Federal Reserve says austerity is hurting US growth

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.

Here’s a snippet of a Fed press release from this past Wednesday (h/t Kevin Drum):

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.


Follow me on Twitter: @aravosis | @americablog | @americabloggay | Facebook | Google+. John Aravosis is the editor of AMERICAblog, which he founded in 2004. He has a joint law degree (JD) and masters in Foreign Service from Georgetown (1989); and worked in the US Senate, World Bank, Children's Defense Fund, and as a stringer for the Economist. Frequent TV pundit: O'Reilly Factor, Hardball, World News Tonight, Nightline & Reliable Sources. Bio, .

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  • ronbo

    Pardon me, madame; but, in America, private enterprise purchases their government and then have their government “mandate’ profit for the private sector. We pay twice as much for half as good medical services. Thanks to…..you guessed it….private health insurance mandates!
    How is your for-profit health insurance industry doing these days? I thought as much.

  • Sweertie

    What about Pelosi?

  • Sweertie

    “It is clear that we must enter an era of austerity…” – Nancy Pelosi

  • Sweertie

    “Not that this is a surprise to anyone who doesn’t watch Fox News or listen to Nancy Pelosi.”

    fify

    “It is clear that we must enter an era of austerity…”

  • http://www.facebook.com/randall.castor.5 Randall Castor

    And the American people with any common sense are saying the fed is going to crash the US dollar by printing so much money.

  • http://adgitadiaries.com/ karmanot

    Yep

  • http://adgitadiaries.com/ karmanot

    Yet you give billions to those parasite royals in welfare. It’s no accident that the royals wave says:”brooch, pearls, tiara.” Or “Guilders, Pounds and Dollars.”

  • Mombasa69

    No Pain, No Gain, you need to re-balance your economy, like we in the UK are currently doing, less government and bigger private sector, you know the private sector the part of the economy that actually creates wealth.

  • clarenceswinney

    SEQUESTRATION
    YUK!
    Budget Control Act passed Congress August 2,2011.
    The “super committee” did not even submit a proposal to cut spending by $1500 B
    over ten years. If they failed, then Sequestration kicked in January 2, 2013.
    Now what? Cut backs are being adjusted or eliminated due to damage to services by our government. Hear the rich screaming? No! House reversed the furlough of 15,000 air traffic controllers. Head Start? Chemo for cancer patients? In Arizona, 43,000 work for Defense in 2000
    companies. Boeing has 500 local suppliers. The Defense supply chain will be affected.
    Sequestration is our Economy Killer. We are still in a Jobs Recession. College grads taking minimum wage jobs. My son works for the Energy Department and they are trying to adjust jobs not to hurt production.
    Our budget problems are from one thing only. Cheney-Bush.
    Took 1800B Budget to 3500B. Took surpluses as far the eye can see to 1400B Deficit on 9-30-09
    Took 5800B of Debt on 9-30-01 to 11,900 on 9-30-09—–Doubled in 8.
    Took 237,000 jobs per month to 31,000.
    Cut revenue with tax cut for upper class.

  • http://www.rebeccamorn.com/mind BeccaM

    They may call him that, but compared to Obama, Nixon was a bleeding heart liberal.

  • http://www.rebeccamorn.com/mind BeccaM

    Well, we just bought a house recently and we’re far from wealthy. The low interest rates did help with the mortgage.

  • ComradeRutherford

    Is that why they call Obama a ‘progressive’ even though he’s exactly the same and the GOP and Democratic Leadership?

  • Naja pallida

    The more likely answer.

  • http://www.rebeccamorn.com/mind BeccaM

    Or, it could be our government leaders do not actually want the Depression to end. It serves their purposes and desires.

  • http://www.rebeccamorn.com/mind BeccaM

    Actually, I’d correct that a bit: Conservatives want the sequester so as to impoverish the nation, so they can try to blame it on the Progressives.

    And by ‘Conservatives,’ I mean the entire GOP and a controlling majority of the Dem leadership. As the progressives and liberals are blamed for the deficits (as opposed to the real causes, which are the military budgets and corporate & plutocrat entitlement programs) this is how they institute privatization, erode the social safety net, and unravel both the New Deal and Great Society programs.

  • Naja pallida

    Not that anyone who has less than a million dollars in an investment account ever makes enough interest to care much about interest rates anyway. About the only time the average person cares is when they apply for a loan. Be it a mortgage, or small business loan, or car loan… but when wages are being castrated and banks aren’t lending unless you can prove you don’t need the money, the Fed’s quantitative easing policy is directly undercut by austerity measures. Austerity reduces the quality of life for everyone except the richest few who are laughing their asses off that interest rates are so low, they are literally making a profit off of borrowing money.

  • http://adgitadiaries.com/ karmanot

    I know I’m not voting Demo again—-ever.

  • http://adgitadiaries.com/ karmanot

    When you drop interest rates, it also discourages saving.

  • http://adgitadiaries.com/ karmanot

    and Mr. god, of course.

  • Naja pallida

    There’s one in the White House now.

  • tomtallis

    You make the completely unwarranted that this is being done out of ignorance. The Republicans want to cause as much trouble and grief as possible. They’re looking toward 2016 and hoping that it will get worse and worse and they can blame it on the Democrats. So far, they’re succeeding, and unless the Democrats grow a very large pair, I think that we’ll see a Republican in the White House in 2017.

  • http://profiles.google.com/sourblaze David

    Pass a Constitutional Amendment allowing for secession. Let the gun toting billionaire funded bigots found their own birther nation, build a Berlin Wall around it and let them rot. Meanwhile the U.S. will catch back up to the rest of the world.

  • pappyvet

    The repubes DO get that. We perhaps should stop assuming that they do not know exactly what they are doing

  • jared

    What would a reasonable annual deficit be? $1.5T not enough? I don’t see any austerity, besides the sequester and in my opinion, both D&R politicians implemented the measly $85b cut in the worst possible way…issuing unnecessary pain to everyone except themselves.

  • nicho

    Yup. You’ve got it.

  • tomtallis

    The GOP does not run on logic or rationality and they’re NOT interested in any facts that contradict their dogma, and make no mistake, the GOP wants to RULE using dogma, only dogma, nothing BUT dogma.

  • Russ

    Exactly!! I couldn’t have said that any better!

  • Russ

    The whole idea is to cuase harm. To the GOP – whatever damage is done – that can be done during Obama’s term can be blamed on Obama. It doesn’t matter how many people are hurt by it. It’s all political now. This is from the Karl Rove school of politics, to be sure!

  • Naja pallida

    Not to mention, austerity is also destroying anything the Fed has done to attempt to rectify the situation from within their powers. The whole point of dropping interest rates to basically nothing is to encourage spending. When you drop interest rates to nothing AND stop spending, you basically grind everything to a halt.

    We know how to get out of a Depression. We’ve done it before. Just doesn’t seem like anyone in government has learned the lesson.

  • TheOriginalLiz

    That’s an excellent point. They’ve got everyone so wrapped around the axle about sh*t that isn’t that important, that we are not able to see, much less pull together to address the real problem this country is facing – our aristocracy.

  • http://www.rebeccamorn.com/mind BeccaM

    Addendum: I also have a theory that the austerity fetish now may also be a panicked reaction among the plutocrats to the dot-com boom of the 90s. Although bubble-fueled, it nevertheless was the last time we had close to full employment, net positive improvements in living standards, and upward pressure on wages and benefits. Boom-time economies invariably have citizens who begin to expect their lives will become better over time, that their kids will have even higher standards of living than themselves — as opposed to what we have now, which is an inexorable global decline in living standards for the 99% and the Proles being conditioned to expect it to go on forever.

  • http://adgitadiaries.com/ karmanot

    And Obama’s Sequester? Designed to finally destroy the last of the great FDR safety net. Obama, the first half/black President of the United States and the first to bring austerity back to set standards for the neo-Robber Baron age.

  • ComradeRutherford

    “Federal Reserve says austerity is hurting US growth”

    That, of course, is why the Conservatives wanted the sequester so bad. They want to impoverish America so they can try to blame it on the Democrats.

    Conservative don’t give a $h!t about the nation, only their own party’s political power.

  • http://www.rebeccamorn.com/mind BeccaM

    Yep. They want the 99% to be poor and easily manipulated — hence the constant propaganda to get us to blame each other rather than the rich bastards who’ve taken all the money.

  • http://www.rebeccamorn.com/mind BeccaM

    Deficit-backed stimulus spending — the classic Keynesian method for pushing large economies out of depression, recession, or stagnation — also has negative side-effects for those who are already very wealthy. There is usually a spurt of inflation as the stimulus takes hold and the economy gets going again. Demand increases, fueling a rise in core prices on just about everything. And existing debt is devalued.

    Who has already big piles of money and holds most of this debt? The 0.01%. The last thing national economies such as Italy, Spain, Portugal,, Greece, and Ireland need is growth-crushing austerity, but the banks demand otherwise.

    Austerity is a win-win-win for the plutocratic oligarchs. The value of the debts they hold in the form of securities and bonds is held steady (or actually increases). There’s little or no inflation, so the millions or billions in their investment accounts hold their value. And best of all for the PBCs*, there is little risk of the desperate poor and shrinking middle class to challenge the political regimes, because frightened people are easily manipulated. High unemployment and a shortage of good jobs maintains a steady downward pressure on wages and benefits.

    I’d also suggest the PBCs actually prefer depressed, stagnant economies, because governments will have to continue to borrow money to operate — and who do they borrow from at ever increasing bond interest rates or, in the case of the U.S. are loaned essentially interest-free piles of cash? The plutocrats.

    As Krugman and other reputable economists have gone hoarse pointing out, we’re in a demand depression. Not a ‘great recession’ but a Depression. People simply don’t have the money to buy things, which leads to a negative reinforcement feedback loop, further depressing demand and causing deflation — which leads to what? Enhanced value for the piles of money already owned by the wealthy. They actually don’t care if demand keeps going down, certainly not in the short to medium term, because they already have mechanisms in place through their creation of a virtually unregulated securities and derivatives market, to ensure their wealth bubble keeps on inflating, even as the 99% grow poorer with each passing day.

    They’ve figured out how to parasitize the entire world economy.

    The greatest threat to the unfettered power of the rentiers is a middle class that isn’t terrified they’ll lose their jobs at any time and who have managed to put away enough savings to get through rough times. Austerity serves this role, ensuring that there actually is economic pain and that all of it is suffered by us commoners.

    One detail I would disagree with in the post is the idea that the Dems have a ‘genetic flinch’ when it comes to stimulus vs austerity. While it’s true that the GOP embraces austerity completely, the Dems — particularly the neo-liberal corporatist contingent — have also embraced it. There are some Dems who know better, but they are few and unrepresented in the current Administration, Congressional leadership, or the DNC. A mere flinch would be acquiescence to austerity-based budgetary priorities, whereas they’re actually coming up with blood-letting proposals of their own.

    I mean, really, the Catfood Commission anyone? Chained-CPI. The Sequester itself.

    (PBC = plutocratic bastard class)

  • nicho

    So the plan of the one percent is working – destroy the middle class.

  • Drew2u

    the GOP has no reason to not change their tune. They are aided by their propaganda machine to lie to their constituents in order to protect their, the GOP’s, own interest: and that is hoarding as much access to commerce (money) as they can possibly get.

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