The current recovery is seriously being threatened once again by what economist Paul Krugman calls "the deficit hawks." They advocate austerity with tired old arguments that have been shown time and again to be fallacious. Their absurd theory is that every dollar spent by government is one less dollar available for spending in the private sector thus cancelling out the spending multiplier leaving net zero stimulus. This myopic "idea" is not only simplistic (and wrong) but reveals the trouble conservatives have with considering the value of collective action and cooperation. When the economy is in recession because households are massively deleveraging their consumer debt while private businesses are loathe to invest due to the unusual risk involved considering the slow economy, it makes sense for the single largest entity in the economy, namely the federal government, to borrow from (and tax) the private sector. This is because consumers and businesses aren't spending and investing, so it is necessary for the government to spend and invest in order to restart economic growth and dramatically reduce the risk of private economic activity as jobs are created and business profits increase through higher sales.
Similarly, the crowding out theory, the notion that government borrowing will "crowd out" private borrowing by swelling demand in credit markets putting upward pressure on interest rates and downward pressure on economic growth, is unfounded as well. The problem is that the private sector is reluctant to borrow money to spend and invest due to the risks posed by the slow economy. Income and investment returns aren't assured. Consumers are deleveraging, businesses often can't borrow and interest rates are thus low due to what Keynes called a "liquidity trap" whereby zero bound interest rates still won't increase borrowing and investing. Thus, we see empirically that interest rates have consistently remained low despite high deficits.
This should be obvious to everyone although I suspect that tea party stubbornness is due more to partisan politics than sound economics. History has always proven the austerity advocates wrong. The idea that we are headed for a Eurozone type crisis is absurd; the US economy consists of one quarter of the global GDP and holds the biggest export markets in the world. Furthermore, unlike EU members, the US prints its own currency. Our trade partners are always happy to lend us money for fiscal stimulus to support assure their US export markets, keep US interest rates low and protect their bond investments (making tax increases on all but the rich unnecessary). Thus, threatening to default on publicly owed debt is incredibly stupid and can only harm the economy.
The austerity hawks are once again attacking the necessary recovery measures with the usual absurd arguments about how dramatic cuts in spending and deficit reduction will restore a friendly business climate and the investor confidence necessary to spur job creating investment. Can anyone honestly imagine a CEO of a major transnational corporation telling her fellow board members something along the lines of, "Like all of you here, I too recognize the need to act now and invest our ample retained earnings in the production of a highly popular consumer item and secure for us a large market share before our competition permanently outmaneuvers us but the current federal debt is simply to high to allow us to go ahead!" To anyone listening to the austerity advocates' version of economic theory, the above fictional statement would become believable. But of course, it is utter nonsense. Brown University professor, Mark Blyth explains how the unnecessary congressional brawl over the debt ceiling in 2011 between Democrats and the new tea party fanatics did more harm than anything else and why the tea party partisans missed the point. In his brilliant book, Austerity: The History of a Dangerous Idea, he critiques the austerity hawk version of the economic crisis,
Take the reason S&P's gave for downgrading the US credit rating. They claimed that, "the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate...will remain a contentious and fitful process." Yet the DJIA didn't fall off a cliff because of the downgrade. To see a downgrade on Friday followed by a DJIA collapse on Monday is to confuse causation and correlation. Had the markets actually been concerned about the solvency of the US government, that concern would have been reflected in bond yields...before and after the downgrade. Bond yields should have gone down after the downgrade as investors lost faith in US debt, and money should have flowed into the stock market as a refuge. Instead, yields and equities fell together because what sent the markets down was a broader concern over a slowing US economy: a lack of growth.Blyth goes on to point out the irony of the entire budget fiasco of 2011, which gave us the real job killer; the Budget Control Act. Passed in 2011 in lieu of a FY2011 federal budget, the BCA issued a mandate to cut well over $2 trillion in discretionary spending between 2012 and 2021. The bill called for over a trillion in mandatory caps on discretionary programs and another $1.2 trillion "across the board" spending cuts to be passed by Congress and backed up by an unprecedented automatic sequestration process to ensure compliance with the austerity mission of the congressional tea party partisans should agreement fail to be reached. The BCA's potential for slowing the recovery was acknowledged immediately by all including the Congressional Budget Office. Thus, Blyth notes the irony of the BCA by pointing out, "...the debt ceiling agreement of August 1, 2011, between Republicans and Democrats in the US Senate that sought $2.1 trillion in budget cuts over a decade (austerity), was supposed to calm the markets by giving them the budget cuts that they craved. Yet this renewed commitment to austerity signaled lower growth due to less public spending going forward in an already weak economy, and stock markets tanked on the news."
We know that austerity is a big disaster. When it was tried in Europe by highly indebted countries such as Portugal, Ireland, Italy, Greece and Spain (PIIGS) in the wake of the global financial crisis of 2008, both debt to GDP ratios and bond yields on these countries' "sovereign debt" rose dramatically! The reason is that these EU member states had long suffered a structural trade imbalance with chronic surplus countries like Germany. When the financial crisis and recession hit in 2008, it reduced their export markets within the EU, and the "PIIGS" economies collapsed with deficits piling up as jobs and tax base were destroyed. Austerity was no help and crisis in the EU continues. No one ever cut their way to prosperity.
The current Ryan Budget is exactly like the one proposed a couple years ago; in this one about 69% of the spending cuts come from programs that assist the middle class, the working poor and the unemployed. It is amazing that a budget that slashes $137 billion in the Supplemental Nutritional Assistance Program (SNAP) over the next ten years also gives more lavish tax cuts to the richest one percent of households. This is exactly the spending that most economists tell us have the highest spending multiplier in the economy (and hence the greatest stimulus potential) because it is all spent immediately by needy families. It is clear that the tea party fanatics aren't eager to boost GDP growth; they want to shrink the state ("starve the beast") and give greater tax relief to their rich supporters.
We need to say no to the Ryan budget proposals mostly because austerity has been shown to worsen deficits not reduce them. This is because spending creates growth and tax base with which to pay down deficits. The Ryan proposals do the exact opposite; they starve the government's source of revenue through austerity and tax cuts for the very rich while starving the economy of needed stimulus and job creation that would build a larger tax base through economic growth. It's time to learn the lesson that deficits don't cause recessions and economic crisis; Recessions and economic crisis cause deficits!