It seems to be the only answer we hear coming from the government elites lately: austerity and cutting deficits. Let’s look at that for one moment, shall we?
First if we cut the federal deficit we need to make massive cuts to US military spending, Homeland Security, the EPA, SEC, USDA, FDA, the Interior Department, et alia. At the state level it gets worse. Cuts to primary and secondary education, road repair, law enforcement, Medicaid, etc. would be rewuired. What exactly do we gain?
The result is that we put less money into the economy. Less money for unemployment benefits. Less money for government contracts to rebuild infrastructure. What happens when less money is circulating in the economy? Does that create jobs? Does it increase tax revenues? The answer to that is “no.”
As Bob Herbert says in today’s NT Times:
More than 15 million Americans are out of work, and nearly half have been jobless for six months or longer. New college graduates are having a terrible time finding work, and many are taking jobs that require only a high school education. Teachers are facing the worst employment market since the Depression. […]
It’s impossible to overstate the threat that this crisis of unemployment poses to the well-being of the United States. With so many people out of work and so much of the rest of the population deeply in debt, where is the spending going to come from to power a true economic recovery? The deficit hawks are forecasting Armageddon, but how is anyone going to get a handle on the federal deficits if we don’t get millions of people back to work and paying taxes?
Indeed, reduction of spending only puts more people out on the streets, generates less tax revenues, and hurts small businesses when the unemployed (and people that fear they are next in line for the unemployment lines) and their families drastically reduce all but essential spending. Absent raising taxes on wealthier Americans, at best budget cuts do little to lower deficits and nothing to help the economy.
Who do the help? Investors in stocks and bonds will be reassured we are told and will invest more in the market? But will they? Would you invest in the market where the unemployment rate is so high, and where corporate profits will decline (law of supply and demand anyone?). Oh, investors might be driven to invest in Big Oil (obscene profits despite the BP disaster) and the Big Banks (too big to fail makes them a safe bet in bad economic times) perhaps, but what other industries will benefit?
The reality is that deficit reduction and austerity measures are, as Paul Krugman notes, an incredibly inefficient means of reducing the deficit in a high unemployment economy.
[S]lashing spending while the economy is still deeply depressed is both an extremely costly and quite ineffective way to reduce future debt. Costly, because it depresses the economy further; ineffective, because by depressing the economy, fiscal contraction now reduces tax receipts. A rough estimate right now is that cutting spending by 1 percent of GDP raises the unemployment rate by .75 percent compared with what it would otherwise be, yet reduces future debt by less than 0.5 percent of GDP.
The right thing, overwhelmingly, is to do things that will reduce spending and/or raise revenue after the economy has recovered — specifically, wait until after the economy is strong enough that monetary policy can offset the contractionary effects of fiscal austerity. But no: the deficit hawks want their cuts while unemployment rates are still at near-record highs and monetary policy is still hard up against the zero bound.
Let’s look at the alternative. What does stimulus spending get us. Well, we have people who studied the effects of the stimulus bill passed last year (specifically the Congressional Budget Office), the one everyone agrees was too small. Yet the CBO finds that even that meager federal stimulus legislation had a significant impact on the economy.
CBO estimates that in the fourth quarter of calendar year 2009, ARRA added between 1.0 million and 2.1 million to the number of workers employed in the United States, and it increased the number of full-time-equivalent (FTE) jobs by between 1.4 million and 3.0 million. Increases in FTE jobs include shifts from part-time to full-time work or overtime and are thus generally larger than increases in the number of employed workers. CBO also estimates that real (inflation-adjusted) gross domestic product (GDP) was 1.5 percent to 3.5 percent higher in the fourth quarter than would have been the case in the absence of ARRA.
Imagine what a real stimulus bill would have done? One that actually invested in significant infrastructure spending and new alternative energy technologies to spur job growth. One that created an analogue to the Civilian Conservation Corps for young Americans? One that increased taxes for outsourcing jobs and decreased them for creating jobs for Americans.
The Deficit Hawks in the Democratic Party obviously never studied what happened to Herbert Hoover. He had the same vision on the unemployment crisis during the Great Depression. His party suffered greatly because he failed to use the government to stimulate the economy sufficiently. Those Blue Dog and Conservative Democrats are going to find that their fiscal conservatism and failure to support measures to increase jobs is going to hurt them this Fall.
It’s a failure to learn from history. Then again I suppose they will all become lobbyists after they lose so what do they care?
