Europe and the U.S. disagree over stimulus vs. spending cuts

The echoes of the Great Depression never seem too far away in the age of the iPad.

Is it time to cut spending and raise taxes to restore some fiscal sanity to the U.S. government? Or spend even more to maintain the momentum of what has been a modest economic recovery?

The federal government did the former in the ’30s, and many of the history books say those moves prolonged the Depression.

As the Group of 20 prepares to meet in Toronto starting Friday, this is far from a historical debate. True policy disagreement has erupted and threatens the global governmental coordination that emerged from the U.S.- spawned financial crisis of 2008.

On pace to post 3.5 percent growth in gross domestic product in 2010, the United States wants to hit the spending accelerator, not the brake. Europe, which has struggled with weaker growth and debt crises, has been cutting government spending.

The divergence in strategy was never more stark than with the announcement Tuesday of sharp budget cuts in Britain accompanied by steep tax increases. Treasury chief Gregory Osborne unleashed a budget proposal that would cut spending in most departments 25 percent, with the goal of generating $44 billion in savings.

Britain’s value-added tax would rise from 17.5 percent to 20 percent, while the capital gains tax for wealthier taxpayers would rise from 18 to 28 percent.

Austerity is the word for 2010, thanks to debt crises that have jumped from Greece and Portugal to Hungary and Spain like California wildfires. Enough is enough, Europe has said. Time to cut and save.

Not the United States. Worried about an unemployment rate that remains above 9 percent, President Obama has stumped for a $120 billion jobs bill. It is meeting resistance in a Congress that already uncorked a $940 billion health-care package earlier this year, as well as last year’s $862 billion economic stimulus package, and the 2008 $700 billion bank bailout.

That’s a lot of spending enacted in a short amount of time. And we’ll need to go beyond the head-nodding stage and commit to showing our foreign financiers how we plan to live within our means.

So while the U.S. doesn’t need to flash an Osborne ax next week, Congress and the administration may want to rethink the price tag of that jobs bill. Oh, definitely prepare to act on whatever the Obama deficit-reduction commission recommends in December.

IHS Global Insight chief economist Nariman Behravesh said Tuesday that Europe’s debt crisis has increased the risk of a double-dip recession. But the likelihood is only “one in five,” he said.

And for those who see only economic apocalypse in Europe, Behravesh provided the example of Sweden in the early ’90s. It had run up a deficit that reached 12 percent of GDP but reduced it to zero in five years.

“So it can be done, and it has been done,” he said.

But can the United States, with a much larger economy, do it?