There have been two debates in political circles about the American economy, debates that seem to have stalled in the partisan perspectives of the two major political parties and are effectively preventing any decisive action to reduce the debt and deficit.

The first debate is about austerity versus stimulus to restore the damaged economic engine thrown off track in 2007 by the colossal failure of the then regulation free U.S. banking system.

The second debate is about how to manage the federal budget to reflect these two polarized positions of austerity and stimulus. Republicans would have the country cut its way to prosperity, arguing that investors will have renewed confidence in the economy once the federal budget is cut enough to be balanced.

Democrats would stimulate the economy with infrastructure improvements and research investments, while more gradually reducing the deficit and debt.

But all ideas are not equal, and the austerity path has far too many examples of failure to be considered a viable alternative to stimulus. Europe has insisted largely on austerity only and their “recovery” has been non-existent.

The problems in Greece, Italy, Portugal, Spain and Britain have all had similar results…the more economic spending is cut, the farther the economies fall into recession.

Unemployment in Spain, Italy and Greece has reached historic levels and seems determined to continue to rise as long as their economies continue to shrink. Britain’s economy is suffering as badly as it did during the Great Depression.

Why? Because the premise of austerity was wrong. The argument required belief in what economist Paul Krugman has nicknamed “the confidence fairy.”

It turns out it was not confidence that was missing, it was customers, and tossing people out of work and reducing the flow of capital into the economy has created fewer and fewer customers in those nations.

While the deficits of these countries have not expanded as much as our own deficits, their economies have shrunk. Add to the shrinking economy the human misery and pain caused by austerity and you have a perfect storm where the deeper the cuts the smaller the demand for goods and services.

More cuts, less demand and so on until Greece demonstrates the threat to democracy from the outcome of austerity.

Conversely, the American economy has managed a rebound and shows signs of throwing off the last of the recession. As economist Sy Harding notes:

“…the positive reports are coming from all the crucial segments of the economy; consumer confidence, home sales, new home construction, the auto industry, manufacturing, the services sector, and even more impressive, in the employment picture.”

Stimulus worked, austerity failed.

But how does that truth, now supported by outcome evidence, guide how to shape the federal budget?

The president this week presented a budget that included spending cuts, infrastructure investments and a 10-year deficit reduction of $4 trillion dollars. Tax changes were also a part of the budget.

Three of the Republican presidential candidates have presented their own budget plans, each representing lower taxes and significant spending cuts.

The Washington Post reports an independent analysis by Budget Watch that estimates each of the plans would most likely result in trillions of dollars of new borrowing.

All ideas are not equal, and the evidence now clearly indicates a nation cannot cut its way to prosperity.

 

Jim Crawford is retired educator and political enthusiast living here in the Tri-State.