How to Avoid the Austerity Trap But Still Deal with the Budget Deficit

We now know austerity economics is bad for weak economies facing large budget deficits. Much of Europe is in recession because of budget cuts demanded by Germany. And as Europe’s economies shrink, their debts become proportionally larger, making a bad situation worse.

The way to avoid this austerity trap is to get growth and jobs back first, and only then tackle budget deficits.

The U.S. hasn’t yet fallen into the trap, but it could soon. Last week the non-partisan Congressional Budget Office warned we’ll be in recession early next year if the Bush tax cuts end as scheduled on January 1, and if more than $100 billion is automatically cut from federal spending, as required by Congress’s failure last August to reach a budget deal.

Predictably, Capitol Hill is deadlocked. Democrats refuse to extend the Bush tax cuts for high earners and Republicans refuse to delay the budget cuts.

If recent history is any guide, a deal will be struck at the last moment – during a lame-duck Congress, some time in late December. And it will only be to remove the January 1 trigger. Keep everything as it is, the Bush tax cuts as well as current spending, and kick the can down the road into 2013 and beyond.

Which means no plan for reducing the budget deficit.

I’ve got a better idea — a different kind of trigger. Instead of a specific date, make it the rate of growth and employment we should reach before embarking on deficit reduction.

Say 3 percent growth and 5 percent unemployment. At that point the Bush tax cuts automatically expire, the wealthy pay a higher rate, and $2 trillion in spending cuts begin.

This way we avoid the austerity trap that Europe has fallen into. And we get on with the long-term job of taming the budget deficit when the economy is healthy enough to do so.

This post originally appeared at Robert Reich’s Blog and is posted with permission.

3 Responses to "How to Avoid the Austerity Trap But Still Deal with the Budget Deficit"

  1. burkbraun   May 29, 2012 at 11:53 am

    It is a fallacy that the deficit needs to be "dealt with" in any case. Is inflation high? Are we running out of dollars? What is the problem?

    Mr. Reich is unfortunately buying into the very construct that is killing this economy (and killing Democratic prospects)- that deficits are bad and need to be "addressed" lest the governemnt actually do something positive. Well, deficits are very good right now, and will be precisely until inflation and growth return. Then lower deficits will probably still be required to offset negative trade balances and economic growth. This is basic MMT theory.

    Secondly, the whole idea of making up fancy bonds to issue to rich people, paying them an annuity for doing nothing, is completely antiquated. It is a holdover from the days when money was gold and the government couldn't make more any time it pleased. Now it can, and bonds serve no purpose except propping up the banking system and the rich. They do nothing to dampen inflation, because they simply exchange one form of saving (bond) for another (dollar bills) both equally printed and issued by the government. Both are savings, and thus do not alter spending that creates inflation.

    Only during world war II was there a tradeoff between inflation and bond issuance, because of the high social pressure to give up consumption in favor of bond purchases.

  2. Aransan   May 30, 2012 at 3:27 pm

    France hasn't run a surplus in over 30 years and their new President is planning to return to surplus in five years. Who would believe them and would you buy their Governments bonds? The chickens have to come home to roost some time when a country has been subsidising their standard of living by borrowing for decades and the euro has enabled them to do that. There doesn't seem to be any way out without pain.

  3. R. Coutinho   May 30, 2012 at 5:43 pm

    France and the USA are two different entities. France can not issue its currency, the US can.