Back to the Depression
Austerity is all the vogue among European central bankers and Republican Congressmen. The Republicans, and especially their tea party wing, have bought into the idea that the only way to cure the present recession/depression is to adopt the Paul Ryan austerity budget: cut spending, reduce entitlements, and work toward a balanced budget. This is perverse. Our economy has no problem that austerity will not make worse.
Austerity does not lead to growth, quite the opposite. The International Monetary Fund did a study which shows that an austerity policy that cuts the deficit by 1% of GDP reduces incomes by about 0.6% and increases unemployment by 0.5%. The US government had a deficit of $1.3 trillion in 2011. To cut that deficit by $150 billion (1% of the $15 trillion GDP), would cost $800 billion of real income and would increase unemployment by about 700,000 workers. Last year, the austerity program cost Greece 11% of GDP and Spain 3.1% of GDP.
Repeat, no theory says austerity is associated with growth. John Maynard Keynes, in his masterpiece The General Theory of Employment, Interest, and Money, finishes Chapter 3, The Principle of Effective Demand, with his explanation of why some economists still hold to this perverse position: “The celebrated optimism of traditional economic theory… teach[es] that all is for the best in the best of all possible worlds provided that we will let well [enough] alone … It may well be that the classical theory represents the way in which we should like our Economy to behave. But to assume that it actually does so is to assume our difficulties away.”
Through the last half of the 20th century, economists read their Keynes and agreed that in a less than full employment economy, the government should not let well enough alone. It could and should inject purchasing power into the economy through government spending. Cut taxes, increase spending, inject money and the economy will grow.
It is not hard to understand why. The average American with no economic training can look at unemployment and ask the obvious: “Why don’t we put those people to work producing goods and services that people need?” More specifically, with a GDP of $15 trillion, 5% additional recession-driven unemployment costs the economy $750 billion per year in lost output.
The use of a fiscal stimulus to put otherwise idle resources to work seems to be clearly common sense. Nevertheless, classical economics assumed that the economy was always at full employment, that laissez-faire was always appropriate.
Economic austerity, on the other hand, is a contractionary policy. It even has a multiplier making the effect greater than the initial amounts involved. State tax revenues are reduced forcing further cuts in services. Diminishing federal grants to states leads to the layoffs of first responders and teachers. Austerity cripples an economy. It is associated with decline, not growth. In a strangely honest moment, even Romney admitted that “as you cut spending you’ll slow down the economy.” His staff quickly tried to “walk him back” from that but it was too late. It was on the record. The Republicans in Congress remain the real austerity hawks.
Austerity is being imposed on southern Europe by the Germans and is being supported by the international banks, including the European Central Bank. It is a disaster. Most observers now recognize that austerity is pushing these countries deeper and deeper into recession. In Spain the unemployment rate is 25% and among those under 25 years of age it is 50%. We do not want to go there.
Europe has a problem but it is not overspending and austerity is not the solution. The deficits in Ireland, Spain, Portugal and to some extent Italy arose as a result of the financial crisis and the subsequent depression. The normal cure for this is for a country to print money, lower the value of its currency and thereby increase exports, decrease imports and stimulate growth. This is a tried-and-true solution but an option that is not available as these countries do not have their own currency. When they joined the euro, they gave up the right to manage their economies using fiscal policy and they set up no coordinating mechanism.
Iceland and Britain, though they were in worse financial shape than Spain and Portugal, do not have a problem because they still have their own currency. The solution is simple but extremely difficult for the Europeans. They have to surrender their fiscal policy to a centralized authority. No one seems to have any hope that the Europeans are ready for a United States of Europe.
Similarly, the United States deficit and debt are not a problem because we have our own currency. We can and do print what we and the world need in the way of dollars. There is absolutely no chance of the United States ending up “like Greece.”
In fact, President Obama would be most pleased if Mitt Romney and Paul Ryan continue to push their austerity budget.
JoAnnK comments:
austerity is a cover up to what Goldman Sachs did with US mortgage notes packaged up as CDO’s (toxic derivatives) and sold on the private market in SWAPS with the banks, making the financial product more valuable and inflating its price to be sold in Europe to unsuspecting countries thru the London exchange at triple AAA moody ratings. Iceland said NO to austerity and is climbing out of the problem. However, Iceland was criticized by the European Union for bucking the trend. History only teaches that the world imposed Austerity on Germany after WWI and Hitler came to power in a very angry, poor and confused nation.
Ron Stouffer comments:
I don’t think Europeans or Americans realize that AUSTERITY is part of a contrived, manufactured corporate agenda eloquently explained in the Shock Doctrine by Naomi Klein. “Crisis capitalism” or “disaster capitalism” as she calls it is step one. Take money from PA schools at the state level, force local property taxes up, declare a funding crisis, and set about privatizing Philadelphia’s public schools, then Harrisburg City and Reading’s schools. Eventually Radnor and Wyomissing, the cream of the crop, will be subject to the Shock Doctrine, unless citizens realize what is really going on and stop it. Beyond schools as just one example, police, fire, parks, colleges, water/sewer, turnpikes, parking garages—all public enterprises are targeted for a corporate takeover. When profit-first entities own it all, democracy ceases and corporatocracy rules the country/state/local government.
In Europe and Canada, the doctrine ties each country’s hands by imposing privatization on them as a quid pro quo to obtain loans from the IMF/World Bank(corporate structures) and attacks their social safety net, including their national health insurance programs which conservatives are underfunding in Canada. Massive transfers of wealth–from the middle class upward to the ruling class and corporations always occur. High unemployment always resulted in every country subjected to the Shock Doctrine. It is massive corporate political interference in the economy masquerading as “market driven” laissez faire, economics. The CORPORATE TAKEOVER is in high gear.
JoAnnK comments:
Today, June 7, 2011 the EU is talking about QE 3 and bailing out Spain’s banks which are about to tank or fail. the stock market zoomed 300 points. How is it that ?
JoAnnK comments:
Americans should feel safe in their homes.
Ron Stouffer comments:
http://commonsense2.com/2009/02/americas-hidden-history/naomi-kleins-the-shock-doctrine/
market gyrations are normal. Maybe the market liked privatizer Scott Walker’s victory. NASDAQ is still 1/2 as high as its all-time high and the Dow has pretty much stayed near current levels for years on end. Check out the history of the Dow starting with Bill Clinton for an interesting take then compare it with its history from 1900 then again from 1950 to now. Note that it hit about 14,000 in July 2007 if memory serves me. One of my points is that corporations need to get new revenue sources—like the Social Security fund—to keep expanding. Wars serves the same function as does new creations like Homeland Security(largely privatized) as well as the fed gov’t itself—now privatized at around 60% of all employees again if I recall or cared to look it up. Naomi Klein is the expert on the “takeover”—read her book or read Rosie’s and my review linked here.
LT comments:
The ground has shifted. Tuesday voters in Wisconsin and California have sent a message that pensions and benefits are on the table to be cut. The promises that unions and governments made are not sustainable in today’s economy. In San Jose the voters by a 70% margin approved arguably the country’s boldest pension cuts. In addition San Diego also cut deeply by a wide margin of the voters. With Walkers 7% victory it was a rout by any measure, especially with 37% of union households voting in favor of the Governor. Most likely everywhere that has deficits due to the pensions and employee benefits there is an ax about to be lowered.
Biggest mistake made was Harry Reid and Ted Kennedy pushing Obama into the race when their were far more qualified senators to choose from after the Bush debacle. In the business world his resume would not have qualified him for much above a bare bones entry level position. His current record is beyond abysmal.
Ron Stouffer comments:
If mega-corproations, those politically involved, can keep up this austerity campaign, small businesses like restaurants and many other non-monopolistic small companies will bear the brunt of fewer dollars circulating in the economy. Those teacher pension checks keep a lot of our economy going. So do Social Security checks. Just keep up the cuts and shifting the faux tax “savings” to the rich and the transnational corporations. Let’s see how austerity really looks when America feels the full effects of the Shock Doctrine. More private sector jobs will be lost and more democracy ceded to the privatizing corporations.
Remember, corporations originally were not allowed to be involved in politics. In 1832, ten PA corporations lost their charters and were no longer permitted to operate in PA. Besides politics, pollution and illegal activities would be causes for loss of charters. Also, limited lifespans, not eternal personhood formerly applied to corporations. These artificial entities(not the worker-bees employed by any given corporation) can now pay a tax-deductible fine for any malfeasance and continue on with pollution, politics, etc. Find more at: http://www.celdf.org http://www.thomhartmann.com and http://www.reclaimdemocracy.org The corporate takeover of sovereign countries, incl. the USA, is a serious threat to liberty, freedom, and self-governance. That is the big picture, with no hyperbole, my friends.