THE BLOG
07/19/2013 05:32 pm ET Updated Sep 18, 2013

New Normal Growth, Or A New Social Contract

It should be obvious. If government size and spending is to shrink as the so-called Austerians and deficit hawks want, then private wealth has to increase to maintain healthy growth--for all households. Conversely, if the predictions of a "New Normal" of slower growth and higher unemployment is to persist longer term, as Harvard economist Kenneth Rogoff and others are predicting, then government spending and benefits will have to grow.

"Tired of go-go growth, voters now look for more attention to addressing environmental concerns, health-care issues, and income inequality," says Professor Rogoff. "But achieving these laudable goals will be expensive, coming on top of the giant budget deficits the US is running to counter the financial crisis. Higher taxes and greater regulation cannot be good for growth."

But the "New Normal" doesn't have to happen, nor can we afford it. Deficits and welfare spending only shrink with healthy economic growth. Already more than one in three Americans lived in households that received Medicaid, food stamps or other means-based government assistance in mid-2010, according to a recent report. This is in large part because the median income for working-age households fell from $61,574 to $55,276 from 2000 to 2010, or more than 10 percent.

And when Social Security, Medicare and unemployment benefits are included, nearly half of the nation lived in a household that received a government check, according to the analysis of third-quarter 2010 Census data done by the Mercatus Center at George Mason University, a libertarian-leaning think tank. That's more than 148 million Americans.

So here is a conundrum that Austerians, and deficit hawks don't seem to understand. Government spending will inevitably continue to increase rather than decrease, unless ways are found to return much of the household wealth that has been lost since 2000 to those who depend so heavily on the government's safety nets.

Only by recognizing such basics of the social contract between the governed and those who govern-- that reduced incomes require increased benefits unless income growth is reversed--can we reach a place that brings back prosperity and a living wage to most Americans.

Right now that social contract is broken. There is the loss of public-sector jobs by such austerity programs as this year's sequester cuts, and last year's $1.6m in mandated government spending cuts. As the Congressional Budget Office reported in The Budget and Economic Outlook: Fiscal Years 2013 to 2023. "If not for that fiscal tightening, CBO estimates, economic growth in 2013 would be roughly 1½ percentage points faster than the 1.4 percent real (inflation-adjusted) growth that the agency now projects, under current laws, from the fourth quarter of calendar year 2012 to the fourth quarter of 2013."

Such fiscal tightening will cause even more privation and poverty for most Americans, made worse by the lingering effects of the Great Recession. That is why the message of books and movies, such as The Hunger Games, is becoming real for young Americans, in particular, as I said in January. We are returning to a society of violence and deprivation and record inequality that are the earmarks of a broken social contract.

Therefore, if Austerians are really serious about reducing government spending and government's size in general, they would be advised to cease and desist from supporting those programs that have decimated household incomes.

For starters, this includes opposing the attacks on collective bargaining rights, particularly in the 27 right-to-work-states mainly in the Midwest and South that also oppose unions that support collective bargaining. Austerians should also oppose wealth-limiting legislation put out by ALEC, or the American Legislative Exchange Council, such as privatizing public education, limiting voter rights, as well as legislation that severely reduces corporate regulation and taxation, which has given Big Business even more leverage over their employees welfare and standard of living.

So there is a lesson to be learned here. Any social contract requires a quid pro quo to survive. If corporations and Big Business wish to limit government reach and spending, they will have to tolerate higher wages and living standards for their workers. Otherwise, we know from past history--even current history--what happens when a social contract is broken.

Harlan Green © 2013