We Will Grow the Economy By Shrinking It

A man is wise with the wisdom of his time only and ignorant with its ignorance. Observe how the greatest minds yield in some degree to the superstitions of their age. -Henry David Thoreau

A man is wise with the wisdom of his time only and ignorant with its ignorance. Observe how the greatest minds yield in some degree to the superstitions of their age. -Henry David Thoreau

Throughout human history societies have been informed and instructed by the superstitions of their age. For thousands of years we believed a single person-a king, a pharaoh, a high priest- should have life and death power over us. Any other social structure was unthinkable. We believed the gods that brought drought could be appeased only by animal and, sometimes, human sacrifice.

Today these superstitions seem ridiculous. How could thinking people ever have believed such preposterous notions?

But here we are. August 2011. And the zeitgeist has given birth to a new superstition. One that will bewilder future generations as much as the belief in the absolute power of pharaohs or drought reflecting the anger of the gods does ours.

What is this new superstition? The belief that we can grow the economy by shrinking it.

The idea defies common sense. And yet in just two short years it has become the fundamental guiding principle of public policy.

The story begins with the financial and economic collapse of 2008. Housing starts ground to a halt. By early 2009 unemployment was in the process of doubling. The economy was all but dead in the water.

With private investment having all but dried up, the government stepped in. The three year stimulus bill, passed in early 2009 was too modest, a result of President Obama's mistaken belief that if he asked for less and made tax credits to business almost as large as the direct job creation component Republicans would be supportive.

Many thought the stimulus was too small. Some thought it too large. But conservatives offered a nonsensical bizarre proposition. The additional spending was useless. Rick Scott, the Republican candidate for governor in Florida, accused his Democrat opponent of having "backed the failed stimulus bill, which created debt, not jobs." The Koch brother-funded group Americans for Prosperity launched a series of ads that claimed the "$787 billion stimulus ... failed to save and create jobs." Presidential candidate Michelle Bachman recently declared, "had the President done nothing we would have seen 288,000 jobs created this week. Instead, we're losing jobs."

A delighted Fox News has spread the narrative far and wide.

How can anyone believe the government could borrow hundreds of billions of dollars, much of it from foreigners, spend it domestically and not create any new jobs? A reasonable person might argue that in the long run the increased debt might raise interest rates and higher interest rates might slow economic growth. A reasonable person might argue that in the long run increased debt might lead to higher inflation, which might have a damaging impact. But to argue that in the short term injecting $800 billion of new spending into the economy has no positive economic is lunacy.

Governments that were going to lay off people did not. Bridges that would not have been built were. Millions of households that would not have had spending money did.

The most credible analysis concludes that as of June 2011 the stimulus resulted in an increase in full time employment of between 1.6 and 4.6 million.

Conservatives argue that left to its own devices the private sector would have quickly righted the economy. Well, the private sector largely was left to its own devices. We should remember that a stimulus of about $250 billion a year was injected into a national economy approaching $15 trillion. History proves otherwise.

The private sector didn't come to the rescue. In 2009 according to Steven Benen of the Washington Monthly it lost more than 4.5 million jobs. In the succeeding year and a half, according to the Bureau of Labor Statistics, it made back a little more than a third of that loss, mostly with low age, low benefit jobs. By June of 2011 the stimulus spending had largely run is course but that seems to have had no stimulating effect on big business. At the end of 2009 U.S. corporations were sitting on $1.6 trillion in cash. As of June, excluding banks and other financial corporations, their hoard had increased to $1.9 trillion.

The stimulus money is gone. State and local governments have lost almost 500,000 jobs since January 2009, more than 160,000 in the first six months of 2011 alone, and massive budget cuts in more than two dozen states whose fiscal years began July 1st will quickly lift those numbers. The federal extension of unemployment insurance will run out in December.

With the conversion of President Obama the argument has been transformed. The debate about raising the debt ceiling was not about whether we should cut public spending during the worst economic recession in 70 years, but about how fast and how much. The debt deal promises to shrink federal spending by more than $2 trillion. The day after the agreement was signed Senator Alan Simpson and Erskine Bowles, cochairmen of the National Commission on Fiscal Responsibility and Reform weighed in with an editorial in the New York Times arguing that federal spending must shrink by more than twice that. As part of the debt ceiling agreement the Congress will vote on a balanced budget amendment to the Constitution.

Reporters are having a difficult time reconciling their new embrace of the proposition that shrinking the economy will grow the economy with the facts on the ground.

The day before the debt ceiling agreement was signed the New York Times headline announced, Optimism on Wall Street. "After an anxious weekend spent glued to their BlackBerrys and Phones, bankers and investors breathed a sigh of relief Sunday as lawmakers forged an agreement to raise the nation's debt ceiling ahead of Monday's trading. Wall Street was hesitant to declare a total victory, though, because lawmakers still faced the hurdle of getting a bill through both chambers of Congress."

The next day, after Wall Street could justifiably declare a total victory, the Times business headline read, World Markets Staggered. But still the reporters held to the superstition of the age. "Market analysis and economist made clear that even though the debt limit agreement averted a potential default on United States debt, the drawnout process had taken its toll."

Apparently, markets fell because it had taken congress so long to raise the debt ceiling, not because of the substance of the agreement itself.

The day after the agreement was signed the stock market plunged more than 2 percent. The next day it dropped another 2 percent. Two days later it dropped another 5 percent

A fierce symmetry is at work. Congress agreed to shrink public spending by $2 trillion. The next week stock market capitalization plunged by almost $1.5 trillion.

Welcome to the new era of austerity, driven by the superstition of our age. We will grow the economy by shrinking it.

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