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How the Economic Quacks Promoting Austerity Will Increase the Deficit

February 28, 2013 in Blogs

By Marshall Auerback, AlterNet



Congress will not avert the dreaded sequester – the government’s latest wheeze to deal with the phony “deficit crisis.” Never mind that the very same deficit is projected to fall under $1 trillion this year for the first time since 2008, according to the CBO. Politicians and the chattering classes rail about the deficit, while in the meantime, Americans can’t find jobs. Our neighbors, friends and fellow citizens have suffered from a persistently high unemployment rate of 8 percent through 2012, and worse, an underemployment situation of around 15 percent. Why doesn’t this very real crisis generate concern? Why all of the fuss about a nonexistent emergency?

Conservatives talk indignantly about government profligacy to justify their deficit obsession. But our large deficits (which peaked some three years ago) can almost always be expected to result from recessions because of what economists call “automatic stabilizers.” These are safeguards that have been in place since the Great Depression – things like unemployment insurance, welfare, food stamps and the like. These programs were introduced precisely to avoid the kind of human misery a great many of our citizens experienced during that earlier catastrophe. These income transfers are also the reasons — not the bailouts to our banks — why the economy has escaped the kind of freefall experienced in the early 1930s.

A major consequence of this policy choice, which is supported by the vast majority of Americans, is that budget deficits in the US are largely automatic and non-discretionary. So recessions create budget deficits, much as private sector booms reduce deficits.

True, we are not booming by any stretch today. But even against this sluggish backdrop, over the last three years, the deficit has experienced a 30 percent drop as a percentage of GDP. That suggests the patient is slowly recovering, but not fast enough. The current rate of job creation is not only insufficient to replace the jobs lost since the crisis, but can’t even keep up with labor force growth. At the recent pace of job creation, we only fall further behind. Withdrawing the medicine prematurely risks creating a relapse in the economy.

And there is much more to do. We need to use …read more
Source: ALTERNET

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