Austerity: A Really Stupid Idea

Il nous faut de l’audace, encore de l’audace, toujours de l’audace!”
—Georges Jacques Danton

I have read that when an airplane is in a dive beyond 90 degrees of bank, the pilot must counter intuitively push the stick forward rather than pull it back to stabilize it. Shortly, the U. S. economy will be in a dive of similar severity, and if conservatives have their way with government spending, the country will auger itself into oblivion.

The deficit hawks in the right wing of the Republican Party  suffered a setback in the elections, but they’re not likely to go away. They’ll keep pushing to slash the federal budget, and even get moderates to go along with them. To the extent that they are successful, they will only exacerbate the real economic issue: joblessness.

Jobs are the public’s biggest worry (607 million hits on Google), and cutting the deficit will do nothing for job prospects. It will actually increase unemployment in the short term and do nothing to stimulate long term employment.

Politicians pander to us, saying we need to reduce taxes and reduce government spending. It’s a popular but misguided approach. The nation needs to spend more. We need a complete overhaul of our aging infrastructure. We need a big emphasis on education, the kind that will fit the nation’s future workers out with the knowledge and skills to work in industry, which has evolved technologically and will provide high paying jobs to capable workers. We need to encourage young workers from abroad to come here through an enlightened immigration process. Young people increase economic activity and put social security on a sounder footing by improving the nation’s demographic balance.

Conservatives will throw their hands up and insist that I’m promoting Keynesian solutions which, they will say, never work. But they do: they worked in the 30s, during a deflationary depression. They failed miserably from the late sixties onward because they were undertaken during a period of high inflation. We are not, as is widely thought, in an inflationary period. We are in a deflationary depression which will ultimately count as the most severe the nation has ever endured, and fiscal stimulus will work just fine to allay some of the effects.

Spending money to improve our national resources and capabilities is very logical, but conservatives are fixated on the budget deficit, claiming that we are doomed unless we eliminate it right now. We can and we should lower the deficit, but not by cutting spending. We should do what we have done in our past: grow the future revenues with investments that will make the future economy flourish.

The nation’s debt to income ratio today is about 6.5 to 1. Thomas K. McCraw, Harvard Business School professor wrote an essay (NY Times, Nov. 11-see link to the essay below) in which he described the nation’s situation in 1789, when Alexander Hamilton took office as secretary of the Treasury. The Revolutionary War had been extremely costly, leaving the nation with a debt to income ratio of 46 to 1.

Ignoring Thomas Jefferson’s urging to pay down  the deficit, Hamilton restructured it and allowed it to grow some while he established national banks which vastly increased liquidity. His aim was to promote more business.

It worked. “…By 1794…the federal debt had increased a bit, but revenues had risen more than threefold. The debt to income ration had shrunk to 15 to 1 from 46 to 1; by 1800 it was 8 to 1…”

Austerity never works. It just pisses people off and radicalizes those that are marginalized by the process. Just look at Germany after WWI, or Greece today. Conservatives revere Thomas Jefferson’s austerity and frugality, but it was Alexander Hamilton’s audacity that won the day.

Here’s the link to professor McCraw’s article:

http://www.nytimes.com/2012/11/12/opinion/mr-hamiltons-growth-strategy.html?hp

Cheers,

Rod

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