Sunday, January 20, 2013

Austerity Is Not The Answer

Austerity Is Not The Answer

[This appeared in the Jacksonville Business Journal, February 1, 2013)

                  Among organized segments of the business community and the corporate elite there are demands for sharp cuts in government spending and a call to balance the budget and reduce deficits. Many even believe that this is the solution to our ongoing economic crisis. But under current conditions, this makes very little economic sense.

                  The fallacy of this approach was starkly exposed in the run-up to the fiscal cliff. Almost all parties – Democrats and Republicans alike – expressed a desire to avoid the fiscal cliff because it was seen as potentially jeopardizing the economic recovery or throwing the economy back into recession. This was not because budget deficits would have increased as a result, but because deficits would have been sharply reduced due to automatic cuts in government spending coupled with an increase in taxes for all Americans. The fear that these two factors (government spending cuts and reduced income) would threaten the economy actually vindicates Keynesian policy proposals. It would suggest that the key to economic recovery is more (not less) government spending and higher (not lower) wages for workers, not fiscal austerity.

                  The logic of the Keynesian approach makes sense if one considers the primary source of the continuing economic crisis – insufficient consumer demand. We are currently suffering a “demand side crisis”. This means that the primary economic problem is not high taxes, budget deficits, regulations, or high labor costs but too few customers for the goods and services offered by a consumer capitalist economy.  Surveys of business have confirmed this as the leading reason for why employers are not taking on more workers.

For a long time we were able to avert this inevitable demand-side crisis because consumers were able to rely on credit cards and home equity to fuel consumption. Those days are long gone. The government is now the spender of last resort and the only way out of the crisis is government spending and higher incomes for workers.   

                  Reducing the deficit, or balancing the budget through sharp spending cuts, will not solve the problem of weak consumer demand; this will only make matters worse. Another common argument, that cuts in government spending will lower interest rates, generate business confidence, and stimulate new investment, is equally questionable. It is based on a belief in what the economist Paul Krugman calls the “confidence fairy”-- private investment will magically increase in response to austerity measures. But until there are customers to move the goods, there is unlikely to be new investment. And there is no evidence that the current deficits are fueling higher interest rates.

                  So it is difficult to understand why business would support austerity.  After all, government spending would reduce unemployment, put people back to work, fund infrastructure projects that generate contracts for businesses, and create more consumers.  This would benefit all business, large and small. 

                  It may be that those who are insisting on sharp reductions in government spending are motivated more by conservative anti-government ideology than the actual economic consequences. The fiscal cliff and the debt ceiling are seen as opportunities to roll back the public sector and, in particular, further eviscerate what remains of the social welfare and social insurance system that they describe as “entitlements”.

                  But on purely economic grounds, it is difficult to support the austerity option. Even the International Monetary Fund, which has a long history of wreaking havoc on Third World economies through the imposition of austerity measures, has recently come out against austerity as a strategy to generate growth and employment.  In Europe millions have turned to the streets to protest the devastating socio-economic costs that austerity measures are exacting on their nation.   
                  The evidence is clear. If we want expansion rather than contraction, reject austerity.


  1. In December, i ran across this article in Forbes magazine and author had the same views that you stated; higher taxes lead to a slower recovering economy because businesses won't invest. He used the Clinton administration as an example as well. It stated that "the Clinton tax increase on those with incomes above $400,000 in 2012 dollars slowed the economic recovery that should have been gaining strength due to the end of the Cold War and the restoration of price stability for the first time since 1965".(Kadlec)

    Are you saying raising taxes for the top 2% will help the economy or raising taxes for all Americans will fuel the economy?

  2. Raising taxes for the top 2% and spending it in a redistributive manner would help the economy. It would put money into the hands of people more likely to spend it now.
    Raising taxes on people who are already struggling would weaken consumer demand and hurt the economy.