It's Consumer Demand, Stupid, Not the Deficit

Published on Friday, September 17, 2010 by In These Times

Chorus of Progressive Economists: Govt. Must Spur Demand to End Recession

by Roger Bybee

Largely oblivious to the reality among working families grappling with unemployment, wage cuts, and trying to avoid foreclosures, conservative politicians (mostly GOP, but also a considerable number of Democrats) are building momentum for an assault on federal budget deficits by slashing government spending.

The Republican approach to deficit cutting is certain to extinguish any hope of economic recovery, bluntly declared Dean Baker. (photo by Flickr user bredgur)

But more than 300 economists have countered with a strong statement calling calling instead for the opposite solution: a vigorous expansion of federal stimulus efforts—and the deficit—to lift the economy out of the persisting Great Recession.

 "The deficit focus risks repeating the mistakes of1937, when FDR pulled back on public spending and plunged us back into the depths of a very deep recession," former Labor Secretary Robert Reich told reporters Thursday on a national conference call with several of the country's most prominent progressive economic experts. "We're in danger of deflation, continued recession, and not getting out of this recession."

The economic recovery is anything but vigorous, as shown by a weak 1.6% level of growth during the second quarter and a rise in poverty, which now afflicts 43 million people, the highest level in a half-century. Other fundamental problems remain, the economists point out:

"The basic problem is a lack of demand," argued economist Dean Baker of the Center on Economic and Policy Research, and author most recently of   Plunder and Blunder.  "Yet it is striking that we've had a dominant narrative that's 180 degrees at odds with reality." As the economists wrote:

Today, the economy is growing only weakly. 7.8 million jobs have been lost in the recession. Consumers, having suffered losses in home values and retirement savings, are tightening their belts. The business sector, uncertain about consumer spending, is reluctant to invest in expansion or job creation, leaving the economy trapped on a path of slow growth or stagnation. Over 20 million American workers are now unemployed, underemployed or simply have given up looking for a job.

The increase in deficits and long-term federal debt is hardly due to anti-recessionary spending, explained Baker.

REAL ROOTS OF DEFICIT

The largest portion of the federal debt is due to unfunded tax cuts and two wars enacted during the George W. Bush administration, Baker noted. President Obama's $787 billion stimulus plan and other initiatives comprise only a fraction of the red ink, but they weren't sufficient to generate enough consumer demand to escape the recession.

"Emergency stimulus policies here and around the world broke the fall, but brought us only part way to full recovery," the economists' statement declared.

The push for drastic deficit-cutting flies in the face of logic and the hard-learned lessons of the 1930's, the statement read:

History suggests that a tenuous recovery is no time to practice austerity. In the Great Depression, Franklin Roosevelt’s New Deal generated growth and reduced the unemployment rate from 25 percent in 1932 to less than 10 percent in 1937. 

However, the deficit hawks of that era persuaded President Roosevelt to reverse course prematurely and move toward budget balance. The result was a severe recession that caused the economy to contract sharply and sent the unemployment rate soaring. Only the much larger wartime spending of the early 1940s produced a full recovery.

"Austerity economics" will not provide the level of consumer demand needed to rekindle the economy and bring down unemployment, the economists argue.

"There are four sources of demand for business," explained Reich. "The first are consumers, who are buried in debt. Second, there is business, which is sitting on more than a trillion dollars in profits but not plowing it back into new machinery and not hiring because they don't see the customers." Exports, another demand source, offer limited hope, as other advanced nations are also in a slump...
 

ONLY GOVERNMENT CAN BOLSTER DEMAND

"Finally, there is government as a consumer, when all else fails," Reich said.

President Obama has taken some steps in the right direction recently to prevent layoffs and service cuts in the public sector and to aid small businesses, but needs to act much more boldly, said Robert Borosage, president of the Institute for America's Future. Borosage urged a vast expansion of stimulus and public sector job-creation programs, especially for young people coupled with tax cuts for all but the richest 3%.

Democratic "deficit hawks" should recognize that deferring the problems of prolonged high unemployment and weak consumer demand will play directly into the Republicans' hands. "The Democrats who are worried about the deficit need to remember that the Republicans are not averse to seeing a bad economy going into the next election, because it's not in their political self-interest," Reich stated.

Not only is a choice of trimming the deficit over stimulating the economy bad politics, but it is bad policy, argued Reich. "Democrats must understand that government has responsibility but opportunity, with low interest rates, to rebuild the nation's infrastructure. ... If we wait to rebuild the infrastructure, we will face much a higher bill to repair it later on."

Robert Kuttner, co-founder of The American Prospect and author of A Presidency in Peril, said that the nation faced a choice between "a high road to recovery or a low road to fiscal balance."

RECOVERY BEFORE TACKLING DEFICIT

"We need the proper sequencing: first, recovery via adequate stimulus and job creation programs. And then we can go to work on the deficit with much lower unemployment and much less need for the government to spend. The idea that we can belt-tighten our way to recovery defies every proven theory in economics," Kuttner stressed.

Even the most valuable forms of government spending are coming into the gun sights of conservatives, the expertss noted. Teresa Ghilarducci, author of When I'm 64: The Plot Against Pensions, outlined how Social Security—once under attack from the Right, as in Rep. Paul Ryan's (R-Wis.) "Roadmap for America"—is preventing the current downturn from growing much worse.

"Social Security benefit increases are more necessary than ever because of the collapse of the private pension system," as the shrinkage of union strength has allowed employers to switch, with federal subsidies, to less-expensive 401K plans that provide a smaller and much more unreliable source of retirement income.

With the pension system weakened for workers, Social Security's role has been critical during the present crisis. The program's existence has held down unemployment by allowing older workers to retire rather than continue in the job market. It has also bolstered consumer demand, she said.

But because of the Right's longstanding ideological hostility to all forms of "social insurance," as Kuttner put it, Social Security is under attack again, including recent barbs by the former Sen. Alan Simpson, co-chair of the presidential commission on debt.

Meanwhile, the Republicans are eagerly yanking on the cords on their chainsaws, hoping that the Nov. 2 mid-term elections will allow them to start lopping off $100 billion in domestic spending, which Minority Leader John Boehner recently declared as the GOP's goal.

The Republican approach to deficit cutting is certain to extinguish any hope of economic recovery, bluntly declared Dean Baker.

© 2010 In These Times