The Austerity Death-Trap

obama jobs billRon Paul’s newly-unveiled economic plan – promising to cut $1 trillion from the federal budget in year one (presumably that means 2013) – is only slightly more ambitious than what we’re hearing from other Republican candidates. They’re all calling for major spending cuts starting as soon as possible.

What are they smoking?

Can we just put ideology aside for a moment and be clear about the facts? Consumer spending (70 percent of the economy) is flat or dropping because consumers are losing their jobs and wages, and don’t have the dough. And businesses aren’t hiring because they don’t have enough customers.

The only way out of this vicious cycle is for the government – the spender of last resort – to boost the economy. The regressives are all calling for the opposite.

But even without these hare-brained Republican plans, we’re heading in their direction anyway. Unless Republicans agree to a budget deal before the end of the year (don’t hold your breath), the temporary payroll tax cuts and extended unemployment benefits we have now will end.

The result will be the most stringent fiscal tightening of any large economy in the world.

Together with ongoing cuts at the state and local government level, the scale of this fiscal contraction would be almost unprecedented.

robert reichIt will come at a time when 25 million are Americans looking for full-time work, median incomes are dropping, home foreclosures rising, and a record 37 percent of American families with young children are in poverty.

To call this economic lunacy is to understate the point.

And if you think 2011 is bad, you ain’t seen nothin’ yet.

Even if you’re a deficit hawk this is nuts. Instead of reducing the ratio of debt to the size of the overall economy, this strategy increases the ratio because it causes the economy to shrink.

Call it the austerity death trap.

Under these circumstances, the harder a country works to cut its debt, the worse the ratio becomes — because the economy shrinks even faster.

Greece is already in the trap. Spain and Italy are perilously close. Even Britain, France, and Germany are tip-toeing up to it. And now us.

Deficit hawks have to understand: The first step must be to revive growth and jobs. That way, revenues increase and the debt/GDP ratio drops. Only then – when the economy is back on track – do you start cutting.

robert reichAt the start of the Clinton administration the annual budget deficit was almost $300 billion. But rather than take a meat-axe to spending, we pushed for growth, as did the Fed. The expansion of the 1990s made it easy to get the budget under control. By 2000 we had a $226 billion surplus.

The austerity trap will even hurt Mitch-McConnell Republicans whose top priority is to “make sure Obama is a one-term president.”

While it increases the likelihood of this Republican goal, it doesn’t stop there. Because the austerity trap will last for many years, any Republican successor will also be a one-termer.

Robert Reich
Robert Reich’s Blog 

Published by the LA Progressive on October 20, 2011
Related Posts Plugin for WordPress, Blogger...
About Robert Reich

Robert B. Reich is Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He has written eleven books, including The Work of Nations, which has been translated into 22 languages; the best-sellers The Future of Success and Locked in the Cabinet, and his most recent book, Supercapitalism. His articles have appeared in the New Yorker, Atlantic Monthly, New York Times, Washington Post, and Wall Street Journal. Mr. Reich is co-founding editor of The American Prospect magazine.

Reich has been a member of the faculties of Harvard’s John F. Kennedy School of Government and of Brandeis University. He received his B.A. from Dartmouth College, his M.A. from Oxford University, where he was a Rhodes Scholar, and his J.D. from Yale Law School.