Why Austerity Wil Not Restore Economic Growth

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The deficit hawks, or those arguing for "expansive austerity" instead of expansive spending, often cite Germany or the UK which have adopted austerity policies, as examples of what we should do. David Leonhardt does a good job of explaining that they have not done as well as the US at this point in the downturn and he makes the case against austerity as the weapon of choice in a downturn,

GDP in the US has grown much faster since 2008 than that of Germany or the UK. Some the growth is the result of the stimulus plan in the US which was much larger, and the negative impact of austerity in Germany and the UK. Without our fiscal stimulus, which was not as great as what was needed, we would look more like Germany and the UK.

The argument for austerity in a downturn is specious. The claim is that government spending will crowd out private spending by absorbing resources that might have been used in the private economy. For example, government borrowing to fund its deficits might drive up interest rates and make it more expensive to fund private investment. Private demand for loans has been weak in this downturn because businesses are waiting for consumer demand to pick up. Interest rates, therefore are very low, and government borrowing is not crowding out private investment. Similarly, the federal government has not absorbed substantial labor resources (only about 45,000 mostly in defense and homeland security). State and local governments have shed 405,000 jobs so the net impact of government has been to add labor resource availability to a private market which has shown little interest.

The case for austerity is certainly a weak case from an economic perspective. It is essentially a moral argument which has historical precedent. Both Hoover and FDR made a moral argument for a balanced budget during the Great Depression. It worsened the economy for Hoover and also for FDR when he raised taxes and cut spending in the face of a rising federal deficit.
World War II led to a big increase in federal spending and it helped to end the US recession. The message is not that we need wars to end recessions but that defense spending seems to be easier to sell to the public.