Austerity, Spending Cuts, GDP

Negative Effect of State and Local Austerity/Spending Cuts (Jared Bernstein)

The US released numbers for economic growth today, showing that GDP grew only at a barely modest 2.2 percent during the first three months of 2012.  That’s down from the 3 percent GDP growth in the last quarter.

The report echoes similar numbers from the Federal Reserve, released Wednesday.  Although slightly higher than their previous forecast, the new Fed report predicts the economy will grow only between 2.4 to 2.9 percent for the year.  Just about everyone agrees that pace is insufficient to produce rapid re-employment for those currently jobless or just now entering the workforce.

We need another federal stimulus to spur consumer spending and investment and to offset what state and local government budget cuts are doing to drag down the economy and employment.

A few reactions, first the New York Times:

“There are mixed messages in this report,” said Dean Maki, the chief United States economist at Barclays. “None of this is going to change fundamental views on the economy.” . . .

Some analysts shrug off the oscillation as normal, pointing out that economies do not move in a straight line. Others see momentum breaking down. “The G.D.P. report was disappointing,” economists at Morgan Stanley wrote. “The mix of activity pointed to slower growth ahead.”

Mark Zandi of Moody’s Analytics said that the low business investment numbers in the report — spending on new factories and office buildings declined by 12 percent despite the warm winter — showed that “businesses remain very cautious.”

Paul Krugman in The Secret of Our Non-Success (see the chart there) points to the aggregate decline in spending, when you consider what the states have done to slash budgets.  Meanwhile, the federal government has failed to make up the difference after the 2009 stimulus spending ended.  As we watch austerity bring down economies in Europe, we’ve been imposing our own brand of austerity, with predictable negative results on the economy:

Obama, far from presiding over a huge expansion of government the way the right claims, has in fact presided over unprecedented austerity, largely driven by cuts at the state and local level. And it’s therefore an amazing triumph of misinformation the way that lackluster economic performance has been interpreted as a failure of government spending.

Jared Bernstein continues the argument fingering US austerity for lousy growth. That’s his graph up top.  Jared emphasizes that while some are saying the current mediocre growth levels are at “trend,” that’s the wrong definition:

2.2% is about the trend growth rate for the economy right now, and so you could look at this and say “steady as she goes.”   That’s not how I see it.  The trend is what you want to return to after you’ve made up your losses, which we have yet to do.   Coming out of such a deep trough as we experienced in the great recession, we need a number of consecutive growth quarters well above trend.  Then we can be content to settle back into trend growth. . . .

In a sane world for economic policy, we’d look at the very low interest rates on government borrowing, the persistently high jobless rate, the underlying slog we see in today’s GDP report, and the state and local fiscal drag, and we’d apply some serious fiscal stimulus in the form of help to the states, which must balance their budgets.  But this is not the world we live in right now.

Last night I watched a fascinating and highly relevant interview of authors Eric Liu and Nick Hanauer (The Gardens of Democracy).  One of their points was to debunk the GOP — or perhaps the Beltway — view that we shouldn’t be trying to raise taxes on the very rich, because “the 1% are the job creators.”  That’s nonsense, they argue.  If that were true, then the wealthiest, who are doing fantastically well these days, and have for decades, or the largest corporations, currently sitting on a trillion or more in retained earnings, would have solved unemployment already.

What creates jobs are tens of millions of consumers spending money, and having most of them be middle class instead of at or near poverty makes a huge difference.  “We all succeed when we all succeed.”  Lots of people spending money creates the demand for products, and that creates the demand for jobs.  It’s that simple.

So, Mitt and Barack, GOPers and Dems, and everyone else: let’s have that debate. Because the evidence against further austerity measures is now overwhelming — you have to be an ostrich or a dodo to miss it.  Debates about whether to cut tax rates further on the rich are worth having, because they’re about equity and sustaining democratic accountability as well as revenues.  But nothing they’re arguing about now is about restoring healthy growth and full employment.  At best it’s just bandaids to triage the suffering caused by the absence of policies that actually work.

More:

Krugman: Death of a Fairy Tale

Calculated Risk: Real Annualized Growth Rates (historic)

Ezra Klein, Don’t get too worked up . . .