Austerity – the Republican Path to a New Depression

I’m amazed that, in both parties, there are so many people who believe that our financial crisis was caused by debt and the deficit (which has shrunk in each of the last 3 years and is projected by the CBO to shrink even more in 2013).

You don’t try to pay down debt and the deficit when the economy is weak. This is basic Economics 101 – like the first day at airline pilot’s school when the instructor tells the students “Don’t shut off the engines while you are still in the air!”

As England, Ireland, and other European countries are learning to their great pain, austerity has only deepened their recessions, lowered their GDP, and heightened joblessness. Austerity causes economic contraction and recession, and the only force that can cushion that contraction is monetary policy support from the FED. Given that interest rates are now, for all intents and purposes, zero, the FED has no room to maneuver to stave off the destructive consequences of austerity.

Basic economic theory (as opposed to the fringe Austrian School, a heterodox economic philosophy that was considered pretty much a joke among economists until Ronald Reagan and succeeding Republicans embraced it) says that the ONLY way to strengthen a weak economy is to spend money on job creation and other investments in the future. Only when the economy is strong enough to withstand the negative effects of debt and deficit reduction should these LONG-TERM problems be addressed.

This is the BEST time to be borrowing money to expand the economy, given that money is virtually free to borrow. We should be borrowing and spending on job training and creation, improving public education (EVERY student deserves a quality education, not just selective charter or private students – and to remain competitive, the country needs it too), increasing PELL grants for middle-class college aspirants, giving loans to entrepreneurs and small businesses (the big banks have their doors welded shut), and, perhaps second only to job creation, rebuilding our corroding infrastructure.

Every dollar we take away from economic investment and put toward debt reduction results in something like 2 dollars lost to GDP according to the newest IMF studies – and, before this study, they had a long history of approving of austerity policies they are now rethinking.

The largest taxpayer-financed, government-managed work stimulus plan in the country’s history was World War II. During the war, our deficit-to-GDP ratio was over 2 and a half times the current ratio – and joblessness was about 1% !!!

Out of this stimulus, we saw the birth of the comfortable middle class, a financially stable working class, and the best economic period in our country’s history. Since 2001 (with the exception of Clinton’s semi-Keynsian economic policies that turned record deficits into record surpluses and lowered a 7.8% jobless rate to 3.9%, everybody except the top fringe of the top quintile has lost ground, as has the country as a whole.

The bottom 80% of Americans currently own only 7% of the nation’s wealth, while the top 1% have 42% of the wealth and, adding in the next 4%, the top 5% have  something over 74% of the wealth.  Nobody is going to risk being a “job creator” if the middle class is unable to afford to pay for increased products and services.

If the situation is so “dire” that the GOP “needs” to cut critical programs that support the most vulnerable, but doesn’t feel any necessity to touch the taxes of those who can more than afford to pay them, then there is something going on in that party that simply does not pass the “stink” test.

When 93% of the money from rising GDP in the last couple of years goes to 1% of the people, we DO have the money we need – it’s just amassed in too few hands to benefit the entire society.  Ayn Rand’s “individualism fetish” is the path to anarchy, chaos, and, ultimately, dictatorship, unless paired with a social contract and equally strong sense of community throughout the society.

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