02.09.13

Austerity is really bad for our economy

Posted in Around The Nation, The Economy, jobs at 1:13 pm by wcnews

Dean Baker, The US should grow the deficit, not shrink it.

There is an astounding level of confusion surrounding the current US deficit. There are three irrefutable facts about the deficits:

First, the United States has large deficits because the collapse of the housing bubble sank the economy.

Second, if we had smaller deficits the main result would be slower growth and higher unemployment.

Third, large projected long-term deficits are the result of a broken health care system, not reckless government “entitlement” programs.

Of course this is nothing new. Economists like Baker and Paul Krugman have been saying this for a while, Kick That Can.

The key point is this: While it’s true that we will eventually need some combination of revenue increases and spending cuts to rein in the growth of U.S. government debt, now is very much not the time to act. Given the state we’re in, it would be irresponsible and destructive not to kick that can down the road.

Even former President Bill Clinton is getting on board.  If only our current President would realize that the deficit is not the economy.

As Robert Reich states – echoing Baker, Krugman, and Clinton – the deficit is the complete wrong discussion to be having right now, The Economic Challenge Ahead: More Jobs and Growth, Not Deficit Reduction.

Right now the central challenge is to reignite the economy — getting jobs back, improving wages, and restoring growth.

Deficit reduction moves us in the opposite direction. That’s because most consumers (whose spending is 70 percent of economic activity) are still losing ground, and businesses won’t expand and hire without more consumers.

So government has to be the spender of last resort.

Under these circumstances, increasing taxes on the middle class (as, for example, Republican legislators and governors are eagerly doing by raising sales taxes, and as the federal government did last month by raising Social Security taxes) makes it even harder for consumers to spend. Which means slower growth and fewer jobs.

Likewise, cuts in government spending, such as occurred in the fourth quarter of 2012, cause the economy to contract — as it did in the fourth quarter.

In other words, we’re still having the wrong discussion. It shouldn’t be how to cut the budget deficit. It should be how to bring back good jobs and economic growth.

Deficit hawks and government-haters are still framing the debate. That bodes ill for all of us.

If only we were all Keynesians again.

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