The Austerity Trap

In February U.S. home prices showed an increase of 10.2 percent over the previous year, the largest percentage gain in seven years. Consumer spending is on the rise and federal tax revenue is up. Borrowing costs are at historic lows, and the federal deficit as a percentage of gross domestic product is shrinking faster than at any time since the end of World War II. How does Washington plan to respond to this economic basket of good news? By following Britain’s thus far disastrous lurch into austerity?

Over the last three years a real-world comparative economic case study has played out as the Obama administration tried to revitalize the economy with what many economists complained was a too-timid stimulus package and tax cuts. Across the pond Britain attempted to provoke growth through budget-balancing that coupled public sector layoffs and social service cuts with higher taxes. The result: The U.S. economy grew about 2 percent each year, and its deficit was reduced as a percentage of G.D.P. by nearly half, from the sudden increase to 10 percent in 2009 to 5.3 percent in 2013. Britain, meanwhile, endured painful social disruption and a credit rating cut while managing to reduce its deficit from 4.8 percent to 4.3 percent of G.D.P. And even that apparent if modest success, far from the 1.9 percent target projected in 2010, was achieved only with creative accounting that was overly kind to the policies of Chancellor of the Exchequer George Osborne. The nation currently wobbles on the edge of a triple-dip recession. Both nations have performed precisely as a Keynesian analysis would have predicted.

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Despite these outcomes, some deficit hawks in Washington, primarily among House Republicans, remain starstruck by austerity, a bad idea whose time has not come. Europe’s current predicaments tell a number of cautionary tales. One narrative cautions against government overspending, another against the manifold dangers of a financial sector grown too powerful and too unsupervised. Which one of these seems most applicable to the American experience? The final European tale of woe is being written as austerity budgets become provocateurs of social upheaval without bringing the hoped-for economic healing.

The timing of a further U.S. embrace of austerity could not be worse. More than six million private sector jobs have been created since 2010, and the U.S. economy is finally showing signs of a potentially self-propelling vitality. Holding the economy back from a full-throttle restoration is the sadly diminished public sector, which has shed more than 700,000 jobs over the last 36 months.

If the failure of austerity in Britain is not enough to encourage a course change inside the Beltway, perhaps a pothole or two will do the trick. Once every four years, the American Society of Civil Engineers publishes a comprehensive assessment of the nation’s major infrastructure categories in its “Report Card for America’s Infrastructure.” Since 1998 the grades have been near failing because of delayed maintenance and underinvestment across most categories; this year the grade rose only slightly to a D-plus. That poor showing should prompt a congressional re-evaluation of fiscal policy that will likely lead to wider deficits in the future while perpetuating the embarrassing decline of basic infrastructure in the United States.

Unfortunately, owing to the nation’s dysfunctional political culture, prioritizing deficit reduction over job creation, however counterproductive that might be, remains the likeliest outcome of current budget negotiations. If the House refuses to budge on austerity, then it should at least consider empowering the states, where public sector job loss has been severe, to explore public-private partnerships on large-scale infrastructural improvements. At the federal level, the nation could declare a war on infrastructural decay, selling “I-Bonds” (“I” for “infrastructure” or “investment”) to fund new projects that could be repaid from user fees or tolls where that is practical and fair. More resources for infrastructure and investment in human capital could be extracted through more aggressive budget mining within the still too-generous disbursements for defense.

According to the Congressional Budget Office’s baseline projections, federal deficits will continue to shrink over the next few years, falling to 2.4 percent of G.D.P. as early as 2015. Over a longer time horizon, total national debt threatens to rise by 2023 to what may be an unsustainable level, but only if nothing is done to adjust spending and tax revenue in the intervening years. While keeping that potential long-term fiscal threat clearly in mind, the optimal decision in the short term is to confront the nation’s persisting high unemployment and decaying infrastructure and spend more now. That priority shift should secure what has been a tenuous economic recovery and achieve the virtuous circle that has eluded Britain during its detour into austerity.

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Mike Evans
4 years 7 months ago
Clearly, boosting our economy with infrastructure investments is a win-win proposition. It puts unemployed folk back to work and spills over into all the related industries and services such as materials, design, production as well as generating revenue from increased incomes. However, that is precisely what the McConnells and Ryans would oppose - success that might make Obama's administration look good. Instead, these curmudgeons have sold out to the international financiers who control all the investment and security markets, who now are looking to expend their hoarded profits in buying other firms at bargain basement prices. The Dow and S & P 500 are back at record highs - good for Wall Street. But Main Street remains replete with empty storefronts and offices, some even blighted for what looks like all time. Who is served? Certainly not the common good.
Richard Salvucci
4 years 7 months ago
You're correct, of course. What's right for the short run isn't right for the long run. But, to misapply Keynes once again, in the long run, well, you know. The point is that our political system seems unable to respond in any intelligent or rational way to the fiscal challenges we undoubtedly face--and they are real enough. It's like the Middle East, the center vanishes, picked off by either extreme. Obama's grand bargain was pretty close to putting us on a sustainable path, but I'm hard pressed to think which band of true believers disliked it more. Unfortunately, the logic of this is all very simple, either we decide to get our house in order, or someone else--probably our bondholders--will make the decision for us. I guarantee you won't like that solution one bit. It's time for the grown-up to take over, if there are any left in Washington.
E.Patrick Mosman
4 years 7 months ago
George Santayana wrote "Those who cannot remember the past are condemned to it repeat it ." In 1939, ten years after the crash on Wall Street, FDR's Secretary of the Treasury, Henry Morgenthau,Jr., wrote in his diary and told the House Ways and Means Committee: “We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong…somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises…I say after eight years of this administration we have just as much unemployment as when we started…And an enormous debt to boot!” It isn't necessary use the Roosevelt administration failures to end the Great Depression but to simply study the absolute failures of European countries that have taxed, borrowed and spent their way to bankruptcy as welfare states. Does history repeat itself? Yes, it does. And there is every indication that Obama and the democrats are intent on repeating the errors of FDR and European countries today.
E.Patrick Mosman
4 years 7 months ago
The editors wrote " More than six million private sector jobs have been created since 2010". Assuming that means January 2011 to April 1 2013 this equates to approximately 222,222 new jobs per month over 27 months. Of course if the starting date is January 2010 the number of new jobs falls to 153,800 per month over 39 months The editors ignored the government statistic that over the same 27 or 39 month period the number of new applicants for unemployment benefits ranged between 325,000 - 370,000 per week or about 1,400,000 newly unemployed per month. Nor did the editorial mention the millions of unemployed that have dropped out of the labor force that are no longer included in the unemployed figures or the number that have moved from unemployment benefits to Social Security disability also no longer considered unemployed.

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