Robert Reich is a Good Man But He Falls Into the Austerity Trap
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Robert Reich has written a column entitled “ Why this is the Worst Recovery on Record.” It’s an odd title because the article makes no reference to this being “the worst recovery on record.” Unlike a newspaper column, we know that Reich chose the title, because it comes from his own blog.
The current U.S. recovery is not “the worst recovery on record” – it is not faintly close to the worst recovery on record. Rhetorical claims like this are dependent on highly selective choices of what years one compares. In 1937 and 1938, President Roosevelt listened to the incoherent claims of his economic advisors that stimulus was bankrupting the Nation and that it had spurred a sufficiently robust recovery that the private sector could now be relied upon to lead the Nation promptly back to prosperity. The advisors recommended that FDR act urgently to impose austerity. FDR cut spending and increased taxes and the Federal Reserve tightened the monetary supply. The result was that a robust recovery from the Great Depression that reduced unemployment by two-thirds during FDR’s first term from a high of 25%. Real GDP growth averaged 12% during that term.
Austerity promptly reversed this recovery and produced a second U.S. depression. In 1937-1938, there was a sudden rise in unemployment and a sudden fall in GDP. “Recovery” was not “weak” in this era, it was an oxymoron. The economy got sharply worse. Austerity perverted a robust recovery into a second depression.
Marshall Auerback has provided an admirably brief summary of these events.
The ongoing U.S. recovery is weak, but it is a sustained, modest recovery because of modest stimulus during the first two years of Obama’s first term. In Europe, austerity has twisted a modest recovery driven by material budget deficits into a severe contraction. Reich’s own writings demonstrate that he knows that the U.S. continues to recover while Europe has done the opposite. He cannot possibly believe that the U.S. recovery is the worst on record when he has observed and written about how austerity destroyed Europe’s recovery.
The Two Least Understood Aspect of the European Crisis
Anyone who has analyzed the European crisis understands that it was not initiated by a “debt crisis” or a “spending” crisis. Nations like Ireland, Iceland, and Spain were being praised by ultra-conservative groups like Cato as the supposed exemplars of success of fiscal rectitude. By now, anyone who has analyzed the European crisis understands the pernicious role that the euro has played in the crisis because it is not a sovereign currency. By now, anyone who has analyzed the European crisis – including the IMF – knows that austerity has been a disaster that has caused a sharp contraction.
What even those who follow the European crisis are rarely saying, however, is the intersection of two facts about the crisis. First, the current European contraction is not a “recession” in many nations; it is an über-Depression. I explained in a prior column that unemployment levels in much of Europe are roughly comparable to average unemployment rates in the largest European economies from 1930-1938. Unemployment rates in the periphery are sometimes multiples of the average unemployment rates in the largest European economies during the Great Depression.
The EU, however, claims that there is merely a “ mild recession.” The EU’s credibility is, unsurprisingly, in tatters.
Unemployment in Greece and Spain is greater than peak U.S. unemployment during the Great Depression. The overall unemployment rate in the Eurozone is 12% – well over the U.S. unemployment rate in 1936, and half-again greater than the current U.S. unemployment rate.