Here are the facts of the economic case as I see them today:
- Much of Europe is in recession and the downturn is in no small part a function of austerity measures that, like bloodletting, are making things worse, not better. While the new French president is certainly making the right sounds, it's awfully hard to point to the actual implementation of helpful policy anywhere.
- The U.S. is doing better but we too are failing to enact measures that would finally release the economy from the residual gravitational pull of the Great Recession.
- The latter point is showing up in lots of worrisome places: the economy is slogging along at too slow a growth rate (around 2%); the job market may be decelerating from an okay pace to a sub-par pace; real paychecks are falling behind inflation.
All of which begs the question, why are advanced economies so seemingly immune to correct diagnosis and prescription? Why are we applying leeches instead of the contemporary medicine of combined monetary and fiscal stimulus in order to once and for all hit the escape velocity that's eluded us thus far?
Here are some answers off the top of my head:
- U.S. Politics: There are those who so badly want to hammer the incumbent president that they're willing to throw the economy under the bus to do so. A potentially interesting wrinkle from Europe is, what if the electorate turns on the austerians?
- Stimulus Doesn't Work: There are also those who know two things: we implemented aggressive measures by the government and the Federal Reserve starting in 2009 and here we are, still hurting, in 2012. Ergo, stimulus doesn't work.
The counter-argument that things would have been a lot worse without those measures, while true, is a very heavy lift. Worse, adherents to this view then take it to the next level: if spending more doesn't work, then spending less surely will. They've convinced themselves that austerity will lead to growth, and though evidence to the contrary grows by the day, they're unmoved by it.
- Vested Interests: Obviously related to the first point above regarding politics, but here you've got wealthy people paying for the think tank research and politicians that will prevent progressive policies, including Keynesian stimulus other than high-end tax cuts. But this too can be a bit of a riddle: it's not obvious how opposing growth right now helps anyone. It used to be -- as recently as GW Bush -- you could count on Republicans to at least temporarily become Keynesian in recessions.
- Disdain for Government: Another reason we're stuck where we are is because too many people, including many in positions of power, simply disdain government's role in an economy they view as exclusively private. These are the "government doesn't create jobs" crowd, though I'm not sure what you do with the 22 million people who work for government, the millions more private-sector jobs that at least partially depend on government spending (e.g., contractors), and the fact that a consistent drag on our current economy is the loss of state and local jobs.
(I should note here that a plank in President Hollande's platform is the hiring of 60,000 more teachers.)
I know... there's Solyndra and the crazy GSA party in Vegas. The latter in particular is inexcusable (regarding the former, as carefully as you plan, some government loans will default -- that's no reason to give up on helping clean energy overcome some of the initial market barriers it faces). But these are tiny examples of things that went wrong*, compared to a ton of evidence that goes the other way, not the least of which regards the Recovery Act itself and the auto rescue, which together helped preserve millions of jobs.
- Nervousness Regarding Debt Levels: If you're already convinced that government spending doesn't work, you're going to view doing more of it as simply raising the debt. What's so unusual about this moment, however, is that given the slack in the economy and the fact that borrowing costs to the government are ridiculously low, the opposite is operative: by strangling growth right now, we're lowering GDP and diminishing our tax base. I don't want to push this too far: stimulus won't pay for itself. But even a cold-hearted cost benefit analysis -- one that took account of the waste engendered by such high joblessness -- would reject austerity measures right now.
I'm sure this list isn't exhaustive. Why do you think we're stuck in the slog?
This post originally appeared at Jared Bernstein's On The Economy blog.
Follow Jared Bernstein on Twitter: www.twitter.com/@econjared
Government spending is to provide essential public services not a means to 'correct' the economy.
These services are expenses - they cost money and more importantly consume real resources. All this has to be paid for with taxes now and taxes on the future generations (also known as government borrowing). Government takes money from some (taxpayers) and spends it on others. It's still the same amount of money. Taxes are necessary to pay for essential public services but it's hard to see how redistributing money is 'stimulative'.
Many people, like Mr Bernstein, believe that government spending, virtually any government spending is good for the economy. If this was the case, Cuba, where govt spending is a huge part of the economy, would be a wealthy place. Why doesn't the govt spending in Cuba 'spiral up' and 'multiply' and create a wealthier economy?
Without the real, private economy there is no real production and wealth creation. Government spending is utterly dependent on the private economy. Roads, police, parks, national defense are examples of essential public services that the government is the best possible means to provide. The taxes on the real private economy make these services possible.
He is sending assignments to all his JournoList minions to gin out some propaganda to whip up support for a new stimulus.
One meme popular among the JournoList hacks is "look at Europe, they reject austerity."
This is a silly argument.
First, it is the bond market and the bail-out funds that impose austerity in Europe. Greece, Spain, Ireland, Italy, England and France would never EVER have launched austerity programs until the bond market said "No more money, well, none for less than 15% interest, until you get your finances in order." No Euro country is free to print its own currency or to issue its own debt without restriction.
Second, despite the weird misrepresentations making the rounds in the lefty press there days, the US has not had any austerity at all. Some states, cut off from the bond market, are having to pare back, but the federal government spends more every single quarter. The rate of spending is accelerating.
I think Jared get a Fail on this JournoList assignment.
Of course, what would one expect from someone who never had any training in economics. Jared holds a BFA in music, two master's degrees - social work and philosophy, and a PhD in Social Welfare. But this is sufficient training to earn him a position as Biden's economic advisor!
Tossing around massive amounts money at the bottom of an economy (demand side) does nothing but piss away money. It builds nothing. It grows nothing.
The reason the economy is still dragging is confidence in gubbmint policy, the cost of ridiculous healthcare mandates, the massive stupidity of Dodd Frank, the impending tax increases, and a complete lack of leadership in the WH. Also, nothing at all has been fixed.
OR ... maybe it's THIS: http://workforall.net/files/Size_of_government.gif
A picture is worth 1000 words, Jared....
http://www.economicsjunkie.com/us-government-growth-1930-2009-update/
as an example. By my analysis of that chart, government expenditure as a percentage of GDP was under 31% when Reagan took office, peaked at 33.5%, and never fell below its starting level until Bush the Greater left office (still over 33%). The number then declined continuously to a low of 28% at the end of the Clinton administration, which was even lower than the low near the end of Carter, then rose continuously through the Cheney administration to the highest level since the Doolittle raid.
Whatever Obama may have done during three years of digging out of the mess he inherited, with revenue deliberately depleted and social needs through the roof, it wasn't significant compared to the harm done by Greenspan and the nihilists in the name of deregulation.
a) that public sector pensions are destroying cities, counties and states right and left...and...
b) that government workers earn double the avg salary of those paying the taxes
is nothing short of ludicrous
Obama's economic team blew it back in 2009 when they published a report predicting specific GDP and job growth results from a given amount of "stimulus" spending. Give them credit, the Keynesians have learned from this blunder. Never offer anything specific. When asked why American & European stimulus failed so spectacularly simply roll your eyes and answer that, as you knew all along it failed because it wasn't enough. How much borrowing and spending would be enough? We'll know when we've borrowed and spent it!