Government spending, austerity? Both are risky

  • By James McCusker
  • Thursday, January 29, 2015 1:24pm
  • Business

Have we become a nation of malcontents, or is there something wrong with the happy charts showing economic recovery? Why are so many Americans feeling disappointed about the economic recovery and feeling left behind in our nation’s economic growth? And how does this relate to our national security?

There are some answers in the numbers. The Congressional Budget Office has released its 184-page report, “The Budget and Economic Outlook” as well as some useful summaries of its data and the assumptions used in its forecast.

The CBO’s prediction of continued economic growth through 2017 is interesting because it would put the current recovery into the history books as one of the longest ones in our country’s history. It should be take-a-bow time, and there are lots of people lined up to do just that.

Before they do, though, we should take a moment to look again at the numbers, the “Carfax” of this economic recovery. For one thing, for all those months of recovery it wasn’t until last July that the number of employed people reached the number who had jobs in 2007, before the crash. And when you consider that the labor force had grown by about 3 million men and women during that time, the reason why so many people are disappointed is clear.

Even many who have jobs feel left behind in the economic recovery because their incomes haven’t kept pace with increases in prices and taxes. The benefits of economic growth seem to end up in someone else’s pocket. Increases in real disposable income have mostly bypassed the lower wage-earners and gone to those with already high incomes.

The widespread disappointment could be an important factor in what level of economic growth we achieve, and, as importantly, in our national security. To see how that is tied together, though, we need to understand that it isn’t just the people who work hard for a living — or who want to — who are disappointed. Economic policy makers are, too.

Economic policy comes in two flavors: fiscal and monetary. Fiscal policy uses the quantity and focus of government spending to control the level of economic activity; monetary policy uses the money supply and interest rates to regulate the level of investment, which is a key determinant in the level of economic activity also.

These policies work beautifully on the chalk board, but their effectiveness today is impeded by some inherent limitations and serious constraints.

The fiscal policies of presidents George W. Bush and Barack Obama have worked to some degree, but neither had the hoped-for economic impact. And both were, because of financial constraints, one-act plays so there was no real possibility of repairing their shortcomings.

Our post-crash monetary policy has consisted of pushing short-term interest rates in financial markets — not what consumers pay — down to near-zero and keeping them there. The Federal Reserve policy called “Quantitative Easing,” besides expanding banks’ lending capacity, had a significant impact on our fiscal policy. The fed bought over $2 trillion in federal government bonds from commercial banks, essentially taking them off the market and allowing the government to spend money it didn’t have without driving interest rates up. History hasn’t issued its verdict on Quantitative Easing yet but its inventiveness will probably place it somewhere between double entry bookkeeping and “The Emperor’s New Clothes.”

How does all of this fit into the national security picture? More easily than you might think.

The European Central Bank is facing the possibility of a third recession since 2008, and has decided to launch its own $1.24 trillion quantitative easing program. Unlike the U.S. which enjoyed an unchallenged credit standing at the time, the ECB not only must cope with continued slow growth, debt, and economic policy disagreements among its members but also is facing a possible defection by Greece. Voters there, tired of “austerity” programs required to pay off the nation’s debts, have just elected a Marxist-leaning government that promised to end the spending cutbacks required by the ECB loan agreements.

Neither the European Union nor the United States can afford to have an essentially bankrupt Greece part ways with Western Europe. It would open a door to nations and extra-national political movements bearing bailout money and looking for influence in the northern side of the Mediterranean. Ultimately that could pose a serious threat to the security of Europe and to us.

Europe’s economic policy problem is similar to ours; balancing austerity against government spending to spur growth — without going to crazy pants extremes in either direction. As those in the private sector know, cost-cutting does not promote growth, it promotes survival. But government spending hasn’t been all that effective in promoting growth, either. Economics isn’t easy.

James McCusker is a Bothell economist, educator and consultant. He also writes a column for the monthly Herald Business Journal.

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