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Does Austerity Actually Work?

Does Austerity Actually Work?

Amidst the global economic crisis, many countries are turning to austerity. The notion that reducing government spending and social services while increasing taxes on the general population will cut the deficit is particularly popular in Europe. As the United States is poised to enact similar principles of austerity, it seems appropriate to ask the question: Does austerity actually work?

The answer appears to be a resounding NO. The United Kingdom strongly implemented austerity measures across the board in the hope of hitting certain benchmarks down the road, but the cutbacks have only heightened the effects of the recession. The Economist says that now half of the economists who called for austerity in the UK three years ago have changed their opinions.

The rest of Europe felt similar effects after experimenting with austerity. As Daily Kos reports, an International Monetary Fund study uncovered that “tax hikes and spending cuts… have been causing far more economic damage than experts had assumed.” The same budget cuts meant to conserve money ended up costing countries more than if it had been spent in a manner that could stimulate the economy.

Austerity’s failures are hardly new. Economist Ha-Joon Chang lists a number of times throughout history that governments have employed austerity in the face of recession only to exacerbate the situation. Given austerity’s track record, Chang cannot fathom why it is continually heralded as a solution. He likens the situation to the famous Einstein quotation that insanity is “doing the same thing over and over again and expecting different results.”

Perhaps a better question is not “does austerity work?” but “who does austerity work for?” For the answer to that, look no further than the people who are promoting austerity: Wall Street executives. ThinkProgress quotes JP Morgan Chase CEO Jamie Dimon calling for us to follow Europe’s lead:

What I’ll say about Europe is they have the will. Listen to their politicians. Their politicians say, “There is no Plan B. The Euro will not be dissolved.” The way is very complicated and will take many years. The United States is the opposite. We know exactly the way. It’s something called like a Simpson-Bowles, we’ve seen a lot of different plans come out. We don’t yet have the will. The United States is a far simpler problem.

Ultimately, austerity is a way of reestablishing the preexisting economic norms by consolidating wealth at the top and offering bailouts to the corporations rather than the people who need it more desperately. “By pushing these policies against all evidence, our leaders are really telling us that they want to preserve – or even intensify, in areas like welfare policy – the economic system that has served them so well in the past three decades,” said Chang.

Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, also notes that “austerity” is just another way for Republicans to capitalize on an already vulnerable populace. Cutting social programs has been on the GOP’s agenda for a long time; the recession is finally a plausible (though highly flawed) excuse to finally enact these detrimental reforms.

“The time for austerity is when the economy is strong and growing,” said Bernstein. “When it’s stuck in the mud, austerity just digs it deeper.” That lesson is one Wall Street and politicians should have learned before their decidedly non-conservative fiscal practices led to the recession. How can we not be wary of calls for financial sacrifices from people who have no intention of making these sacrifices themselves?

 

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154 comments

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5:20AM PST on Mar 2, 2013

You can NOT spend your way out of debt. So we have to drastically cut spending. But first the Senate has to pass a budget!

2:47PM PST on Feb 14, 2013

@Steven B.
"Why do you try to obfuscate the facts with so much BS?."

What part of what I said do you consider BS? I can back up everything I said with data.

"The FED does not print any money. The FED buys both public and private debt and the central Banks buy private debt using monetary policies called Quantitative Easing (QE)." Steven B.

Well technically the dollar is not money but debt notes but most people still refer to the dollar as money. QE is creating dollars out of thin air or "printing", it's all electronic so they do not actually print it but it has the same effect. And $1.7 trillion in US Treasury bonds held by the FED is hardly trivial.

"Nowhere in my post did I mention a top marginal tax rate of 90%, it does not matter what the actual tax rate paid was or whether there were deductions or not and it certainly does not have anything to do with today’s rates and loop-holes." Steven B.
You mentioned it in an earlier post of this page but anyway. So it doesn't matter what the real tax rate paid was are you serious? It makes no difference that they had way more deductions and loop holes back then than there are now? I think you might want to re-evaluate that.

11:01AM PST on Feb 14, 2013

Eric L
Why do you try to obfuscate the facts with so much BS?. The article was about austerity budgets and whether they lower debt/deficits. My posts show they do not. The GDP and unemployment numbers plainly show that during Hoover's austerity budgets in 1930, 1931 and 1932, GDP went down dramatically and unemployment climbed as the austerity budgets drained the demand from the economy at an increasing rate putting the economy into a recession that dove almost straight down. After 3 years of using conservative economic remedies for curing an ailing economy (tax cuts for the top 1% and austerity spending for the masses), Hoover threw out the conservative playbook in 1933, increased spending and raised the top marginal tax rate from 25% to 63%. Those actions slowed the downward plunge of the economy starting the long road to recovery.

FDR enacted the New Deal Programs which put money into the hands of the people driving demand up and unemployment down. FDR raised the top tax rate to 79%, both FDR's and Hoover's tax increases were done during some of the worst economic times and the economy did not collapse, in fact it grew and the sky did not collapse. Worried about deficits, FDR cut back on the spending (austerity) in 1937 and the economy immediately started a year-long recession that saw the GDP drop and unemployment climb. This move by FDR set the recovery back at least 2 years. FDR increased spending and brought the economy back on the road to recovery.

10:52AM PST on Feb 14, 2013

Eric L
This year, as CNBC reports, the Fed has been a modest player in the market for Treasury debt:
Mom-and-pop investors, and not the Federal Reserve, have been the ones most responsible for driving the mad dash to government debt, according to newly released data…The demand among average investors has swelled so much, in fact, that they bought more Treasury paper in the first quarter than foreigners and the Fed combined.

Households picked up about $170 billion in the low-yielding government debt during the quarter, while foreigners increased their holdings by $110 billion. The Fed, meanwhile, actually slightly decreased its net holdings.

The FED does not print any money. The FED buys both public and private debt and the central Banks buy private debt using monetary policies called Quantitative Easing (QE).There was a round of QE by the FED started at the end of 2008, involving mainly the purchase of mortgage-backed securities (rotten derivatives), purchase of Treasury debt was fairly small. The next round of the QE was done in the first half of 2011 with the FED buying Treasury Debt totaling $600 billion. There is a new round of QE that will entail buying bad debt at a rate of $85 billion a month.

Nowhere in my post did I mention a top marginal tax rate of 90%, it does not matter what the actual tax rate paid was or whether there were deductions or not and it certainly does not have anything to do with today’s rates and loop-holes.

10:49AM PST on Feb 14, 2013

Eric L
Why do you try to obfuscate the facts with so much BS?. The article was about austerity budgets and whether they lower debt/deficits. My posts show they do not. The GDP and unemployment numbers plainly show that during Hoover's austerity budgets in 1930, 1931 and 1932, GDP went down dramatically and unemployment climbed as the austerity budgets drained the demand from the economy at an increasing rate putting the economy into a recession that dove almost straight down. After 3 years of using conservative economic remedies for curing an ailing economy (tax cuts for the top 1% and austerity spending for the masses), Hoover threw out the conservative playbook in 1933, increased spending and raised the top marginal tax rate from 25% to 63%. Those actions slowed the downward plunge of the economy starting the long road to recovery.

FDR enacted the New Deal Programs which put money into the hands of the people driving demand up and unemployment down. FDR raised the top tax rate to 79%, both FDR's and Hoover's tax increases were done during some of the worst economic times and the economy did not collapse, in fact it grew and the sky did not collapse. Worried about deficits, FDR cut back on the spending (austerity) in 1937 and the economy immediately started a year-long recession that saw the GDP drop and unemployment climb. This move by FDR set the recovery back at least 2 years. FDR increased spending and brought the economy back on the road to recovery.

9:42AM PST on Feb 14, 2013

As the article says near the end, austerity does not work for the 99%, it only works for the 1% by tanking the economy so the 99% get thrown into bankruptcy and the 1% can buy a lot of distressed property at bargain prices. For the 1% austerity works very well. For the 99% austerity is a disaster.

9:12AM PST on Feb 14, 2013

Oh well, I guess as usual, David cannot answer my direct question. Why? Because he cannot. He's a bag of hot air.

6:44PM PST on Feb 13, 2013

@Steven B.
"Do companies that borrow from the people who invest in them have to pay back (buy back) all that debt from the sales of stocks? The sale of treasury bonds is the investment of countries and individuals in the American economy. If America was bankrupt or on the edge of bankruptcy or in peril of defaulting on it's debt there would be no buyers for US Treasury Bonds but even at historically low interest rates the bonds cannot be printed fast enough."

Yes when a company borrows money by selling bonds they do have to pay them back, stock is ownership in the company.
Exactly, when the world realizes that the US Treasury bonds will not be paid back in full value but with a weaken dollar they will stop buying them. If demand is so great why is the FED printing dollars to buy a growing chunk of the US Treasury bonds?
http://www.ritholtz.com/blog/2012/06/who-else-is-buying-u-s-treasuries/

So what do you think would happen if the FED just stopped printing dollars to buy US Treasuries?

You throw up a lot of GDP numbers, tax rates, unemployment rates. Do you think that is the whole picture or are there other factors at play that can distort the results? For example marginal tax rate versus the real tax rate people paid. How many people actually paid anywhere near 90% in taxes? What deductions did they have versus now?

Think about this and get back with me. If everything else is equal does are higher tax rate help or hurt an economy and why?

3:18PM PST on Feb 13, 2013

Eric L
Year GDP Tax Rate Unempl.
1928 97.4 25%
1929 103.6 24% 3.14
Hoover enacts austerity measures
1930 91.2 25% 8.67
1931 76.5 25% 15.82
1932 58.7 25% 23.53
1932 Hoover raised top tax 25% to 63%, increased
corporate tax rates 15% and doubled estate tax. Austerity stopped,
government spending starts slowing downward slide of economy.
1933 56.4 63% 24.75
FDR enacts New Deal programs putting $$ into consumers’ hands
increasing demand which creates more jobs that increase demand further in an ever widening upward economic spiral. Depression bottoms out.
1934 66 63% 21.60
Recovery begins as the full effect of increased demand creates a 10% increase in the GDP. GNP rises 7.7 %, unemployment falls.
1935 73.3 63% 19.97
New government spending on public works and rural electrification. Push to strengthen Labor/raise wages. GNP grows 8.1%, unemployment falls.
1936 83.8 79% 16.80
Top tax raised to 79%. GNP grows a record 14.1%, unemployment falls.
1937 91.9 79% 14.18
"Great Mistake" of 1937 deficit leery FDR cuts government spending
creating recession within the depression. Unemployment rises.
1938 86.1 79% 18.91
U.S. resumes deficit spending
1939 92.2 79% 17.05
1940 101.4 81.1% 14.45
Great Depression ends
1941 126.7 81% 9.66

http://www.usgovernmentspending.com/spending_chart_1920_2010USb_13s1li011mcn__US_Gross_Domestic_Product_GDP_History

http://www.u-s-history.com/pages/h1528.html

3:10PM PST on Feb 13, 2013

Eric L
How can you compare economies whose combined GDP that is less than 3/4 of 1% of the American GDP??

After spending was cut, to balance the budget, a recession immediately followed. When taxes were raised and government spending resumed -- with deficits -- that recession ended.
The next post shows unequivocally that austerity budgets wreak havoc on the economy, GDP goes down and unemployment goes up as demand dries up sending the economy into a ever-contracting downward spiral until austerity measures are stopped and spending is resumed to increase the demand needed for recovery.

The Revenue Act of 1932 laid the groundwork for the progressive income tax system that prevailed in America for the next 45 years, as we built the largest middle class the world had ever known under Roosevelt, Truman and Eisenhower (Ike rebuffed appeals from his fellow Republicans and kept top marginal rates above 90%). The increases enacted during the worst economic times America has ever had, and contrary to RWNJ claims, the economy rocovered and flourished. When taxes were raised the economy improved. Every time. Deficits had no negative effect on the economy. Indeed, when deficits were at their highest, the economy boomed.

When taxes were raised again, and government spending went sky high, the Great Depression finally ended.

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