We now know austerity economics is bad for weak economies facing large budget deficits. Much of Europe is in recession because of budget cuts demanded by Germany. And as Europe's economies shrink, their debts become proportionally larger, making a bad situation worse.
The way to avoid this austerity trap is to get growth and jobs back first, and only then tackle budget deficits.
The U.S. hasn't yet fallen into the trap, but it could soon. Last week the non-partisan Congressional Budget Office warned we'll be in recession early next year if the Bush tax cuts end as scheduled on January 1, and if more than $100 billion is automatically cut from federal spending, as required by Congress's failure last August to reach a budget deal.
Predictably, Capitol Hill is deadlocked. Democrats refuse to extend the Bush tax cuts for high earners and Republicans refuse to delay the budget cuts.
If recent history is any guide, a deal will be struck at the last moment -- during a lame-duck Congress, some time in late December. And it will only be to remove the January 1 trigger. Keep everything as it is, the Bush tax cuts as well as current spending, and kick the can down the road into 2013 and beyond.
Which means no plan for reducing the budget deficit.
I've got a better idea -- a different kind of trigger. Instead of a specific date, make it the rate of growth and employment we should reach before embarking on deficit reduction.
Say 3 percent growth and 5 percent unemployment. At that point the Bush tax cuts automatically expire, the wealthy pay a higher rate, and $2 trillion in spending cuts begin.
This way we avoid the austerity trap that Europe has fallen into. And we get on with the long-term job of taming the budget deficit when the economy is healthy enough to do so.
ROBERT B. REICH, Chancellor's Professor of Public Policy at the University of California at Berkeley, was Secretary of Labor in the Clinton administration. Time Magazine named him one of the ten most effective cabinet secretaries of the last century. He has written thirteen books, including the best sellers "Aftershock" and "The Work of Nations." His latest is an e-book, "Beyond Outrage." He is also a founding editor of the American Prospect magazine and chairman of Common Cause.
Follow Robert Reich on Twitter: www.twitter.com/RBReich
We need to take the debate to a new level in Washington, introduce pragmatism to replace dogmatism and teach both sides of the aisle how to intelligently engage each other and COMPROMISE!s
In a growing economy with low unemployment, meaningful deficit reduction will be rejected because:
- cutbacks now threaten to derail the ‘still fragile’ economy
- people deserve to enjoy themselves after the bleak crisis period
- debt is shrinking as a percentage of GDP and therefore irrelevant
- there is 'unfinished business' that couldn't be tackled before because of the crisis
- the recovery proves that any future crash can always be corrected with stimulus spending later
What about private investment? JPMorgan just reminded us that private "investment" is often a euphemism for unaccountable speculative gambling.
The people from the West should reject the money system monopoly and accept complementary currencies to restart trade within their communities. These countries are rich, have educated work-force and rich industrial equipment. It's absurd to put this developed world into austerity in order to enrich a third world.
Then, we should tie spending levels also to the GDP. The government's sole job would become prioritization, and nothing new could be funded without adequate economic growth to fund it or without cutting something else (exceptions can be made for emergencies, such as war but not in an unlimited way).
Bam! 99% of our economic mess solved. But, there's no will to do it because it requires politicians to return their power to the individual. Thus, we also need term limits.
If you mean welfare, it really just needs to be reformed so that the underclass doesn't make it a way of life..
facts are always welcome in rebuttal to right-wing nonsense.
Keep your eye on the end game, which is 0% tax on capital gains, dividends and estate. And after they achieve those goals, and there is no money for SS or Medicare at all, even though the middle class pay into them with every paycheck, who will you blame then? Still the poor??
Technology has made workers less necessary than at any other time in human history and coupled with science has led to there being more potential workers than at any other time in human history.
There is already a surplus of labor AND most labor that is done is done by slaves. Slaves in China, Cambodia, Vietnam, wherever we can find them. That pool of slave labor makes it IMPOSSIBLE for western style capitalism to survive. Which is why it has collapsed and instead become some weird facism/feudalism/corptocracy creature that simply cannot survive much longer.
Robert, this article does nothing to address ANY of the problems facing us or the EU. Raising the top rates back up above fifty percent, cutting military spending, ending free trade with countries who use slave labor, etc. Those things MAY bring us back. But at this point in time I think The March of Folly has begun.
1. Audit and account for the 10s of TRILLION in state and local CAFRs, all available online, and increasingly documented by CAFR activists. This money could pay a citizen's dividend - forever.
2. Use some of that CAFR money to set up State banks like the wildly successful Bank of North Dakota, screwing the big banks in favor of the People
3. Tax the Land, not the People with a Land Value Tax, untaxing all productive activity at the same time. "Rent," 1/3 of GDP, now collected by private parties, should go back to the People whose demand created it.
4. Re-issue debt-free money the way Lincoln did as U.S. Notes, the way coins are issued, the way the constitution (Art. 1, Sec. 8) allows Congress - and ONLY Congress - to do. No interest and money put directly into public works programs, providing jobs!
$91 billion in PA accounts alone could be partly redirected into a State Bank.
There are >184,000 CAFRs in the U.S. so that's how you get to 10s of trillions.
Just post WW 2.
"There is always a case being made for deficit spending regardless of any prosperity."
Yes, and that was bad judgement.
"Non stop increases in taxation and spending have been tried."
In the US? When? Taxes peaked at over 90%, decades ago, with a low of about 28% in the late 60's. Small increases since then trickled on until the Bush cuts, which have remained constant (with occasional uncertainties) through today.
The US had a large debt to GDP ratio post WW2; taxes went high, growth went high, debt was paid down and the economic standing we're hoping to create "again" was realized for many years that followed.
Common sense isn't sufficient to understand the problem, let alone solve it.
Meditate on Romney's statement that severe cuts in the budget would initiate a recession and try to reconcile why that was an accidental statement of the truth.
Drop military spending, money saved. Jobs lost (oops).
Save pet (expensive) military projects, debt increases (oops) - jobs saved (ok).
Drop spending on education, money saved. Jobs lost (oops), GDP fades years later (oops).
Increase spending on education, GDP goes up years later (ok), debt increases (oops).
It's not that cutting is a bad idea, its that every such act has an opposing reaction contrary to our goals, requiring a calculus of balance of forces on a MOVING TARGET.