Push Comes to Shove: Austerity Has Slowed the Recovery

For an ideology that has failed so consistently in practice, austerity continues to enjoy remarkable support as a theory.

Europe and the US have both imposed this tight-fisted approach to governing on their electorates, promising a quick return to economic redemption. The experiential data are in, however, and the policy's adherents have been proven wrong. Consistently.

The problem is really one of philosophy: if you dont believe in government to begin with, it is difficult to support government programs. Facts, therefore, become an inconvenience to be explained away rather than a cause for reconsideration. A secondary challenge is that many austerity advocates do believe in some government spending, but not on programs that would actually benefit anyone other than their friends or themselves. This further reduces confidence in government as the budgetary outlays remaining, while outsized when compared to that of the average homeowner, are insufficiently focused when it comes to lifting the prospects of 60 or 90 or 300 million people.

Allusions to getting one's house in order play popularly, especially when larded with veiled references to the 'otherness' of those receiving the largesse provided by over-burdened tax payers. But it is precisely those yeoman stalwarts of the nation's (any nation's) heart and soul who are undercut by the refusal to permit government investment in order to counteract the impact of global forces whose power the individual, even most corporations, are too weak to resist.

Like any virus, austerity will eventually run its course as the body (politics) it requires for propagation sicken and waste away or bestir themselves to choose a more efficacious cure. The question is whether there is sufficient time to heal before another contagion strikes. JL

Brian Beutler reports in TPM:

Here’s the buried lede from the Congressional Budget Office, which on Tuesday released its Budget and Economic Outlook for the coming decade: D.C.’s deficit obsession has been quite effective at cutting deficits at the expense of the still-struggling economy. “[E]conomic activity will expand slowly this year, with real GDP growing by just 1.4 percent,” according to CBO’s projections. “That slow growth reflects a combination of ongoing improvement in underlying economic factors and fiscal tightening that has already begun or is scheduled to occur-including the expiration of a 2 percentage-point cut in the Social Security payroll tax, an increase in tax rates on income above certain thresholds, and scheduled automatic reductions in federal spending. That subdued economic growth will limit businesses’ need to hire additional workers, thereby causing the unemployment rate to stay near 8 percent this year, CBO projects.”

In other words, intentional efforts to reduce annual deficits and stabilize the debt are working. But if you retrain your gaze from the government’s balance sheet to the real economy, you’ll see the impact of that austerity is fewer people working and slower growth. According to CBO, the recovery won’t really pick up steam until next year, and the economy won’t have recovered until the end of 2017, when it will reach its output potential, and unemployment will fall to 5.5 percent.

CBO notes that the U.S. hasn’t experienced six consecutive years with unemployment exceeding 7.5 percent in over 70 years.

The report does contain a thin silver lining for President Obama, who pledged in his 2008 campaign to halve the deficit in his first term.

“At an estimated $845 billion, the 2013 imbalance would be the first deficit in five years below $1 trillion; and at 5.3 percent of GDP, it would be only about half as large, relative to the size of the economy, as the deficit was in 2009,” if current laws don’t change, according to CBO.

However, this particular budget and economic forecast is highly uncertain, even in the short term. Looming fights over the sequester, government appropriations, and the debt limit could dramatically alter the fiscal outlook and thus the economic forecast, for the year and coming decade. Similarly, deficits will be higher than projected if Congress, as it routinely does, extends expiring tax credits and overrides a 25 percent cut to Medicare physician reimbursement rates before the end of the year.