to our great colleagues at the Institute for America’s Future,
on September 16, 2010, the following statement, signed by more than
300 economists and civic leaders, was publicly released. It warns of
“a grave danger” that today’s still-fragile economic
recovery will be undercut by austerity economics of the kind being pushed
by conservative politicians and by the White House Commission on Fiscal
Responsibility and Reform.
The statement urges the president and Congress to “redouble efforts
to create jobs” through investment in infrastructure, sending
aid to the states and creating public service jobs.
In addition to warning that premature deficit reduction will cripple
growth, the statement also warns that some conservative deficit reduction
proposals would undermine such important programs as Social Security,
even as they fail to reduce deficits. Finally, the statement outlines
a plan for reviving growth and jobs, for effective deficit reduction
after the recovery, and for investment in infrastructure, green technology,
and long-term economic productivity and job creation.
This statement was written by
Robert Borosage and Roger Hickey of the Institute for America’s
Future, Dean Baker of Center for Economic and Policy Research, and Robert
Kuttner from The American Prospect and Demos. Don Mathis signed on for
the Partnership. Other signers include Angela Glover Blackwell of PolicyLink,
Barbara Ehrenreich, Jeff Faux, Jacob Hacker, Julianne Malveaux, Lawrence
Mishel, Robert Reich, Mary Kay Henry, Joan Kuriansky, and Debbie Weinstein.
WARN OUR POLITICAL LEADERS:
DON’T KILL GROWTH AND JOBS IN THE NAME
OF DEFICIT REDUCTION.
the fall of 2008 the U.S. and other major economies were in a free fall
in the wake of a global financial crisis. Emergency stimulus policies
here and around the world broke the fall, but brought us only part way
to full recovery.
Today there is a grave danger that the still-fragile economic recovery
will be undercut by austerity economics. A turn by major governments
away from the promotion of growth and jobs and to premature focus on
deficit reduction could slow growth and increase unemployment –
and could push us back into recession.
History suggests that a tenuous recovery is no time to practice austerity.
In the Great Depression, Franklin Roosevelt’s New Deal generated
growth and reduced the unemployment rate from 25 percent in 1932 to
less than 10 percent in 1937. However, the deficit hawks of that era
persuaded President Roosevelt to reverse course prematurely and move
toward budget balance. The result was a severe recession that caused
the economy to contract sharply and sent the unemployment rate soaring.
Only the much larger wartime spending of the early 1940s produced a
Today, the economy is growing only weakly. 7.8 million jobs have been
lost in the recession. Consumers, having suffered losses in home values
and retirement savings, are tightening their belts. The business sector,
uncertain about consumer spending, is reluctant to invest
in expansion or job creation, leaving the economy trapped on a path
of slow growth or stagnation. Over 20 million American workers are now
unemployed, underemployed or simply have given up looking for a job.
The President and Congress should redouble efforts to create jobs and
send aid to the states whose budget crises threaten recovery by forcing
them to lay off school teachers, public safety workers, and other essential
workers. It also makes sense to invest in public service jobs –
and in infrastructure projects for transportation, water, and energy
conservation that will make our economy more productive for years to
Target what drives deficits. Don’t fix what isn’t
Austerity advocates confuse two different issues—short term deficits
generated by the recession and long term projections of deficits and
Deficits rose last decade largely due to the Bush tax cuts and the unfunded
wars and prescription drug program,but they exploded as a result of
the economic crisis. Once prosperity is restored, deficits will be reduced
substantially. Over the long term, projections of rising deficits and
debt are mainly due to one fundamental factor: rising health care costs.
Contrary to the claims of many deficit hawks, America does not have
an entitlement crisis. America has a broken health care system. Efforts
to reduce public sector costs without fixing the health care system,
such as caps on Medicare and Medicaid spending or replacing them
with vouchers, will undermine the effectiveness of these programs, but
won’t fix the broken health care system. The health care reform
bill passed earlier this year may be a first step towards repairing
the health care system, but much more will need to be done.
Social Security has nothing to do with our current deficit. It is supported
by its own dedicated payroll taxes (which were increased to build up
a trust fund to cover the baby boomers’ retirement). Social Security
has actually reduced the unified budget deficit for the most of the
last three decades and will continue to do so for most of the next decade.
Making sure Social Security is solvent for the next century should be
dealt with separately from any process set up to address short or longterm
deficits, and can be accomplished with minor adjustments.
fiscal responsibility, while investing in the future.
The president’s National Commission on Fiscal Responsibility and
Reform has set a goal of reducing the Federal deficit to 3 percent of
GDP by 2015. It is not clear that this arbitrary target can be met without
damaging our recovery. In any case, the goals of economic policy must
be far broader.
The most important question is this: What will drive economic growth,
job creation and prosperity in the years to come? Conservatives argue
that we should simply reduce deficits and wait for the next economic
boom. But the last boom was built on a bubble, inflated by unsustainable
household debt and financial speculation. If we focus merely on cutting
spending and raising taxes, the economy could shrink again – or
stay stuck in a permanently low level of growth and high levels of
President Barack Obama has called on us to build a new foundation for
the economy. This requires making investments vital to our future –
in education and training, in research and development, in a modern
infrastructure for the 21st century. It requires ending our addiction
to oil, and capturing a lead role in the green industrial revolution,
creating the next generation of green jobs.
Study after study demonstrates that America has a huge “public
investment deficit” in areas vital to our economy. Some estimates
suggest a shortfall in public investment of as much as $500 billion
a year. As long as we have unacceptably high unemployment, outlays for
additional investment can be deficit-financed. But once we achieve a
robust recovery, our country should continue to pay for productive public
investment, while acting to bring down public deficits. This will require
We must have the confidence to forge our future. At the end of World
War II, the US was burdened with debt that totaled over 120% of GDP.
But we made the investments vital to a new economy – the GI Bill,
housing subsidies, the interstate highway system, the conversion of
military plants, and the Marshall plan. We ran annual deficits over
most of the next three decades and the debt grew in absolute size, but
the economy and the broad middle class grew faster. By 1980, the debt
had been reduced to barely 30% of GDP. The better way to reduce the
deficit as a percent of GDP is to increase GDP.
Even with a growing economy, increased investment and deficit reduction
will require new sources of revenue, new priorities and a crackdown
on wasteful subsidies.
Below are a range of measures which could be used to reduce
the deficit and finance needed investments. Not all signers endorse
every one of these options:
Any effort to cut spending should address the military
budget, which consumes over half of discretionary spending. Much of
our huge military spending is devoted to weapons designed to counter
a Soviet Union that is no more. Defense experts estimate we could achieve
significant Pentagon savings – in the range of $100 billion
per year – while still sustaining the most powerful military
in the world. We can use funds freed up to invest in new manufacturing
industries that make our nation more secure.
we should cut back the massive amounts wasted on outmoded subsidies
– billions to the oil industry, to wasteful farm subsidies, and
tax loopholes benefitting a few, with little productive return.
the revenue side, in an era of Gilded Age inequality, progressive
tax reform is long overdue. Revenue for reducing deficits and increasing
investment can be raised by making taxes more progressive and by taxing
activities we want to discourage. Some examples:
• A small tax on financial transactions (e.g. 0.025 percent
on credit default swaps) would reduce high volume speculation and
would produce revenues of at least $177 billion per year..
• The Wyden-Gregg corporate loophole-closing proposals produce
$1.078 trillion over ten years.
• Taxing hedge fund mangers’ “carried interest”
income as regular income gains $3 billion per year.
• End special tax treatment of capital gains income. Revenue:
$480 billion over ten years.
• A 5.4 percent surcharge on high incomes (passed by the House)
produces $500 billion over ten years.
• A carbon tax would help reverse climate change. Revenue: $500
billion over ten years.
• End Bush tax cuts for people making more than 250k. Revenue:
$678 billion over ten years.
• One version of a progressive estate tax on large fortunes
would generate $50 billion per year.
value-added tax that amounts to a regressive sales tax on the working
middle class should not be part of this package. There may be a future
case for a VAT, perhaps to fund progressive social programs or replace
even more regressive taxes, but not for deficit reduction.
Take the high road to fiscal balance.
There are two alternative paths to long-term fiscal balance.
The less desirable path is austerity economics: government
sharply cuts spending long before full employment is reached; production
stagnates; revenues decline. We might reach budget balance but at a
lower level of economic output, with increased taxes on working Americans
and reduced public services.
The alternative, high-road path would increase public spending financed
by deficits for a year or two until unemployment is definitely on a
downward trend and GDP is rising rapidly. We then collect more revenues
from a stronger economy. By identifying investments vital to our future,
and paying for them with targeted spending cuts and progressive tax
reforms, our country provides the basis for new private-sector investments
that help fuel growth, generating greater revenues while reducing the
deficit. The benefit of this second path is that government moves towards
a reduction in annual deficits and a lowering of the debt-to-GDP ratio,
at a higher level of economic output, while building a new basis for