The Danger of Austerity

[Joanne98]

Last week, I noted that the lack of passage of the unemployment bill was, well, incredibly stupid. Today, Paul Krugman notes this stupidity as well.


In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today’s governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer.


Right now the economy is benefiting from these policies. We've seen an increase in PCEs, retail sales, ISM indexes, regional Fed indexes, investment in equipment and software and exports. This has culminated in three quarters of GDP growth.

In short, we're at the beginning of a recovery. All we have to do is keep doing what we're doing.

However,


As far as rhetoric is concerned, the revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the economy, by improving business confidence. As a practical matter, however, America isn’t doing much better. The Fed seems aware of the deflationary risks — but what it proposes to do about these risks is, well, nothing. The Obama administration understands the dangers of premature fiscal austerity — but because Republicans and conservative Democrats in Congress won’t authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the state and local levels.
Why the wrong turn in policy? The hard-liners often invoke the troubles facing Greece and other nations around the edges of Europe to justify their actions. And it’s true that bond investors have turned on governments with intractable deficits. But there is no evidence that short-run fiscal austerity in the face of a depressed economy reassures investors. On the contrary: Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard-liners’ medicine.


The continuation of the recovery is dependent on politicians doing the right thing. Last week's debate about unemployment benefits was without a doubt one of the most Kafkaesque events I have ever witnessed in my lifetime. Not since someone floated the idea that we can win a land war in Asia has Washington done something so mind-numbingly stupid.

http://bonddad.blogspot.com/2010/06/danger-of-austerity.html

[Warpy]

1. Perhaps when Krugman's predictions come true

we'll get a little common sense in government. Right now they're all trying to paste an unsustainable system together because they're terrified of the changes a return to sanity will bring them. Only when they've got little left to lose will they consider junking the bad system conservatives have forced on us.

[Possumpoint]

4. When He's Proven Wrong

We'll have more debt.

[Hawkowl]

12. Study 1931-33 please

You want to cut debt? Raise the marginal tax rate on corporations and the wealthiest 5% back to Nixonian levels and cut the Pentagon's budget in half.

Curtailing domestic spending will ensure the Great Depression II.

[earthside]

2. Herbert Hoover?

Gosh, are we in a time machine and been transported back to the 1930s?

So, the remedies of the New Deal are the remedies of the 21st century?

Sorry.

Not so.

We are in a debt crisis and piling more debt on top of more debt is crazy.

A fundamental reform in the economic system is what is in order, including a return to living within our means -- and that means cutting the military budget by probably in half. It means acknowledging Peak Oil and Global Climate Change and boldly moving to dramatic conservation. It means bringing in real free enterprise with real competition -- breaking-up the mega-transnational corporations and mega-banks. It means decentralization and a shift to local/community economies. It means completely reforming the stock markets to ensure actual investment and not just chart and graph based gambling.

Krugman et al. are wrong ... running up another couple of trillion dollars in federal spending under current conditions will bring us into the Greatest Depression, from which we may never recover.

It seems to me that both the right and left are relying on old ideas instead of innovating solutions for this century.

[fasttense]

13. But you have no proof or any historical example of what you say.

When FDR tried to cut the deficit, the US went back into a depression. It only recovered when we went to war and increased spending to 110% of GDP.

These are facts you can look them up. Now, can you give me an example in US history where cutting federal spending during an economic downturn improved the economy?

Even Ronnie Raygun increased the federal budget deficit and we got out of the recession.

Chile tried to impose austerity during a recession and it got very, very bad over there.

I know of no example were austerity measures improved the economic environment.

[Possumpoint]

3. So You Want To

Continue down the path of massive deficit spending by Federal Government to support jobs at all levels of government. To support the deficits at the state level. To keep state and local employees from being laid off. This will give the illusion of well being so that the private sector starts spending money it doesn't have, to support the economy. This will bring the jobs back or so you hope. Sorry, I am one of those that thinks that it won't work. Things go well till the government turns the money faucet down or off. Then things choke up again.

Focus must be shifted from government welfare to a private jobs program. Taxes and laws must be changed to encourage private industry to start hiring again. Make it profitable for private industry to bring on new hires. There aren't enough incentives for that at present. Otherwise, private industry will maximize the employees they have to continue the good profits they're getting with the status quo. With around 9.8% unemployment and the world economy in downturn there won't be the demand for our goods and services otherwise.

[Warpy]

5. It starts with government spending

to repair our rotting infrastructure. Private companies actually hire the workers to do that work. Wages increase demand for goods and services.

Clinton's economy was based on the internet revolution, which was based on government spending on the infrastructure to support it.

The economy always works from the bottom up, not the top down. The last 30 years of shifting wealth to the top should have confirmed that for everyone. The greater the wealth shift away from the bottom, the worse the economy.

This is just the end game of supply side economics and it always plays out the same, conservatives fighting to keep the status quo of an unsustainable system.

[Possumpoint]

7. That Was The Premise Used To Sell The Stimlas Program

Money was supplied to the states. However many of them used it to prevent layoffs of teachers, fireman and policeman instead. A relative few projects were funded in this manor. If that is your intent then the states must be limited as to how they use the funds. I agree that the economy works best from the bottom up and that's where the jobs need to be.

TARP prevented the complete meltdown. However, it prevent the elimination of the rot built up in the system and saved the jobs, salaries and bonuses of the very people that caused much or the grief. This program seemed to be created to save the bacon for the top end of the food chain.

[Warpy]

8. The TARP program was GOP, don't forget that

The s.t.i.m.u.l.u.s program saved jobs, especially jobs repairing infrastructure. In my own state, teachers were winners, holding onto their jobs instead of facing layoffs with the remainder teaching 40 kids to a classroom, something no one wanted. All those saved jobs provided demand for goods and services, saving other jobs. Are you getting this yet?

TARP was pure GOP conservatism, with only a few hasty restrictions tacked on by Democrats. It was an emergency measure that originally had no restrictions on how the banks were to use it. If we didn't come within hours of a total financial collapse, we were certainly within a few weeks of one. However, blaming Democrats for a bad Republican plan is a bad idea, especially on DU.

The GM bailout, which occurred under a Democratic administration, made sure none of the money went into executive pockets and even had as a condition the sacking of the CEO. Do you understand the differences?

Unfortunately, the rot that permeates the system is not being addressed yet as Congress still hopes to paste that system back together. While most of us here on DU realize it's a futile effort, history teaches us that Congress is generally a conservative body that has to do all the wrong things before they resign themselves to doing the right things.

[Possumpoint]

9. It Apears

that the STIMULUS Program was used to delayed the inevitable. This was done in the belief (hope) that the recovery would begin and save their bacon. Now that the funds are drying up, the layoffs will begin. I don't think that congress will pass another similar program. By the way, when I went to elementary school (1951-1960), there were 60 students to a class. It was however a catholic school and discipline was strict.

Yes, TARP was a piece of GOP crap. I hold it in contempt. I have sworn not to vote for anyone who supported it.

I didn't mention the US Auto bailouts. Was the real reason behind it to save union jobs? If so, it was successful in the short term but can the US Auto companies compete with foreign brand autos, whether built here or overseas? Only time will tell.

My belief is that the rot will not be cleaned out until there are no other choices. The elites will be protected at all costs. When the house of cards falls and burns then it will be fixed. Till then, congress will patch it up with band aids.

[SnakeEyes]

6. This sounds...

An awful like what the right is claiming. I'm not sure what the answer is but if it's what the right is saying then it can't be correct.

[Name removed]

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[Name removed]

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[fasttense]

14. More trickle down?

"Make it profitable for private industry to bring on new hires."

Like BP and Wal-Mart aren't making enough money yet? Raygun increased the deficit to huge numbers and it brought the US out of a recession.

If they are making good profits right now, then why aren't they hiring?

Giving away more money to the uber wealthy while treating American citizens like trade bait is not going to do anything but make this 2nd RepubliCON Great Depression do what it did when FDR tried to balance the budget.

[Moostache]

15. I refuse to accept austerity measures until:

1) The top marginal income tax bracket is returned to 90% and held there until the existing deficit is retired.
2) The corporate tax rate on profits over $1B is increased to levels of the 1960s and held there until the existing deficit is retired.
3) The war in Afghanistan is ended and ALL troops brought home and all bases closed.
4) The war in Iraq is ended and ALL troops brought home and all bases closed.
** There can be NO REDUCTION IS SOCIAL SPENDING that is not 1-to-1 matched with increases in taxation on those who benefited dis-proportionally in the last 30 years. There can likewise be NO REDUCTION IN SOCIAL SPENDING that is not EXCEEDED by cuts in military misadventures started by Bush-Cheney to aid their oil buddies.

I personally plan to lead non-violent opposition to any efforts to make the poor and middle class pay more than the affluent and connected to remove this public debt from the books.

No justice.
No peace.
End of cooperation.
End of discussion.

We can only begin talking about solutions when the first steps to solve the problem are taken by those who CAUSED the problem to begin with!

In my opinion and my own personal calculus, it is better to be resisting on your feet and risk death, than to live on your knees as slaves to the system that has been rigged against 90% of the people. I have no intention of living with the table scraps of the modern-day Marie Antoinette set of criminal elites.

5) The US empire overseas is dismantled and ALL troops brought home and all bases closed.
** This cold-war infrastructure of US troops defending vast swaths of the globe MUST END above ALL ELSE! Damn the corporate profits that are propped up by this burning of national wealth and treasure. Its high time the world begin to take care of itself and that Americans no longer exert military pressure beyond our borders for non-defense purposes. It is fine for our military to be conducting legitimate operations to protect American borders and nationals, but it is indefensible for the might of the US military to be used by dictators around the world to assist in the suppression of their people to advance the wealth of themselves and their well-connected American benefactors.

6) The military-industrial complex is transformed into a new research effort in energy independence.
** This is the corollary to ending the US empire abroad...bring the troops home and begin creating NEW industries at home that focus on the problems of the 21st century (finally) and forget about the policies and practices of the 20th century. Energy production - clean, renewable and inexhaustible - is THE issue of the 21st century. Put the focus and power of the military on the job of TRULY defending America in THIS century! Train the troops to build instead of only destroy. Transform the weapons research programs into energy production research programs. Transform NASA into an agency charged with solving EARTH's energy needs while simultaneously continuing vital space research as well.

Our ability (or lack thereof) to lead in this endeavor is the difference between another American century and becoming a third world nation by 2050. It is too important to allow the shouts and screams of child-like tantrums from the neo-cons and their ilk. We must commit to this effort every bit as much as our grandparents and great-grandparents committed to WWII. It is frankly MORE important to the survival of what we now consider civilization at this point. Allowing draconian measures to reduce the deficits on the backs of the poor is evil and should not be countenanced.

7) ALL off-shore drilling is ended until effective prevention, containment and clean-up is DEMONSTRATED.
8) The Fairness Doctrine is re-instituted for ALL live and recorded media (TV, radio, internet, etc.).
** At long last, it is beyond time to end the right-wing talking points echo-chamber that infuses so much hatred and vitriol into the American public airwaves. This country is supposed to represent FREEDOM in all forms - personal, press, religion. assembly. What we currently have is a rigged system that pours right wing talking points over the air in disproportionate levels and at great cost to the soul of the nation. When the cynics behind this situation talk about "shutting up Rush", what they are really saying is that they do not WANT free competition of ideas or choices in the marketplace. They want the same things they want in their beloved "free markets"...a rigged game and a no-lose proposition for themselves but not actual freedom or real fairness.

Heaven forfend...it is far better to lay the problems at the feet of the masses and use the rigged systems and elections they already have than it is to actually change and really assist in creating solutions to the mess their beloved "free market ideology" has wrought.