Nobel Prize winner argues austerity measures limit growth; message aimed for Brussels or Washington?

Advisor One
Gil Weinreich

Joseph Stiglitz (left) in 2001 receiving his
Nobel Prize in economy from
Swedish King Carl XVI Gustaf.

Nobel Prize-winning economist Joseph Stiglitz said that countries adopting an austerity-based economic policy were sure to fail. Speaking in Copenhagen on Friday, he accused European leaders of what he called “deficit fetishism,” arguing that budget cutting in lean times retards rather than encourages economic growth.

Bloomberg News quotes the Stiglitz, a Columbia University professor, paraphrasing the famous Einstein quote about insanity. Said Stiglitz: “Austerity is an experiment that has been tried before with the same results.”

The Stiglitz criticism comes on the heels of first-quarter economic results that proved stronger than expected for Europe’s leading economies, Germany and France. Even Greece, whose solvency issues triggered Europe’s economic crisis, eked out its first economic expansion in three years, with growth of 0.8% for the quarter, which matched the EU average.

Possibly bolstering the economist’s case, the U.K. and Spain, two prominent budget cutters, posted quarterly growth of 0.5% and 0.3%, respectively.

The Stiglitz comments may also be aimed at influencing the economic policy debate currently raging on Capitol Hill, ahead of expectations the U.S. will reach its debt ceiling limit of $14.3 trillion on Monday. The current consensus in Washington is that the deficit must be reduced, but Democrats and Republicans agree on little else. Before the 2010 midterm elections that brought a House Republican majority, the Democratic administration favored a stimulative fiscal policy in contrast to Republican budget cutting preferences.

Now the differences lie in how deep budget cuts should be, with Republicans wanting to take on large entitlement programs and Democrats seeking tax hikes. Some officials, including Treasury Secretary Timothy Geithner and Fed Chairman Ben Bernanke, have stated that failure to lift the debt limit could wreak havoc in the bond markets. A Gallup poll released Friday confirmed months of earlier polling suggesting the American public opposed raising the debt ceiling.