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Volume 80 No. 3 (Fall 2013) Austerity: Failed Economics but Persistent Policy

Volume 80 No. 3 (Fall 2013) Austerity: Failed Economics but Persistent Policy

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AUSTERITY: FAILED ECONOMICS BUT PERSISTENT POLICY

Volume 80, Number 3 (Fall 2013)
Teresa Ghilarducci and Richard McGahey, Guest Editors
Arien Mack, Journal Editor


Table of Contents

I. The Source and Power of Austerity’s Vision

Anwar Shaikh
Crisis, Austerity and the Role of Economic Theory in Policy

This special issue of Social Research focuses on how austerity economics—cutting public spending and budgets, and reducing debt and deficits—has become the dominant policy prescription in the developed world, even though a good deal of economic theory and analysis says that austerity will make things worse. Among the topics discussed are linkages in economic theory regarding austerity, and how Keynes and Keynesians seemed to be excluded from much of the current policy discourse; the political economy of austerity in the U.S. and Europe and why progressive alternatives have a hard time being part of the policy discourse; implications of austerity for an aging society; how austerity and growth policies have developed historically in economic theory and policy; and what we can learn from developing countries, especially in Latin America, where they are pursuing a different strategy.

Gary Dymski
The Logic and Impossibility of Austerity

This special issue of Social Research focuses on how austerity economics—cutting public spending and budgets, and reducing debt and deficits—has become the dominant policy prescription in the developed world, even though a good deal of economic theory and analysis says that austerity will make things worse. Among the topics discussed are linkages in economic theory regarding austerity, and how Keynes and Keynesians seemed to be excluded from much of the current policy discourse; the political economy of austerity in the U.S. and Europe and why progressive alternatives have a hard time being part of the policy discourse; implications of austerity for an aging society; how austerity and growth policies have developed historically in economic theory and policy; and what we can learn from developing countries, especially in Latin America, where they are pursuing a different strategy.

William Milberg
A Note on Economic Austerity in Science, Morality, and Political Economy

The issue of economic austerity has been more debated today than at any time since the 1930s. Austerity policies have had longstanding support from economists, beginning with the writings of Hume, Smith, and Ricardo in the eighteenth and early nineteenth centuries, providing both microeconomic and macroeconomic justification for minimal state intervention and public debt creation. Given this long tradition, we might ask why the debate around austerity has not been satisfactorily resolved. I argue below that the fact that the debate is ongoing does not reflect a lack of theoretical effort. Debates over economic austerity go beyond the standard guideposts of scientific disagreement and reach down to conceptions of economic life, economic morality, and economic well-being. Social science cannot resolve disagreement at this level.

II. US Political Economy

Richard McGahey
The Political Economy of Austerity in the United States

In the face of failed economic performance and intellectual disarray, it is surprising that austerity continues to have such an influence on economic thinking and policies. This article traces the history of austerity policies in the United States, seeking to account for the power that such ideas continue to have. Austerity policies are slowing the economy and preventing necessary public investments that can help support future economic growth. Understanding the continuing power of these ideas and policies is one part of creating a better informed policy debate, and advocating for policies that can help restore economic growth and promote social equality.

Robert Pollin
Austerity Economics and the Struggle for the Soul of US Capitalism

The paper then reviews the recent experiences of U.S. state and local governments, which show how the austerity agenda is attacking the foundations of is already a modest U.S. welfare state. It is becoming increasingly clear that many, if not most, austerity hawks view this period as an opportunity to eviscerate the public sector, labor unions, social insurance and other basic social protections. The paper closes by sketching some ideas capable of countering the austerity agenda, by both moving the U.S. economy toward full employment in the short-term and sustaining full employment in the long term.

Alan Aja, Daniel Bustillo, William Darity, Jr., and Darrick Hamilton
Jobs Instead of Austerity: A Bold Policy Proposal for Economic Justice

Our article discusses the formation of a National Investment Employment Corps as a direct alternative to austerity economics. Given the disproportionate effect of the “Great Recession” on African Americans and Latinos, the federal government’s attempt to stimulate the private sector while Congress cuts essential public services and safety nets only begs for disastrous consequences akin to current crises in Europe and throughout the globe, while worsening conditions for aforementioned and other unprivileged groups. Instead, we propose investing in a National Investment Employment Corps to provide a job guarantee for all citizens with the purpose of maintaining and expanding the nation’s physical and human infrastructure. A National Investment Employment Corps program would not only address employment needs for blacks and Latinos, but also serve as a solution over fiscal austerity by providing full-employment while simultaneously ensuring long-term benefits toward the national well-being.

David Howell
The Austerity of Low Pay: US Exceptionalism in the Age of Inequality

This essay begins by establishing that US income inequality was high relative to other high-income countries in 1980 and became an extreme outlier by the mid-2000s. It then provides a brief account of the main forces underlying America’s path to extreme inequality and low wages. Finally, it shows how low-paid workers in the United States have fared relative to their counterparts in the rest of the rich world. It does so by reference to two sets of findings from my recent research. The first finding is that extreme inequality has not only not bought the United States exceptional productivity growth, but also that the United States shares less of its productivity growth with wage earners than is typical of other rich countries. The second set of statistics shows that the US low-wage share of employment is the highest in the rich world, and reports that the share of young, less-educated workers paid low wages is far higher in the United States than France, mainly due to the diametrically opposed minimum wage policies. At the same time, the evidence does not support the orthodox prediction that French employment performance worsened for these workers, either in absolute terms or relative to their US counterparts. The widespread advocacy for austerity in the current political debate is a reflection of the power of the same free market fundamentalism that generated and promoted the post-1980 laissez-faire experiment. To reduce inequality and promote economic growth and middle-class incomes, the article concludes with a call for replacing this disastrous experiment—including its prescriptions for austerity for the less well-off—with a return to the relative egalitarianism of the pre-1980 era.

III. Escaping Austerity Economics: Alternative Analyses

Stephen A. Marglin and Peter Spiegler
Unpacking the Multiplier: Making Sense of Recent Assessments of Fiscal Stimulus Policy

We will shed some light on meaning of empirical estimates of the multiplier an their proper use. On the general level, we will undertake a critique of the multiplier, explaining the role that various assumptions play in the three leading methodologies for calculating multiplier values. We find that two types of assumptions are crucial: “counterfactual assumptions” that specify the baseline against which the impact of the stimulus is judged and “behavioral assumptions” about the decision-making processes of economic agents. On the specific level, we apply what we learn from the critique to a sample of recent work claiming that certain aspects of the 2009 American Recovery and Reinvestment Act’s (ARRA) stimulus were ineffective—in particular, work by Stanford’s John Cogan and John Taylor claiming that ARRA funds funneled through state governments had no effect because states saved rather than spent the funds. We argue that the conclusions of these studies are highly sensitive to counterfactual and behavioral assumptions that are in some cases questionable and in others clearly implausible. We conclude with some general thoughts on the proper use and interpretation of the multiplier in assessing fiscal stimulus programs.

Christian Proaño
On the Potential Pitfalls of the EU Fiscal Pact: A Simulation Study of the International Dimension of Fiscal Austerity

The main purpose of this study is to analyze the macroeconomic dynamics and stability of an artificial monetary union consisting of two industrialized economies with the similar economic structure (for the sake of concreteness, Germany and France) under a stylized debt brake rule using an estimated semi-structural dynamic macroeconomic model. The rationales for fiscal budgetary rules are briefly discussed and the functioning of a particular type of budgetary rule–the German debt-brake–is explained in detail. In this context, the two main pitfalls of such a rule are discussed: the accurate estimation of potential output and the international dimension of the implementation of such a rule in the context of the euro area. Next, a stylized two-country macroeconomic model of a monetary union along the lines of Flaschel et al. (2008) and Proaño (2009) is discussed and implemented for the evaluation in terms of macroeconomic stabilization of a stylized debt rule under the assumption that the fiscal authorities do not directly observe the actual output gap of the economy. Finally, conclusions are drawn from this study.

Willi Semmler
The Macroeconomics of Austerity in the European Union

The main purpose of this study is to analyze the macroeconomic dynamics and stability of an artificial monetary union consisting of two industrialized economies with the similar economic structure (for the sake of concreteness, Germany and France) under a stylized debt brake rule using an estimated semi-structural dynamic macroeconomic model. The rationales for fiscal budgetary rules are briefly discussed and the functioning of a particular type of budgetary rule–the German debt-brake–is explained in detail. In this context, the two main pitfalls of such a rule are discussed: the accurate estimation of potential output and the international dimension of the implementation of such a rule in the context of the euro area. Next, a stylized two-country macroeconomic model of a monetary union along the lines of Flaschel et al. (2008) and Proaño (2009) is discussed and implemented for the evaluation in terms of macroeconomic stabilization of a stylized debt rule under the assumption that the fiscal authorities do not directly observe the actual output gap of the economy. Finally, conclusions are drawn from this study.

IV. Moving Forward and Away from Austerity

Terra Lawson-Remer
Austerity and Democracy

This article focuses narrowly on three critical economic issues and their relationship to democratic transitions: economic crisis, economic growth and the middle class, and public expectations for social and economic opportunities. History provides compelling insights. First, short-term economic crises are often the proximate trigger of regime change. Second, economic growth under autocracy does not lead to political freedom, but the robust middle class that generally emerges as countries become more prosperous can prevent backsliding to authoritarianism once democracy is established. Third, the promise of political freedoms raises people’s expectations for material opportunities, so failure to deliver on these expectations makes a return to authoritarianism more likely. The transition from authoritarianism to democracy is notoriously difficult. Many countries that were at one time budding with democratic promise now appear mired in political infighting; others are trapped in downward spirals of poverty and unemployment. Substantive democracy, characterized by majority rule with strong minority and civil rights protections, comes only slowly for most transitioning countries. As reformers in countries around the world struggle to consolidate fragile democratic possibilities, and as the international community tries to support them, gleaning policy-relevant insights from the trajectories of other democratic transitions is now more important than ever. In order to distill practical lessons for policymakers and reformers, this article looks carefully at the statistical evidence and at landmark country transitions that occurred over the past 25 years—Brazil, Mexico, Indonesia, Thailand, Poland, Ukraine, and South Africa—with a diverse range of experiences and outcomes. The evidence from the case studies and the statistical research helps clarify why some democratic transitions have succeeded while others have stumbled, and reveals several important insights. Equity, inclusion, and a strong middle-class are linchpins of an enduring social contract.

Michael A. Cohen
Austerity and the Global Crisis: Lessons from Latin America

One of the most surprising realities of the past four years of the global economic crisis has been the strong performance of many Latin American countries—in many cases exceeding the growth of the United States and Europe. The experiences of Latin American economies with austerity is described by declining performance followed by a decade of experimentation and increasing awareness and confidence about the role of national economic policies in managing crises and shielding national economies from global volatility. Record-level growth was interrupted by the effects of the global financial crisis after the collapse of Lehman Brothers in October 2008. The effects of the global economic crisis on the region led to the explicit decision by most Latin American governments not to follow austerity policies in order to sustain growth. This decision has largely been successful, although sound fiscal performance has been affected by monetary pressures that appreciated Latin American currencies. Latin American experience of more than 60 years strongly suggests that policies restricting spending can have major negative impacts on national economic growth and social welfare. Those promoting spending, on the other hand, have a greater likelihood of maintaining aggregate demand at the macroeconomic level while providing key services and infrastructure needed for minimal levels of well-being.

Teresa Ghilarducci
Austerity Distorts the Common Economic Interests between Generations

Austerity political economy is a platform for justifying cuts in the social wage. Raising the social wage raises nonlabor income, living standards for working families, and makes retirement—and other forms of paid nonwork—possible. A higher social wage increases the relative bargaining power of workers in the labor market. It is not a surprise that advocates for cutting social spending expenditures attempt to divide the interests and political strength of working families. A particular form of the division is the false claim that spending for the old takes away from spending on youth. There is no evidence for the argument that in the light of shrinking federal spending, any dollar preserved for the old will be taken away from the young. This claim is fierce and wrong. The myth that we have arranged our society in a reptilian way—so that the old eat the young (as lizards and other reptiles do when food is scarce)—has been advanced for over three decades by conservative critics and business-aligned interests. The deprivation of American children is not caused by the existence of programs for the elderly; in fact, whenever support for old age programs increase, so does support for spending that helps children out of poverty. I argue that prominent “generational-divide” economists are mistaken because the economics of their narrative are wrong. The well-being of our children and grandchildren depends on political alliances and economic growth that distributes the productivity gains of workers to workers, retired workers, and children of workers, not cuts in Social Security and Medicare.


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