No, Ryan Didn't Win In November But... Austerity Ahoy Anyway

You don't have to be a Professor of Public Policy, or a former Secretary of Labor, to know that the current sputtering recovery is anemic and that Beltway dysfunction is not addressing it. But Friday, Bob Reich, asserted that "apart from the Fed-- which continues to hold interest rates down in the quixotic hope that banks will begin lending again to average people-- the government is heading in exactly the wrong direction: raising taxes on the middle class, and cutting spending." That describes the Austerity Agenda being demanded by conservatives on both sides of the Atlantic-- Britain, which has instituted it wholeheartedly, is slipping into a triple-dip recession-- and both sides of the aisle. The document of the failed Austerity Agenda is Paul Ryan's budget, which has been extolled by virtually the entire Republican Party. Conservative Democrats just think it needs a little lightening up around the pain infliction and then it'll be just fine.

Something like 20 million Americans are either unemployed or under-employed. That's the real problem and, as Reich has pointed out, we know exactly what to do about it. "It's not rocket science." Consumer spending has been dropping and even a Republican knows that "the only reason for employers to hire more workers is if they have more customers. But American employers have not had enough customers to justify much new hiring."

There are essentially two sources of customers: individual consumers, and the government. (Forget exports for now; Europe is contracting, Japan is a basket case, China is slowing, and the rest of the world is in economic limbo.)

American consumers-- whose purchases constitute about 70 percent of all economic activity-- still can’t buy much, and their purchasing power is declining. The median wage continues to drop, adjusted for inflation. Most can’t borrow because they don’t have a credit record sufficient to allow them to borrow much.

And now their Social Security taxes have increased, leaving the typical worker with about $1,000 less this year than last.

The Conference Board reported last Tuesday consumer confidence in January fell its lowest level in more than a year. The last time consumers were this glum was October 2011, when there was widespread talk of a double-dip recession.

The only people doing well are at the top-- but they save a large part of what they earn instead of spending it.

Overall personal income soared by 8 percent in the final three months of 2012 compared to an increase of just over 2 percent in the third quarter, but this income didn’t go into the pockets of the middle class. It went into the pockets of people at the top.

Wages and salaries grew a measly six-tenths of one percent.

...So if we can’t rely on consumers to stoke the economy, what about government? No chance. Government spending is dropping, too.

The major reason the economy contracted between the start of October and end of December 2012 was a major reduction in government spending in the fourth quarter.

Government spending has declined in nine of the last ten quarters, but it took a precipitous drop in the last quarter. This was mainly because military spending fell 22.2 percent. That’s the largest fall-off since 1972 (mainly due to reduced spending on the war in Afghanistan, and worries by military contractors about further pending cuts). State and local spending also continued to fall.

Personally, I’m glad we’re spending less on the military. It’s the most bloated part of the government. Major cuts are long overdue. But the military is America’s only major jobs program. Cutting the military without increasing spending on roads, bridges, schools, and everything else we need to do simply means fewer jobs.

What’s ahead? More of the same. So what possible reason do we have to suspect the recovery will pick up speed? None.

Don’t count on consumer spending. Wages and benefits continue to drop for most people, adjusted for inflation. States are hiking sales taxes, which will hit the middle class and the poor hardest. Deficit hawks in Washington are contemplating additional tax hikes on the middle class.

Housing prices are stabilizing, thankfully. But one out of five homeowners is still underwater, and the ranks of people renting rather than owning are rising. Health-care costs are also rising for most people in the form of higher co-payments, deductibles, and premiums.

Don’t count on government, either. Government spending continues to head downward. The White House has already agreed to major spending cuts, some to go into effect this year. Coming showdowns over the next fiscal cliff, appropriations to fund government operations, and the debt ceiling will likely result in more cuts.

More jobs and faster growth should be the most important objectives now. With them, everything else will be easier to achieve-- protection against climate change, immigration reform, long-term budget reform. Without them, everything will be harder.

Yet we’re moving in the opposite direction-- following Europe’s sorry example of failed austerity economics.

Now there's one unadulterated dose of pessimism! Yesterday on his blog, Krugman seemed to back up what Reich was saying.

Not long ago, the usual suspects were going on and on about how government spending had soared under Obama, pointing to spending as a share of GDP. Some of us tried to point out that this bump represented two temporary factors: 1. GDP was depressed thanks to the crisis, so the spending share was correspondingly elevated 2. Emergency aid programs, notably unemployment benefits, were up because of the crisis. The implication of this argument was that the government spending share would decline as the economy recovered.

Conservatives were, of course, having none of it-- Obama was permanently enlarging the government to European size. So, how’s it going?

In the figure below the blue line shows government spending at all levels as a share of GDP; the red line shows the share of potential GDP-- what we’d be producing at normal employment-- as estimated by the Congressional Budget Office; it’s lower than the first line because the economy is still operating well below capacity.

Down we come.

What both Krugman and Reich would like to see-- as well as Bernie Sanders, as you can see in the video up top-- is the President demanding that the lazy, worthless bums in Congress give the country a real Stimulus package, rather than more failed Austerity. Warning that the Beltway is using Austerity to lead the country into another Recession, Roosevelt scholar David Woolner reminded us last week of a speech FDR gave in 1938:

The only real capital of a nation is its natural resources and its human beings. So long as we take care of and make the most of both of them, we shall survive as a strong nation, a successful nation and a progressive nation-- whether or not the bookkeepers say other kinds of budgets are from time to time out of balance.

This capital structure-- natural resources and human beings-- has to be maintained at all times. The plant has to be kept up and new capital put in year by year to meet increasing needs. If we skimp on that capital, if we exhaust our natural resources and weaken the capacity of our human beings, then we shall go the way of all weak nations.

He further reminds us that "most economists agree that the uncertainty brought about by the dysfunctional nature of Washington is having a negative effect on the economy. But we hear little about the direct effects that cuts in government spending have had on job growth. How many Americans, for example, are aware that one of the primary drivers of our persistently high unemployment rate is the sharp decline in public sector employment-- the massive layoffs of teachers, firefighters, police officers, and other public sector employees over the past two years? We might also ask how many Americans recognize that one of the primary ways President Obama managed to stop the downward economic spiral at the start of his first term was through the funding of public sector jobs via the stimulus funds that were channeled to state and local governments. Indeed, it was the expiration of that federal support, and Congress’s refusal to support the president’s modest request for additional federal dollars to support state and local governments in his jobs bill, that initiated the recent public sector decline."

One would assume, in the face of such economic realities, that Congress would support the type of modest spending proposals President Obama put forward in the American Jobs Act. But rather than provide funding for the employment of teachers, firefighters, police officers, and the like, rather than put hard-pressed Americans to work rebuilding our dismal infrastructure (now rated 23rd in the world), Congress would rather engage in another endless round of bickering about the perils of deficit spending. Once again heeding the siren song of the deficit hawks, those soothsayers of doom who insist that without an immediate and massive reduction in the level of federal spending we face an imminent economic collapse.

Interestingly, roughly three-quarters of a century ago President Roosevelt faced a similar argument at the start of his second term. Thanks to the stimulus spending of the New Deal, the U.S. economy had been growing at an average annual rate of over 11 percent. Fearing inflation, his more conservative economic advisors, like Treasury Secretary Henry Morgenthau, urged the president to cut spending, balance the budget, and tighten the money supply. But the U.S. economy-- which had seen the largest drop in the unemployment rate in history-- was still fragile, and the results of the spending cuts were a disaster. Unemployment shot up, industrial production declined, and the country soon found itself in the midst of a recession.

Thankfully, FDR quickly reversed course, and his re-instigation of the essentially Keynesian economic policies (counter-cyclical deficit spending) he had been following since the start of his tenure as president soon turned the U.S. economy around. But the cost to the American people and to FDR’s political fortunes was high. Millions lost their jobs unnecessarily, and the president took a real beating in the 1938 midterm elections, rendering his social and economic reform agenda much more difficult to accomplish.

President Obama, who is fond of history, might do well to study what happened to FDR in 1937. At the very least he should not give up on his demand that Congress provide a modest level of support for further federal spending on behalf of state and local governments. He should also insist on further federal spending on infrastructure. As FDR once said, these measures do not represent wasteful spending; they represent an investment in the American people, an investment in what he liked to call “human capital.” Human capital whose health and well-being was not only critical for the present but also for the future. Indeed, FDR insisted that:

Before we can think straight as a nation, we have to consider, in addition to the old kind, a new kind of government balance sheet-- a long-range sheet which shows survival values for our population and for our democratic way of living, balanced against what we have paid for them. Judged by that test-- history’s test-- I venture to say that the long-range budget of the present Administration of our government has been in the black and not in the red.