America’s ugly economic truth: Why austerity is generating another slowdown
David Dayen, Salon
Tuesday, Oct 21, 2014 07:00 AM EST
You usually think about October surprises in the political context, but we’ve had something of an economic October surprise this year. A tumultuous drop in oil prices and a significant stock market pullback underlie serious challenges for the global economy. And it points to a core problem that has really been with us for over a decade, but more acutely since the Great Recession: Countries cannot generate enough demand in the economy without a financial bubble of some sort. Sadly, the primary way to change that has been, catastrophically, shut off by the blinkered stubbornness of our policymakers.
America, with our sluggish growth, represents the positive outlier in this scenario. But pretty much everywhere, a familiar story can be told, as Neil Irwin pointed out last week. “The world economy still hasn’t recovered from the last recession,” Irwin writes, and “investors lack confidence that policy makers have the tools they would need to avert a new slide into recession after years of throwing everything they have at it to try to encourage recovery.” This is more a belated realization than a change in fundamentals. It’s almost as if investors woke up one morning and realized that this is all there is – weak growth, if that, as far as the eye can see.
But, of course, it’s not that policymakers lack the tools to avert recession. They refuse to use the tools they have.
With an intractable wage slowdown, extreme inequality keeping money in the hands of people who can’t spend it fast enough, and a persistently high trade deficit, we have almost no ability to get demand to a level consistent with full employment. And the biggest tool we can use, increased federal spending, has been overwhelmed by $2.1 trillion in cuts from the deal to end the debt ceiling crisis in 2011, including the random hacking away at the budget known as sequestration. Therefore, the economy remains relatively depressed almost by definition. You cannot have a budget deficit under 3 percent of GDP given these conditions and expect an economic surge.
Austerity amid recovery has been a disaster everywhere it’s been tried, and the fact that America’s course looks better right now than the more calamitous policy choices in Europe or the rest of the world brings little comfort. Anyway, a global slowdown, which appears to be the current path absent concerted action, will inevitably hit us at home.
Of course, the kinds of policies that could really get economies moving would be distasteful to those who have been profiting off the status quo: the global 1 percent. They don’t want higher inflation or reduced inequality or less financial engineering. But this serves as a poor excuse for policymakers, who are not contractually bound to do the bidding of the wealthy. Moreover, such selfishness happens to be counterproductive, as we’re seeing with the market slump. All things being equal, the rich do better in a growing economy than a slumping one.
The real surprise this October, sadly, would be a reemergence of the tried and true implements of economic progress. IMF managing director Christine Lagarde put it best recently when she said, “There is a real risk of subpar growth persisting for a long period of time, but what is important is that we know it can be averted.” But knowing is not enough. It’s time for the world to do something.