Let's Kill the "Fiscal Cliff" Instead of the Economy
Everyone now agrees that the so-called “fiscal cliff” is a stupid policy that threatens our economy and our people. Everyone agrees why the “fiscal cliff” is stupid – it inflicts austerity at a time when it is likely to throw the nation into a gratuitous recession. Causing a recession leads to increased unemployment and a larger budget deficit. We have all seen austerity force the Eurozone into a gratuitous recession in which Italy, Spain, and Greece have Great Depression levels of unemployment.
Here’s the short version of why austerity is a self-destructive response to the Great Recession. A recession occurs when demand to purchase goods and services falls and the economy contracts, causing increased unemployment. This simultaneously causes tax revenues to fall and government expenditures for programs like unemployment compensation to increase. The fall in revenues and increase in expenses causes the federal budget deficit to grow rapidly.
Austerity is a policy of raising taxes and/or cutting governmental spending for the purported purpose of cutting the deficit. If one raises overall taxes in response to the Great Recession the result is a reduction in private sector demand. If one cuts governmental spending the result is a reduction in public sector demand. The result of reducing private and public sector demand in the recovery phase from the Great Recession, where overall demand is already grossly inadequate, is to throw the nation back into recession or even a depression. That causes the budget deficit to grow. A policy of austerity undertaken under the claim that it will reduce the deficit causes a gratuitous recession that leads to a massive loss of wealth, far higher unemployment, and in increased deficit. That is why austerity is a policy that is the self-destructive economic analogy to the medical insanity of bleeding patients.
We have known that austerity is an idiotic response to a severe crisis for 75 years. The U.S. was in the midst of a strong recovery from the Great Depression until FDR’s neo-liberal economists convinced him in 1937 that is was essential that the U.S. adopt an austerity program to reduce the federal deficit. Austerity forced our economy back into a Great Depression.
It was only the stimulus of federal spending in World War II that brought the U.S. out of the depression. During World War II and for the remainder of that decade the ratio of debt-to-GDP was at or near historically record levels. The result was the greatest industrial expansion in history, full employment (including a massive influx of women), strong economic growth, and sharply declining deficits and debt-to-GDP ratio because the growth led to large increases in revenue and the low unemployment greatly reduced spending on the unemployed. We also defeated the Axis powers, created Social Security and the GI Bill, and began an extraordinary expansion of our housing stock to house the baby boom.
We learned many lessons from the catastrophic failure of austerity and the extraordinary success of stimulus in this era. The U.S. adopted a fiscal system of “automatic stabilizers.” These are counter-cyclical (they push in the opposite direction of the business cycle) fiscal effects that are designed into the system and do not require new legislation once the recession or inflation begins. The result of these automatic stabilizers has been to reduce the severity and duration of recessions. Indeed, studies show that the larger the national governmental role in the economy, the less volatile the economy. This makes sense because the stabilization function should be more effective if the stabilizers are larger relative to the economy.
Unfortunately, these sensible counter-cyclical policies that make theoretical and common sense and have repeatedly worked in the real world were forgotten by many due to a campaign of deficit hysteria funded by Pete Peterson, a Republican billionaire financier who has made it his mission in life to destroy the safety net. His ultimate goal is to privatize social security so that Wall Street can receive hundreds of billions of dollars in fees investing our retirement funds.