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May 7, 2013
Steve Kraske of The Kansas City Star recently interviewed me for a piece about austerity. The story
ran in today’s paper. It doesn’t provide much depth (unlike bloggers,
journalists have strict space constraints!), so I followed up with a few
comments on the Star’s website. I thought I’d share them here, since
I’m always trying to improve the way I communicate these ideas with
non-economists. So here’s my best effort to make the anti-austerity
case in simple terms.
1. When we allow our economy to operate
below full employment (as now), we are sacrificing trillions of dollars
in lost output and income each year. We can never go back and recover
it. It is gone forever. You’ve seen the debt clock? Here’s the lost output clock.
Capitalism runs on sales. In survey after survey, we find that the
Number One reason businesses are slow to hire and invest in new plant
& equipment is a lack of demand for the things they produce.
Businesses hire and invest when they’re swamped with customers. See
this story in The Wall Street Journal
The two decades after WWII certainly aren’t the only time that robust
growth reduced the DEBT/GDP ratio. During the late 1990s and early
2000s, the economy grew at an above average clip. Unemployment fell to
3.7%. Inflation remained modest. There was a job vacancy for every job
seeker in America — genuine full employment. Because people were
working, there was less spending to support the unemployed (food stamps,
unemployment compensation, etc.) and more people paying income taxes.
The deficit disappeared, and the national debt fell to around 40% of
GDP. So you do not need post-WWII conditions to support the argument
that economic growth is the way to reduce the debt.
debt/GDP ratio falls when the denominator grows faster than the
numerator. Right now, just about everyone is fixated on using austerity
(raising taxes and slashing spending) to reduce the numerator (DEBT).
The problem, as Europe has kindly shown us for years, is that austerity
“works” by crushing incomes, which in turn crush sales (or what we call
GDP). So instead of bringing the ratio down, austerity hampers growth,
which causes deficits and debt loads to rise
Although virtually no one bothers to mention it, the deficit is
currently falling at its fastest pace since the end of WWII. Yes, right
now in America, even before the sequester, the deficit was plummeting at a scorching rate
Why? Because the economy was recovering from the Great Recession.
Unemployment was falling and growth picked up to around 2.5 percent.
When people get jobs, they earn wages/salaries, pay income taxes and
stop collecting unemployment.
6. Policymakers on both sides of
the political aisle are moving us in the wrong direction. The fiscal
cliff and the sequester both impose austerity (tax increases and
spending cuts) at a time when there are vast unused resources (labor,
raw materials, excess capacity in our factories) and inflation is
running below the Federal Reserve’s target. These are exactly the wrong
policies and they will hurt the economy.
7. Saying that
austerity is bad policy ≠ saying government needs to spend more money.
Businesses need customers, but the government does not have to be the
one doing the buying. We have been advocating a full payroll tax
holiday (extended to the employee and the employer) for 5 years now.
That amounts to a 6.2 percent across-the-board cut in the wage bill,
and the addition of almost $300/month to the take-home pay of the
average worker. Businesses need customers, and customers can be created
by leaving more money in the hands of those who work for a living.
8. We have a serious infrastructure problem in this country. The American Society of Civil Engineers just released its 2013 Report Card
and it is ugly. Our ports, roads, waterways, etc. are in serious
disrepair. This makes it more expensive for businesses to produce/ship
goods, which raises U.S. prices and reduces our global competitiveness.
Meanwhile, we have millions of out-of-work construction workers and
manufacturing workers — the people with exactly the kinds of skills that
are needed to repair and rebuild our national infrastructure.
have useful work that needs to be done, millions of people who want to
contribute and policymakers with no plan to connect the two.
What holds us back? Fear of the Chinese? Fear of bond vigilantes? Fear
of the ratings agencies? Fear of becoming the next Greece? Fear of
turning into Zimbabwe? Fear of sticking our grandchildren with a huge
tax bill? This is what they tell us as they impose austerity. None of
it — I repeat — none of it has the slightest bearing on our reality.
Final (and most important) point: The United States of America has
sovereign money. The US dollar comes from the US government. It cannot
come from anywhere else. We can never run out of dollars or be forced
into default like Greece, which does not have its own currency. We do
not need to borrow from the Chinese to do the things that we decide to
do for our economy.
As long as the real resources (labor, raw
materials, factory capacity) are available, the financial resources
(money) can always be there. This can be done without causing
inflation as long as the additional spending does not outstrip the
economy’s capacity to produce. We can afford to cut taxes and
spend more money to improve our infrastructure without burdening the
next generation. Failing to get the economy back to full employment
will burden us all for years to come.
Stephanie Kelton teaches economics at the University of Missouri-Kansas City. Dr. Kelton blogs at New Economic Perspectives, which she created and currently edits. Follow her on Twitter.
The fault,dear brutes, is not in our stars, but rather in the lies of the GOP...ReplyDelete