[Graphic via Political Correction]
The Village was rocked this Friday before Labor Day with yet more depressing economic news. According to the Bureau of Labor Statistics the U.S. labor market added 0 (that’s right ZERO) jobs in August as the unemployment rate remained saddled at 9.1 percent. As Matt Ygelesias noted right away the strikingly gloomy numbers are “policy results” of conservative economic theories that focuses on “steady cuts to the government sector, offset somewhat by private sector growth.” [See the handy dandy chart above].
It is also a result of the fetish around austerity driven legislative measures that have continued to stagnate our economy. Very interestingly there are couple news items of note today, focusing on other parts of the world with dramatically different economic results stemming from austerity driven measures and from one taking the opposite approach. First, let’s take a look at the part of the world where governments gone on a mad binge of budget cutting measures similar to what we have seen from almost all corners in Washington (except for some resistance in pockets of progressive bubbles). Howard Schneider from the Washington Post reports on how “austerity” may be “killing Europe’s recovery” [emphasis added throughout]:
After more than a year of aggressive budget cutting by European governments, an economic slowdown on the continent is confronting policymakers from Madrid to Frankfurt with an uncomfortable question: Have they been addressing the wrong problem?
The campaign to reduce government deficits has come in response to a European debt crisis that could endanger the global banking system. And the budget cutting has been coupled with a reluctance by the European Central Bank to stimulate economic growth like the Federal Reserve has in the United States; the ECB has instead raised interest rates twice this year to contain inflation.
Those steps have sucked hundreds of billions of dollars out of a European economy that may be edging towards recession.
Such a downturn, by choking off government revenues and increasing the demand for public services, could put struggling countries such as Spain and Italy at risk of missing the very deficit-reduction targets that budget cuts and other austerity measures were meant to achieve.
In the United States, political and economic leaders are facing the similar dilemma of how to rein in the massive federal debt by enacting deep and immediate spending cuts without undermining already anemic economic growth.
The International Monetary Fund, which has generally encouraged “fiscal consolidation” in euro-zone countries, has noted that budget cutting undermines growth and employment. The impact is even more pronounced if many countries are cutting at once and central bank policies are not geared toward growth — just the path Europe is following, according to the IMF.
With the euro-zone economy slowing and governments aggressively cutting, the ECB may need to concede its rate increases and tight money were a mistake, Peter Vanden Houte, an analyst at ING, wrote Wednesday in a research note. “Loose monetary policy seems to be the only medicine left to prevent a painful fall back into recession,” he said.
Meanwhile, the story is a little different in Argentina, a country that took the exact opposite approach to austerity. Come with me on the other side of the flip.
Ian Mount has this on “Argentina’s turnaround tango:”
Argentina has regained its prosperity partly out of dumb luck: a commodity price boom has vastly benefitted this soy, corn and wheat producer. But it has also prospered thanks to smart economic measures. The government intervened to keep the value of its currency low, which boosts local industry by making Argentina’s exports cheaper abroad while keeping foreign imports expensive.
It then taxed those imports and exports, using the money to pay for a New Deal-like public works binge, increasing government spending to 25 percent of G.D.P. today from 14 percent in 2003. As a result, the country has 400,000 new low-income housing units, as well as a long-delayed, 235-mile highway between the northern cities of Rosario and Córdoba.
It has also strengthened its social safety net: the Universal Child Allowance, started in 2009 with support from both the ruling party and the opposition, gives 1.9 million low-income families a monthly stipend of about $42 per child, which helps increase consumption. Because the amount depends in part on how often the child attends school, it is also likely to improve the country’s long-term educational performance.
The results have also paid off politically: President Cristina Fernández de Kirchner recently won about 50 percent of the vote in an open primary against nine other presidential candidates.
Why have Argentines embraced bigger government? In part because the preceding era showed how poorly austerity measures — the sort now being pushed by conservatives in the United States — promote growth. In the late 1990s, Argentina cut government spending drastically on the order of its lenders at the International Monetary Fund. Predictably, between 1998 and 2002, Argentina’s economy shrank by almost 20 percent. It was only after Argentina turned its back on these austerity demands, and defaulted on its debt, that it began to recover.
Now as Mount smartly notes Argentina is “hardly a perfect parallel” for the U.S. However, it does provide extremely helpful data points how cost-cutting during an economic downturn only “inhibits growth” and how real stimulative government spending zeroing on infrastructure development, securing unemployment benefits, social safety nets can help boost the economy. It is also helpful when you take that Argentinean example and compare with what has been happening across Europe.
Once taken into account those examples, and examine what has been happening in the U.S., one has to continue to wonder why the conventional wisdom in Washington, driving both party leadership is so obsessed with austerity driven measures. After all the much hyped “Super Congress” has no mandate to create jobs. In fact austerity and cuts are pretty much guaranteed because of the trigger mechanism designed into this “Super Congress.” As Simon Rosenberg noted on NDN:
As I have written before, I have come to believe in a time when the greatest economic challenge facing the United States is our lack of a strategy to deal with the "rise of the rest" and greater global competition, austerity is a guarantor of accelerated national decline. The only way we are going to succeed in the 21st century as we did in the 20th is by raising our game, by giving our workers and kids more; by making our infrastructure and networks the most modern in the world; by creating a digital age government that does more with less; by making the investments in R & D which have given us so much, including the Internet; by liberating ourselves from the 20th century energy paradigm which has become too expensive, too volatile and too dangerous for the planet; by continuing to reform our health care system so it covers more people, is less expensive and continues to lead the world in innovation.
The question is whether the leadership and their key staffers of both parties have gotten the message.