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Euro-area Economy Austerity Bad Strategy for the U.S.

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Headlined to None 12/11/12

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In a prior OpEdNews piece, I argued broadly that austerity in the face of a recession is counterintuitive. It is wrong-minded to focus on the deficit as this is just tantamount to taking one's eye off the ball. The focus here needs to be on growing the economy. For instance, why does anyone respond to rising unemployment by firing workers as many governors around the country did? One has to assume that otherwise smart people are pursuing a hidden agenda when they threaten to go over the fiscal cliff if they don't get what they want. Ironically, they pledged Norquist never to raise taxes, but if they can't agree to raise taxes on higher taxes on the top two percent of taxpayers--and if President does not flinch--then Taxmageddon, i.e. on December 31, 2012 everybody's taxes rise by default on January 1, 2013. That is, the Bush tax cuts will expire. In that event, the signers to the Norquist pledge avoid being punished for there is safety in numbers. Grover Norquist cannot punish all the Republicans in Congress that offend him. But he has subliminally threatened to punish Republicans who would dare vote to raise taxes.

Some people have no love for Medicare, Social Security Insurance, or Medicaid. They call them entitlement pejoratively even though workers make FICA payments that support them. But opponents of these programs that primarily benefit the poor and the middle class--labeled takers and moochers--see them as spreading debilitating socialism insidiously across this country. Rep. Eric Cantor, Gov. Mitt Romney, Rep. Paul Ryan, want to undermine--euphemistically, save--these social programs. Euphemisms like privatize and "entitlement reforms' are willful attempts to obfuscate their real motives. Fiscal cliff debate stalemate is another installment in the ruse by Republicans to tie higher taxes on the top two percent of the taxpayers to concessions on spending--cutting Medicare, SSI and Medicaid benefits.

This is sort of what the Europeans are doing and I hope we don't follow them over the cliff. What is going on in the U.K., Greece, Spain, Ireland, and Portugal could happen here. In four years, Europe has devolved into another recession because they are stubbornly insisting on austerity. It does not seem to occur to them that their attention should be on jobs and economic growth rather than on deficits. I have consistently maintained that faced with a recession rather than exacerbating it with layoffs of police, teachers, firefights, slaying unions, defunding of Planned Parenthood, PBS, etc., governors and Congress need to encourage employment. If you don't the economic downturn gets more severe. But ideology and politics never take a nosedive in bad times. If anything they get reinforced. And political operatives recognize that recessions are good for the party out of office. They can be used as counter foils against the party in power. That is why Mitt Romney kept repeating that "Obama did not cause the recession but he made it worse." He said this ad nauseum but his charge obviously didn't get much traction because it was false. This is why when the unemployment rate fell below 8 percent to 7.8 percent in September, the people at Fox News, Gov. Mitt Romney, and Jack Welch were beside themselves with grief and anger. Jack Welch felt justified to question the drop in the unemployment numbers from 8.3 percent to 7.8 percent as breakneck speed. And Gov. Mitt Romney said, "7.8 percent unemployment is not what a real recovery looks like." Remember that Labor Department was accused of fudging the numbers to favor the re-election of President Obama. But routing for bad times, for slow growth and high unemployment is political expediency. And blaming the terrorist attack on Benghazi on the President, as Governor Mitt Romney, Senators John McCain, Lindsey Graham, and Kelly Ayotte; and bubbleheads Rush Limbaugh and Sean Hannity with the complicity of Fox News have done is difficult to explain. Again, political expediency accounts for some of this. Of course, no one questions these people's love of country. They are great Americans! You would think they'd place the blame for the Benghazi attack squarely on the shoulders of the terrorists.

It is not at all surprising that the euro-area has slipped into another recession in just four years.

"The euro-area economy succumbed to a recession for the second time in four years as governments imposed tougher budget cuts and leaders struggled to contain the debt crisis that broke out in October 2009. Gross domestic product in the 17-nation bloc slipped 0.1 percent in the third quarter after a 0.2 percent decline in the previous three months, the European Union's statistics office in Luxembourg said today. The result matched the median forecast in a Bloomberg News survey of 44 economists, as unexpected strength in Germany and France was outweighed by contractions elsewhere." (see: Marcus Bensasson) At this juncture, it appears monetary policy has been quite impotent. Ben Bernanke's easy money policy has not been working. Its continuation might set the stage for future inflation and high interest rates that will crowd out investment. A more promising strategy is more stimulus spending as President Obama is ". . . asking Congress to approve at least $50 billion US in long-term spending on the country's roads, railways and runways in a re-election effort to show he's trying to stimulate the sputtering economy." Republicans like to say we don't have a revenue problem; we have a spending problem. They want draconian cuts in spending to solve an artificial deficit crisis. Revenue is about 18.3 percent of GDP and spending is 28.1 percent of GDP. These two trends are clearly out of whack. But this should not be cause for alarm. Why? Because the U.S. economy is lucky to have automatic stabilizers in place. In recessions, tax receipts decline because of higher unemployment. Automatic stabilizers enable the Federal Government receipts and expenditures that rise or fall automatically without the intervention of the Congress or the President. In a recession, government, business, and household face hard times. Not only do government receipts suffer, but also business revenues and profits do no better--businesses cannot sell their goods--so inventories rise, production falls below capacity, and layoffs increase. Fortunately, the bottom does not come off the economy because the automatic stabilizers kick in. That is, unemployment compensation to laid-off workers grows, and corporate and individuate income taxes fall. Obviously, when receipts fall off and spending does not fall off as much, deficits follow. In this picture, firms have not incentives to borrow even when interest rates are near zero, because they aren't willing to produce goods that they can move. And they can't move their goods off the shelves because people are not working. People are not working because firms aren't hiring. This is a vicious circle. And to get out of it Keynesian economists look to the government (and deficit spending), as the only real viable player remaining in a steep contraction of the economy. Others argue cutting spending will signal to business the government's commitment to live within its means, so business investments would rise.

Below is a snapshot reproduction of numbers for the United States government total spending, deficit, revenues and GDP for fiscal year 2012. Just as an aside the debt is the accumulation of past deficits. And the national (public) debt stands at approximately $16 trillion. A gargantuan number, true, but remember that most of it is owned (not by China and Japan) by Americans. Raising the debt ceiling is a conversation for another time--although Republicans say they can use it for leverage.

FY 2012 (billions)

Total government spending = $3,795.6 (28.1%)

Federal Deficit = $1,327.0 (9.8%)

Government revenues = $2,468.6 (18.3)

GDP = $13,470.5

We are really looking at two options. The country has a budget imbalance for whatever reasons--two wars, Medicare Part D, the Bush tax cuts favoring the top marginal taxpayers--so receipts fall short of expenditures by 9.8 percent (18.3 percent receipts less 28.1 percent expenditure). These deficits add to the national debt, which is now about $16 trillion--debt ceiling question is yet another  debate issue. The tension here is between taxing and spending and borrowing and spending. We have chosen to borrow and spend and this nine percent gap is a reflection on our predilection. However, the gap  in the deficit has to be closed. On December 7, 2013 Sen. Harry Reid called Sen. Mitch McConnell's bluff for an up and down vote to let the President increase the debt limit. Sen. Reid said, okay, let's, forcing Sen. McConnell to filibuster his own bill--this was never before done in the Senate. If the stakes were not so high, this Kabuki dance would be funny--well, it was hilarious.

One way to close the deficit is the way the euro-area policymakers are doing it--through austerity. But we do that and run the very real risk of another recession just as the U.S. economy is showing signs of stronger growth--consumer confidence is higher, and the unemployment rate fell to 7.7 percent as reported by the Labor Department on November 7, 2012. We could balance the budget on the backs of the poor, the retired, the sick, the young, the old and women. And use the savings from this to support cuts in top marginal tax rates for the rich--i.e. job creators. John Boehner repeatedly states that increasing taxes on the rich hurts the economy. Yet, there is empirical evidence to show that is not true. It is true, however, that increasing taxes on the middle class might have adverse effects on economic growth for obvious reasons. They spend increases in after-tax income.

A preferred solution is increasing spending--i.e. more stimulus--the $50 billion President Obama is asking for the infrastructure--roads, bridges, etc. The idea of course is to put money in the hands of people who would go out and spend it. In addition, take some of the tax breaks the rich enjoy away--15 percent tax on interest, dividends, and profits, (so-called unearned income), cut taxes on 98 percent of taxpayers, extend the payroll tax holiday, remove the cap of $110,100 on FICA, don't meddle with Medicare, Medicaid benefits, and Obamacare is the law of the land. The focus of the government should be both on creating jobs and an environment for businesses to increase investment. And contrary to Vice President Dick Cheney's assertion that deficits don't matter, in a bad times they do. Deficits are needed to prevent the economy from totally imploding. If you still entertain doubts about this, just look to the euro-area economy for evidence.

 

Seymour Patterson received a Ph.D. in economics from the University of Oklahoma in 1980. He has taught courses and done research in international economics and economic development. He has been the recipient of two Fulbright awards--the first in (more...)
 
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We face going over a fiscal cliff, se... by Seymour Patterson on Tuesday, Dec 11, 2012 at 2:22:56 PM
You're essentially right concerning the facts & fi... by Rico D. on Tuesday, Dec 11, 2012 at 4:38:31 PM
Fiscal Cliff, or State For Sale A previous comm... by Rico D. on Tuesday, Dec 11, 2012 at 4:40:14 PM
With Michigan the number of of right-to-work state... by Seymour Patterson on Wednesday, Dec 12, 2012 at 8:04:46 AM
Once again, I'm not disagreeing with you one bit. ... by Rico D. on Sunday, Dec 16, 2012 at 9:55:40 PM
was to show the correlations between what's advanc... by Rico D. on Sunday, Dec 16, 2012 at 10:11:26 PM
The critical issue here is whether we should ... by Reza varjavand on Wednesday, Dec 12, 2012 at 12:04:00 PM
The conversation around social justice is muted. I... by Seymour Patterson on Wednesday, Dec 12, 2012 at 1:07:47 PM
not many people implicate the Democrats - particul... by Rico D. on Sunday, Dec 16, 2012 at 10:27:20 PM
I don't disagree. Sometimes their positions on ent... by Seymour Patterson on Monday, Dec 17, 2012 at 8:30:46 AM
The social safety net has nothing to do with the F... by Rico D. on Wednesday, Dec 19, 2012 at 1:04:32 AM