Friday, February 01, 2013

Have The Republicans Finally Managed To Tank Economic Growth?


Tuesday we looked at how David Cameron's Conservative government has used an Austerity agenda to steer the U.K. into a crippling triple-dip recession. The next day the Commerce Department surprised everyone by projecting that this nation's GDP shrank by 0.1 percent in the last quarter of 2012. The White House blamed the obstructionist Republicans for pushing the same Austerity agenda that has crippled the British economy-- not to mention the economies of Spain, Greece, Italy, Ireland and Portugal, all of which have cut back on government spending in the face of economic slowdowns. The game the congressional Republicans are playing with sequestration-- coupled with the lay-offs to the public sectors in the states they control-- are exacerbating economic uncertainty and have stopped growth dead in its tracks.

Worse yet, the GOP is heartened by the slowdown report and are doubling down on their push for Austerity and sequestration. Paul Ryan, who just a few months ago was warning shrilly that sequestration would be catastrophic for the economy, was publicly embracing it on Meet the Press Sunday. The GOP insistence that it is their job to bring pain to regular American working families is nothing short of insane.
Ryan’s comments reinforced House Speaker John Boehner’s (R-Ohio) insistence that the sequester would be the biggest point of leverage for Republicans to extract the cuts that they want. And at least rhetorically speaking, other House GOP members have stepped into line. “I’m pretty sure it is going to happen now, and I would really like to see us fix the [continuing resolution]  problem,” House Armed Services Committee Chairman Buck McKeon (R-Calif.) told Politico last week. “I guess the feeling is until everybody feels enough pain, we’re not going to do the things that we really need to do. And that scares me.”
Economists are urging Boehner, McConnell, Cantor and Ryan to stop sabotaging the economy and to stop pushing sequestration as a threat to get their way on wrecking Social Security, Medicare and Medicaid and other programs that help working families.
Rep. Chris Van Hollen (D-Md.) said Wednesday's report from the Bureau of Economic Analysis was further proof that implementing "big austerity measures now will hurt the recovery." But the ranking member of the House Budget Committee added that the findings may not be enough to persuade lawmakers to replace the looming sequester, or a decade's worth of automatic cuts to defense and domestic spending.

"The question is how far over the ledge do we go before people take action," Van Hollen said in an interview. He said he hoped sequestration wouldn't be triggered. "But that may be required to bring some sense to the process. If you look at this report, there is no doubt that the spending slowdown contributed to the contraction and that was before the sequester. That was just in anticipation to the sequester."

...As it stands now, the modified sequestration will cut discretionary defense spending by 7.3 percent and discretionary non-defense spending by 5.1 percent this year, along with a 2 percent cut to Medicare. The non-defense cuts will land on housing assistance and community development programs, education grants to states and many federal agencies. Some initiatives are exempt, including Social Security, Medicaid, food stamps and children's health insurance.

Republicans, initially, were far more alarmed with the prospects of sequestration than Democrats, arguing that it would dramatically gut the country's military. GOP leadership moved over the summer to swap the more than $500 billion in defense cuts with savings from the federal workforce and reduced spending on the Supplemental Nutrition Assistance Program, better known as food stamps, among other things.

"House Republicans twice last year passed legislation to replace the sequester with changes to entitlement programs-- the major driver of our deficit; rather than opposing our efforts, President Obama should join us," Rory Cooper, a spokesman for House Minority Leader Eric Cantor (R-Va.), said in an email.

Recently, House Republicans' mindset has changed. Upset over deals that raised both tax rates and the debt ceiling, they began looking at sequestration as bankable spending cuts. The approach is driven, in part, out of the belief that the White House will eventually cut a deal favorable to the GOP (administration aides have been privately warning about the economic ripple effects of the sequester being triggered). But it has also caused concern among the party's defense hawks.
Chris Mooney has interviewed Paul Krugman for his podcast, Point of Inquiry and elicited an explanation of just how wrong the Austerity pushers have it. As Mooney writes, "Krugman's latest book, End This Depression Now!, makes a strong case that the current focus on cutting budget deficits is misplaced. An economic crisis like this, with lingering high unemployment, demands a big infusion of government stimulus, argues Krugman. In contrast, cutting spending or imposing austerity only worsens things-- just as we've seen of late across Europe. How sure is Krugman about all of this? And how do we know that he's right, and his very, very-sure-of-themselves opponents are actually dead wrong?

Mooney focuses on science so he framed the discussion around what counts as science in economics-- and conversely, what counts as pseudoscience. He asked, how about the idea that cutting taxes increases revenue to the government? Krugman's response: "That's pure crank….nobody believes that, except the entire Republican party."
And what about the idea that the 2009 stimulus bill failed to create any jobs? "That's a very marginal position," said Krugman. A few economists have supported it, he explained, but the majority of experts in the field think the stimulus, although not necessarily strong enough, do think it had a substantial effect.

Krugman's central point is that Keynesianism is well established in economic science, meaning that under the present, depressed economic conditions, the US government needs to spend to stimulate the economy. By contrast, cutting spending, or imposing austerity, is a terrible blow to a struggling economy. "We've had incredible, teeth rattling austerity in Greece and Ireland," Krugman explained on the show, "and the evidence is in. Every place that has imposed austerity has seen a really sharp economic downturn."

So, we asked, if Keynesianism thinking is the key to fixing our present economic woes, then why won't people listen? Why are we currently so obsessed with deficits?

Krugman's answer was twofold: People make up their minds about economics based on heuristics and shortcuts-- for instance, the misleading metaphor that likens government finances to the budget of an individual family-- and Keynesianism can be complex and counterintuitive. It also runs up against the popular notion that the government shouldn't lean on the scales, because a fair system is one in which people get ahead or fall behind based on their own merits, without external help. As Krugman explained, that's not actually how it works at all-- you can fail in this world for reasons that are totally beyond your control:
The economy is an interactive system. Money flows in a circle. My spending is your income, your spending is my income. And that means that your destiny has a lot to do with what other people are doing. You can lose your job, you can be in big trouble, not because you did something wrong, but because there's not enough spending and the economy is depressed.

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