09/26/2012 08:37 am ET Updated Nov 26, 2012

'Tis the Budget Season

Summer's over. Politicians around the world are back in town. Budgets need to be drawn and approved in an annual ritual that determines what the democracies of the world do with up to half of their Gross Domestic Product.

This year is especially important when it comes to budgeting government revenues and expenses. The stakes are high, emotionally high. Election outcomes, the global economic recovery, and people's destinies are in play. For all the talk about individual responsibility, we are indeed very much dependent on how much money the government takes in and how it spends it all. It's a key feature of modern society, whether you like it or not. Government spending helps us accomplish cherished goals such as extending educational opportunity to all, providing healthcare and pensions to those who have worked hard for their entire lives, and defending us from natural and man-made disasters. But the budget also provides us and our politicians with ample opportunities to choose the wrong course of action.

Take Europe, the epicenter of global economic and financial malaise. No matter whether unemployment is approaching 25 percent, as in Spain, or comfortably below 6 percent, as in Germany, politicians are going out of their way to cut expenses, at a time when banks are shaky and credit is scarce. Households are holding their breadth, postponing expenses and reducing their debts, while businesses abstain from investment and job creation. In a continent in which every country's most important trading partner is a neighboring country, ordinary people have realized that there is no light at the end of the tunnel, at least for the next four or five years. Austerity for all, by all, and above all seems to be the dominant ideology among policymakers and politicians. Europe has fell victim to its own success at integration: together they rise, and together they fall.

The situation is no better in Japan. Its debt burden is actually higher than Greece's. True: most of it is in the hands of Japanese households. Moreover, Japan is an export powerhouse, one of only three countries in the entire world that can boast a massive trade surplus with China. But Japan is an exhausted, aging society, very much like Europe. Its political system is sclerotic, having lost more than two decades trying to figure out how to overcome the consequences of a devastating bubble.

Against the depressing backdrop of Europe and Japan, one might think that the United States would shine as the land of opportunity, dynamism, and resolve. And yet, we are also struggling to come to terms with the new realities of the 21st century. A large proportion of the labor force, present and future, does not seem to possess the skills needed to compete in the new global economy, and much of the country's infrastructure is crumbling. The budgetary process, however, is being driven by a set of priorities that is likely to reduce the long-term growth potential of the economy. Everything's that being cut--from education to research and infrastructure--is fundamental to our economic future. Meanwhile, no politician dares touch entitlement programs for fear of reprisal. Much of defense spending, however wasteful, is also off limits.

There is no doubt that government deficits and cumulative debt have reached unsustainable levels in much of the developed world. Competition from emerging economies and population aging add to the need for addressing the problem. But politicians in Europe, Japan and the U.S. are making two egregious mistakes in prioritizing austerity over everything else. The first is to confuse what's important and necessary with what's urgent. The truly urgent thing is to get the economy growing again, not to cut expenses. The best way to reduce the deficit is to grow the economy. Growth must come first.

The second mistake is to think that in an inter-connected global economy we can afford austerity measures simultaneously in all countries. Back in the 20th century, governments used to meet and discuss how to sequence each other's policy moves. It is very discouraging to see that governments are doing very little to coordinate their policies, especially those related to the budget. At a time when households don't spend and businesses don't invest, governments around the world should not engage in wholesale fiscal adjustment. Without concerted action, the developed economies have only one way to go: a prolonged recession or near-recession with persistently high unemployment.