The Last Thing We Need Right Now is "Austerity"

Friday, August 5, 2011

If you know anything about economics - and I'm not talking graduate-level Macroeconomics; Econ 101 will do just fine! - you know that gross domestic product is comprised of four main elements. Just to demonstrate how non-partisan this concept is, I'm going to quote Too Conservative's "Cato the Elder" on this one:"GDP = C + I + G +(Ex-Im) (Guess what the G stands for?) That's math, not opinion."
That's right, gross domestic product is a function of: 1) private consumption; 2) investment; 3) government expenditures; and 4) exports minus imports.  Period.
A bit more "Econ 101": In a recession, when "C" and "I" fall, about the only thing that can make up the difference is "G" -- hence, Keynesian economics. And, clearly, unless you flunked Econ 101, you know that cutting "G" during a recession - aka, "austerity" - is THE LAST THING you'd ever want to do. In fact, cutting "G" during a recession would be the EXACT OPPOSITE of what any serious economist would recommend. To the contrary, as Joe Nocera reminded us all the other day:
We've all heard what happened in 1937 when Franklin Roosevelt, believing the Depression was over, tried to rein in federal spending. Cutting spending spiraled the country right back into the Great Depression, where it stayed until the arrival of the stimulus package known as World War II. That's the path we're now on. Our enemies could not have designed a better plan to weaken the American economy than this debt-ceiling deal.
I'd actually disagree in part with Nocera's final clause, for a few reasons (e.g., spending cuts don't really kick in 2011 or 2012), but I DO agree that the last thing Washington should have been focusing on the past few months is the short-term deficit (instead, they should have been extending unemployment benefits and passing other "countercyclical" policies), as opposed to the long-term, structural debt problem.In fact, despite the howling from a lot of uninformed/duped people out there, those two things are not very well connected. Thus, our short-term deficit is driven by: a) extension of the Bush tax cuts, at a cost of $400 billion a year; b) the ongoing wars in Iraq and Afghanistan; c) the one-time-only "stimulus," now winding down; and d) the recession itself, which has cut economic growth and, thus, tax revenues.  In contrast, long-term structural debt is driven overwhelmingly by one thing: spiraling health care costs. And guess what this latest debt deal does NOT address? That's right, spiraling health care costs. Great work, guys!