Arguments against Austerity

Troubling pieces of economic news have recently called into question government economic policy during this recession:  the International Monetary Fund’s prediction that the entire European economy will continue to shrink in 2012, and recent comparisons showing that the British economy--by growth standards--is doing worse four years into this recession than it did four years into the Great Depression of the 1930’s. Taken together, these stories indicate that government austerity (cutting spending) is not working.  Why doesn't the U.S. learn from Europe's failing attempt at austerity?

The argument against government stimulus is normally that it "crowds out" private spending.  But this process involves government debt levels to push up interest rates.  Since interest rates are already ridiculously low in the U.S., this argument falls apart. 

Another prominent argument against fiscal stimulus is that high debt levels force rates on government bonds to spike.  We are not witnessing that in the U.S. right now, in fact, America can borrow at some of the cheapest interest rates in history as the rate of our 10-year T-bill indicates. 

Here is an excellent peice discussing why our govenrment should be doing more to help the ailing economy.  The graph is very interesting, in that it shows the decline in state/local spending which is one reason why the economy isn't recovering as quickly.