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How Austerity Is Ushering in a Global Recession
Not only is the United States slouching toward a double dip, but so is Europe. New data out today show even Europe’s strongest core economies – Germany, France, and the Netherlands – slowing to a crawl. 
Policy makers be warned: Austerity is the wrong medicine.
We’re on the cusp of a global recession.
Policy makers be warned: Austerity is the wrong medicine.
We all know about the weaknesses in Europe’s “periphery” – Greece, Ireland, Spain, Portugal, and Italy. But the drop in Europe’s core is dizzying.
Germany grew at an annualized rate of just half a percent last quarter, down from 5.5 percent in the first quarter of the year. France didn’t grow at all.
What’s going on in Europe’s core? Partly it’s a loss of confidence due to debt crises in the periphery. But that’s hardly all.
Europe depends on exports – especially to Asia, India, Latin America, and the United States. But exports to China and other emerging markets have been dropping. China, worried about inflation, has pulled in the reins on its sizzling economy. Brazil has been pulling back as well.
And as the United States economy sputters, exports to America have been slowing.
But chalk up a big part of Europe’s slowdown to the politics and economics of austerity. Europe – including Britain – have turned John Maynard Keynes on his head. They’ve been cutting public spending just when they should be spending more to counteract slowing private spending.
The United States has been moving in the same bizarre direction. Cutbacks by state and local governments have all but negated the federal government’s original stimulus, and no one in Washington is talking seriously about a second. The pitiful showdown over increasing the debt limit has produced the opposite: a Rube-Goldberg-like process for capping spending rather than increasing it, and a public that’s being sold the Republican lie that less government spending means more jobs.
Yes, governments on both sides of the Atlantic are deeply in debt. But policy makers on both sides seem to have forgotten that economic growth is the most important tonic.
Public debt has meaning only in relation to a nation’s GDP. When more people are working, more companies are profiting, and economies are expanding, revenues pour into national treasuries.
When economies stop growing or contract, the opposite occurs. Economies can fall into vicious cycles of slower growth, lower tax revenues, spending cuts, and even slower growth.
That’s what we’re seeing now.
What’s worse, nations are so intertwined that when every major economy is slowing the cumulative effect is larger.
With anemic growth in America and Europe, the Japanese economy comatose, and emerging markets (including China) pulling in their reins, the vicious cycle could become worldwide. If global demand for goods and services continues to fall behind the potential supply we’ll see unemployment rise further and growth slow even more — especially in Europe and the U.S.
Central banks may try to reverse this course. Ben Bernanke and company at the Fed have committed themselves to near-zero interest rates for the next two years (not exactly a rousing endorsement of America’s economic prospects in the near term). Given the sharp slowdown in Germany, the European Central Bank might now feel some pressure to lower interest rates there – or at least delay the next increase.
But when growth is slowing so dramatically and unemployment is already high, monetary policy can’t possibly do it alone.
Without an expansionary fiscal policy, low interest rates have little effect. Companies won’t borrow in order to expand and hire more workers unless they have reasonable certainty they’ll have customers for what they produce. And consumers won’t borrow money to spend on goods and services unless they’re reasonably confident they’ll have jobs.
Fiscal austerity is the wrong medicine at the wrong time.
Robert Reich, one of the nation’s leading experts on work and the economy, is Chancellor’s 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. Time Magazine has named him one of the ten most effective cabinet secretaries of the last century. He has written thirteen books, including his latest best-seller, Aftershock: The Next Economy and America’s Future; The Work of Nations; Locked in the Cabinet; Supercapitalism; and his newest, Beyond Outrage. His syndicated columns, television appearances, and public radio commentaries reach millions of people each week. He is also a founding editor of the American Prospect magazine, and Chairman of the citizen’s group Common Cause. His widely-read blog can be found at www.robertreich.org.
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85 Comments so far
Show AllHi. I don't want to be rude here, but there's a difference between "austerity" as a socio-political phenomenon and "frugality," which is an individual choice.
Austerity, in this sense, doesn't really mean counting pennies and only buying what you truly need, it means shifting the burden of gov't debt onto the backs of the middle and working classes, while kicking the truly poor right in the teeth. Austerity means cutting a program like Medicare, which is the only thing keeping many, many seniors in nursing homes. Where will they go? Most likely, they'll go back to families that can't afford them, which is why many were in homes to begin with.
Austerity means cutting money for education, healthcare, libraries, food stamps and everything else the not-rich use and need, while asking nothing of the rich themselves.
Frugality may be considered a personal virtue, but it's got nothing at all to do with the socio-economic program of austerity.
Thank you, Krycek, good point. I was confusing the two.
Okay, blueskykate1, just so I'm understanding your point of view correctly.....as long as the destruction of the planet is slowed, you are okay with your chilldren living as slaves?
No one has proven Keynesian theory wrongheaded yet. It has been utilized successfully over the past 75 years only to be abandoned by the morons in charge today who seem to revel in their stupidity.
'But policy makers on both sides seem to have forgotten that economic growth is the most important tonic.'
They never forgot. Please read 'Shock Doctrine.'
"But policy makers on both sides seem to have forgotten that economic growth is the most important tonic."
There are different brands of tonic on the shelf, and if we reach for the one that further retrenches the obsolete fossil fuel infrastructure we'll wake up naked on a crate headed for the falls.
Not highways but public mass transit. Not pipelines and hydro-fracing, but conservation and alternatives. Sadly, the cognitive dissonance of reality is just too much for the American psyche.
Look - here's the real problem nobody is willing to admit, or address:
Capitalism survives ONLY via perpetual over-consumption - AKA, demand - by the majority of We The Consumers.
We The Consumers, however, are obese - both physically and materialistically. We got enough food, water, clothing, shelter, TVs, cars, dishwashers, gadgets, etc. More than enough.
In other words, We The Consumers' demands have been, for the most part, sated. We're full - we can't eat anymore.
And that's why Capitalism is 'failing.' Because it worked.
Reich is only interested in promoting Democrats at the expense of Republicans. Therefore he over looks the biggest problem--the Middle East wars--since Democrats are equally culpable.
If it were possible for the US to do another big stimulus program, they would have already done so.
Eventually, you have to stop printing money and that is our reality.
The US economy would improve rapidly if the money we are pouring into Iraq and Afghanistan were spent at home.
Mr. Reich (bless him and may his tribe increase) always takes the tone that these decisions are made by officials who have differences of opinion but are never the less working for some kind of common good. Mr. Reich is very civil in his declarations and mostly limits his assessments to the economic realm. He also has no problem asserting his reasoned judgements even if they are entirely oppossed to the current economic philosophy espoused or expressed via default by the grandee's of the democratic party. My problem with this is that the 'conservative' economic philosophy-which is the dominant outlook regardless of the party in the drivers seat- is not a philosophy at all. It is more like a criminal conspiracy. The economists who forward the conservative scheme do so as hired guns of the corporate elite. This has been and is well documented. The purpose of this conspiracy is nothing short of the destruction of the democracy and civil society. It is important to be aware of the fact that without equality of opportunity in an individuals economic life, there can be no equality at all. The point is that these economic decisions go well beyond just the momentary economic health of the nation. Our country has been hijacked by criminals. I don't think there is a well mannered way of saying that.
WEXXTON: Your insight is sharp; and your post so "on the mark," that I'll refrain from pointing out the spelling mistakes. (Unless you'd like to improve your writing skills?)
Thank you for the kind words Siouxrose but my capacity to improve flatlined decades ago. However, I am always willing to listen.
Well said, wexxton!!
Capitalism is a System based on Selfishness. Globalization does not allow us to be selfish anymore. We are being forced to depend on each other. We keep hearing Politicians talk about creating Jobs, as the cure all for all that wrong with Capitalist system. The problems with Capitalism are deep seated; If you create a million jobs which don't pay a living wage,Why go to work? Working Americans Should Consider a General Strike. Demand living wage jobs, there is no point in working for nothing.
Reich you're trying to argue both ends. Is it about companies not able to borrow or about consumers not able to spend? Stop focusing on companies and start focusing on consumers. It's a bit old to focus on companies. Companies are mostly doing quite well compared to consumers. And what about growth? Growth is NOT the answer, because growth will accelerate climate change. It's about a fundamental paradigm shift. The level of sustainability is key. I wish that Common Dreams would quit diddling with 20th century ideas and introduce some new thinkers. Reich is old news. Do some research !
Empire of Folly...think Easter Island after the entire island was razed leaving the soil unsustainable...instead of massive statues of gods, we will get the drones and war toys, leaving the rest of the us with stagflation, and slaves to debt.
Definitely feels like Germany 1933 these days.....
Here's how to tell if you have a debt crisis:
1. If you're having to offer a 5% or higher interest rate on your gov't bonds, then you have a debt crisis. That's Greece's problem.
2. If investors will, adjusted for inflation, literally PAY you to park their money in your public sector, then you don't have a debt crisis. That's the situation here in America (1.4% interest on T-bills). Of course, we should never let the debt/gdp ratio get above 50-60% in ordinary circumstances. It offers just the kind of wiggle room during economic downturns we could use more of in times like these. You can thank R Reagan and GW Bush for that bit of idiocy. BTW: Republicans cut taxes to force economic austerity on government, and to a certain extent it works. Hence, America has been on an austerity binge for most of the last 30 years. Question: how well did this work in stimulating the economy? Other than hatching a $11 trillion debt, it did no good at all, and in fact for ordinary Americans its been a disaster. As Reich says, austerity during deep recession is just plumb stupid.
The US doesn't have a debt crisis YET. Interest rates in Greece were low too 3 years ago, but like with any bubble, at some point there's some kind of catalyzing event and everyone rushes to the exits. Per capita the US has more debt than Greece, so I wouldn't feel too smug about its finances.
Another contributing factor is that most people have a choice in their 401(k)'s between stocks and bonds. They tend to lean towards allocating a higher percentage in bonds during uncertain times, and stocks when they feel more justified in taking risks. In the current climate of financial crisis this causes a huge rush into bond funds and treasuries because they don't know any better. But this model of bonds vs stocks is flawed and many people are going to lose their shirts if they don't get out of dollar denominated investments while they still can.
Finally, austerity binge for 30 years? The past 30 years were a period of unprecedented easy credit and low interest rates with Greenspan, then Bernanke, using the tool of lowering interest rates to solve any problem. This has caused a massive overhang of debt that is finally beginning to catch up with us. We are now entering a period of inflation with higher interest rates as the dollar finally loses its reserve currency status, if you think the past 30 years were "austere", wait until you see what's coming next..
It is laudable of Professor Reich to call for a re-creation of New Deal infrastructure jobs programs like the CCC. He also calls for a restoration of FDR's WPA, which included a much wider variety of jobs outside strictly infrastructure jobs, including jobs for map makers, photographers, writers (even, for a brief time, playwrights), fresco painters, etc., to help maintain American artistic culture.
Such programs would have to be twice the size of those original programs to match the increase in population to get enough people THROUGH the next 10 to 20 years of neo-liberal globalized structural decline, plus peak fresh water, plus peak oil. Traditional infrastructure jobs and even a more occupationally diverse WPA are not, in and of themselves, sufficient to do what is necessary: To completely reconfigure the U.S. economy and ecology to be healthy, sustainable and much more socially just and economically fair.
Such a transition demands a well thought-through Green New Deal that dynamically effects a revolution and maintains for the long-term a new system for how we maximize the generation and use of clean renewable energy, distribute food, heat and cool our homes, apartments and commercial buildings, transport goods and people, provide health care, educate our citizens and envision public media--especially public mass media--and re-link wages to worker productivity (something U.S. plutocrats and politicians de-linked two decades ago).
I think for such a revolution to be successful on a long-term basis there must be a restoration of the Constitution and Bill of Rights with prosecutions of those guilty of high crimes; a phasing out of the neo-liberal "absolute advantage free trade" regime; a judicial overturning of all federal court and Supreme Court decisions (and court clerk scribblings) since 1886 that have advanced the odious notion--manufactured out of whole cloth--that "corporations have legal personhood" with rights and liberties equivalent to those of flesh and blood citizens, and a repeal of the Taft-Hartley Act of 1947 that overly limited how labor unions could organize or engage in several types of labor strikes. [I would qualify that by saying I share FDR's skepticism regarding the unionization of public sector employees, who I think do require more limits on their striking abilities than private sector unions. They should have their wages permanently linked to the cost of living index and have the right to collectively bargain over benefits.]
In addition there are the last 40 years of bipartisan, anti-democratic, socially unjust and economically capitalist crony-skewed polices to reverse, including:
(1) Corporate collectivization of small and medium-sized family farms into gigantic industrial farms in order to drive as many family farmers and local agricultural workers AS HEARTLAND VOTERS off the land and into urban areas seeking industrial and (increasingly over time) service wage jobs.
(2) Absolute advantage "free trade" offshoring of middle-class manufacturing jobs to drive industrial workers AS URBAN, SUBURBAN AND RURAL VOTERS into the ranks of service wage workers or the unemployed--both groups who have less means to participate in the democratic process and tend to decline in voter participation as their incomes decline. [Note: Corporate collectivization of family farms & absolute advantage "free trade" offshoring were two arms of a Milton Friedmanite neo-liberal strategy to preclude the formation of a populist progressive voter coalition of rural agricultural workers & urban industrial workers as advocated by the old populist William Jennings Bryan--a strategy that has succeeded beyond Milton Friedman's wildest Zionist plutocratic dreams.]
(3) Legalization of usury in all its forms.
(4) Deregulation of corporations (including big banks).
(5) Deregulation of mass media cross-platform ownership and the illegal sale of the public's digital spectrum.
(6) The weakening or revolving door corporate crony non-enforcement of government oversight with respect to federal cabinet level regulatory agencies and State level EPDs.
(7) Proliferation of privatized prisons that lack oversight from the Federal Bureau of Prisons, and growing corporate reliance on severely underpaid prison labor.
(8) Conduct of the Federal Reserve completely beyond its charter and any substantive Congressional or Executive regulatory oversight.
(9) Massive federal level political crony bailouts and subsidies for criminally speculative banks, hedge funds, other shadow banks and large insurance firms who insure under-regulated derivatives.
(10) Similar bailouts for politically connected crony corporations.
(11) Militarized & privatized neo-liberal foreign policies that corporately incentivize illegal preemptive wars triggered by "suspicion of a threat to national security" [the Bush Doctrine] instead of "evidence of clear and present danger to national security" [the Constitutional war trigger for 226 years of American history until 2002].
(12) The related war crimes masking, un-Constitutional obliteration of habeas corpus, the Constitution & Bill of Rights (except for the 2nd Amendment--so far), the Geneva Conventions and international war crimes statutes that the U.S. itself was instrumental in creating as a body of international law resulting from the Nuremberg War Crimes Tribunals.
Is Amurka up to such challenges anymore? Or will a series of chaotic, disorganized, demand-lacking, poverty rebellions be crushed along with the last embers of democracy? Have you looked at the bat-shit crazy religious whackos running as top tier Republican presidential candidates? Have you been able to force yourself to listen to any of Obama's inane lies and babbling since his staged "debt ceiling debate"? Have you noticed no one on the ENTIRE American "Left" (such as it sort of, kind of, maybe sometimes is) has the guts to stand up and run to the left of Obysmal? Have you noticed the utter lack of ANY large U.S. protests against all of the above when they've been taking place all over Europe, the UK, the Arab world (even some large public rallies inside Saudi Arabia for Allah's sake!)???
With all the unemployed people what would you attribute the lack of civil protests to?
Certainly people are not splurging this summer at least not in general.
I would think the unemployed as well as the college students facing no jobs and loans would organize and hit Washington D.C. and New York City like The Macy's day parade for weeks this summer this being 08 18 11.
I am willing although not able without help to be a body there protesting non-violence and making sure things were noticed.
Merchants would shortly be between a rock & a hard spot when tens of thousands upon thousands blocked their side walks and parking lots & only the food trucks and restaurants would make out.
The elite money would run ride fly or get to the Hamptons or in Washington D.C. The Beltway restaurants we pee-ons couldn't afford anyway.
After journalists showed another March on Washington happening also in The Big Apple with thousands marching more would join like the truckers in the 1974 .
I wish i knew how to set up a web page Titled March on The big Apple & Washington 2011.
New York closes Wall street and G/S & AIG employees stay home for a vacation.
I bet it would send a message to boycott China's merchandise.
Please see this:
http://en.wikipedia.org/wiki/Busses
Thenemo1 on Twitter.com
Thanks for any help or civil advice
Matters are even madder than Reich supposes. Announced today is Merkel and Sarkozy have agreed in their respective countries, "to introduce a balanced budget rule to the constitution." http://news.yahoo.com/sarkozy-merkel-push-euro-unity-no-joint-bonds-015857325.html
Without hyperbole, it seems to me the Western world, at least, is for the first time since the end of the Eighteenth and throughout the Nineteenth Centuries, poised for a series of revolutions as the status of the majority sinks into poverty. What I do not understand is what is driving this decline into financial austerity.
Yes, yes, I know commondreamers will always reply money interests control the government, but engendering such a decline in the standard of living of the majority is so replete with danger, even business interests are not so stupid as to ignore it. Being obviously self-destructive, how can it be explained?
Some "business interests" are more equal than others. The U.S. plutocracy has grown thirty-fold since 1986 (the year the Democratic Leadership Council was founded to sell out the Party to plutocracy wholesale). There are now enough billionaires in the U.S. for the five or six most powerful oligarchs to line up less powerful billionaires behind them in factions within the upper-class while the dominant oligarchs vie for more concentrated power: Triumvirates or Caesar-hood.
On a global scale there are enough billionaire oligarchs in Asia now to vie with U.S. and EU oligarchs for control of key world resources and financial hegemony. I suspect the only thing preventing this from degenerating into an open slug-fest (economically and militarily) is the fact that the U.S. dollar is still the world's key reserve currency that nearly all countries use to pay for their multi-billion dollar oil purchases (with our "too big" banks skimming $billions in profits from these transactions every year), and the foreign big players are waiting for our tremulously over-extended empire to topple.
I suspect there is a battle of the oligarchs going on inside the U.S. that is manifesting itself politically in the sort of fringe libertarian and religious extremists who keep storming to power at the State level and moving closer to the Washington D.C. power center. I think the pluto-libertarian Koch brothers lead one of these bellicose oligarchical factions. I think they are vying with status quo neo-conservatives like the Bush Dynasty and a few remnant paleo-conservatives like Warren Buffet. Each of these billionaires have powerful supporters within their own class and are ideologically opposed to each other in certain key respects.
"metal," you provide a plausible argument. With the economic rebuilding of Europe and Japan following World War II, initiating with the Carter administration, to compete, the U.S. increased productive and decreased consumptive investment. Economic development of China and India accelerated disproportionality of this investment, now accelerated even more by development of other third world countries, such as Brazil. Effectively, this "Neo-Mercantilism" is to what the Chicago School of economics comes.
Because of the disproportionate ratios of productive to consumptive investment, necessarily money will concentrate in the hands of a few. As Marx pointed out, however, demand correspondingly decreases, generating an accelerating business cycle. Your analysis of the palliative effect of the dollar as the world reserve currency seems correct. Difficulty here is similar to that currently confronting the EU. By tying multiple economies to a single currency, the ability to resolve debt by devaluation is constrained, accelerating decline in consumptive investment.
As the standard of living throughout the world correspondingly declines, while wealth concentrates in the hands of a fewer and fewer, an increase in probability of civil war substitutes for the probability of international war. Accelerating this phenomenon is the effective decline of the state, as the increased concentration of wealth constitutes an effective return to feudalism. In this circumstance, historically feudalism collapses into bourgeois dominance.
Perhaps this political cycle should replace the business cycle in analysis, although exhibiting a longer run.
John Maynard Keynes had the right idea--fifty years ago. Sometime in the 1980's the global economy began to outstrip the biosphere's ability to support it. Since then, it should have been apparent that the strategy of growing our way out of our economic difficulties is futile.
"How Austerity Is Usering In A Global Recession" & the descent into fascism
from the Peter Petroff Archives - "The Growmg Opposition in Germany", 1935
"Wages have gone down & down.......For some time the workers in the armament industry were still in a somewhat privileged position. Now there is a general tendency to level wages. The depletion of all social services and the severe cuts in unemployment benefits (by one third or more) further lowered the
standard of life. The Nazi government is appropriating hundreds of millions of marks from the insurance funds of the workers (1933, 200 million from the unemployment insurance alone) for the exchequer to spend on armaments."
& this,
"The opposition of the various sections of the population is not yet coordinated and lacks organization. It finds queer expression in many ways -. religious, particular, cultural, social" -
Any relationship to the here & now in America? If so, on the calendar of pre-war Germany, whet time is it now?
When the economy started getting into trouble in the late 1920s, President Herbert Hoover responded with fiscally "responsible" belt tightening. What happened? We entered the Great Depression. FDR was then elected, listened to John Maynard Keynes, and instituted the New Deal beginning in 1933. For the next three years, the US experienced double-digit growth in GDP. In 1937, FDR listened to the deficit hawks of the time and sought to balance the budget. The US once more entered a recession. FDR quickly reversed his decision and again pushed for greater public spending, and the economy returned to rapid growth that continued unabated right through WWII.
"Those who cannot remember the past are condemned to repeat it." -- George Santayana
NeoRedpill, Thanks for reminding us of this.
NeoRedpill knows his history!
Follow the money supply. What does the government borrow when it borrows? However I think that Keynes still believed in the private creation of money by the banking system. That is the reason for the debt problem.
Government creation of money need not require interest, and does not have the same parasites living off it, but needs to be open and visible and widely understood by the public and not supplemented by private creation of credit money/bank money by the private banking corporations. Follow the money!
The first step in the right direction: take politics out of this. This isn't a game of politics, this is a very serious game of survival. The EU has become so rigid, that if one country starts slipping so do the others. And the euro allows absolutely no flexibility among EU members. In olden days, a particular country would have devalued it's currency - now all of us are in the same sinking boat. If laws are not enforced, then what good are they? There is a limit of debt for EU countries, yet each and every one has exceeded this limit and Brussels says nothing. Why bother with a European Parliament? It has turned into a bureaucratic dictatorship because we, the average citizen, don't get to vote on anything that goes on in Brussels or Luxembourg or Strasbourg.
How nice it would be to take the politics out of it. However, the practical operational definition of politics is Who Gets What. Who gets the money and who gets the knife.
There is no possibility of separating the two. On the upside, we always know in advance who will prevail.
Everyone complained about the bailout moves, now everyone complains austerity measures...make up your mind Americans! cant have it all...there is always a price to pay.
Rub that lamp a little harder Aladdin and maybe things will get a bit more clear. The bailouts went to the thieves, the austerity gets applied to the victims....do you see a pattern here?
If Congress coined/printed the money supply, and regulated the value thereof, as it is supposed to do, by the constitution, preventing the production of other money, or substitute thereof such as by any private corporation including the Fed and the rest of the banking system, then the debt and interest problem would melt away, and the bankers and investment dealers would turn to useful employment.
"Fiscal austerity is the wrong medicine at the wrong time." Well that
depends on what the objective is. If the objective is to create a global
oligarchy and one world government, then it is exactly the right medicine.
We are facing a global depression because the world's peoples and their leaders do not yet fully understand that their underlying economic system is broken. I won't call the system capitalism in deference to the system described by Adam Smith, perhaps corporatism would be a better name for it. Any system that depends on continual growth is doomed to failure in a world of finite space, energy and physical resources. We have bumped into those limits. Because evolution has wired our brains to give priority to short term survival over the longer term health of the village or the species, we continue to make poor decisions. The drive to austerity is one of them. But the alternative of attempting to stimulate the economy to return to a fondly remembered past are just as misguided. Perhaps the austerity hawks will do us a great service by accelerating the collapse of our failing system so that we can get on with the work of transitioning to a more robust system based on lower consumption and a less extreme distribution of work and wealth.