The Next Austerity Disaster

The Next Austerity Disaster

The Challenge

The United States is in the midst of the most protracted unemployment crisis in modern history, and for vast segments of the population, the recession has never ended. Wages are still sinking; more than 20 million people are in need of full-time work. Yet, the national debate is fixated on fixing the debt rather than fixing the economy.

This is "austerity" economics, which demands cuts in government spending in the belief that this will reduce government deficits, even as it costs jobs and imposes hardships on people.

Mass unemployment, declining wages, and faltering growth suggests the United States has already suffered too much austerity, too soon. And yet the political debate is focused on how much more to impose. Washington imposed $1.5 trillion in spending cuts over 10 years in the 2011 “debt ceiling” deal. Washington stumbled past the year-end “fiscal cliff” with a deal that featured about $600 billion in tax hikes over ten years, including returning rates for the richest Americans back to Clinton era levels, and ending the payroll tax holiday, adding 2 percent to every working family’s payroll tax rate.

Now Congress has created an even more precarious fiscal peril to extort even greater cuts. Between now and the middle of May, we’ll hit the debt ceiling again, the automatic cut (sequester) of military and domestic budgets for the remainder of the year will kick in, and the temporary appropriations for government will expire. This sets up a new negotiation to forestall these ruinous calamities, now with Social Security, Medicare and Medicaid directly targeted.

The leaders of both parties suggest that more deficit reduction is needed and that it would help the economy. Not surprisingly, polls suggest that most Americans believe that cutting spending will help the economy, not harm the recovery. The reality is that spending is not out of control, the deficit is already plummeting, and we should be focused on fixing the economy to make it work for working people, not on austerity driven by wrong-headed deficit hysteria.

Make the Case

Start with the struggles families are facing. The budget debate now underway in Washington, focused on “fixing the debt,” misses the point. Americans are still suffering record levels of long-term unemployment. Poverty has risen to a level unseen in generations. Inequality is at new extremes. Wages are at the lowest percentage of the economy on record [1], while corporate profits are at the highest [2]. We should be focused on fixing our economy.

Challenge the austerity myth. And here’s the real deal. You can’t fix the economy by “fixing the debt.” Cutting spending now will only slow the recovery, put more people out of work – and as we have seen in Europe, end up adding to our debt burdens.

In fact, fixing the economy is the necessary first step in getting our books back in order. Our deficits are largely due to the recession, with the costs of unemployment and the lost revenue from the loss of jobs. In these conditions, the best deficit reduction program is to put people back to work.

Even the slow growth we’ve witnessed has begun to reduce our deficits as jobs have been created. Despite all the hysteria, deficits are down by 25% compared to the economy, according to the Congressional Budget Office [3]. They are falling faster than anytime since the demobilization at the end of World War II. And our debt level is basically stabilized for the next decade. More austerity – whether balanced between taxes and spending as the president calls for or focused just on spending cuts as Republicans suggest – will only serve to slow growth [4], cost jobs, and impede the recovery needed to get our books back in shape.

Worse, the austerity debate is now focused on whacking at the basic pillars of family security – Social Security, Medicare and Medicaid. The cuts under discussion – slowing the inflation adjustment for Social Security [5], raising the eligibility age for Medicare or the retirement age for Social Security -- would harm the most vulnerable in our society.

Describe the way out. Fixing our economy requires a very different agenda than mindless cuts. We need to invest in areas vital to our future, and stop squandering resources on things we don’t need and can’t afford. End the wars abroad, bring our troops home, and invest the savings in rebuilding America – putting people to work while modernizing our decrepit infrastructure, from roads and rail to broadband and the electric grid.

End the subsidies and tax breaks to big oil companies and invest the resources in research and development to capture a lead in clean energy and the green industrial revolution sweeping the country.

Crack down on global tax havens, tax Wall Street speculation, tax investors at the same rate as workers, and use that income to provide every child with the opportunity to learn, from universal preschool to affordable college.

Lift the minimum wage, empower workers to gain a fair share of the profits they help to generate and curb perverse CEO compensation schemes that give them million-dollar incentives to ship jobs abroad.

And fix the sole source of our projected long-term debt problems – our broken health care system. Don’t cut benefits for Social Security, Medicare and Medicaid. Instead, take on the insurance and drug company lobbies that have made our health care cost nearly twice what the rest of the industrial world pays.

Case in Point

We’ve done this before. The U.S. came out of World War II with a much higher debt burden than now – 125% of GDP. Yet worried about the GIs coming home to an economic depression, our leaders focused on fixing the economy. They passed the GI Bill that educated a generation. They subsidized housing and built the suburbs. They subsidized the conversion of wartime plants to civilian production. They sent billions of dollars to Europe to create allies and markets. They built the broad middle class that made America exceptional.

They generally ran deficits, added to the total national debt, but the economy grew faster, and by 1980, the debt was down to less than 40% of gross domestic product and not a problem. We call them the greatest generation. We would do well to learn from them.

The U.S. isn’t Greece, but it must avoid imitating Europe. The International Monetary Fund's chief economist recently acknowledged the failure of austerity in Europe [6], noting that spending cuts had a much more destructive effect on growth – driving the European Union back into recession – than the IMF had predicted. Austerity economics cost jobs and torpedoed growth. And it ended up increasing the debt burdens of the governments.

Counterpoint

When they say: We're spending our grandchildren's money with all these government deficits.

You can say: We should be investing their future, not dooming them to a life of diminished opportunity and an old age filled with hardship and deprivation. We want to leave them opportunity in a robust economy. You want to leave them reduced security from Social Security and Medicare.

When they say: We can't afford these “entitlements” any more.

You can say: “Entitlements”? You can't talk about Social Security, Medicare, and Medicaid in the same breath. Social Security is still in surplus, forbidden by law from contributing to the deficit, and its mild long-term problems can be fixed by requiring high income earners to pay the same rate as everyone else. And the problem with Medicare and Medicaid isn't that their benefits are “generous” – they're not – but that our profit-driven health care system is too costly and must be fixed.

When they say: We don’t have a tax problem; we have a spending problem.

You can say: Billionaires are paying lower tax rates than their secretaries. Many multinationals like General Electric hide profits abroad and pay no taxes at all. Big oil and prescription drug companies pocked billions in unneeded subsidies. The Pentagon is spending almost as much as the rest of the world combined on the military. We’ve got both a tax problem and a spending problem. But our real challenge is making the investments we need to rebuild the country and educate the next generation – and cracking down on the unfair tax breaks and wasteful spending to pay for them.

When they say: We can’t afford trillion dollar deficits.

You can say: We can’t afford over 20 million people in need of full-time work, falling wages and a sinking middle class. In fact, the deficits are coming down in relation to the economy faster than anytime since the end of World War II. Any faster, it just might drive us back into recession. To fix the deficits, we need to fix the economy first. And focusing on deficits now won’t fix the economy.

Public Pulse

• At least two-thirds of Americans would support policies that reduce the deficit by asking the wealthiest Americans to do a little more: remove the $110,000 earnings cap on Social Security payroll taxes, increase Medicare premiums on higher incomes, limit mortgage deductions on expensive homes and end them on second homes, and end $1 billion in tax giveaways to the wealthiest (Democracy Corps [7]).
• By 64 percent to 17 percent, voters say we should maintain Social Security and Medicare benefits, and address the deficit by increasing taxes on the rich rather than reducing Social Security and Medicare benefits (AFL-CIO [8]).
• 65 percent of respondents support providing $55 billion dollars over three years to modernize schools and rehire teachers (Democracy Corps [9]).
• 51 percent support investing $234 billion dollars in infrastructure, including rebuilding highways and bridges, as well as creating an infrastructure bank to finance major projects. (Democracy Corps [9]).
• 58 percent of people believe there is no need to cut spending for Medicare to reduce the federal deficit. (Kaiser Health Tracking Poll [10])

Hot Facts

• If we do nothing else, federal debt as a percentage of gross domestic product would continue to decline, not increase, for the rest of this decade (Center for Budget and Policy Priorities) [11].
• If we had enacted President Obama’s proposed 2013 budget, which included $140 billion in jobs program spending, there would have been an additonal 1.1 million Americans back at work, paying taxes instead of collecting unemployment insurance. (Economic Policy Institute [12]).
• Failing to spend money to maintain and upgrade our ports, waterways and airports could lead to the loss of as many as 1 million jobs (American Society of Civil Engineers [13]).
• Austerity measures in Europe are predicted to shrink the Euro zone economy by as much as 4 percent, causing deficits to increase in almost every country (National Institute of Economic and Social Research) [14].

Tweet This

#FixTheDebt now won’t fix the economy. Fix the economy with jobs first. #Letsgettowork http://t.co/D7ZOk10b [15]

#Tellmewhy conservatives want to follow Europe’s failed austerity. Focus on rebuilding #middleclass instead http://t.co/D7ZOk10b [15]

#FixTheDebt by taking on health care lobby, not the sick and elderly. Say no to austerity. http://t.co/D7ZOk10b [15]

Learn More

• Office of Management and Budget Report Pursuant to the Sequestration Transparency Act of 2012 [16]
• “Who Would Promote Job Growth the Most in the Near-Term,” [17] The Economic Policy Institute
• “U.S. now on pace for European levels of austerity in 2013,” [18] The Washington Post
• “Infrastructure Costs Americans More to Neglect than Maintain,” [19] America 2050
• “Growth Forecast Errors and Fiscal Multipliers,” [20] The International Monetary Fund
• “Top 1% Got 93% of Income Growth as Rich-Poor Gap Widened” [21] Bloomberg News
• Campaign for America’s Future “Austerity Watch” page [22]

Get this and other Smart Talks on the Web at OurFuture.org/SmartTalk [23]
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