The Austerity Myth

William Mitchell has a very useful piece in The Nation, in which he thoroughly debunks the rationale for austerity measures currently pursued in the U.K., the U.S., and elsewhere. Having reduced public revenue through massive giveaways to corporations and the wealthy, those in power claim there is no choice but to make huge cuts in public spending that benefits the poor and middle class. The continued high levels of unemployment reduce revenues further by shrinking the pool of taxpayers. Mitchell points out that while "taxing the rich" may be the right thing to do, it is not the only way we can restore balance. Embracing deficit spending in the short term, to grow the economy and put people back to work, is a sensible and proven method to improve the economy for more than the wealthiest.

Austerity is not the only alternative. The major economies are suffering from a collapse of private spending and a massive overhang of private debt. Consumers won’t spend if they fear unemployment; firms won’t hire and produce if sales are flat. Persistently high unemployment means that our economies are forgoing massive production and income-earning opportunities. Unemployment also causes other problems, such as family breakdown, increased alcohol and substance abuse, increased crime rates and community dislocation. An economy with high unemployment is unhealthy. Austerity will worsen unemployment. It beggars belief that a government entrusted with advancing the well-being of its citizens would deliberately introduce policies that force people into joblessness.

As long as private spending is subdued, the greatest need is to expand budget deficits. That’s the only way the advanced economies will drive growth fast enough to absorb the huge pool of unemployed. Inflation is low, and there is considerable slack in the economy, which can be brought back into productive use by further government stimulus. The current obsession with inflation control and austerity (using unemployment to discipline wage demands) is very costly.

In advocating further fiscal stimulus, I would use the increased public spending to directly target job creation. I would introduce an open-ended public employment program—a Job Guarantee—that offers a job at a living (minimum) wage to anyone who wants to work but cannot find employment. These jobs would “hire off the bottom,” in the sense that minimum wages are not in competition with the market-sector wage structure. By not competing with the private market, the Job Guarantee would avoid the inflationary tendencies of old-fashioned Keynesianism, which attempted to maintain full capacity utilization by “hiring off the top” (making purchases at market prices and competing for resources with all other demand elements). Job Guarantee workers would enjoy stable incomes, and their increased spending would boost confidence throughout the economy and underpin a private-spending recovery. There is no reason the government could not afford this program. The labor is available for work, and the government can easily supply the jobs. There were no questions asked when the government, in the early days of the crisis, instantly provided billions for the banks. Let me repeat: the government has no financial constraint on its spending and should immediately allocate funds to a massive job-creation program.

Sustainable growth requires that the private sector save overall and avoid ever-increasing levels of indebtedness. It is possible that strong net exports could allow high levels of domestic activity with both private saving and the government’s budget in surplus. But that situation cannot hold for all countries. Normally, budget deficits will be required. Progressives should stop apologizing for them.