It’s the Austerity and Lack of Trust

The chart below shows government spending after our last four recessions (that’s total federal, state and local spending, corrected for inflation, with the numbers at the bottom representing yearly quarters after the recessions).

After three recessions, government spending went up. After the most recent recession, it’s gone down:

blog_austerity_state_local_federal_spending_0

It makes sense for families to cut spending if they run into economic difficulty, but it makes no sense for the government to do the same. In situations like we’re in now, the government has to counteract the natural tendency of families and businesses to cut back when economic times are hard. Common sense and economic theory tell us the government should spend more after a recession in order to help the economy recover, even if that means increasing government debt until things get better. Yet we’ve been following the opposite policy the past few years. The result has been a relatively weak recovery that has left too many Americans unemployed and underemployed.

Why have we acted so stupidly? The obvious answer is that there were Republicans in the White House after those earlier recessions. Now there’s a Democrat. That’s why Republicans in Congress supported government spending after the earlier recessions, but have vigorously opposed it this time. (After all, Republicans love certain kinds of government spending, despite what they claim.) Hypocrisy, foolishness, the desire to recapture the White House, combined with the failure of Democrats to make the case for more stimulus. It’s all those things and more. 

The chart is from “How Austerity Wrecked the American Economy” at Mother Jones. The author updates the story here.

Meanwhile, Paul Krugman sees a connection between the declining acceptance of evolution among Republicans and their rejection of stimulus spending: in order to be a good Republican these days, you have to deny climate change, evolution and modern economics.

Another economist who has repeatedly pointed out the stupidity of what we’ve been doing is Joseph Stiglitz. In a New York Times article called “In No One We Trust”, he explains how we’re losing trust in each other and our institutions as inequality increases. The article is especially interesting when he shows how a lack of trust and an excess of bad behavior got us into the economic mess we’re still trying to get out of:

Trust is becoming yet another casualty of our country’s staggering inequality: As the gap between Americans widens, the bonds that hold society together weaken. So, too, as more and more people lose faith in a system that seems inexorably stacked against them, and the 1 percent ascend to ever more distant heights, this vital element of our institutions and our way of life is eroding….

The banking industry is only one example of what amounts to a broad agenda, promoted by some politicians and theoreticians on the right, to undermine the role of trust in our economy. This movement promotes policies based on the view that trust should never be relied on as motivation, for any kind of behavior, in any context. Incentives, in this scheme, are all that matter.

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