GRASSROOTS/Hank Kalet

Discovering Japan

Austerity measures already have had an impact on the American economy, but mandated cuts triggered by a 2011 budget compromise are likely to make things a lot worse.

With the clock ticking on so-called sequestration – or automatic, across-the-board spending cuts – the budget plan’s impact is starting to become clear.

We are looking at likely job losses that will make economic growth impossible. And even as we shed jobs, sequestration will us with a safety net of less-than-dubious value.

All of this is going to happen because of the wrong-headed belief in Washington that it is our debt and deficit that are greatest problems.

Several reports were issued in September detailing the impact that the 2011 Budget Control Act will have, including the loss of more than a million jobs across the economy and severe cutbacks in Medicare and funding for long-term care, housing for the poor, medical and science research, education and a host of other programs.

The Budget Control Act was the compromise passed by Congress last year that ended a stalemate over increasing the federal debt limit. The bill capped spending, which is expected to lead to $1 trillion in cuts over a 10-year period ending in 2021. It also created a joint committee charged with cutting the federal budget deficit by an additional $1.2 trillion. The committee – the Joint Select Committee on Deficit Reduction, known as the Supercommittee – reached an impasse in November 2011 and a set of automatic cuts, known as sequestration, is scheduled to be triggered in January.

Jeff Madrick, writing in Harper’s magazine, says the government is in the grip of an “austerity myth” that views “the federal deficit as the nation’s most urgent problem.” The problem is that “federal as well as state and local spending has been falling for a year or more, and if we go over the ‘fiscal cliff’ mandated by the 2011 budget compromise and the expiration of the Bush tax cuts, government stimulus will shrink much further.” The result: “government will suck hundreds of billions of dollars out of the economy.”

That is the wrong approach to the stagnation in our economy. Conservatives use the failure of the 2009 Obama stimulus to push unemployment down below 8% or to create consistent growth. The problem was not the use of stimulus but its size.

“The stimulus, in fact, was too small when measured against the depth of the recession,” he writes.

This is the point that economists like Dean Baker, Paul Krugman and Joseph Stiglitz made in early 2009. Their argument was that more money needed to be injected into the economy to create demand and that the approximately $800 billion might stanch the bleeding but do little more.

Deficits are a real problem – but not one we need to focus on in the short term. If we are to start creating jobs and growth, we need to inject money into the economy by rehiring the teachers, cops and firemen our local governments have let go, extending and expanding unemployment benefits and start spending money on infrastructure – including not only roads and bridges, but school buildings and new patrol cars, alternative energy research and expanded broadband access.

Conservatives will object. They’ll say we are courting a Greek-style meltdown and that we have to balance our books before we do anything else. (They say this, of course, even as they offer huge tax cuts to the rich, but that is a topic for another column.)

Greece is the wrong model. We are not Greece. But we could end up with the kind of long-term economic stagnation that continues to plague Japan.

Gregory Clark, writing in The Japanese Times in August, explains that austerity measures are destined to fail because they “inevitably cut tax revenues more than they cut spending. National debt increases rather than decreases. Worse, recovery from the economic downturns they create then forces them to ease the original spending cuts. So the national debt situation gets even worse.”

Japan, he says, “was the poster-child model for this economic folly in action.”

Beginning in the mid-1990s, Japan attempted to shrink a budget deficit caused by the collapse of a bubble economy. The spending cuts led to recession, tax revenues fell and debt increased. It was the exact opposite result promised. Fiscal expansion helped create a modest recovery, Clark said, but were immediately followed by “structural reforms” and another market collapse.

“The graph for Japan's long-term economic history says it all,” Clark writes. “From 1980 through to 1990, Japan's generally Keynesian policies saw a steady rise in government spending matched by a equally steady rise in tax revenue, while the national debt relative to GDP remained roughly at around the 50% level.

“Since 1991, and despite various deficit hawk commitments to reduce government spending, that spending has continued to increase — from around 75 trillion yen annually to almost 90 trillion yen mainly because governments were forced to maintain or increase spending to counter the recessions they had created. Meanwhile tax revenues went into a steep decline — from 60 trillion yen down to 40 trillion yen per year. National debt relative to GDP jumped to well over 150%. Even allowing for global economic hiccups during the period, this increase in national debt can only be seen as a negation of austerity ideology.”

Japan pushed itself over a fiscal cliff and has not been able to climb back up. Given Japan’s recent economic history, why would we want to do the same thing?

Hank Kalet is a freelance writer in New Jersey, who covers the economy for NJ Spotlight and other publications. Email grassroots@comcast.net.

From The Progressive Populist, October 15, 2012