07/15/2013 10:42 am ET

Growth vs. Austerity: A False Choice

Promoters of austerity assert that when government deficits reach a certain critical level, economic growth becomes un-sustainable. Advocates of growth contend that austerity itself stifles growth.

Is it possible that both sides in this debate are right -- and wrong?

Most students of the Great Depression agree that a critical element in that worldwide economic meltdown of the 1930s was an insufficient supply of money in circulation to fuel demand for goods and services. There is also general agreement among economists today that there are two basic ways to remedy an insufficiency in the money supply.

The first is through fiscal policy. Reduce taxes when the money supply is insufficient to fuel adequate demand. Increase taxes when demand is excessive.

The second is through monetary policy. Print more money when the supply is insufficient. Print less money when there is too much money chasing too few goods and services.

The advantage of using fiscal policy is that the benefits of its application can be spread across the entire economy by increasing aggregate demand. The problem in actually applying fiscal policy as an instrument of growth, however, is that politics too often trumps sound fiscal policy.

This is especially true in the United States, where 47 percent of the people pay no federal income taxes at all. This means that any proposal to reduce taxes to stimulate the economy is inevitably opposed by those who already pay no taxes. They see no personal benefit to themselves, but only to the rich -- presumably defined as anyone who actually pays federal income taxes.

Instead, they fall victim to demagogic proposals for increased government spending. This is apparently based on the premise that government can make better spending choices (think Solyndra or Tesla) than hard-pressed taxpayers who might otherwise spend the money on such silly things as food, clothes, refrigerators, cars, or shelter, and thus put to work the otherwise unemployed who provide such goods and services.

In consequence, the task of increasing the money supply in times of recession is left to such unelected entities as the Federal Reserve. The Fed inevitably targets more narrow sectors of the economy such as housing or the stock market. This in turn creates bubbles that inevitably collapse and trigger future economic catastrophes.

In such an economic environment, "austerity" in the form of balancing expenditures and revenues does not retard growth. To the contrary, it instills confidence on the part of potential investors in the economy. And it lowers the cost of government borrowing.

One reason that Germany's economy is thriving, while its neighbors in Europe are suffering, is that some years ago Germany made the difficult decision to stand up to entrenched interest groups, reform oppressive labor rules, open up its markets, reduce burdensome regulation, and control its deficit. This in turn led to investor confidence, which dramatically reduced the rates which Germany pays on its sovereign bonds compared to its more profligate neighbors.

Meanwhile, the governments of Germany's neighbors are anxious to appease both the powerful entrenched cartels and labor groups making their voice heard in often violent demonstrations. They seek to stay in power by equating responsible fiscal policies with "austerity" which they assert is the cause of their economic depression, and which they promise to resist.

The sooner that the politicians in these countries, as well as in the U.S, realize that the responsible fiscal policy which they deceptively identify as "austerity" is not only consistent with growth, but a prerequisite to it, the sooner the world will be restored to economic prosperity.

Robert Hardaway is professor of law at the University of Denver Sturm College of Law. He is author of 17 books on law and economic policy, including "The Great American Housing Bubble."