The Federal Reserve said (admitted) this week that government austerity measures have hurt economic growth.
Not that this is a surprise to anyone who doesn’t watch Fox News – or to the citizens of the UK, Spain, and Portugal – but it’s one more indication that the Republicans’ Holy Grail for curing all economic woes, austerity, is actually causing more problems than it’s solving.
Labor market conditions have shown some improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth.
Fiscal policy is government spending.
As you know, ever since the stimulus Democrats have been playing a “can you out-austerity me?” game with the Republicans. All the economists we trust have been saying from the beginning that you don’t cut government spending either in a recession or during anemic economic growth. They’ve also been saying that, with interest rates at historic lows, and borrowing practically free, now is not the time to pay off debt – now is the time to take on more debt, and invest in things that will lead to more economic growth later on.
But Republicans are very good at what they do, lying, and Democrats have a genetic flinch. So as soon as the stimulus passed, Democrats stopped talking about it, Republicans kept talking about it, until the conventional wisdom was not only that the stimulus was a waste of money (it wasn’t), but that the debt was the biggest problem we’re currently facing, and it’s not. Lack of job growth is the biggest problem we’re currently facing. An anemic economy where a lot of people’s salaries, mine included, actually went down again last year, after finally ticking up the year before, is the biggest problem we face. And the fact that millions are still unemployed, with virtually no hope for finding a job any time soon – including a lot of unemployed recent college grads – is among the biggest problems we face.
But Republicans are a one-song show. It doesn’t really matter what the problem is that we face, the answer is always tax cuts, gay bashing, and Benghazi.
As Mark Blyth notes in a new article in Foreign Affairs, austerity doesn’t work:
The results of the experiment are now in, and they are equally consistent: austerity doesn’t work. Most of the economies on the periphery of the eurozone have been in free fall since 2009, and in the fourth quarter of 2012, the eurozone as a whole contracted for the first time ever. Portugal’s economy shrank by 1.8 percent, Italy’s fell by 0.9 percent, and even the supposed powerhouse of the region, Germany, saw its economy contract by 0.6 percent. The United Kingdom, despite not being in the eurozone, only barely escaped having the developed world’s first-ever triple-dip recession.The results of the experiment are now in, and they are consistent: austerity doesn’t work.
The only surprise is that any of this should come as a surprise.
After all, the International Monetary Fund warned in July 2012 that simultaneous cuts to state spending across interlinked economies during a recession when interest rates were already low would inevitably damage the prospects for growth. And that warning came on top of the already ample evidence that every country that had embraced austerity had significantly more debt than when it started. Portugal’s debt-to-GDP ratio increased from 62 percent in 2006 to 108 percent in 2012. Ireland’s more than quadrupled, from 24.8 percent in 2007 to 106.4 percent in 2012. Greece’s debt-to-GDP ratio climbed from 106 percent in 2007 to 170 percent in 2012. And Latvia’s debt rose from 10.7 percent of GDP in 2007 to 42 percent in 2012. None of these statistics even begin to factor in the social costs of austerity, which include unemployment levels not seen since the 1930s in the countries that now make up the eurozone. So why do governments keep on treading this path?
Chris has written at length about the damage austerity has done to the English economy (which first was facing a double-dip recession because of austerity, and now may be facing a triple-dip recession as a result), to the Spanish economy, and now the Portuguese economy.
Nowhere in the world has austerity restored a national economy. Even a conservative US think-tank has determined that austerity may be hurting the US economy.
Of course, that didn’t stop the Republicans from imposing austerity at home. Even at the state law, ill-timed austerity is hurting people. Just look at Scott Walker’s Wisconsin. The problem, among many, is that austerity slows down the economy which hurts job growth, and which in turn hurts government revenues (fewer people employed means less money taken in from taxes). And as noted above in the Blyth piece, deficits are now increasing. The UK is a perfect example. Austerity increased the deficit and cost the economy billions.
Austerity does not work. And to the extent it might be a necessary remedy in extreme circumstances, you don’t implement it in a weak economy. It’s almost as if the Republicans think America is some third-world country that needs desperate measures to save it from its desperate ways. Perhaps it’s time the Democrats reminded the GOP, publicly and loudly, that America is not the Third World.