Home > The Economics Profession, The Economy > Going sideways: The battle over budget cuts

Going sideways: The battle over budget cuts

from Dean Baker

There is a new economists’ sign-on letter being circulated that warns bad things will happen if there are big cuts to the public investment portion of the federal budget, as Republicans in Congress are now advocating. The argument in the letter is correct, but it is nonetheless painful to see this sort of thing being circulated right now.

The politicians in Washington may have missed it, but we are still in the middle of the worst economic downturn since the Great Depression. The unemployment rate is still 9.0 percent and virtually no forecaster, including those in the administration, expects it to return to normal levels any time soon. In addition to the unemployed we have more than 8 million people under-employed and millions more who have given up looking for work altogether.

In such times we might expect that there would be discussion of a big new stimulus program. After all, we do know how to generate growth and create jobs. As a large and growing body of research shows, we just have to spend money. This means that tens of millions of people are suffering as a result of unemployment or under-employment simply as a result of bad economic policy.

The politicians who could in principle push through more stimulus have been intimidated into silence by the business lobbies and the media who have decided to make concerns about the deficit the top and only economic priority. In this context, it would have been reasonable to expect that a letter drafted by prominent liberal economists (the lead signers include Alan Blinder and Laura Tyson, two of the top economists from the Clinton Administration) would center on the need to boost demand to create jobs. Economists who don’t have to run for office can say such things even when politicians can’t.

But there is no mention of stimulus, just a plea not to cut public investment. This plea could even be taken as an implicit endorsement of cuts to other areas of spending such as Medicare, Medicaid and Social Security.

In fairness to the authors of the letter, the state of politics in Washington is quite bleak right now from a progressive standpoint. The Republicans won a huge victory last fall with the conservative wing of the party on the ascendancy. They seem virtually certain to retake the Senate in 2012. Arguably the best that can be hoped for is to shelter a few selected areas from spending cuts.

While that may be true at the moment, it is hard to see this path as anything other than a slower road to disaster. After all, no one believes that the economy is going to turn around based on the sort of budget that is likely to come from a compromise with the Republicans. And President Obama is virtually certain to be held accountable for the state of the economy in 2012. Furthermore, even if he does manage to get re-elected, he will still be dealing with the same sort of congressional opposition he faces today. And of course, no one in their right mind can think that the current economic situation is acceptable.

At some point, we have to talk about changing the terms of the debate. This is where our two honcho Democratic economists need to be taken to the woodshed. They could be trying to argue the case that the economy needs additional stimulus to get back to normal rates of unemployment. The Republicans may block this path, but at least then the public might understand that people are unemployed or underemployed because of a political decision, not an act of God.

If they think increased stimulus is an impossible lift at this point, why not argue the case for work sharing? We can encourage employers to shorten hours instead of laying people off. If we can reduce the rate of layoffs by just 10 percent, this would translate into almost 2.5 million additional jobs over the course of a year.

In principle, this work sharing doesn’t even have to cost any money. It’s just substituting payments for short-time work for unemployment benefits. Work sharing is the reason that Germany’s unemployment rate has fallen in this downturn, even though it has seen less GDP growth than the United States.

Pushing for either more stimulus or work sharing would at least set out a positive agenda, as opposed to splitting the difference on a real bad path. Of course, if our leading Democratic economists had been a little more far-sighted we never would have been in this mess in the first place.

They would have been talking about the housing bubble back in 2002-2004 when it could have been reined in without wrecking the economy. Better yet, they could have been talking about the stock bubble back in the Clinton years before it set the U.S. economy on a path of bubble-driven growth.

It would be good if Republican plans to shut down the government and/or gut large areas of public investment can be thwarted. But serious progressives have to move beyond a situation where we are choosing between bad and worse choices. The folks setting the economic policy agenda for the Democrats are not going to get us there.

  1. Ken Zimmerman
    March 2, 2011 at 11:33 am

    I do not agree with the basic goal here. Considering the obstacles you list so ably and the absolute lack of support for economic recovery by most Republicans I prefer the opposite strategy. That is, stand aside and let the Republicans implement their policies while making certain what they do and how they do it is widely described and explained. This will certainly do a lot more damage but I wonder will itdo any more than pushing around the edges for little crumbs that will cushion some citizens from some of the new crises to come. When the Republicans hurt enough people and can no longer hide behind slogans and/or fake economic reports, you might be surprised how qickly Republicans lose support and are booted out. Just food for thought.

  2. s h a r o n
    March 2, 2011 at 12:31 pm

    Conservatives and liberals
    Republicans and Democrats
    rich and poor

    How many other ways can we divide ourselves up?

    What if there were no political machines, no “parties”? What if sometimes we just have to stand naked and present policy/opinion/–solutions–without hiding behind the “tenets” of one political platform or another?

  3. paul davidson
    March 2, 2011 at 2:26 pm

    aa aDean is absolutely right. but share the work merely means sharing the suffering amongst a larger populstion — who might treai n cut there spending even more –leading t o s furthr decline.

    It is about time econmosts stopped worrying about being politicallycorrect and therefore mntioned in the New York Times oe even the Wall Street Journal –where Alan Blinder writes articles every week or so.

    it is also time that tnured faculty stop saying let the republicans ruin the economy– (their job is no threatened)– and that will help bring back “progressive” policies. Ruining the economy means ruining many peoples lives forever.

    SBut what can be done Dean?


  4. March 2, 2011 at 3:24 pm

    “…They would have been talking about the housing bubble back in 2002-2004 when it could have been reined in without wrecking the economy.” How?

  5. Jeff Z.
    March 2, 2011 at 7:53 pm

    Keep in mind that any of these actions has collateral damage on the rest of the population that showers after they get home from work. These actions tend to reduce economic growth and lead to increased unemployment. Also, these are easy to see in hindsight, less so otherwise.

    1. Talk about it. The Fed could have used its research arm to document the existence of the bubble, warn people that buying houses at bubble inflated prices was/is a stupid thing to to, and war of the consequences such as higher unemployment. Greenspan/Bernanke could have warned about this every time they talked to a reporter or Congress, but what did we get? “Maestro” saying that ARMs were a great idea and were saving people thousands of dollars each, without considering the effect of the resets,

    2. The Fed has a fair amount of regulatory authority. It could have used it to clamp down on “liar loans” and other practices. Between this and #1, this would have made people more leery of borrowing and banks more careful about who was borrowing their money. The Fed can (and did, in 2007-08) issue mortgage guidelines. These guidelines had been promised since the 1990s.

    3. If these fail, there are more drastic measures that have more impact, but more collateral damage to the public. These include raising interest rates rapidly or far enough to puncture the bubble, increasing banks’ capital and/or reserve requirements, cutting the money supply (i.e. by selling bonds) to potentially shrink the sources of funds (which is less effective in an internationalized market).

    Using the ability to warn people and raise interest rates may have had a very believable signaling effect that may have given everyone involved a clear warning. Of course, there is no real way of knowing for certain, but we do know that the people who should have known, either did not know or did not act.

    For more detail on these arguments, see Dean Baker “False Profits” and “Plunder and Blunder” both from Poli Point Press.

  6. March 3, 2011 at 8:32 pm

    There is a very simple way to stop the boom bust cycle: collection of all land rent for public benefit. This also promotes development and fosters equality of wealth. Easy credit always ends up in land/location because. Uniquely land can produce a revenue stream (unlike gold), requires no maintenance or protection, while in the long run it cannot wear out or lose its value except in circumstances of physical disaster.

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