The Austerity Trap and the Jobs Deficit
May 17, 2012 - 2:15pm ET
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The dire threat facing America, according to Mitt Romney and Republicans this week, is debt, not mass unemployment.
We face "a prairie fire of debt," Mitt Romney warned in Iowa. Debt is "a grave threat to freedom," intoned House Speaker John Boehner in Washington, while threatening to hold the country hostage again over raising the debt ceiling in December.
In the Senate, Republicans forced votes on the House Republican budget that would gut Medicaid, cut all of the domestic services of government by one-third, enact deep cuts in food stamps, college grants and loans and more. (Even five Republican senators—including two in competitive races —couldn't stomach that).
First Things First
There are only two problems with this. Reducing deficits isn't actually the first priority of Romney or Republicans. And the plans they champion will surely cost jobs, and most likely add to the debt burden.
Before dealing with the "prairie fire" that threatens the nation, Romney and Republicans want to add fuel to the flames. Their first priority is spending more money on the military and collecting less money from the rich and the corporations.
Romney's tax plan would cut revenue by some $4.9 trillion over a decade, less some unspecified loophole closings. Millionaires would pocket an average tax cut of $250,000 and those making $10,000 to $20,000 per year would end up paying an average $174 more in taxes.
If Social Security and Medicare were protected for those near retirement, as Romney sometimes suggests, then the domestic side of government—everything from the FBI to food safety to Medicaid and food stamps—would have to be cut by over one half in 10 years. Romney can sell that plan only by denying its effects.
The Austerity Temptation
This Republican extremism tempts Democrats to offer alternative plans for austerity. Because Democrats are prepared to raise taxes on the rich and put a lid on military spending, they can reduce deficits without ending Medicare or eviscerating all government services.
Their position of "shared sacrifice" is much more popular in the polls. Two-thirds of Republicans support a mix of spending cuts and tax hikes to reduce the deficit. And in any "grand bargain," the President can put everything on the table, and expose Republican hypocrisy on deficits and extremism on taxes. Many Democrats relish a face-off on austerity.
The Austerity Trap
But arguing about austerity is a trap—because what the economy needs is jobs and growth.
The best deficit-reduction program is to put people to work. Americans would prefer to cash paychecks and pay taxes than to collect unemployment insurance and rely on food stamps. When people go back to work, government revenues go up and expenditures go down. No measure will do more to reduce deficits. A full employment economy erases more than a third of the deficit. With a stronger workforce, we could focus on the real source of our long-term debt problem: the soaring costs of our broken health care system.
But when Democrats focus on the austerity debate, they get tongue-tied about jobs.
With the Federal Reserve already keeping interest rates near zero, there are only two major theories about how to generate job growth.
One view is what has infamously become known as the oxymoronic "expansionary austerity." The argument is that if you cut spending, taxes and deficits and roll back regulations, businesses will gain the confidence to invest and hire.
The alternative suggests that business owners don't lack confidence; they lack customers. With mass unemployment, businesses sit on profits; the rich move money elsewhere. So the government must act to put people to work.
With money "cheaper than free," (that is, the government is able to borrow at interest rates lower than the rate of inflation), there will never be a better opportunity to rebuild America, launch a major program to renovate our decrepit public infrastructure and put a construction industry that is flat on its back to work. Add to that revenue sharing so the states can rehire teachers and cops, and a Veteran's Corps and Urban Corps to directly employ veterans and young people. Accelerate refinancing and mortgage relief for underwater homeowners. Keynesians would pay for this by borrowing the money, but even if we taxed the wealthy and corporations to use the money they are sitting on, we'd still generate more jobs, and then more revenue and less spending—and in this way lower deficits.
Romney and the Republicans champion expansionary austerity. But we've had a real-world experiment in such austerity in Europe. While Obama resisted Republican calls for drastic budget cuts, Britain's conservative coalition government embraced them. This approach drove Britain back into a recession, increased misery and will likely end up raising, not lowering, its deficits and debt burden. Across Europe, we've seen that austerity in a weak economy is like bleeding a patient just recovering from an operation. It's dangerous to your health.
But Democrats are virtually silent about their jobs agenda. Obama put a decent one out last fall and campaigned for Republicans to pass it, but hasn't said much about it recently. When Republicans failed even to pass a decent transportation bill—traditionally a bipartisan jobs bill—the White House barely took note.
At present, the Obama campaign seems intent on selling the growth we have. "We're on the way back." But with mass unemployment, wages still not keeping up, and home prices still in the pits, momentum is not an answer.
Americans are naturally skeptical about Romney's trickle-down promises. We've been there, done that. A few made out like bandits; 99 percent didn't share in the rewards.
Democrats need to lay out a big argument on jobs first as part of building a new strategy for the economy. They must challenge Romney's hysteria and hypocrisy on debt not with a better austerity plan, but with a plan for an economy that works for working people. A mandate from voters for jobs first will be vital when the lame-duck Congress confronts the fiscal train wreck after the election, and jobs first is the only sensible way to begin getting our books in order.
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