Nor was it just Republicans. In the end, for reasons both political and ideological, Obama decided that he needed to demonstrate that he took the deficit seriously, and in his State of the Union address he did just that.
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To that end, he announced a three-year spending freeze and the formation of a bipartisan committee to address the long-term deficit. Sure, there were still a few economists who believed that even in a deep recession government spending merely crowded out private spending and thus did no good, but they were a distinct minority. Most economists acknowledged that deficit spending was appropriate at a time like this. After an exhaustive review of government debt levels throughout history, they concluded that there was a hard threshold beyond which government debt got so high, it could actually tank the economy.
When debt was between 0 and 90 percent of GDP, there was no problem. But when debt exceeded 90 percent of GDP, economic growth was cut in half. Obviously, we were doomed. There had always been plenty of those. But Reinhart and Rogoff really seemed to deliver the goods. It was no longer a matter of whether deficit spending was helpful in principle—an argument that had been going on for decades and showed little prospect of ever being resolved. In this particular recession, we were already past the 90 percent danger point where further debt would have disastrous future consequences.
And with that, the trajectory of the next three years was set: It would be austerity as far as the eye could see. They were cited by columnists. They testified before Congress. American deficit hawks were singing the same song. Kent Conrad D-N. The result was predictable: spending cuts and more spending cuts. This was unprecedented, as the chart above shows.
After every other recent recession, government spending has continued rising steadily throughout the recovery , providing a backstop that prevented the economy from sliding backward. It happened under Ronald Reagan after the recession of , under George H. Bush after the recession of , and under George W. Bush after the recession of But with federal outlays squeezed by all the budget deals, total government spending peaked in the second quarter of and then started falling, falling, and falling some more.
Along the way, there were plenty of Cassandras who warned that austerity was strangling the recovery in its cradle. They pointed to history: When FDR cut spending too soon in , it famously throttled recovery from the Great Depression. They pointed to Europe: Austerity there had crippled the recovery and kept unemployment at stratospheric levels in Greece, Portugal, Spain, and other countries. And they pointed to Ben Bernanke, the Republican-appointed Fed chairman and Great Depression scholar who all but begged Congress not to sabotage the recovery with foolish spending cuts.
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The day after the UMass study was published, economist Dean Baker of the labor-funded Center for Economic and Policy Research pointed out that although Reinhart and Rogoff showed countries growing more slowly when debt passed 90 percent, it was a very gradual slowdown, not some kind of cliff. No economist in the world believed that a debt level of only 30 percent had a serious impact on growth. And even if their data were right, there had long been a more fundamental question about their analysis.
Debt is just debt. None of this means that countries can simply pile on as much debt as they want. In fact, it might be just the opposite. Increasing the debt in a situation like the one we face now might, by spurring a faster recovery, produce lower debt in the long run. A prolonged weak economy obviously causes pain in the present—people out of work, wages stagnant, houses foreclosed—but it can also cause permanent damage in the future. This is one way in which cyclical unemployment—the normal kind that goes away when an economy recovers—can turn into permanent, structural unemployment.
Thanks to spending cuts, GDP may not catch up to long-term growth until In some cases it can be even worse.
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Thanks to massive austerity forced on Spain by the European Union, the unemployment rate there stands at 27 percent. Nearly 10 percent of the country has been without work for more than two years. And among the young, the unemployment rate is 57 percent. Let that sink in for a minute. More than half of the young people in Spain are out of work.
The figures are just as bad in Greece, and only modestly less catastrophic in Ireland, Italy, and Portugal. Countries have succumbed to armed revolution—and dragged the world into crisis—for less. So what has austerity cost us in the United States? The full price is hard to calculate, but the Congressional Budget Office figures that sequestration alone has cut GDP growth by about 0. Since sequestration accounts for less than half of total belt-tightening over the past couple of years, a rough guess suggests that our austerity binge has cut economic growth by something like 2 percentage points—about half the total growth we might normally expect following a recession.
But we got it from not running up the debt.
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The chart above illustrates what austerity has done to the economy. These blips are quickly erased as the economy returns to its long-term trend. But this time around, our rebound has been agonizingly slow. If we had spent more in order to close the output gap faster, it would have meant more jobs— perhaps as many as 3 million more —higher wages, healthier retirement accounts, and, ironically, a shrinking deficit thanks to higher tax revenues and lower spending on food stamps, Medicaid, and other programs for the poor.
Our obsession with austerity has hurt us in other ways, too.
Interest rates, for example, have been at historic lows for the past four years. Until recently, in fact, real interest rates were actually negative , which means the federal government could have spent money and then paid back less than it borrowed in the first place. This was a once-in-a-generation opportunity to repair our decaying infrastructure at bargain rates: roads, bridges, airports, rail lines, local transit, electrical grids, gas pipelines, internet backbones, and much more. Clinton's campaign advantageously used the then-prevailing recession in the United States as one of the campaign's means to successfully unseat George H.
It's the jobs, stupid. (Not the debt or deficit) ~ Mike Norman Economics
In order to keep the campaign on message, Carville hung a sign in Bill Clinton's Little Rock campaign headquarters that read:. Although the sign was intended for an internal audience of campaign workers, the phrase became a de facto slogan for the Clinton election campaign. The phrase has become a snowclone repeated often in American political culture , usually starting with the word "it's" and with commentators sometimes using a different word in place of "economy". Examples include "It's the deficit, stupid! From Wikipedia, the free encyclopedia. The Washington Post. The New York Times.
It's the Deficit, Stupid! Mother Jones.