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January 30, 2013 9:23 AM So Is Austerity Now a Problem?

By Ed Kilgore

One of the more darkly entertaining things to watch in Washington right now is the dance of those who are alarmed about the pending March 1 “sequestration” of defense funds trying to make their case without admitting the underlying principle that public-sector austerity (defense or non-defense) is bad for a still-deflated economy.

The job of reconciling these points of view got harder today with the release of data by the Commerce Department suggesting that drops in federal spending were mainly responsible for plunging the four quarter GDP numbers into the red. First quarter GDP estimates are already being depressed by the growing impact of the payroll tax increase that hit on January 1, which a lot of people just didn’t anticipate.

It’s awfully tempting to argue for a delay in the defense sequester on “stimulus” grounds—if you are the kind of politician who hasn’t abundantly estopped any such argument with prior shrieks about deficit spending being the economy’s main problem.

Here are the numbers that could be used to make the economic case for a full sequester delay, from the Bipartisan Policy Center:

A slowdown of activity due merely to the possibility of a sequester has already led to reductions in force among defense contractors and sub-contractors, and in some cases significant profit declines. CBO estimated a decline of 0.7 percent in 2013 gross domestic product (GDP) growth because of the ripple effect of the sequester cuts on smaller businesses and on government personnel. For an economy that already suffers from chronic unemployment and very slow expansion, the sequester could push the nation into sub-2 percent GDP growth for 2013 and perhaps 2014.
Our estimate of approximately one million lost jobs due to sequester remains our base case if a full sequester occurs as scheduled on March 1.

But many defense hawks are sticking to the alleged defense case for getting rid of the sequester.

That’s all well and good from a personal consistency point of view. But the reality is that we are seeing the impact of fiscal decisions made on the basis of the erroneous idea that debt and deficits are the main threat to economic growth. And it would be nice to see deficit well as defense hawks admit it for a change.

Ed Kilgore is a contributing writer to the Washington Monthly. He is managing editor for The Democratic Strategist and a senior fellow at the Progressive Policy Institute. Find him on Twitter: @ed_kilgore.

Comments

  • Perspecticus on January 30, 2013 9:47 AM:

    "And it would be nice to see deficit well as defense hawks admit it for a change."

    Agreed. Of course, it would also be nice if the Oakland Raiders were going for a three-peat of consecutive Super Bowl wins this Sunday, but neither of these things is going to happen.

  • sjw on January 30, 2013 9:50 AM:

    Dumb economic decisions by Congress are to blame for the fourth quarter drop, though fortunately for us, there's been enough stimulus pushed by Obama to have kept the economy going respectably for several years. With that said, Obama now needs to ratchet up the rhetoric and push for more stimulus. The scary alternative is Britain, now in its triple dip -- the consequence of crazy, anti-Keynsian, conservative austerity policies.

  • Celui on January 30, 2013 9:50 AM:

    The GOP talking points will certainly ignore the effects of public spending on stabilizing the economy because ---people who have cash will always spend it!! (Except for banks, of course) All this fear-mongering surrounding debt and deficit simply flies in the face of the realities that we are seeing in the Euro economies where their austerity measures are resulting in increasing economic disparities, the diminution of the middle class, and the establishment of the wealthy as the enshrined privileged class. The fact remains: jobs aren't there because banks and the 'job creators' continue to sit on their millions, because the privileged ones continue to buy even more privileges because they 'own' the politicians in Congress, and because the wealthy and their defenders in the states and Congress are now re-structuring American society in a new Robber Baron mentality. I can't imagine how deep this hole could become if Rmoney/Ryan had been elected.

  • c u n d gulag on January 30, 2013 10:04 AM:

    "And it would be nice to see deficit well as defense hawks admit it for a change."

    What?
    And admit that they were wrong for years?
    LOL!!!
    Fat chance!

    They've invested too much time and energy, and made too much money, elevating and advancing their careers as economic experts, wise politicians, and balanced pundits, by screaming that the "The debt be risin'! The debt be risin'!! The debt be risin'!"

    Why, they might get laughed at and ridiculed - MOCKED even!
    Why risk all of that, when they can double-down, and keep making money in our cluefree MSM, still crying, "The debt be risin'!",* while telling everyone that they know what they're talking about, and everyone else isn't serious?

    *Never mind that one of the biggest problems facing us, starting, like, NOW! - is that "THE SEAS BE RISIN'!

  • Peter C on January 30, 2013 10:27 AM:

    Austerity means that we are deferring infrastructure maintenance that will result in repairs costing more in the future than they would now a stitch in time saves nine. With interest rates near zero, austerity is insane, even before considering our high unemployment rate.

    I will agree that Defense cuts (which Id like to see) endanger the recovery when their opponents admit that it is validity of Keynesian Economics which provide the theoretical underpinning of their argument.

    Then, perhaps, we can discuss the relative benefit of spending which either creates economically productive infrastructure or economically stagnant weaponry.

  • lbdinosaur on January 30, 2013 10:31 AM:

    Converting that defense spending to social programs, education improvement and infrastructure updating would go a long way to keeping Keynesian doves happy - and put our country on the path to sustained recovery.

  • kindness on January 30, 2013 11:09 AM:

    I want the sequestration cuts to happen just as they are written now because for all the bad things that will happen to progressive programs I like I see this as the only way Defense is ever going to get cut one penny.

  • T2 on January 30, 2013 11:13 AM:

    what is clear is that following a Paul Ryan economic plan would devastate the recovery. The Media seem to think he is a genius on economic matters, but it is plain that he is not. In fact his ideas are the opposite of what will help. I wonder when the Media will figure that out? I think the public has, as evidenced by the sound beating he took as what's-his-name's running mate.

  • Rick B on January 30, 2013 2:41 PM:

    There are two reasons why conservatives are debt hawks. The first is that the American conservative movement is the panicky reaction of the American rural and small town gentry to to takeover of American society by urbanized elites.

    The total US population in 1940 was 132,164,569. As of mid-2011 it is estimated as 311,800,000. That increased population has essentially all moved into large cities, and the rural communities are often disappearing. The disappearance of the small communities means that the small town gentry are losing social and political power. They are "conservative" because as long as they hold onto the formal power structures of the early nation then the rural gentry effectively run the nation. That's what the existence of the Senate was for (save the rural gentry from the city masses.) That's why the conservative Republicans held onto the House with a minority of the votes.

    That rural gentry consists largely of small town professionals like doctors, lawyers, dentists, CPA's, small business owners and bankers. You know - the same people who filled the ranks of the John Birch Society.

    These people All operate their businesses based on accounting balance sheets. None are large enough for economics to make much difference. They all look at "the bottom line" which is an accounting fiction.

    Which leads to the second reason they are debt hawks. The fictions of accounting create a political club they can use to beat back the "big government elites." Because big government operates in the realm of economics. It doesn't even use the fiction of income statements and balance sheets which small business organizations live and die by.

    Government accounting is so different that it even has its own set of accounting standards supervised by the GASB - the Governmental Accounting Standards Board. Ask a conservative and they will tell you "That's NOT accounting!"

    Paul Krugman has spent the last decade and more describing how the economy does NOT operate on accounting balance sheet rules. Conservatives, from the culture of small business gentry, simply don't believe him. They consider what he writes nothing more than propaganda to be used to take power from them and give it to the masses in the urban jungles.

    Conservatives using balance sheet accounting know that whenever you borrow money it has to be paid back later, but Krugman points out that is only an accounting fact for individuals and small companies. A household cannot spend more money than it receives in the long run. But a government faces the economic problem that if the households do not spend then the businesses shut down and lay off the workers, leaving the entire economy less productive. That is not an accounting fact but it is an economic fact. So the government can create money and give it to the household and create demand, firing up the economy. Later the economy can cover the interest. The debt from WWII, for several years greater than GDP, has never been paid and never needs to be.

    Here is Krugman explaining macro policy in a liquidity trap. Almost no conservative caught in the accounting fiction will believe this, which is why I think even the British and German conservatives are destroying their own economies.

    Even the few not fooled by accounting recognize that they have a powerful political club to use to keep power from the mongrelized people of the cities.

  • Neo on January 30, 2013 2:55 PM:

    President Obama unilaterally cut $500 billion from defense spending before sequestration. The Administration did everything possible to stop defense contractors from sending out layoff notices before the November election, yet we have this reduction in GDP.

  • Doug on January 30, 2013 4:28 PM:

    Neo, citations, please?
    Reduce DoD spending by $50 billion per year, take half of that money "saved" and invest it in repairing/rebuilding our infrastructure. Reduce DoD spending in 2015 by another $50 billion and do the same.
    While $100 billion won't solve all our infrastructure problems, or our economic ones, it WILL go a long ways towards it.