Austerity Measures Will Only Worsen Current Recession
The administration and Congress made a terrible mistake switching their attention from jobs to deficit reduction -- and the country is already suffering the consequences. GDP growth fell from 3.1 percent in the last quarter of 2010 to just 1.8 percent in the first quarter of this year. Consumer spending has slowed. The pace of business investment has weakened. Factory orders are down. In fact, the Institute for Supply Management’s May manufacturing figure fell to 53.5 from 60.4, the largest one-month decline since January 1984. Housing still hasn’t recovered from the bursting of the bubble and remains a disaster zone.
Friday’s job report for May -- showing an increase in the official unemployment rate to 9.1 percent from 8.8 percent in March -- should give the "Austerity Now!" crowd pause. Amid the assault on government spending, public sector employment fell by 29,000 in May, mostly at the local level. Local government jobs are down nearly half a million since they peaked in September 2008. Expect this to worsen in July, when the new budget year starts in most states. Teachers are getting pink slips.
There is no sign the private sector, which added a mere 83,000 jobs in May, is about to take up the slack. Companies are sitting on trillions in profits, but they won’t use this money to create jobs if they don’t see increasing demand for their products and services. With the economy slowing and the political class focused on deficit reduction, it’s hard to fault these big corporations -- not to mention still struggling small businesses -- for not taking on more workers. A "contractionary expansion" -- fancy economist talk for cutting government spending and unleashing the private sector to expand hiring and production -- is nowhere in sight.
Women are especially at risk. They hold the majority of the public sector jobs already lost or slated to be cut. While job creation during the recovery has been slow for both men and women since the labor market hit bottom in February 2010, men gained more than four-fifths of the new jobs, even capturing two-thirds of jobs added in private services where they are less than half the workforce. In the public sector nearly two-thirds of the jobs lost were held by women.
While everyone else is tightening their belts is not the right time for the government to tighten its belt as well. That way lays disaster. Unless demand picks up, the private sector is not going to hire enough workers to make a dent in unemployment. Where will increased demand for private sector products and services come from? Workers are unemployed or worried about their jobs, and households are strapped for cash. There’s no chance that consumers will soon rescue the economy. The only hope for a speedy recovery is for the government to increase spending in a way that averts layoffs, creates jobs and puts money in the pockets of ordinary people.
Austerity while the economy is weak hurts the economy. It makes the deficit worse, not better, as tax revenues again begin to shrink. What is needed right now -- dare we say it? -- is for government to spend more: provide block grants to the states to avert a crisis in public education and a decline in access to health care for poor kids; extend unemployment benefits to the rising number of long-term unemployed; and engage temporarily in direct job creation to put millions of unemployed workers back to work quickly.
Concern about the bond vigilantes, those feared bogeymen that deficit hawks maintain are ready to pounce and raise interest rates if the government takes steps to improve the job situation, is misplaced. It’s the weakening economy, not government spending to protect and create jobs, that investors fear. Yields on 10-year Treasury bonds are not rising -- they have fallen to 3 percent as investors seek safe harbor in US government guaranteed assets. Only the current foolishness over raising the debt limit can threaten that guarantee and cause investors to flee US government bonds and the interest rate to suddenly spike.
Absent government policies, it takes a long time for an economy to recover from a recession and financial crisis. The panic and depression of 1873, similar in many ways to the current economic situation, lasted six years before lifting in 1879. But unlike in 1873-'79, we now have the economic know-how to bring our current crisis to a speedy end. We lack only the political will.
Policy-makers must focus on creating jobs, not slashing the deficit. It’s unconscionable to allow nearly 25 million unemployed and underemployed Americans to continue to suffer the devastating economic and psychological consequences of unemployment.