Resist austerity politics, focus on job creation

For over a year the U.S. political class has been gripped by a near obsession with deficit politics.  First, members of Congress passed temporary resolutions for months as they debated how much federal spending to cut in fiscal year 2011.  Next, the debt ceiling debacle left President Obama reeling and Republicans emboldened by a successful hostage strategy as political leaders across the ideological spectrum competed to pass plans that would slash government spending.  Now a “super committee” will meet to cut at least $1.5 trillion over the next ten years with a $1.2 trillion trigger if gridlock results.

Meanwhile, millions of Americans remain out of work.  The only thing more tragic than the remarkable waste of human capital is the lack of attention paid to the problem by top policymakers.

And yet another crisis is brewing.  Congress will soon take up the 2012 federal appropriation.  Paul Ryan has already set the stage with the Path to Prosperity, his bare bones spending plan that turns Medicare into a voucher program and proposes $5.8 trillion in spending cuts over the next ten years (along with over $4 trillion in additional tax cuts).  The Obama administration has countered with a budget plan that involves targeted spending cuts and small investments in clean energy and education.

The discourse in the U.S. has shifted farther and farther away from sensible policies to stimulate a struggling economy and will likely lead us to contemplate full scale austerity measures—a shift that may commence during the upcoming budget battle.  To illustrate why this would be an extremely poor decision, recent events in the United Kingdom are instructive.

After the financial crisis of 2008 and the economic tumult that followed, Great Britain began a small but significant recovery in 2010. It posted a 1 percent growth in GDP, smaller than pre-recession growth rates, but much greater than the 2.5 percent GDP drop in the first quarter of 2009.  At the same time, industrial production and consumer confidence were trending in a positive direction, back toward pre-crisis levels.

However, after announcing an austerity program in October 2010 that was implemented shortly thereafter, this positive trend completely reversed.  In a rapid turnaround most British government agencies implemented cuts of 25 percent or more while completely stripping funding for the arts.  Since that time, unemployment has remained high, consumer confidence has dropped to levels not seen since the worst moments of the financial crisis, and industrial production has fallen precipitously.

If the United States goes down this path, we will see similar consequences not only in abstract figures but in the lives of real people.  The United States is still in a deep hole, but we have the ability to lay the foundation for recovery.

For example, as we experienced structurally high unemployment in the construction sector, our infrastructure received a D rating from the American Society of Civil Engineers.  The creation of an infrastructure bank and a national public works program would address this urgent problem and lay the foundation for economic growth in the future.

Make no mistake, the ballooning federal deficit is a serious problem in the long term.  But the real crisis in this country is a driven by unemployment and a lack of consumer spending.  Currently, investors are banging down the doors of the Treasury to buy bonds, bringing interest rates to all time lows.  As a result, we have an opportunity to invest in America’s most valuable asset, human capital, and put the unemployed back to work.

“Long-run debt sustainability is of bona fide concern to economic stability, but as we know, in the long-run we are all dead,” George Magnus noted in a recent report for UBS.  “If we don’t pay attention to growth in the short-run, we may never get to worry about long run sustainability because options [will] be shut down.”

Without measures to reduce unemployment and stimulate spending, aggregate demand will continue to deteriorate.  The resulting spiral will only take us farther away from economic recovery and a sustainable fiscal picture.  The U.S. must learn from Britain’s mistakes and resist the path to austerity.