Austerity for Whom?

Last fall we spent the long Columbus Day weekend in Baltimore and Washington (see here and here). The purpose of our visit was twofold, to visit our daughter at Goucher College and take our youngest daughter on a couple of college visits. After our visit to Johns Hopkins Saturday morning we met our middle daughter and drove down to the Inner Harbor for the afternoon.

Walking from the garage near Camden Yards to the Inner Harbor we passed the Occupy Baltimore encampment. Just kitty-corner from the Harborplace Mall and the USS Constellation Museum, you could look across and see the marina and the new Ritz-Carlton Residences. As we were walking along I said to our middle daughter, pointing first to the Occupy camp and then the marina, “99 percent, meet 1 percent. 1 percent, meet 99 percent.” Seeing the two so close together really brought home the stark differences between them and a couple of recent columns (1 and 2), along with another installment in my friend Brian’s “Capitalism Destroys Everything” series of posts got me thinking about this again.

While I have been largely sympathetic to the grievances expressed by the Occupy movement I have also been frustrated by the apparent lack of a coherent message and actionable political agenda. In so many cases it simply seems to have been an exercise in venting anger at a futility we cannot name and a desire to find someone else to blame. But it’s impossible to deny that there are some very deep and very real problems that, if they remain unaddressed, will threaten the future of countless thousand or millions, to say nothing of the republic. And let me be blunt, my concern is for three of those thousands or millions in particular, but to which their fortunes – or lack thereof – are undoubtedly linked.

Before the economic collapse four years ago we were all riding high (some more than others, as has been increasingly the case over the last four decades) on real estate values, easy credit, and consumer spending. Aggregate demand for goods and services collapsed. What happened is no mystery. As credit dried up, demand dried up, supply decreased through layoffs, plant closures, the implosion of entire industries, etc., etc. Millions of people were thrown into unemployment and foreclosure. This was the mess a new president would have to face.

For the first few months it seemed we might see a classic Keynesian response to the collapse, a response that has been used by leaders on both sides of the aisle: Temporarily replace the reduction in aggregate demand with public spending. In turn this would reduce the severity and length of the recession through infrastructure investment and other stimulus programs. In the ensuing scramble the same people who should have been worrying about debt and deficits while they were racking them up on tax cuts and unfunded wars suddenly grew a conscience. Now, they said, we couldn’t afford to have the stimulus we really needed and, for the last two years we have been treated to delay, dysfunction, and an increasing sense of dread.

Austerity, we are told, is “the way out.” Reduce spending, improve confidence, keep our creditors happy and all will be well. Oh, and while you’re at it, cut taxes some more and reduce “job-killing” regulation. Cutting spending, reducing debt, and balancing budgets are all things that resonate with people. They understand it, they’ve had to do and, if they haven’t been able to, many of them have suffered financially.

One of the problem with the austerity “cross-our-fingers-and-hope-for-the-best” model is that demand leads supply. If no one buys your goods, you’re not going to make them. You’re not going to build factories and you’re not going to hire people, you’re going to preserve their capital and make investments that do result in profit. If you’re a business that’s what they’re supposed to do. If you can make a profit, as corporations have been for the last couple of years, without building more factories and buying more machinery (both of which increase demand), and/or hiring more people (or substituting technology or cheaper labor elsewhere), you will (okay, maybe you won’t, because you’re an altruistic special case).

Businesses are “job creators” only when they need to be. They only hire when there is more demand than they can supply. Cutting their taxes or further reducing regulation won’t increase demand and won’t lead to job creation, not without customers. So what does austerity – cutting spending, reducing debt, “getting our financial house in order,” “having government live within its means just like households do” – have to do with all this? Cuts in government spending mean even less money in the economy to pave roads, run schools and, yes, feed people. It’s economic stimulus in reverse.

In the short term who is affected most by austerity policies? Those would be the people who pave and repair our roads, who teach our children, and those who will otherwise go hungry. They’re not the people in the Ritz-Carlton Residences in the Inner Harbor or the people entertaining on their yacht at the marina – but these people also aren’t the problem. Instead of framing the issue as one of class warfare we should be looking at growing income equality and the underlying problems of poverty, unequal opportunity and systemic injustices that threaten both the 99 percent and the 1 percent. I’m reminded of a scene in Dickens’ “A Christmas Carol” where the Ghost of Christmas Present draws back his robe to reveal two starving children. Answering Scrooge’s question about who the children belong to the ghost says, “They are Man’s. This boy is Ignorance. This girl is Want. Beware them both, but most of all, beware this boy!”

We cannot ignore the ballooning debt and government spending indefinitely, but we have needlessly hamstrung our response to the economic situation. The problem isn’t that we’ve done too much. We’ve done too little and become distracted by austerity as the latest fad – much like all those post-New Year’s diets that are now all but forgotten.

Our infatuation with austerity will deepen the causes of income inequality for a very long time to come and lead to a far worse result for all concerned. Rather than let this happen, harness the profits, harness the billions and billions sitting idle on corporate balance sheets (including bailed-out TBTF banks), let them become the engines of infrastructure and economic reinvestment, put people to work, restore demand, and then see what we can do.

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