The Austerity Crusade Fails Again; If Only They'd Listen To Keynes

It shouldn't have needed yet another proof, but here it is: as John Cassidy puts it, "an official confirmation from the United Kingdom that austerity policies don’t work."

Anybody who works from a knowledge of economic history already knew that. But the high priests of Supply-side were sure. All they needed to do was to be sufficiently faithful to their doctrine. It didn't work. And nobody who even came close to understanding Keynes was surprised by anything other than the deficit-hawks continued belief that balancing the budget will somehow cure all the ails us. Cure it because ... um ... underpants? Surely that's it. The balancing of the budget would cause the confidence fairy's underpants to fit better and she would come dancing along to rain blessings upon us for so dutifully cutting to balance our budgets.

After all, it surely all comes back to underpants, at least when we're dealing with the faith-based economics of Supply-siders (the Trickle-down-istas). For anyone who's seen South Park's "underpants gnomes" and their business plan:

1. Collect underpants
2. ?
3. Profit!

It's the very same with deficit-hawks:

1. Balance the budget
2. ?
3. Profit!

It really does require a pure leap of faith to jump off that cliff. Sadly, there are sharp, pointy rocks below and there really is no confidence fairy waiting around to boost folks back onto solid ground after they slash budgets during a downturn. So march off to the austerity crusade boys. And don't forget to inflict lots of suffering on your economy because that's the only way to scare the evil spirits out of it. Right? We just have to believe hard enough and the confidence fairy will appear. Never mind those rocks. We're not plummeting towards them, they're just growing bigger. That's all.

But no, that's not all. Austerity fails. At least from where we are. Austerity will be harmful so long as we're demand-constrained rather than supply-constrained. And we're clearly demand-constrained rather than supply-constrained. So anyone who was paying attention should have known not to cut spending. But the Supply-side faithful would have nothing of it. Listen? Pay attention to history? Heck no!

Can we please stop with the misguided, ill-timed budget-cutting when our economy isn't roaring along? Pretty please? Austerity fails. Supply-side fails. Trickle-down doesn't trickle down. We can only safely cut when we're already doing well ... preferably when we're overheated. We're not suffering from overabundance. If we bleed our economy of government spending, all that'll do is make the patient more sick. Enough with the "harsh medicine" already. It'll only hurt.

The Cost of Balanced Budgets and a Longer View on Presidents and Jobs From Ike To 2012

I'd usually heard the 50s described as more or less a golden era of rising prosperity. But till recently I tended to skip over digging into that decade's economic data to focus on the Great Depression up through World War II (when not mucking about the peaks and valleys of more recent times). So I have to admit this chart surprised me.

starting with Ike, the first President fully covered in the monthly POP data; to June 2012

I was expecting that adding in the Republican Presidents before Reagan would show that prior to Trickle-down / Supply-side economics / Reaganomics infecting the Republican party, they'd done better. I expected to be illustrating the post-Depression glory days of the Republican party via Ike, Nixon, and Ford. Instead, the data gave me what we see above. In jobs, Nixon and Ford both did worse than Johnson, Carter, and Clinton. While Nixon and Ford did better than Obama's marks for his full term so far, they each did worse than during his tepid recovery span from February 2010 on to the latest data. And then there's Ike -- whom we admire -- down there with the likes of the Bushes. I didn't want to see that. Frankly, I wanted to believe Ike pulled off the Clinton trick of balancing the budget while improving employment. But I can't deny the data.

If we look a bit further back, before the dates in the data used above to put payroll growth in perspective via population growth, we can at least compare Ike's raw payroll figures to those from FDR (since 1939) and Truman, but that only rules out claiming Ike's dismal jobs performance as part of a longer trend.

Ike's sad job numbers with context: at least he's not Bush II

It's not a pretty picture for Ike, which I'm sad to see. Thankfully there's still much to admire from President Eisenhower in the highway system and his work for civil rights. I still like Ike. I still think I'd have voted for him if I'd been old enough at the time. But his economic record is tarnished.

In his defense, President Eisenhower did start his term with a 2.6% unemployment rate during that first full month. It's hard to improve on 2.6% unemployment. Still, unemployment rose dramatically to 6.9% by the first full month of his successor's term. Ike's shift: +165% unemployment. That's a rather lousy fumble. And while the Eisenhower years saw increasing family incomes, the same can be said for the Kennedy / Johnson years except without the rising unemployment, as over the course of their span they reduced that rate from the 6.9% that Eisenhower left them back down to 3.4% by the end of Johnson's Presidency.

So what went wrong? Let's look at the modern history of balanced budgets:

• At Republican urging, FDR tried to balance the budget with spending cuts and it brought us the Recession of 1937-38. 
• After World War II we saw dramatic cutbacks in spending with balanced budgets in 1947 through 1949 and the recessions in 1945 and 1949. (Of course, the war spending was unsustainable; there was probably no way to avoid recession in the late 1940s.)
• Truman balanced the budget in 1951. But like the later Clinton-era balanced budgets this one was done while expanding federal outlays ... rather swiftly increasing from the 1948 lows. Then after we slowed spending at the end of the Korean War, we got the recession of 1953.
• Eisenhower balanced the budget in 1956 and 1957 and we got the Recession of 1957.
• Eisenhower balanced the budget again in 1960 and we got the Recession of 1960.
• Nixon balanced the budget in 1969 and we got the Recession of 1970.
• While Clinton balanced the budget in 1998 lasting through Bush's first budget in 2001, the balancing in these years was done without reducing the growth of federal outlays but rather through moderate increase of tax rates. As such, this particular instance was thoroughly different from most previous balancing of the budget (except Truman's).

There were also some recessions that didn't correspond to these balanced budgets: the oil shock under Nixon, the extremely high interest rates under Reagan, the S&L crisis under Bush I, the Dot-Com crash under Clinton and Bush II, and the housing/finance crash under Bush II. I'm not suggesting that all recessions are caused by cutting to achieve balanced budgets. However, it would seem that balancing our national budget via cuts -- even if only in inflation-adjusted terms as in 1960 and 1969 -- tends to lead to recession.

The impact of Eisenhower's budget balancing exploits are particularly of interest for its parallel to job losses in the Great Recession. Private payrolls dropped by 2.385 million between August 1957 and June 1958, a 5.26% decline. By comparison, that's just barely below the 5.47% decline during the worst job-loss months of the Great Recession from August 2008 through June 2009. Remember that saying about doing the same thing and expecting different results. If we implement massive cutbacks like Eisenhower with our sequestration fiscal cliff, we can expect yet another massive fall just like the Eisenhower recession ... and we've not climbed far enough back from the jagged rocks as it is.

In case after case, budgets balanced with spending cuts have brought on recession. And now the Republicans are once again pushing us to balance the budget with dramatic spending cuts. Democrats may not be leading the charge, but Obama like FDR is far too willing to accept the Republican push for cuts. If we don't turn away from this push to slash budgets, previous experience shows us it will hurt the economy. When we make the debt more manageable by growing our economy such that the debt shrinks by comparison, that's tended to work out well. When we clumsily attempt to tackle the debt directly by slashing spending to balance the budget in the hopes a primary surplus, the records shows it tends to work out poorly.

Presidents and Jobs (Average Private Payrolls Added Per Month Since Carter)

Given that Republicans are often billed as the pro-business party, shouldn't we find business booming under Republican Presidents? Shouldn't we find payrolls rising significantly from all that business expansion?

For President Reagan, to be fair, we should note that his early years were hurt by the same force that crushed payrolls under President Carter during April through July of 1980: the high rates with which Paul Volcker battled inflation. Double-digit prime interest rates diminished employment under both Presidents Reagan and Carter. While those unusually high interest rates may have been necessary to get control over inflation, those high rates severely slowed expansion and thus hiring. However, that doesn't remove the possibility that President Reagan's descent from Carter's payroll numbers hinted at the start of a Republican trend under Trickle-down policies. After all, the Bush I policies were largely a continuation of the Reagan policies. If we average together the Reagan and Bush I months, together they get 113.3 thousand jobs / month. That's less than either of Carter or Clinton. And it's also less than the rate of increase we've seen since the turn-around on 2/1/2010 under President Obama.

While these figures aren't conclusive proof alone, add them together with a few other factors such as that GDP growth has lagged under the lowest top marginal tax rates. It sure looks like Trickle-down (or Supply-side economic or Reaganomics) failed us in a big way.

Maybe we should stop accepting the notion that talking about lowering taxes and deregulating would actually be business-friendly. Maybe we should instead consider ways to return to the sort of sensible, progressive tax structures we had before Reagan lead us down the road to decline. Instead of calling it red tape, maybe we should consider regulation's value for helping business manage risk, compete on a level playing field, and have more predictable returns. And maybe we should get back to expecting serious infrastructure projects and demanding aggressive investments in our research and development programs to build our avenues for growth.

Notes on methodology: Generally speaking, the January in which the executive transitions from one branch to another will be almost entirely impacted by the outgoing President's policies and not those of the incoming President. As such, the average uses the change in monthly manufacturing payrolls starting with the change from the first full month of the President's term (i.e., from the February that is the first full month to the March thereafter) and going until the first full month after the President's term (i.e., the last change counted is from the January during which the President in question is last in office to the February thereafter). Data from BLS/FRED.

The Golden Fleece

The drums sound. The town crier roars, "Fleecing the rich! Fleecing the rich!"

But who is fleecing whom? And is the only fleece here just wool for pulling over eyes?

Fleecing the rich is a red herring. We have a demand-driven economy. There aren't enough folks in the very top to take care of all the demand. If the middle and lower classes combined don't have enough money, they can't keep commerce flowing fast enough. That matters, because jobs come from spending. Sure, they come directly from business, but business gets its money from spending at that business. Without enough spending, we can't support as many jobs. There's a minimum level of spending the economy needs for businesses to bring in enough money to need the current workforce to meet the demand. More commerce than that level means more jobs are needed. Less commerce than that level means fewer jobs are needed.

"But wait", the supply-siders say, "the wealthy will buy more Bentleys with their tax cuts or vacation more or something and cover that commerce."

Will they? Let's leave aside the fact that Bentley Motors Limited, like Rolls-Royce, is a British manufacturer and a Bentley purchase may not be as likely to create American jobs as a Fiesta or a Cruze purchase. Even more importantly, each wealthy person only needs so many cars, even if they were purchasing American made cars. The 400ish billionaires in the US can only wear so many clothes, eat so much food, or use so much of anything themselves. Yes, there are more millionaires -- several million of them -- but still, they only need so much each. It's the hundreds of millions of people who are less affluent who will always make up the bulk of need for goods and services. It's not strictly for any lack of patriotism among millionaires; it's just that there aren't enough people at the top to need enough goods and services themselves to keep everyone employed.

With the amount of wealth held by the middle and lower classes declining, we have a serious problem. That's all of us ... not just the middle and lower classes, but the wealthy too. The rich may be more insulated from unemployment and stagnant wages than the rest of us, but if the level of commerce falls too low it can fail to sustain their investments. And the bigger argument for those of us who would like to join the ranks of the wealthy: if commerce is shrinking rather than growing, there's not much chance for new members of the upper class. In order to have rising affluence, you have to have a healthy economy. In order to have a healthy economy, the middle class can't be declining ... because the middle class is the core of spending and the heart of the economy.

"But wait," they defenders of trickle-down say, "if we cut they're taxes, they'll have more money to invest. You're saying that if people have more money to invest then the natural inclination is to NOT invest that money? You're saying that if there's an opportunity for a greater return on that investment, people are less likely to invest that money?"

Sure, they'll invest. Many of them will sink the cash in things that don't create jobs (or at least not in significant numbers) such as buying stocks, foreign bonds, money markets, and commodities like gold. If one billionaire buys a zillion shares of Corporation X from another billionaire, that's generally 0 jobs created ... although it may help maintain a job at a brokerage and then the broker's income may help create or sustain a few other jobs (but still, effectively close enough to no jobs versus what certain other uses for that money could do).

Some few of them might invest in venture capital funds that specialize in US startups or expansions. Some few of them might directly invest in US entrepreneurship. But with raw no-strings-attached tax cuts there's no guarantee that any of them will. If other investments look more profitable, most of them won't invest in such American job-creating investments.

Some might also invest in venture capital or direct entrepreneurship in other countries that compete with our own ... thus destroying American jobs. It is entirely possible that some large amount -- potentially even 100% -- of the tax cuts for the top 1% could end up being invested in foreign companies that will end up killing jobs here. It's not likely that every penny will go abroad, but there's no guarantee that any of it will stay. And it is very likely that at least some of it will go to foreign investments that compete with us. Growth in China is currently high, so odds are good that quite a few of them will risk the possible Chinese housing bubble and such in order to capitalize on their high growth rate. Chinese entrepreneurs are probably thrilled that we're considering borrowing money from China to free up no-strings-attached cash from our wealthy such that some of our wealthy will have more money to invest in China.

Of course, it's probably just a coincidence that this is coming right after Republican wins that saw large chunks of their add money coming from the US Chamber of Commerce that gets large chunks of their money from foreign members such as state-owned Chinese companies. Surely it's entirely unrelated that some of the most lucrative investments around are Chinese companies that compete with American companies. I'm not saying there's any cause and effect there. Probably a coincidence, but a very unpleasant one for our prospects of this tax cut for the wealthy being a good thing for the nation.

Perhaps the most interesting potential: The top bracket could all invest the cuts into Treasuries, so we'd be freeing up money for them to lend back to us at interest to cover the money we gave 'em interest free. Merry Christmas to them, eh?

But the long and short of all this is that while tax cuts for the wealthy will mean more investment, that investment won't necessarily help the American economy and may in fact hurt ... because the bulk of it could be investment in our competitors.