Return of the Deficit Hawks
The drumbeat for deficit reduction is growing louder. I can hear the deficit hawks in the background chanting “Austerity!” They would have us believe that the greatest threat to global economic security is runaway deficits. Given that we are still in a recession, that unemployment rates show no sign of coming down any time soon, and that financial institutions still are not channeling investments into the real economy, it seems fair to ask whether this obsession with deficits makes sense right now.
When the financial crisis first hit in late 2008, both European and US policy-makers responded by pumping investments into the financial and productive sectors. By applying lessons learned from the 1930s, governments prevented a really bad recession from becoming
another Great Depression. But now, these same governments are facing pressures from many quarters, including bond markets, to reduce deficits even though history tells us deficit spending is a necessary part of economic recovery.
Austerity during a time of high unemployment is an especially bad idea. It deepens the slump, depresses tax receipts and cancels out any gains the government might have realized by spending less. As economist John Maynard Keynes observed: “The patient does not need rest. He needs exercise.” During a major slump, economies need stimulus.
It is hard not to wonder about the timing of current deficit worries. While deficit hawks have been around for a long time, they were oddly subdued during the Bush Administration. For the most part, moderates and conservatives in both parties were mum about the effects of two wars and drastic tax cuts for the wealthy [here's a useful chart on the impact of the wars and tax breaks on the deficit]. Now that the tax cuts have been secured and the financial sector has been bailed out, it is time to worry again about deficits. How convenient. It’s bailouts for the rich and austerity for the rest of us.
Deficit reduction is being used to shut down debate about government actions to create jobs and channel more investments into productive capacities. It diverts attention away from Wall Street’s failure to keep up its end of the bargain by making more investments in the real economy. Deficit reduction also is being used in the ongoing attacks against health care reform, to push for cut-backs in Medicare and to get privatization of Social Security back on the table. It has almost killed our chances to see action on climate change any time soon.
Last week, the House scaled back a bill to extend unemployment benefits, and the Senate went into recess without taking any action. As a result, many families are about to lose unemployment benefits and/or health insurance. In a good op-ed that shows how these kinds of cuts do more harm to the economy during a recession, Paul Krugman calls these lawmakers the ‘pain caucus.’ Are we going to let the pain caucus control the terms of debate about economic recovery?
--- Sandra Hinson
