Commentary: More spending cuts equal more economic suffering | St. Louis Public Radio

Commentary: More spending cuts equal more economic suffering

Jul 28, 2011

This article first appeared in the St. Louis Beacon, July 28, 2011 - If he is inclined toward optimism about his political future, President Barack Obama may find comfort in the polls and in deficit-reduction proposals that have positioned him as a deficit hawk who seeks higher taxes for the wealthy, two key concerns of independent voters.

Obama's rightward shift on deficits has enhanced his position as professor of reasonableness and compromise. I have embraced the deficit problem, he will say during the campaign. I have challenged my own party on spending while maintaining commitments to the core promise of entitlements. And all the Republicans can do is coddle the rich while reneging on their supposed dedication to debt reduction by rejecting even my $4 trillion proposal. It's manna from heaven for besieged Democratic ad-men whose challenge is re-election when millions are out of work.

But in truth, Obama's real political hope is that his own diminished popularity will continue to be exceeded by that of his breathtakingly intransigent opponents. In the end, he must rely on the sorry state of Republicans because the price of his deficit rhetoric is an almost total abandonment of the idea that the economic plight of millions will be worsened if the primary near-term concern of government is reduced spending.

Consider the evidence.

By every measure, consumer spending is far below that of any recession in decades. Despite this, consumer debt is increasing because credit-card interest payments have exceeded the minimum payments millions of people can make. With consumer spending accounting for two-thirds of our economy and with confidence heading south, the bleak job picture may further deteriorate if a budding feedback loop takes hold of lower spending leading to fewer jobs and even less spending.

In such an environment, history shows the folly of government adding further to recessionary pressures by reducing spending. That's what the Hoover administration did when it sought balanced budgets in the face of growing recession. Unemployment was a survivable 8.7 percent in post-stock market crash 1930. It ballooned to 23.6 percent by post-austerity 1932.

It happened again with Roosevelt's recession of 1936. Sustained government spending had reduced depression-era unemployment from a high of 25 percent to about 16 percent. But because of a debt-conscious Treasury secretary, Roosevelt's 1936 budget was slashed and, within two years, unemployment had ballooned to 19 percent. Similar austerity was central to the infamous lost decade in Japan and is currently yielding reduced growth in the United Kingdom and in post-stimulus America.

On the tax front, the revenue side of debt management, history is equally unkind to the austerity crowd. Thus, the administration of President George W. Bush slashed taxes, and the economy created 1.9 million jobs; compare that to the 22.7 million jobs created during the administration of President Bill Clinton, who raised taxes. Even President Ronald Reagan understood the need for more revenue when he raised taxes repeatedly to combat predictable deficits following his 1981 tax cut.

When government spending competes with a booming private sector, the competition for money can increase interest rates. That can reduce consumer spending and increase imports, yielding lost jobs at home. But we are nowhere close to such competition. Interest rates are at historic lows and the only hint of an increase relates to the debt-ceiling melodrama and concerns about default. The private sector is not hiring because of little demand and because profits are soaring without the need to hire. The role of government should be to create demand until private hiring takes hold.

To his credit, Obama supports many pro-demand policies: tax incentives for job creation, payroll tax reductions to provide money for those who will spend it, an infrastructure bank (supported by Republicans until Obama suggested it), aid to states to preserve teacher employment, federal research money for 21st-century growth industries like clean energy and biotechnology.

But presidential rhetoric supporting such policies barely exists. The entire debate is about Republican issues, and there is no willingness to argue that short-term spending cuts might devastate recovery, that long-term debt reduction should follow short-term stimulus.

So here we are. The Democratic proposal from Senate Majority Leader Harry Reid of Nevada contains no tax increase and has moved so far right that, without the debt-ceiling increase, it might be mistaken for a mini-tea party proposal. If you ignore the two-stage gimmickry of scheme of Speaker John Boehner, R-Ohio, the distinctions between the two proposals become obscure.

Neither option even considers the feasibility of creating a quick dose of urgently needed jobs in, say, education or construction. Both plans might send us careening back to recession because of near-term spending cuts. A nervously sanguine Wall Street seems convinced that debt-ceiling sanity will prevail with some last-minute accommodation. But whether they are right or wrong, Washington appears committed to applying rhetoric only to the growing distress of so many, many millions.

Ken Schechtman is a freelance writer and a professor at the Washington University School of Medicine.