisis in Greece was taken, wrongly, as a sign that all governments had better slash spending and deficits right away. Austerity became the order of the day . . . The premature turn to austerity, it turns out, was a terrible mistake . . . [I]n America, Republicans insist that they'll use a confrontation over the debt ceiling -- a deeply illegitimate action in itself -- to demand spending cuts that would drive us back into recession.