Austerity versus Stimulus: Just the Facts

(11AM EST – promoted by Nightprowlkitty)

  The most heated debate in Washington these days involves deficits and unemployment. There are lots of heated rhetoric, finger-pointing, and hyperbole.

  What there isn’t is a surplus of actual facts.

 For instance, this headline reads “U.S. should cut deficit to spur recovery, IMF says”. It implies that cutting the deficit would automatically increase economic growth.

  That sounds good to me. The problem is that the IMF never actually says that. In fact, the article spends most of its time warning about a drop in economic growth.

 The headline was misleading, as is just about everything said in this debate.

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  Here’s another example. The headline reads “Unemployment Extension Could Boost Jobless Rate”. This narrative fits in well with Republican opposition in Congress. Senator Jon Kyl (R-AZ) said in March on the Senate floor:

 “In fact, if anything, continuing to pay people unemployment compensation is a disincentive for them to seek new work.”

  Senator Judd Gregg (R-NH) believes that unemployment benefits “basically keep an economy that encourages people to, rather than go out and look for work, to stay on unemployment.”

   Congressman John Linder (R-GA): “Even when businesses are willing to hire, nearly two years of unemployment benefits are too much of an allure for some.”

   Sharron Angle, Republican senatorial hopeful in the state of Nevada, believes that “…we really have spoiled our citizenry and said you don’t want the jobs that are available.”

 I’m not sure where those millionaires in Congress got the idea that living on $1,200 a month is some sort of gravy train. Maybe they simply have never met anyone on unemployment before, and have no idea what the cost of living is.

  The article would seem to back up their opinions. The headline seems to indicate that the unemployment rate is higher because you pay people not to work, but once again it is misleading.

 The government’s unemployment rate counts only workers who say they’re looking for work. To qualify for benefits, a person has to say he or she is looking for work. When benefits were less generous – or simply unavailable – more jobless workers indicated that they had given up looking, and thus weren’t officially counted as unemployed.

  Michael Feroli, a J.P. Morgan Chase Bank  economist, says this phenomenon may have boosted the reported unemployment rate by 1.5 percentage points.

 So what the article is actually saying is that the U3 measurement of unemployed would be lower, but there would be absolutely no change in the U4 measurement of unemployed.

  I should point out that the “discouraged worker” category never existed until the late 1960’s. Thus what is currently the U4 was the headline unemployment number when Johnson was president, and the presidents before him. Most people still consider the “discouraged worker” category a statistical trick to lower the unemployment rate, as well as underreported because it generally misses the homeless.

Welcome to reality

  So what are the actual costs of austerity?

Moody’s is predicting the loss of 200,000 jobs from filibustering the tax extenders bill.   Nomura Securities says it will knock 0.4% off of the GDP.

  Goldman Sachs says that failure to extend unemployment extensions will reduce personal income growth by 0.2% by the end of July, and if Congress fails to pass the whole package of unemployment extensions along with health subsidies, some state fiscal aid, and the “Making Work Pay” tax credit, then it will create a drag on the economy of 2%.

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  Ireland has already followed the austerity program. Their reward is a 13% unemployment rate, a 20% cut in salaries, an economy that shrunk by 7.1% last year, and rising interest rates. Ireland played by the rules and got punished for it.

  Ireland wasn’t the first down this road. This road was paved by Latvia.

 Government spending cutbacks and deflationary monetary policies have shrunk the GDP by more than 20% over the past two years in Lithuania and Latvia. Wage levels in Latvia’s public sector have fallen by 30%, and the central bank has expressed hope that the wage squeeze will continue and lower private-sector wages as well…Yet the central bank trumpets the wage decline as a success – and would like even further shrinkage!

  Property prices have plunged too, by as much as 70%. Mortgage arrears have soared to over 25 percent, and defaults are rising.

 The unemployment rate in Latvia is about 20%, just barely higher than Spain.

  This shouldn’t surprise anyone who knows any economic history. The IMF, World Bank, and all the economic experts of the first world have been pushing third world nations into austerity measures for decades. The results have been that the third world has gotten poorer.

 Does unemployment benefits cause a higher unemployment rate? As a matter of fact there is some evidence that it does.

 Alan Reynolds of the Cato Institute has found that the average unemployment episode rose from 10 weeks before the recession to 19 weeks after Congress twice previously extended jobless benefits-to 79 from 26 weeks. Even as initial unemployment claims have fallen in recent months, the length of unemployment has risen. Mr. Reynolds estimates that the extensions of unemployment insurance and other federal policies have raised the official jobless rate by nearly two percentage points.

 It sounds impressive, but what is missing from these numbers is causality. Reynolds is saying that the unemployment rate is going up because the unemployment extensions are happening, but his only evidence is that the two are happening around the same time. That’s like saying the streets are wet because the weatherman predicted rain.

  Now the WSJ article could have approached this from the point of view that people on unemployment won’t take a part-time minimum wage job that pays less than what they are making on unemployment benefits. That would be logical and make sense. It would raise the level of debate on the subject.

  Instead, the WSJ decided to approach it from a different perspective.

 But do these Senators really think it’s compassionate to give people an additional incentive to stay out of the job market, losing crucial skills and contacts? And how politically smart is it for Democrats to embrace policies that keep the jobless rate higher than it would otherwise be? How many Democrats share Mr. Harkin’s apparent desire to defend a jobless rate near 9% (today it is 9.7%) in the fall election campaign.

 Ah, yes. Those evils Democrats that want to make people suffer. If only we cut out all the unemployment benefits then we would have full employment overnight. If we slash tax rates then tax revenue will grow. And don’t forget that markets can regulate themselves.

  It’s called magic thinking and the WSJ seems to embrace it.

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 When magical thinking doesn’t work Arthur Laffer is there to create strawmen.

 On the face of it, the idea that higher unemployment benefits won’t lead to more unemployment doesn’t make much sense. Imagine what the unemployment rate would look like if unemployment benefits were universally $150,000 per year.

 Uh, right. $14,000 a year. $150,000 a year. No real difference between the two to Laffer.

  More to the point, who exactly is even talking about raising the amount of unemployment? Only Laffer.

 As Paul Krugman summarized:

 Everyone agrees that really generous unemployment benefits, by reducing the incentive to seek jobs, can raise the [normal unemployment rate]… But in case you haven’t noticed … What’s limiting employment now is lack of demand for the things workers produce. Their incentives to seek work are, for now, irrelevant.

  On the other hand, adults want to know what reality is. The folks at San Francisco Federal Reserve did a study which defines that amount.

 The question arises whether this extended availability of UI benefits has contributed to a lengthening of unemployment spells because jobless workers are staying in the labor force longer in order to continue collecting benefits. Such a dynamic could raise the unemployment rate. However, analysis of data on unemployed individuals decomposed by their reason for unemployment, which affects their eligibility for UI, suggests that extended UI benefits have had a relatively modest effect. We calculate that, in the absence of extended benefits, the unemployment rate would have been about 0.4 percentage point lower at the end of 2009, or about 9.6% rather than 10.0%.

 Thus if the Republicans in the Senate want to lower the unemployment rate by 0.4%,  at the expense of hundreds of thousands of people losing their homes, retirement savings, and having their lives destroyed, they are on the right track.

  Plus, much of that 0.4% is going to get eaten up by the extra 200,000 people who are going to lose their jobs from the filibuster.

What about the deficits?

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 There’s been a lot of talk about federal deficits recently, as well there should be. The numbers are beyond imagination and must be addressed one way or another.

  Fed Chief Ben Bernanke recently gave a stern warning.

 Bernanke again urged the White House and Congress to come up with a credible plan to reduce the nation’s red ink, which hit a record $1.4 trillion last year.

  Failing to do so would push interest rates higher – not only for Americans buying cars, homes and other things – but also for Uncle Sam to service its debt payments, he said.

  All that would sap national economic activity and could cause employers to cut back on hiring, Bernanke said.

 Bernanke’s statement is clear, concise, and is in agreement with generally accepted economic theory. In other words, it makes sense.

  What it doesn’t do is make itself relevant.

 Mortgage rates hit an all-time low today. The 10-year Treasury is yielding just 3%.

10-year TIPS are going for a yield of 1.3%.

   There is no other way to say it: the markets aren’t concerned with the deficits or the inflation rate. To put it another way, Bernanke’s warning will one day come true if nothing is done to change our direction, but that day isn’t tomorrow. Or next week. Or next year.

  Another important point of the deficit debate involves a word that should be required – structural. As in “structural deficit”.

  We have serious issues with chronic deficits. We spend far beyond what we can afford on things we need every year, every decade. But is stimulus spending one of those things?

 Take it from Robert Bixby, president of the Concord Coalition, which exists solely to raise the alarm about big bad deficits:

  “As a deficit hawk, I wouldn’t worry about extending unemployment benefits,” Bixby told Boston Globe columnist Scot Lehigh. “It is not going to add to the long-term structural deficit, and it does address a serious need. I just feel like unemployment benefits wandered onto the wrong street corner at the wrong time, and now they are getting mugged.”

 The deficits that cause economists to sweat are things like Medicare spending and the over-sized defense budget. One-off issues like stimulus spending for the unemployed and bankrupt states don’t even register.

A Third Way

  Margaret Thatcher used to say “There is no alternative” to the free market, free trade, capitalist globalization agenda. If she was right, then Iceland should be in a world of hurt right now.

  Iceland citizens refused to pay up on $5 Billion worth of Icesave accounts held by foreigners (around a quarter of GDP) after their deregulated banks went bankrupt. Originally the Parliament agreed to sacrifice 4% of GDP every year to pay foreign depositors, but the Iceland people revolted.

  On top of that, the Iceland Supreme Court ruled that $4.3 Billion in loans indexed in foreign currencies was illegal.

  Iceland has been doing the exact opposite of what the financial system says you are supposed to do – sacrifice everything to pay bad loans.

 So Iceland should be in one of the levels of Hell for refusing to pay, right? Wrong.

 “The picture has been that of an improvement quarter-on-quarter … while the year-on-year numbers have been lagging other countries,” said Mats Olausson, analyst at SEB.

 He said Iceland’s economic recovery would be slow.

 Iceland’s economic crisis was severe, but only half as bad as Latvia’s. Iceland’s unemployment rate is currently far below Ireland’s.

  Europe had been threatening that if Iceland didn’t pay up on the Icesave accounts that they would be blocked from membership in the EU, and the IMF threatened to hold up loans. It turns out that those threats were bluster.

  Tiny Iceland has put a finger in the eye of the world banking system and is better off because of it.

  What we should ask ourselves is why? Why has Iceland done better than nations who followed the banker’s prescription?

  To answer that you must ask the loaded question that the financial media never asks: who stands to gain or lose from austerity?

 The explanation, of course, is that today’s economic planning is not being done by elected representatives. Planning authority has been relinquished to the hands of “independent” central banks, which in turn act as the lobbyists for commercial banks selling their product – debt. From the central bank’s vantage point, the “economic problem” is how to keep commercial banks and other financial institutions solvent in a post-bubble economy.

  How can they get paid for debts that are beyond the ability of many people to pay, in an environment of rising defaults?

  The answer is that creditors can get paid only at the economy’s expense. The remaining economic surplus must go to them, not to capital investment, employment or social spending.

 This is the problem with the financial view. It is short-term – and predatory. Given a choice between operating the banks to promote the economy, or running the economy to benefit the banks, bankers always will choose the latter alternative. And so will the politicians they support.

 To put it in even simpler terms: Austerity measures aren’t designed to help the general economy or the public. Austerity measures are designed to help the banks and multinational financial interests only.

 This is a good thing to keep in mind if a politician or talking head on TV tries to tell you that things will be worse if we don’t sacrifice. They are either ignorant, or are lying. The politicians want the working class to compensate the bankers for their losses in order to “save the financial system”.

 The austerity measures, which are always targeted at labor and the poor, never at the wealthy and the people who caused the crisis, are not in your interests. If you trace the crisis, bailouts, and austerity measures, there is a common thread – the rich are taken care of at the expense of the working class at every single step.


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  1. Shakin’ the bush Boss.

  2. If it wasn’t for all those damn poor people the rich have to keep stepping on.

    Sheesh, almost scratched my new Italian loafers.

  3. I would argue why stress about structural deficits.  It is this structural deficit argument that is making social security a target (although it’s not the problem).  The issue is not size of deficit it is who is benefiting from it.  Clearly, top incomes and corporations (particularly Wall Street and Halliburton and defense contractors) are the ones benefiting from it right now.

    The war is over controlling fiscal/monetary policy.  

    • banger on July 10, 2010 at 05:27

    reality is that, as St. George Carlin said, the oligarchs want it all.

    We know this and we also know that they will get it too. They will get everything and we will be serfs on some plantation eventually. We know that they will do it by neo-Orwellian practices of mind-control that work almost perfectly.

    • War is Peace
    • Freedom is Slavery

    Using reason or science or even love and compassion is going to get us nowhere but we still have to keep at it even if we know it is hopeless and it is hopeless. No one is listening other than those that pretty much agree with you because we live in an era when dialogue is virtually impossible for the vast majority of the American people.

    The oligarchy will keep saying that War is Peace and the people will believe, not because they actually believe, but  because they have lost the ability to say “no” to the authorities since they are sapped of strength or the ability to use the higher faculties of the brain.

  4. during the Bush/Cheney regime?

    Great article as usual, gjohnsit!

    I would also contend that in addition to the matter of class warfare, there is a political element as well. The country was beginning to benefit from the New Deal, but in 1937, due to Republicon concern about deficit spending, FDR scaled back on spending, and, predictably, the economic recovery stalled.  This lesson has not been lost on the Republicons.

    Having no ideas whatsoever that would help to improve the lives of the non-wealthy in this country, they can only sow hate and suspicion among their less well-healed followers, directing it toward their political opposition.  

    It seems entirely obvious to me that the Republicons are intending to do everything possible to scuttle a halting, weak recovery that was a;ready severely weakened by compromises in the stimulus bill to obtain the support of three Republicon outliers.

    If all goes according to the Republicon playbook, the economy will be tanking again by this coming November.  They will then blame it all on Obama and the Democrats, urging people to return them to power so they can resume their program of tax cuts for the rich and destitution for everyone else. Unbelievably, many of their blind fanatics will buy it wholesale.  

    What the Repub;ocams are attempting to pull off is not entirely unlike someone who murders both parents, then encourages others to harshly judge his parents for leaving him an orphan.

  5. Now they’re offering it to everyone. The gods of Mount

    Ocapitalism cannot be dethroned. To hell with reason and the democratic rabble, excellence is the domain of the aristocracy as it is written from Olympus. The real squabbles are between the gods.

    As long as people think about history in terms of a decade or two, we’re about as intellectually flexible as the pyramids.  

  6. …should have to join the ranks of the unemployed ASAP.  

    Their willful, self-serving stupidity isn’t just astoundingly clueless, it’s downright evil.  Especially considering who is paying their salaries–tax dollars horribly misspent, IMHO.

    • on July 11, 2010 at 04:04

    people of Iceland.

    The courage to tell the bankers and financial Mavens that the wealth that they accumulated over the past 30 years will have to be enough – and any bad loans that they made in the past few years, well, they’ll just have to take a loss on those.

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