Austerity Programs Will Not Solve U.S. Economic Woes


In my previous post, I introduced the idea that there are three myths of the conservative economic imagination that require examination. These "pillars" constitute the main ideas of conservative arguments for policy action. Today, I will tackle the second pillar, the argument that favors a domestic austerity regime to correct the national debt and encourage economic growth.

Let’s begin by examining the conservatives’ narrative in support of austerity: The government has a significant debt problem, with ever-increasing deficits and unfunded liabilities in its entitlement programs, which is set to explode in growth in the future. This nightmare scenario necessitates that the size of government dramatically decreases through significant cuts in spending, combined with subsequent cuts in tax rates, which will benefit both individuals and businesses and lead us down the road to future growth.

The current economic malaise, according to this narrative, is clearly the work of “uncertainty” which has manifested through business owners' fears over the effects of future increased regulation and the potential for increased tax rates. Decreasing the size of government will necessarily decrease the role of regulation in the market and will calm business leaders' fears of future increased taxation.

Now the issue at play in determining the economic rationale for an austerity regime at this time is its near-term effect on economic growth. Economists and international economic organizations argue that austerity hurts in the short term. These results should not be too shocking, as austerity measures necessarily dampen expenditure and, therefore, economic growth. A complicating factor is the notion that the recent recession was normal and that austerity measures are necessary after the extravagances of the previous boom.

If the U.S. economy was only faced with one economic problem – ballooning debt – then the choice of austerity would be reasonable. Unfortunately, ballooning debt is not the only problem currently facing the U.S. economy. The urgent, critical problems that need to be addressed are ones of low aggregate demand, depressed investment, and high unemployment. All of these issues are connected to the fallout from the financial crisis that left us with substantial household debt overhang, a figure which continues to increase as asset prices continue to fall.

The conservative narrative does nothing to alleviate the primary causes of our current economic trouble. Cutting government spending means cutting jobs, increasing unemployment, and further adversely affecting demand. Reducing tax rates means reducing government revenues, which further amplifies the supposed logic of cuts to government spending, which further increases cuts in government jobs.

The government cannot address its long-term debt crisis without first addressing the problem of near-term economic growth. Further depressing economic growth through austerity measures will cause the current malaise to grow worse and will extend the amount of time necessary for our economy to rebound. Prolonged economic slowdowns will cause the government to suffer lower revenues and can only work to increase deficits and debts, not correct them.

The conservative narrative argues, by its focus on austerity, that our primary concern should not be the current economic plight we find ourselves in, but rather the prospects for our economy 10 and 20 years into the future. In normal times, this concern would be a rational one. However, unless we address the root causes of the current economic malaise – those of weak demand and high household debt, conditions that curb business growth and lead to persistent high unemployment – our economy cannot grow, a condition necessary for any plan to address national debt to succeed.

Government cannot "cut" its way to economic growth and businesses cannot increase domestic consumer demand with higher cash flows on their balance sheets. Money flows will change from taxes and public revenues to tax breaks and corporate profits, the proceeds of which businesses will be more than happy to invest abroad, where the prospects for growth are higher.

I am not arguing for haphazard government borrowing and spending. In the near term, government spending can have a positive effect on economic growth. Interest rates on government bonds are at historic lows, which the government should take advantage of, and increase its investment over the next few years in infrastructure, energy, education, and science, and technology research. These are areas that will continue to decline in a prolonged economic slump, and, with regard to infrastructure, will only be more costly to correct later.

To wit, we should not take government debt lightly. The issues of entitlement reform and austerity should be engaged, with plans to address the dramatic projected future increases. However, we cannot succeed in this process by depressing current economic growth. Now is the time to grow in economic strength in order to weather the hardships of austerity in the future.

Photo Credit: sushi♥ina