Learn from previous mistakes

There are ways out, but with three decades of fiscal conservatives arguing for immediate fiscal austerity, it has become a mantra. So there is a a lot of misunderstanding about deficits. If we are going to generate growth and shared prosperity out of the mess we are in, expanded public investment must be a centerpiece of any new economy.

We'd be wise to spend more to forestall layoffs at the state and county levels, to put people directly to work in some kind of urban corps or green corps, to add to public construction projects, to extend unemployment benefits, food stamps and other income supports. Instead, both parties and local governments still pay tribute to false idols that should have been discarded in the recent economic collapse.

We've already done the whole small-government, low-taxes, deregulation and lay-everybody-off number. We got top-end tax cuts, declining wages, collapsing sewers and gridlock, a ruinous financial casino and indebtedness through corporate trade policies (offshoring). The result is growing inequality, a sinking middle class, more than a fourth of America's children in poverty, increasingly destructive climate change, and a world financial crisis and recession with a collapse yet possible. Time to wake up, time to go another way.

History holds lessons. Fiscal austerity risks creating a "vicious" circle in which austerity slows growth, necessitating further austerity. In 1937, in the midst of the Great Depression, the Roosevelt administration succumbed to political pressure to reduce the government deficit, causing a second recession. There is understanding of the need for budget deficits to provide short-term fiscal stimulus to combat recessions. There is far less appreciation of the need for budget deficits in the medium term to facilitate the process of private sector de-leveraging and to spur growth.

The problem with Obama's stimulus is that it is too small to help us here, not too big.

Some references:

Palley, Thomas., "The Fiscal Austerity Trap." Sept. 15 2009, www.newamerica.net/publications/policy/fiscal_austerity_trap,

Auerbach, A.J., and W.G. Gale, "Activist Fiscal Policy to Stabilize Economic Policy," paper presented at the Federal Reserve of Kansas City conference in Jackson Hole, Wyo., Aug. 20-22, 2009.

Aschauer, D.A., "Is Public Expenditure Productive?" Journal of Monetary Economics, 23 (1989), 177-200.

Rogoff, K., "The New Normal for Growth," Project Syndicate, May 2009.

Tobin. J., "Deficit, Deficit, Who's Got the Deficit?" The New Republic, January 19, 1963.

-- D.O. CLARKE, Richland

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Sunday, Nov. 01, 2009

Learn from previous mistakes