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Obama's New Treasury Secretary Pushes Austerity That Spreads Global Misery

Lew spends Spring Break in Europe with fellow austerity hawks who promote harmful economic nonsense.

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Putting two lawyers together to discuss macroeconomic policy also leads to discussions that cause economists’ jaws to drop in shock.  If you understand economics you may wish to put on a neck brace before reading the next passage lest its incoherence cause whiplash.

“Standing next to Mr. Schäuble, Mr. Lew said pointedly that deficit reduction needed to be balanced with growth and investment policies. While growth targets may be different for different countries, he said, ‘I think it is fair to say that zero isn’t a good target for anybody and negative is very bad.’”

“Growth targets” are meaningless in this context.  You cannot counteract austerity dragging your economy deeper into recession or depression by saying: “we are targeting a growth rate of four percent.”  There is no magic incantation that can remove austerity’s destructive effect.  A country cannot “balance” austerity with “growth and investment policies.”  Austerity is an anti-growth policy.  It frequently makes the debt-to-GDP ratio larger because it causes such a large fall in GDP.  Krugman explained this in the same article I cited above.

“Meanwhile, austerity hasn’t even achieved the minimal goal of reducing debt burdens. Instead, countries pursuing harsh austerity have seen the ratio of debt to G.D.P. rise, because the shrinkage in their economies has outpaced any reduction in the rate of borrowing.”

Investment programs can be very helpful in conjunction with overall stimulus budgets, but they cannot counteract austerity.  This has been one of Obama’s recurrent blind spots.  He seems to believe that if he can implement a new $2 billion infrastructure investment or jobs program that can overcome the damage to the economy caused by austerity in the form of a combined $300 billion in reduced spending and increased tax revenues.  The net effect is $288 billion in lost demand due to austerity.  This slows growth.  If the austerity is large enough it causes growth to turn negative and throws the Nation back into recession or depression.  We may know why Obama has this blind spot about the damage he is inflicting through austerity – he gets his advice from Lew.

 

William Black is the author of The Best Way to Rob a Bank Is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as executive director of the Institute for Fraud Prevention, litigation director of the Federal Home Loan Bank Board and deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.