A buddy of mine really freaked me out the other day when he demonstrated he’d bought into the Austerians hook, line, and sinker. I. e., that the way out of a recession is gut government spending. During the discussion he threw out “I took macro economics, I know how it works.” I didn’t argue with him because, one, I love the guy to death, he and his wife are some of the most decent compassionate people I’ve ever known, and two, I judged it would have been pointless. But if I was going to try to argue on those terms, here’s how it might go …
What is the standard practice for the Federal Reserve when indicators pick out a deepening economic downturn? If you said lower interest rates, you are correct! We can deep into swamp on this, what effect it has on demand deposits in the federal banking system, how it spills over into other interest rates determined by lenders like banks or bondholders bidding on paper. But suffice it say the fed does this in the hope of increasing private sector demand. The reason is simple: increased demand fights off recession.
But sometimes there is a particularly nasty economic calamity and that’s exactly what happened in October of 2008. Banks were on the verge of failing, which means unless the government propped them up, demand would really drop because ATMS would stop spitting cash and checks would stop clearing regardless of how many electrons were lined up on the positive side of a business or person’s bank account. The first thing the government did, beyond lowering the discount rate, was to juice the entire banking system with a shitload of money. Almost a trillion in cash and trillions more in no interest, no payment schedule loans as part of the Troubled Asset Relief Program or TARP signed into law by George Bush.
Short story, it worked, it bought the big banks time and it brought us depositors liquidity; our ATMs and checking accounts kept chugging along. As important if not more so, lines of credit for business big and small were preserved. In other words, demand was not allowed to dry up.
TARP was corrupt and vexing and pissed off both the right and left plenty. But it was enough to stabilize things for a while, it just wasn’t going to get us out of what everyone knew would be an absolutely brutal recession. The next step in preserving demand was the stimulus, a series of tax cuts, benefits extensions for those being laid of by the millions, and projects at home instead of places like Afghanistan and Iraq. Again, the whole idea is to preserve demand. If people just flat stop buying everything from cell phones to cars to yachts, demand drops and that could have kicked off a full on Depression that could last for a decade or more.
At the time many economists warned the stimulus wasn’t big enough. Some of us pointed out the peculiar lesson being conveyed, that there is now no moral hazard, no risk in taking risk if we’ll socialize corporate losses but keep the profits private. But demand is demand and it had to be preserved literally at all costs.
Now enter the Austerians. Their argument is that, somehow, slashing government spending and thus laying off thousands and thousands of people directly or indirectly employed by the government, while also cutting unemployment benefits, Medicaid, food stamps, whatever you pick, would somehow have the same effect as increasing demand.
No one actually believe this. It’s one of those weird pieces of mythology the right spews and for some bizarre reason the rest of us have to pretend there’s an actual argument behind it. What’s even funnier is the same people pushing the idea that cutting spending is somehow going to increase demand also insist that cutting taxes and putting more money into the hands of rich people will … increase demand. The cynical humor of this glaring inconsistency is apparently lost on the Austerians, but there it is.
We all know and agree on why the fed lowers interest rates in a recession, we all know why the fed insures bank deposits (They didn’t used to and that ended badly), we all know why the fed makes sure the banks can keep operating: it’s to preserve consumer demand. Very few people who understand that basic idea really believe that gutting spending from anyone, whether it’s the government at any level or the Keebler Elves, will increase demand and lead us out of recession. The only reason they claim to believe it isn’t because of any rationale or historical data. They’re doing it because their conservative team is wavign them on.
On that point, really, listening to Republicans and Wall Street CEOs opine on the economy, much less scold the rest of us on debt management and economic stewardship after they turned a budget surplus into the worst deficit and economic disasters since 1929 and produced the most toxic debt in history, is like being forced to hear LBJ scold the country on failing to provide an exit strategy out of Vietnam.