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An End to Austerity?

The result of such austerity policies has been lost output and overall wealth that several economists say could last for years--and may even be permanent--hurting both jobs and economic output.
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On November 5, 2015, the U.S. House of Representatives passed the bipartisan Surface Transportation Reauthorization and Reform Act, a new multi-year transportation authorization bill, by a vote of 363-64. It will refund the Highway Trust Fund, among other public projects. The Trust Fund, a main source of highway repairs and improvements, was about to run out of money.

And, earlier this summer the Senate passed their proposal for the same bill. The next step is the House and Senate must reconcile the differences between their two versions and pass a compromise transportation bill. The most recent extension of the current transportation program expires November 20 so they will have to work quickly.

Are we one step closer to a federal government that sees the need to boost spending in order to boost jobs and economic output for years to come? If so, it means a majority of the U.S. Congress finally see the folly of austerity policies--such as the sequester budget cuts that defunded even defense spending, or Repubs shutting down all government rather than agreeing to new budget caps.

The result of such austerity policies has been lost output and overall wealth that several economists say could last for years--and may even be permanent--hurting both jobs and economic output. It would fulfill the prophecy of a 'new normal' of slower growth for economies of older, developed countries.

Paul Krugman and other leading economists have lamented the vise-lock that austerity policies have on developed countries since the Great Recession, and that are continuing in Europe. "Governments that slashed spending in the face of depression hurt their economies," said Krugman, "and hence their future tax receipts so much that even their debt will end up higher than it would have been without the cuts."

"And a new paper by Mr. Summers and Antonio Fatás, in addition to supporting other economists' conclusion that the crisis seems to have done enormous long-run damage," says Krugman, "shows that the downgrading of nations' long-run prospects is strongly correlated with the amount of austerity they imposed."

The Initiative on Global Markets at the University of Chicago -- hardly a hotbed of liberal or Keynesian thought -- regularly surveys a number of the leading American economists about a variety of policy issues, such as government stimulus spending, says Econ Prof Justin Wolfers. The survey results find widespread consensus that government spending during economic crises has benefits to employment and growth that far exceed its costs.

Even the EU may be seeing the folly of their current austerity policies, brought on by another emergency--millions of immigrants fleeing into Europe from war torn Middle East and Africa that have to be housed and fed. ECB Chairman Mario Draghi has been sounding the necessity to increase its QE program that to date is purchasing $60 billion per month in securities, in an attempt to boost growth by pushing down interest rates into negative territory. So the ECB would then literally be paying borrowers to borrow money in order to expand the monetary base.

Graph: Trading Economics

But why does there always have to be an emergency before Austerians (i.e., those who believe public debt is evil) and Progressives (who believe public debt is good and necessary for the public welfare) come together for the common good? The Senate passed its long-term highway bill in July, though their work on federal infrastructure funding isn't over. Senators voted 65-34 to approve the six-year bill, which funds federal highway and infrastructure projects for three years.

The legislation would be used to pay for about $47 billion of funding for the Department of Transportation's Highway Trust Fund. That funding accounts for only the first three years of the legislation. Under the Senate bill, senators would have to determine by 2018 how to pay for the full six years.

Austerity is an economic orthodoxy the gripped Herbert Hoover at the beginning of the Great Depression, before FDR decided that a New Deal of government stimulus spending was needed to fight what was not yet a Great Depression--itself an expression of changing times.

But then austerity prevailed in 1937 as well. Republicans were swept back into power because Americans thought the Depression over. Roosevelt listened to them, and raised taxes and cut spending to pay down the deficit before the economy had fully recovered, plunging the U.S. back into what became The Great Depression.

Unfortunately, it took the united will of a World War against fascist terrorism to bring the U.S. together with European countries to fight economic orthodoxy. We knew then government spending and budget deficits were needed during such times. U.S. debt ballooned to some 120 percent of U.S. GDP at the end of WWII.

It took an exploding population and the consumer-driven society that succeeded WWII to bring the U.S. deficit back down to pre-war levels by the 1970s. And only with policies that boost growth have we been able to keep debt levels manageable.

The U.S. Great Recession was technically over in June 2009, lasting 18 months, but sustained growth didn't resume until 2012. Whereas Europe suffered through two recessions since 2008 because it followed austerity policies that cut spending and raised taxes, led by the more conservative northern governments and Germany.

A suddenly bipartisan U.S. Congress made a start in refuting such austerity policies by first agreeing to a two year budget plan that ignores the debt ceiling. The Surface Transportation Reauthorization and Reform Act is another step in the right direction. Maybe it is good politics in a Presidential year to advocate stimulus spending over austerity. Who cares why, as long as both parties can agree it's the path to future growth?

Harlan Green © 2015

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