austerity cartoon

When Did Voodoo Economics Become the Norm?

Economist Robert Reich breaks the spell of voodoo economics that has cast a pall over the American economy since Ronald Reagan. In his essay exposing the economically fallacious argument that “the deficit is the problem,” he points out:

We are in the most anemic recovery in modern history, yet our political leaders in Washington aren’t doing squat about it.

Yes, the Republican Congress-led gridlock in Washington that has dampened the recovery now threatens to bring it to a grinding halt.  Reich continues:

In fact, apart from the Fed — which continues to hold interest rates down in the quixotic hope that banks will begin lending again to average people — the government is heading in exactly the wrong direction: raising taxes on the middle class and cutting spending.

If Spending Isn’t the Problem, What Is?

The misnomer that the budget deficit is the problem is a causal fallacy. The deficit isn’t the cause of our economic downturn; it’s a symptom. So what’s the real problem?

  • People of working age who are actually working is close to a 30-year low – Close to 20 million Americans remain unemployed or underemployed.
  • 40 percent of all jobless workers, remain trapped in long-term unemployment – most have few job prospects, and their unemployment benefits are running out.

What the Heck Is Going On?

Professor Reich points out that the source of the problem, and, consequently, the solution is no mystery – it’s well known to economists. As he tells it:

The only reason for employers to hire more workers is if they have more customers. But American employers have not had enough customers to justify much new hiring.

There are essentially two sources of customers: individual consumers, and the government. (Forget exports for now; Europe is contracting, Japan is a basket case, China is slowing, and the rest of the world is in economic limbo.)

American consumers — whose purchases constitute about 70 percent of all economic activity — still can’t buy much. The median wage continues to drop, adjusted for inflation. They can’t borrow because most don’t have a credit record sufficient to allow they to borrow much.

…The Conference Board reported last Tuesday consumer confidence in January fell its lowest level in more than a year. The last time consumers were this glum was October 2011, when there was widespread talk of a double-dip recession.

In other words, it’s not a supply side problem – it’s a demand side problem. Years of tax breaks and subsidies for the “job creators” has not succeeded in getting them to create more jobs. Why is this? It’s because the top income earners aren’t spenders – they save (ie. hoard) a large part of what they earn instead of spending it. And more and more of the economic pie is being directed toward them, instead of the real job creators – the consumers.

  • Personal income soared by 8% in the last quarter of 2012 vs. just 2% in the third quarter, going to the people at the top who earn their money primarily from investments.
  • Wages and salaries for ordinary workers grew just 0.06%.

As a result, consumer spending is declining rapidly.  And greatly exacerbating the situation, government spending is dropping, too. According to Professor Reich, the major reason the economy contracted between the start of October and end of December 2012 was a major reduction in government spending in the fourth quarter:

Government spending has declined in nine of the last ten quarters, but it took a precipitous drop in the last quarter. This was mainly because military spending fell 22.2 percent. That’s the largest fall-off since 1972. (This was mainly because of reduced spending on the war in Afghanistan, and concerns by military contractors about further pending cuts.) State and local spending also continued to fall.

The Obvious But Obfuscated Solution

The solution is obviously spending and investment. But consumers won’t spend as their wages and benefits continue to drop, and states move to raise sales taxes, which disproportionately hurt the middle class and the poor.

In times like these, the government has successfully come to the rescue, as during the Great Depression, when government investment saved millions from crippling poverty and eventually recovered the economy.

So what’s the government doing now?  The exact opposite of what history tells us works – they are spending less:

The White House has already agreed to major spending cuts, to go into effect this year. Coming showdowns over the next fiscal cliff, appropriations to fund government operations, and the debt ceiling will likely yield more.

More jobs and faster growth should be the most important objectives now. With them, everything else will be easier to achieve — protection against climate change, immigration reform, long-term budget reform. Without them, everything will be harder.

Yet we’re moving in the opposite direction. Why isn’t Washington listening?

Judging from the prevailing meme that the deficit is the problem we need to address most urgently (even though it’s been coming down since Obama took office)  policymakers either don’t have a clue about economics, or they are engaging in deceptive, self-serving polemics.

 

ROBERT B. REICH, Chancellor’s Professor of Public Policy at the University of California at Berkeley, was Secretary of Labor in the Clinton administration. Time Magazine named him one of the ten most effective cabinet secretaries of the last century. He has written thirteen books, including the best sellers “Aftershock” and “The Work of Nations.” His latest is an e-book, “Beyond Outrage,” now available in paperback. He is also a founding editor of the American Prospect magazine and chairman of Common Cause.

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