Graph of the Day: The New Politics of Austerity
By Benjamin Landy
With millions of Americans out of work, slow economic growth, and now Standard and Poor’s downgrade of U.S. debt, consumer confidence is plummeting to new lows, making the prospect of a double-dip recession all the more likely. According to the latest Gallup poll, Americans’ economic confidence fell to -53 this week, a level not seen since the peak of the recession in 2009, while 77 percent now believe that economic conditions are only getting worse – nearly 20 percent more than this time last year. Without fast, meaningful action by Washington, aggregate demand will fall and consumer confidence will further collapse — yet both House Republicans and the Obama administration continue to insist on contractionary austerity measures that will do nothing to create jobs or help ordinary Americans.
When consumer confidence is this low, government spending is generally used to temporarily boost demand, creating a positive feedback loop of economic growth; this is the crux of Keynesian economics. Governments, unlike families, can run large deficits during recessions so long as revenues increase once the economy recovers.
Recently however, it has become clearer that the last 30 years of borrowing have been something of a crutch. We have been artificially bolstering demand that should otherwise have been significantly decreased by the demographic force of the Baby Boomer retirement, and the ever-growing income inequality that has drained the resources of the middle and lower class. By eliminating the Bush Tax Cuts, we could generate substantial new revenues to inject back into the economy. Instead, the bottom 90 percent of American households are deleveraging, painfully, and will continue to do so for some time.
But the United States — again, unlike a household — does not have to do this. As the recent surge in bond prices indicates, there is still massive demand for American debt, despite S&P’s downgrade. In a consumption-driven economy such as ours, we should be spending more now, to create new jobs and self-sustaining growth, not tightening the purse strings even further. Anti-Keynesian fiscal conservatism cannot create growth during a recession. Instead, it will strangle what little demand is left in the economy, and consumer confidence with it.
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