The debate around the budget is getting ever further removed from reality. As every budget expert knows, the reason that we have seen large budget deficits in the last five years is that the economy plunged following the collapse of the housing bubble. This collapse cost us more than $600 billion in annual construction demand and more than $500 billion in annual consumption demand.
This lost demand gave us large deficits because it led to plunging tax collections and more spending on programs like unemployment insurance. We deliberately raised deficits by roughly $300 billion annually in 2009 and 2010 with the stimulus package.
These deficits were supporting the economy, making up for the loss of private sector demand. They took the deficit from a very modest 1.2 percent of GDP in 2007 to a peak of more than 9 percent of GDP in 2009.
Unfortunately, rather than deal with the reality – that we need deficits to sustain demand in a context where the private sector will not do it – the politicians in Washington have gotten hysterical. This is like complaining about our use of water when the school is on fire with the kids still inside.
In spite of the hysterics coming out of Washington, the interest burden of the debt is near a post-war low. Even if no further cuts are made, it is not projected to get back to its early 1990s level for more than a decade.
In this context, it is unfortunate that President Obama has proposed a budget that has substantial cuts to Social Security. The vast majority of seniors are already struggling. The proposed cuts would be a reduction in their income of more than 2 percent. By contrast, his tax increase last fall cut the after-tax income of the typical wealthy household by less than 0.6 percent.
The budget should be focused on expanding the economy and creating jobs, ideally through more spending in infrastructure, education and research. It should also include funding for state and local governments to reverse layoffs and cutbacks that have slowed growth and raised unemployment.
Unfortunately, President Obama has accepted the agenda of the Washington elite, putting cuts to Social Security and Medicare at the center of his budget and offering little that will help to speed the growth of the economy and create jobs.
2---Haters Gonna Hate: Rory Carroll's Venezuela on NPR, Mark Weisbrot, CEPR
3---JPMorgan Chase, Wells Fargo Report Record Profits As Lending Remains Constrained, Huff Post
4---Drop in Home Loans Takes Toll on Banks, NYT
5---The Biggest Threat to Your Portfolio, Motley Fool
6---Margin Debt On Stocks Is Telling Me To Get Out Of The Market, ETF Daily
7---350 Economists Warn Sequester Cuts Could Kill Recovery, Huffington Post
Will they pay attention to 350 economists?
With sequestration spending cuts due to begin on Friday, 350 prominent economists have issued an important statement warning that "the fragile recovery is threatened by obsessive concern with cutting deficits that has infected both parties." The economists from universities and research groups across the U.S. are reminding politicians that the U.S. economy is still "marked by mass unemployment, rising poverty, and declining wages." And they are warning that big spending cuts aimed at reducing deficits could throw the economy back into recession.
The economists' statement, Jobs and Growth, Not Austerity, was written by Robert Borosage and myself, co-directors of the Institute for America's Future, and by Robert Kuttner of The American Prospect. The full statement and list of over 350 signing economists can be found at jobsnotausterity.org.
The economists point to the cautionary example of European countries that have in plunged themselves into recession as a result of misguided policies aimed at reducing deficits. The economists declare, "As Great Britain, Ireland, Spain and Greece have shown, inflicting austerity on a weak economy leads to deeper recession, rising unemployment and increasing misery."
Will they listen to 350 economists AND a shrinking economy?
There is no doubt that, after the 2009/2010 short burst of stimulus, America's turn to spending cuts has already damaged a very weak recovery. The Department of Commerce reports the economy stopped growing and actually shrank in the fourth quarter of 2012. And plaintive emails from Wal-Mart executives obtained in February by Bloomberg News, reflect a sharp decline in retail sales, driven by the last deficit deal that allowed the payroll tax cut stimulus to expire.
On top of this slowing consumer buying power, Congressional Budget Office director Douglas Elmendorf told Congress that if the $1.2 trillion across-the-board sequestration spending cuts are allowed to take place in March, the U.S. economy would lose 750,000 jobs in 2013. Other analysts have predicted sequestration would result in a loss of up to 1 million jobs....
There is no theory of economics that explains how we can deflate our way to recovery. Businesses are not basing investment decisions on how much Congress cuts the debt in 2023. As Great Britain, Ireland, Spain and Greece have shown, inflicting austerity on a weak economy leads to deeper recession, rising unemployment and increasing misery.
8---The Sequester’s Hidden Danger, NYR
Indeed, the real danger of the sequester lies in the misguided deficit-cutting mania that created it in the first place. Put in place by Congress with the president’s approval and encouragement in 2011, the idea of automatic sequestration came out of the same obsession with austerity measures that has put much of Europe into recession and prevented the US economic recovery from fulfilling its potential. Deficit reduction has wide support in Washington and its most active promoters are financed by some of the nation’s wealthiest citizens, who argue that it is a far better alternative than asking them to contribute more in taxes. We must cut deficits now, even before we have a full economic recovery, the thinking goes, to deal with rapidly rising healthcare costs that will drive up the government’s Medicare and Medicaid expenses beginning twenty-five years from now.
This approach to economic policy has no sound basis in either historical experience or current economic analysis. Washington’s austerity economics—the notion that you can induce economic recovery in a weak economy simply by cutting government expenditures—willfully ignores, denies, or declares nonsense the true lessons of the Great Depression, which demonstrated precisely the opposite. More or less since Adam Smith, economists had argued you must increase savings to increase investment, which in turn drove economic growth and produced rising incomes. One way to do this is to get federal deficits down as a percent of GDP. But in the 1930s, it was clear that government efforts to save money had not prevented the global economy from tumbling into severe depression. To the contrary, they helped create the depression of the early 1930s and then a second major downtown in 1937. This is around the time that John Maynard Keynes had the dramatic insight that it wasn’t savings that led to investment but the other way around: more government spending raises incomes and therefore savings, from which more investment is made...
Though he backed the stimulus in early 2009, Barack Obama had already displayed a sympathy for deficit reduction policies before he took office, and he subsequently appointed the Bowles-Simpson commission to suggest ways to balance the budget as soon as possible. He did not accept their proposals, but the austerity advocates quickly gained the upper hand.
Many may wonder why it is so easy to renounce the remarkable Keynes. In part, it is because he so deeply challenged Smith’s Invisible Hand itself, that almost religiously held principle that markets themselves are self-adjusting as prices change to make demand and supply equal.
9---WSJ Ignores Experts To Downplay Harmful Economic Consequences Of Sequester, media matters
Yet the Journal's own MarketWatch noted on Tuesday that the Congressional Budget Office has estimated that the sequester "will halve U.S. growth in 2013." MarketWatch explained:
U.S. economic growth in 2013 will be 1.4%, the Congressional Budget Office estimated on Tuesday, up from a previously estimated decline of 0.5% pinned on the so-called fiscal cliff. CBO said however that growth would be about 1.5 percentage points faster in 2013 if not for fiscal tightening including the so-called budget sequester.The Bipartisan Policy Center has also estimated that the full sequester would cause approximately one million job losses.
The editorial also supposes that the sequester would help economic growth, which ignores the fact that the 2012 fourth-quarter decline in GDP was largely due to a steep drop in government spending