Grim is the right word to describe the latest economic news from both the European Union and the United States. Throughout the European Union, austerity programs have failed both politically and economically. In Spain, unemployment rates have soared above 24 percent. The Dutch government is on the edge of collapse because of the popular and political unwillingness to accept the austerity program proposed by its conservative government. Romania is not far behind. Greece, Italy, and Portugal remain in perilous condition. France faces a presidential run-off election between President Nicholas Sarkozy, who is moving rightward on immigration issues, and the free-spending socialist candidate Franciose Hollande. On the American front, the decline of GDP growth to 2.2 percent rightly raises fears that our sputtering domestic recovery is just about over.
It is no surprise, therefore, that leading columnists like Paul Krugman have taken this opportunity to announce triumphantly that austerity is a “fairy tale” that shatters the social confidence that it is designed to shore up. It is futile to invoke fiscal austerity, he argues, when economically beleaguered countries really need to be “spending more to offset falling private demand.” The cure is supposed to be increased government spending, but that solution has its own serious problems. Krugman assumes that the declines in private demand and private investment are attributable to mysterious external forces that are beyond the power of government to control.
But both macroeconomic programs are doomed to failure. Only by changing our microeconomic policy—reforming the labor market, specifically—will we start seeing economic growth. The calcification of labor markets with regulation upon regulation is the primary impediment to economic recovery today, as I explain further over at Defining Ideas.