Ill-advised Austerity to Sweep through American Economy

Austerity means more than reducing budgets or trimming around the edges; it means making services that are standard scarce and directly impacting citizens’ quality of life. And at 11:59 pm Friday, March 1, 2013, austerity came to the United States. The legislation requiring budget sequestration will force 9% cuts to every project of every office of every program of every agency within the federal government. No one will be spared; no consideration will be given for human need or impact on quality, health or long-term solvency.

We know from the European experience that austerity brings recession. The UK has had three since 2008. The Greek economy is in a spiraling nosedive. Spain’s austerity measures have pushed unemployment past 50% for young people. There is a reason for this: when coffers are strained because the economy is growing slowly or not at all, cuts to government spending deprive people in society of money, and that slows economic activity. It also leaves more people without work, which further strains budgets.

To avoid mass public-sector unemployment, sequestration will be achieved in part through furlough: reducing days worked and eliminating pay for the time not worked. This is, we are told, the best that can be done to prevent the worst of the worst: a ripple effect of degradations that would include mass layoffs, home foreclosures, and put even more communities under sustained, pervasive economic strain.

It is difficult to overstate the point: fiscal austerity means that government uses its immense spending power to remove huge sums of money from circulation. This takes money out of people’s pockets, makes paying bills harder, makes buying luxury goods a gamble, and so puts the brakes on overall economic output. Absent some sort of counterbalance, the consequent economic degradation can permeate an entire marketplace, undermining whole communities and slowing the wider recovery.

That is what we know. What we don’t know is what happens when this malaise is spread evenly, everywhere. It has never been done quite this way before. When another version of sequestration was attempted, in the 1980s, last-minute deals and clever budget planning allowed policy makers to dampen the blow and essentially to prevent the cuts. The current legislation was designed to prevent such manipulations, and so to force a compromise.

We never got the compromise, and so now we must live with 9% cuts to federal spending, everywhere, at virtually the same time. Here, it may be instructive to remind ourselves that in the fourth quarter of 2008, as the financial collapse deepened, the US economy shank by 8.9%. That was a lot, and it was enough to be felt directly, in people’s family budgets. Such a decline is felt quickly and over a wide area.

The federal budget accounts for somewhere between 22% and 25% of GDP, depending on a number of factors. This means that a 9% reduction in federal spending will shear more than 2% off our national economic output—at a time when banks are still getting back their sea legs, with respect to lending (after a five-year hiatus) and unemployment figures wobble uncomfortably close to stagnation (possible connection there?).

Such a decline may not sound like much, but that is just what we know will be mathematically guaranteed to occur. If such a decline does occur, however, there will be ramifications across the entire landscape of economic activity. Investors in the US and abroad will lose confidence, and money will become tighter. That is precisely when banks feel themselves less willing to lend.

As early as 2007, even before the financial crisis exploded across the world economy, lending institutions were finding it harder to support the capital requirements for new lending. Since then, most major banks have struggled to find a way out of the arithmetic of the collapse. There was not enough wealth in the human-scale economy to support the projected future revenues to which the banks were aspiring, and on which they hoped to base their future operations.

What that means now is that a direct blow to the banks’ ability to imagine a way out of this arithmetical shortcoming will stanch the flow of capital to the Main Street economy. The United States is a consumer-driven marketplace of capital exchange, and so an impediment to the flow of capital through the hands of the people who live and work in that Main Street economy will affect the layered economic dynamics on which sustainable growth must be built.

In short: a 2-3% reduction in GDP, imposed on the marketplace by lawmakers, will ripple through the economy, reducing household wealth, increasing the cost burden on families and small businesses, and force an expansion of that decline. The contraction can be two to three times worse than the amount plotted in the sequester legislation. And this is happening with gasoline prices at $4/gallon in some places and power companies charging inexplicably high prices in some metropolitan areas.

So, a thought or two for members of Congress:

  • Like it or not, you have an obligation to not do harm through your legislative praxis;
  • You can use this opportunity (not to slash spending across the board, but) to redirect spending to more generative activities—like education, clean energy and advanced job training;
  • You should consider the potential long-term value of redirecting controversial and/or superfluous defense contract spending to home mortgage repair and refinancing;
  • The right choices right now will keep our communities whole and build a prosperous future;
  • The wrong choices (including inertia) right now will erode the value-base on which we expect families and small businesses to build a prosperous future.

We are at one of those crucial moments where the temptation to “let the process run its course”, which in the sequester legislation is akin to letting brute force win the day, is an abdication of responsibility. Democrats and Republicans, liberals and conservatives, advocates of laissez-faire and union leaders, all need to come together, be honest, and find the workable center. This is, after all, everybody’s democracy.

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