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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!

 

Originally posted to steve1960 on Thu May 01, 2014 at 01:37 PM PDT.

Also republished by Community Spotlight.

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Comment Preferences

  •  Unfortunately my most recent Dem. candidate (0+ / 0-)

    for Governor, Bill White, has joined the "balanced budget" forces.
    I don't know what his future plans are, but I'm disappointed but not surprised. He wasn't exactly a flaming liberal.

    You can't make this stuff up.

    by David54 on Thu May 01, 2014 at 02:13:31 PM PDT

  •  Has Austerity OCD (1+ / 0-)
    Recommended by:
    PipeUp

    made it into DSM V?

    Best Scientist Ever Predicts Bacon Will Be Element 119 On The Periodic Table

    by dov12348 on Thu May 01, 2014 at 02:39:57 PM PDT

  •  Good diary, one correction, however: (2+ / 0-)
    Recommended by:
    Calamity Jean, Sinan

    The total deficit  =  how many dollars are in the private sector, to a penny.

    The Public Sector Deficit is the Private Sector's net financial asset.

    How large should the deficit be?  As large as is required to run the economy at full capacity (full employment, as long as we don't become an economy more fully reliant upon robot slave labor to provide most of what we need).

    And small enough so as not to create too much inflation.

    The deficit should merely be the outcome of running a smart real economy of real things and resources.

    It's just the left hand side of the national accounting ledger.

    Also, then there's the foreign trade deficit, which is part of the private sector.

    It's difficult to have a public surplus (pay down the deficit) when you're running a foreign trade deficit without creating a domestic private deficit, cuz domestic incomes = public sector spending  - foreign trade, which is in deficit:

    Public Sector +1 = (Domestic Private -2) - (Foreign Trade +1)

    To have both the public sector and domestic private sector in surplus at the same time, you have to have a large enough foreign trade surplus to pay for both.

    The Deficit is just an accounting entry, keeping count of how many dollars are in the private sector, both domestic and foreign.

    As Timmy Geitner put it, the fed gov is like the bowling alley, keeping awarding points to the players.

    No one ever worries about the bowling alley running out of points, and no one worries about paying the bowling alley back.

    •  <nitpick> (0+ / 0-)

      Change "deficit" to "debt" in paragraphs 1 and 2, and replace "difficult" with "impossible" in paragraph 8. Otherwise, I agree completely.

      Let's also take notice that the Ryan budget is designed to drive as much net spending as possible directly into the hands of the 1%, meaning that even if a deficit is achieved, the 99% will not share in the rewards of growth. Not all deficits are created equal.

      ...if you plant ice you're gonna harvest wind. (RH/JG)

      by telebob1 on Thu May 01, 2014 at 04:47:31 PM PDT

      [ Parent ]

      •  I prefer "total, or cumulative, deficit" to the (0+ / 0-)

        word debt, as debt conjures up household debt, and the national total deficit isn't at all like a household debt.

        Yes, "impossible", not "difficult".

        Correct, not all deficits are created equal.

    •  MMT (0+ / 0-)

      Looks like we have a winner...well done. I agree completely.

      Do facts matter anymore?

      by Sinan on Fri May 02, 2014 at 09:03:19 AM PDT

      [ Parent ]

  •  Read "The Crash of 2016" by T Hartmann (0+ / 0-)

    Why can Republicans appear on even MSNBC and not be challenged on policy and theory which has been proven to be simply, WRONG. They get a pass which implies equal validity to all views.

    "The devil can quote Scripture to serve his own purposes."

    by SpringHopeCarolina on Thu May 01, 2014 at 07:17:15 PM PDT

    •  You point out something that makes me so mad... (0+ / 0-)

      It almost makes me as mad as gutless Dems--the way the GOP can say or do ANYTHING, no matter how egregious or wrong, and get clean away with it and not even be challenged by the very people who are supposed to challenge them.

      •  The Dems aren't gutless. (0+ / 0-)

        They're in on the game.

        "Americans have a strong devotion to afflicting the afflicted and comforting the comfortable. They have a hard time contemplating any meaningful overhaul of the rules of their political system" -- Alec Baldwin

        by Sagebrush Bob on Sat May 03, 2014 at 04:26:09 PM PDT

        [ Parent ]

  •  Obama's Economic Hit Man Alan Simpson (2+ / 0-)
    Recommended by:
    Jakkalbessie, jbsoul

    on Paul Ryan:

    Former Sen. Alan Simpson (R-Wyo.) praised Republican vice presidential candidate Paul Ryan on Friday, lauding the Wisconsin congressman as a "spokesman of hard truth against fakery."

    Simpson, who co-chaired President Obama's commission on debt and deficit reduction with Erskine Bowles, said during an appearance on Fox News that Ryan "encourages" him.

    "Erskine [Bowles] and I felt he was one of the sharpest guys we dealt with," Simpson said. "He doesn’t have to have a staff member there feeding him stuff and little memos. He can go a half an hour without a note. He knows the issues.”

    Bipartisanship. It's what's for dinner. But it's not very filling.
  •  They are defenders of the Faith (1+ / 0-)
    Recommended by:
    jbsoul

    Because the facts are not on their side. Belief is all they have - and the attention of the Very Serious People who listen to them.

    "No special skill, no standard attitude, no technology, and no organization - no matter how valuable - can safely replace thought itself."

    by xaxnar on Thu May 01, 2014 at 08:19:12 PM PDT

  •  Put them on Snap (2+ / 0-)
    Recommended by:
    hbk, jbsoul

    Instead of giving our elected politicians a paycheck, pay them minimum wage for the hours they actually work at the office or in chambers, take away their healthcare, food, drinks and lodging budgets, and then subsidize them all on welfare, Snap, transportation and anything else they would qualify for and make them live in Washington in low rent housing. I wonder if they had to stay in Washington instead of the 20 hours a week they are commonly there and can't run home or receive money or care packages how many would feel austerity is this huge hand out?

  •  saw CNN reporting on the jobs report (3+ / 0-)

    look, jobs
    INFLATION COMING?!?!
    it's not as rosy as it seems.

    so, it's bad because it will cause inflation, but not good enough, because (and truthfully) lots are still unemployed

    One wonders how they handled the few bush months that hit this level.

  •  The Govt is always responsible for its own (0+ / 0-)

    interest rates, not the market. Or do people think that QE and the Fed's ZIRP are some accident or manifestation of the market?

    The US Dollar does not come from taxpayers or China, the private sector or the 1%, the US Dollar comes from the US Govt.

    Issuing securities is not borrowing. This completely misleads  readers about the way the monetary system works. T-bonds are not a mortgage, nobody has claim to US national assets as collateral when they deposit their money into securities accounts at the Fed. The only thing you are entitled to when you buy a T-bond is your nominal deposit plus a specified interest payment. T-bond holders are not entitled to a piece of the US Mall if the US "defaults".

    "The Earth is my country and Science my religion" Christiaan Huygens. The gold standard ended on August 15, 1971, its time we start acting like it. If we can afford full employment killing Germans, we can afford full employment during peace-time.

    by Auburn Parks on Sat May 03, 2014 at 01:59:09 PM PDT

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