Budget austerity isn't best path for our country

This article appeared in the Patriot News, Sept. 4, 2012.

Both parties are concerned about the looming fiscal catastrophe facing the country. In December, if no agreement is reached between the GOP and Democrats, taxes will rise and defense spending will fall, both substantially. Falling off the “fiscal cliff” will thus have the immediate effect of sharply lowering the budget deficit. The Congressional Budget Office, which supplies nonpartisan reports on economic and budget outlooks, estimates the budget deficit in fiscal 2013 will be $400 billion less under this scenario than under the case where the draconian tax increases and spending cuts are avoided altogether.

Those favoring austerity policies should be pleased at the prospect of this movement toward fiscal rectitude. After all, they have been castigating the government for running up large budget deficits and adding to the country’s national debt. The U.S., in this view, is fast headed toward a Greece-like implosion, made even worse by rampant inflation and sharp declines in the international value of the dollar. So reports that the budget deficit is set to fall by $400 billion next year should be welcome news. The government will borrow less and the national debt will grow more slowly.

Business executives, who have apparently been reluctant to invest thus far on account of uncertainties engendered by the government’s tenuous fiscal position, should now gain confidence and go on a hiring spree. Unemployment will fall and the economy’s output of goods and services will grow.

Actually, not so fast, says the CBO.

Far from promoting economic growth, the CBO notes, the sudden decline in the budget deficit will have pernicious effects on the economy. The country will fall back into a recession, with the unemployment rate rising to 9 percent in the second half of 2013.

The CBO’s analysis highlights the perils of embracing austerity measures too quickly. When the economy is weak and unemployment remains high, there is considerable slack in the productive capacity of the country. The proper course of action under the circumstances is not to cut government spending or raise taxes, but to do quite the opposite.

The 2009 fiscal stimulus sought to inject $787 billion into the economy. Two-thirds of the package consisted of aid to local and state governments (which allowed them to keep teachers and firefighters on the payroll) and spending on infrastructure. The remainder, a third of the stimulus package, consisted of tax cuts, which were designed to bolster consumer spending.

Did the stimulus work?

Economists continue to debate its effectiveness, but an increasing number of studies now show that the fiscal policies (combined with aggressive monetary policies taken by the Federal Reserve) did prevent the 2008-09 recession from becoming far worse. Many of us have forgotten the alarming declines in economic growth, the rapid increase in the unemployment rate, the plummeting stock market, in late 2008. Fears of a repeat of the Great Depression were very much in the air. But, for once, the lessons of history were learned. The government repudiated calls to adopt the kind of austerity measures that had hobbled the U.S. economy throughout the 1930s. Instead, it implemented expansionary policies that arrested the free fall of the economy and set the country on a path toward recovery.

The recovery has been far from robust. The severity of the housing crisis coupled with the meltdown of the financial markets meant that a significant rebound was likely to take time.

But recent months have witnessed jobs being created, consumers spending more and even sales of existing homes starting to rise.

All this is at risk.

During the next few months, Washington will squabble over extending the Bush-era tax cuts and continuing spending on social programs. If December comes and goes without an agreement, any pleasure we derive at the thought of smaller budget deficits will be short-lived.

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