It seems that the Republican right has forgotten the basics of Economic. Frankly on the state level it seems many policy makers have forgotten important lessons when it comes to knowing when austerity policies are appropriate and when they are not. The people paying the price are not the elite 1%, but the average worker who is continuing struggle.
While the United States has avoided out right austerity, they still have made some missteps on the federal and especially the state level which has prolonged our recovery and has increased out chances of seeing a double dip recession.
We only need to look across the pond to see the devastating effects of austerity during an economic downturn. Will Congress and the states learn from these massive errors in judgement, or will they continue to pursue austerity at a time when the people need them most?
What is an austerity policy?
It is a policy of deficit cutting, lower spending, and a reduction of benefits and public services provided to individuals. They are used primarly to reduce deficit spending. Sometimes this is coupled with a tax increase. These measures are usually embraced when a governmental entity has exceeded it's obligtions.
The IMF had this to say recently in the wake of austerity policies being implemented in Europe:
"Fiscal consolidation typically has a contractionary effect on output. A fiscal consolidation equal to 1% of [gross domestic product] typically reduces GDP by about 0.5% within two years and raises the unemployment rate by about 0.3 percentage point."
Most of Europe has embraced these policies. However, the implementation of the policy in Greece has plunged them into a deep recession. Other countries in the EU have also seen a contractionary reaction to austerity policies.
As for the US, Republicans have been talking about austerity for the last couple of years. Austerity policies when utilized appropriately can be a boon to the government. However, now is not the time for the US to implement these policies.
1. They decrease growth and increase unemployment. It takes a minimum of five years for an austerity policy to show any positive benefits and that is if it is implemented at the appropriate time. During a recession or weak recovery would extend this break even point out further depending on the severity of the economic situation at the time of implementation.
2. It requires the central bank to be able to offset the effects of an austerity policy through monetary policy and stimulus. The Federal Reserve has rates at an all time low, which limits their ability to offset. Increasing the money supply is also limited at this time and it could cause a devalutation of our currency. Our central bank is not in a position to offset the type of austerity policies that the Republicans are proposing.
3. If other countries are implementing austerity policies, with each subsequent addition, the problems for offset are magnified. Europe is already agressively implementing austerity policies, if the US follows suit, the world central bank would be unable to offset the fallout as well as the Federal Reserve. They are already struggling to offset what Europe is doing.
4. If increased taxes in any form, or increase in fees are implemented, this will cause inflation to rise. The Federal Reserves' response to inflation is to raise interest rates, which would further negate their ability to offset austerity measures.
The Federal governement has largely avoided any major austerity measures, but the gridlock in Congress has had a negative effect on the economy. Further measures may obliterate any progress in the Recovery, and would increase the likelihood of a double dip recession.
The Solution
Passing the payroll tax cut and extending unemployment benefits is the right way to address issues in our current economy. More must be done. Republicans are touting deregulation as a means of job creation. As I've outlined in a previous article, deregulation typically does not have a large impact on job creation. In fact, in some cases it can be a job killer. Measures put forward that would have an effect focus on increased education, tax breaks for hiring employers, and help for small businesses which typically lead recoveries.
Europe should be seen as a cautionary tale of how austerity policies can go wrong. Greece in particular is seeing a massive recession as a result of aggressive austerity policies. Closer to home, Illinois increased their tax rate, which has resulted in a significant increase in unemployment, and still fails to address the structural issues which caused the deficit in the first place. Many other states are also embracing austerity as a means to balance the budget.These policies have largely been offset by the Stimulus, however, the Stimulus money is gone as of this year. The effects of these policies will start showing later in the year now that the offset has been exhausted.
Austerity policies are not the correct approach for our current economic reality. Should Congress shift their focus towards austerity, they will have a repeat of what occured the last time, which resulted in the US's bond rating to be downgraded for the first time in history, and prolonging a very painful recovery.
Any politician promoting these policies does not understand the consequences and are either unconcerned with the effects this has on the average American or they are completely ignorant of the basics of the economy. Either way, they would not be a good leader in solving our current economic woes and if successful in implementing such policies at this time would cause the economy to worsen.
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