No Hope in Austerity

The Boston Globe had a story today that must be familiar across the nation. Budget constraints due to cuts in local aid force communities to cut workers and services. 

Hundreds of city and town employees are being laid off across Massachusetts as the recently signed state budget forces communities to cut back on librarians, police, teachers, and other workers to balance the books.

Meanwhile as the Federal stimulus phrases out while the weak economy keeps new revenues low, more cuts may reside in the future. It is easy to be pessimistic about the economy hearing this – but be prepared to get more so. Many governments around the world and Republicans and many centrist Democrats at home are pushing to cut back government spending looking to balance budgets now. Now, during “the worst job market since the Great Depression, with five job seekers for every job opening, with the average spell of unemployment now at 35 weeks.” In his New York Times column, Paul Krugman points out the cruelty and counter-productiveness of austerity and cutting unemployment benefits while explaining the benefits of extending them.

Helping the unemployed, by putting money in the pockets of people who badly need it, helps support consumer spending. That’s why the Congressional Budget Office rates aid to the unemployed as a highly cost-effective form of economic stimulus.

Most of the experts and sources I’ve read seem to agree that government tightening its wallet now is a bad idea. The Economist has a good overview and analysis of the debate for and against austerity. They also take the position now that the greater danger in the short term is budget reduction; but I think they try a bit too hard to seek out a centrist position (even if it is just a paragraph). They write:

Mr Krugman’s crude Keynesianism underplays the link between firms’ and households’ behaviour and their expectations of future tax and spending policy. For example, firms across the rich world are hoarding cash. Their reluctance to invest may have more to do with regulatory, financial and fiscal uncertainty than weak consumer demand (see article). If governments address those worries, businesspeople may start spending.

They almost self-refute in the same paragraph; this seems to acknowledge that short term spending isn’t a concern of businesses. Furthermore, won’t deficit concerns make it more likely that governments will raise taxes, not less? The Keynesians I know certainly aren’t calling for tax increases anytime soon. Stimulus advocates recognize longterm budgetary issues and seek to ease businesses’ and financial markets’ concerns by setting up policies to reduce the deficit in the long term while doing everything it can to invigorate the economy now. After all, one of the biggest contributors to the deficit is the weak economy depressing revenues. 
In the article they link within they perfectly explain why the anti-austerity crowd has it right:

Few rich-world businesses can feel confident about expanding capacity when the outlook for consumer spending is so cloudy. Fiscal stimulus has helped shore up aggregate demand. Now the worry is that corporate taxes may rise as governments try to fill the hole in their finances, and that non-bank firms will get caught up in a regulatory backlash. (my emphasis)

In a solid economy, Krugman and other leftwing economists often push too hard and exaggerate, but with this economy they have it exactly right. Sometimes in a storm, the “radical center” is hard to find or off the mark. 
(image: President Hoover from Business Week)
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