The Fiscal Myth That’s Killing The Economy, In 7 Steps
A new economic working paper reinforces an important reality: We need more government spending to repair the economy for millions of working Americans. Unfortunately, our political debate is being held back by an economic myth – one that has yet to be challenged in political debate, despite an ever-growing body of evidence against it.
The paper, by Josh Bivens of the Economic Policy Institute, is called “Why is recovery taking so long – and who’s to blame?”
The myth is called “austerity,” and it can be roughly defined as “the persistent but false belief that government spending cuts are always a good idea.”
Here are seven things about austerity worth knowing:
1. Our current recovery is too slow, and isn’t reaching everybody it should.
As Bivens points out, employment took longer to reach its pre-recession levels this time around than it did in the previous three recovery periods. Perhaps even more significantly, the rate of job creation remained slower after the recession officially ended.
What’s more, the jobs created after the 2009 crisis were weighted heavily toward lower-income professions. Labor force participation for people of working age remains low, even though it has improved somewhat.
And, as the Center for Economic and Policy Research recently reported, the percentage of people who are involuntarily working part-time rather than full-time is 25 percent higher now than it was before the recession.
As CEPR’s Nick Buffie notes, “Over 6 million people are working part-time involuntarily, and on average they work 23 hours per week. Because full-time workers are typically employed 42–43 hours per week, this is effectively a wage cut of almost 50 percent for the affected workers.”
2. The weak recovery affects a lot of full-time workers.
It is not just the unemployed and underemployed who are affected by the weak recovery. Many full-time workers are earning less than they would be if the economy had rebounded at a faster pace, creating more and better jobs than it has.
The American middle class needs a raise. But millions of people won’t get their raises until the economy is stronger and the demand for workers goes up. And demand will remain low until there are more jobs to fill.
3. We know what to do about it.
Government has two tools at its disposal in situations like this: monetary policy and fiscal policy. Monetary policy was promptly deployed after the latest crisis, both to bail out Wall Street and to improve the overall economy. The Federal Reserve should have been more attentive to the Main Street economy, using some of the creativity it used to rescue the financial sector, but it did cut interest rates and that helped.
Unfortunately, fiscal policy, in the form of job-creating government spending initiatives, was used only sparingly at the federal level. Over the past seven years there have been spending cuts at the federal, state and local levels. That’s the opposite of what’s needed, especially in an economy like this one.
As Bivens points out, it’s necessary to increase demand under conditions like those we see today. A simplistic overview of the process: The government creates jobs, the people who get those jobs spend more, the economy’s “pump” is primed and growth follows.
We aren’t talking about radical, far-left ideas here. This approach has been mainstream economic thinking for many decades, and was successfully applied under Democratic and Republican administrations alike.
4. We relied on the myth of austerity instead.
But recent years have seen the rise of different ideas – ideas that were tended and nurtured by right-wing institutions like the Peterson Foundation, and by conservative economic thinkers too numerous to mention. “Austerity economics” – the belief that governments can cut their way to growth – became conventional thinking in the halls of academe and the halls of power. It is obsessed with deficit spending, to the exclusion of other concerns that are often more pressing.
Austerity-driven cuts have hurt the U.S. economy. Austerity’s done even more damage in Europe. When the global financial crisis of 2008 struck, multilateral decision-makers (including the European Central Bank and the International Monetary Fund, or IMF) imposed a harsh austerity regimen on Greece and other struggling European economies. The result, as we now know, was disastrous.
To its credit, the IMF conducted an internal review of its actions during this period. The report found that IMF officials ignored a number of warning signs and had a “strongly optimistic bias” about the effects of austerity. The report also agreed with an earlier investigation that found “a high degree of groupthink, intellectual capture … and incomplete analytical approaches.”
That’s pretty much what happened here, too.
The crisis of 2008, and the events that followed, disproved austerity economics and other hallmarks of conservative economic thought. But it remains popular in powerful circles – perhaps because, as Upton Sinclair said (in the gendered language of his time): “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
5. It’s mostly a Republican problem …
Despite ample evidence to the contrary, Republicans remain steadfast in their opposition to government spending – even for government jobs like teaching, firefighting, and emergency management.
As Bivens explains:
“We are enduring one of the slowest economic recoveries in recent history, and the pace can be entirely explained by the fiscal austerity, particularly with regard to spending, imposed by Republican policymakers, members of Congress primarily but also legislators and governors at the state level.”
The Republican Congress can even take much of the blame for state-level spending cuts, since transfers from the federal government account for more than 20 percent of state and local spending.
Bad economies aren’t an act of God. They are a result of human action – or inaction.
6. … but a lot of Democrats have bought into the myth, too.
A number of top Democrats echoed the rhetoric of austerity, too. That led to weaker political support for the spending we needed, and probably clouded the judgment of Democratic leaders when it came time to make the case for needed spending increases.
President Obama spent far too much time fighting for a “grand bargain” on spending with congressional Republicans that was rooted in austerity thinking, and too little time challenging that thinking. He also had the habit, especially in his first term, of echoing the false economic tropes of the austerity crowd by saying things like “just like every family in America … the Federal government has to live within its means …”
National budgets don’t work like family budgets at all – that is, unless the family in question issues its own sovereign currency.
There are strong hints of austerity-oriented thinking in Hillary Clinton’s rhetoric, too. That puts her at odds with enthusiastic backer Paul Krugman, who wielded a poison pen on her behalf during the Democratic primaries but is currently making the case for borrowing and spending.
Austerity thinking was highlighted at last month’s Democratic National Convention when Gene Sperling, a senior economic advisor to former presidents Clinton and Obama, was featured in a humor-oriented anti-Trump video produced by “Funny or Die.” Whether or not hilarity ensues must remain a matter of personal opinion, but the video clearly relies on austerity economics – specifically, an exaggerated fear of deficits – to scare viewers.
There has never been a better time for the federal government to borrow money and invest in the economy. It can obtain very low interest rates, the economy would respond very well to job creation, and we urgently need to spend money on repairing and expanding our national infrastructure. (The American Society of Civil Engineers says we need to spend $3.6 trillion by 2020.)
7. We need a national debate about austerity economics.
Hillary Clinton has proposed modest levels of infrastructure investment and other government spending – modest, but better than nothing. President Obama put forward similar spending proposals. But these proposals suffer from a fatal flaw that renders them useless in today’s climate: They’re too large to get past the Republicans in Congress and too small to change the political debate.
Democrats have not directly challenged Republicans on government’s proper role in the economy. Too often, they have tried to co-opt the rhetoric (and sometimes the policies) of austerity instead.
Republicans, on the other hand, offer a clearly articulated and internally coherent (if utterly fallacious) economic perspective. Democrats can also offer a coherent perspective, too – one with the added advantage of having been proven by experience. That perspective can make life better for millions of people.
This is the economic debate this country needs. But we won’t get it until someone challenges austerity economics and the conservative philosophy behind it – directly, unambiguously and fearlessly.