State Austerity Budges Hampering GDP Growth

Blame Budget Austerity for Poor GDP Growth

By EILEEN APPELBAUM

April 27, 2012 RSS Feed Print

[See graphic on which states still have austerity budgets]

Eileen Appelbaum is a senior economist at the Center for Economic and Policy Research.

As the Obama administration's 2009 stimulus continues to wind down, the effects on the US economy are showing up in the economic data. Coming out of a steep recession, the economy should be experiencing robust output, or GDP, growth. Output growth of 3 percent in the fourth quarter of 2011 helped bring the unemployment rate down. However, the government's announcement that output growth fell to 2.2 percent in the first quarter of 2012 should give policy makers pause. The economy needs to grow by at least 2.5 percent just to keep unemployment from rising. Thus this latest figure on GDP growth does not auger well for the job market, which has seen a steady rise over the last few weeks in initial unemployment claims. In the face of weaker demand, Investment spending by business is slowing. Cutbacks in government spending at the federal as well as state and local levels are already hurting GDP growth. In the absence of federal revenue sharing with the states--the first time the federal government has not had such a program when unemployment is above 7 percent--state and local government expenditures have fallen for seven consecutive quarters.

[See a collection of political cartoons on the economy.]

With the U.S. economy slowing and job growth still very weak, what should the government do? Continued calls for government belt tightening, fiscal consolidation, and austerity are out-of-step with economic realities. The argument for austerity is that drastic cuts in government spending will stave off inflation and provide businesses with the confidence to go out and invest. But these are empty arguments. Oil prices fluctuate widely, rising for reasons unrelated to government policy. Sustained inflation is only possible if wage and benefit costs are rising. Thursday's report on employer costs, however, shows that the year-over-year increase in employment costs is a very modest 2 percent and the increase in the latest quarter is even smaller. As for business confidence taking up the economic slack, the UK provides a stark reminder of just how wrong this argument is.

The United Kingdom, like the United States and unlike Greece, has its own currency. The U.K., like the United States and unlike Greece, has its own central bank and control over its own monetary policy. There is no chance that the United States (or the United Kingdom) can end up like Greece. There is, however, the distinct possibility that the United States can end up like the United Kingdom.

[Read: Government Economic Intervention Made America Great.]

Almost two years ago the U.K. put in place a coalition government led by George Osborne that implemented an austerity program that cut government spending and public services and was supposed to give British businesses the confidence to invest and boost economic growth. The outcome has fallen far short of these expectations. The U.K. is experiencing the slowest growth in a century, with GDP still 4.3 percent below its peak reached four years ago. Output has grown just 0.4 percent in two years under the Osborne government, and now--with two back-to-back quarters of declining GDP--the British economy has officially slipped back into a double-dip recession. Confidence has not returned to U.K. businesses; indeed lending to businesses fell sharply in March despite the fact that banks had cash available to lend out. Meanwhile, the toll on the British people as government services are cut has become more severe. The charitable trust that operates a network of food banks in the United Kingdom reported that the number of people turning to food banks to feed themselves and their children doubled over the past 12 months.

The wounds to the U.K. economy are self-imposed. Unlike Greece or Spain, the United Kingdom did not come under pressure from the E.U. Neither was there pressure from the bond markets; interest rates and borrowing costs were quite low. British politicians chose to slash spending and impose austerity on the British economy. The lesson should not be lost on America's political leaders. Like the United Kingdom, the United States has control over its economic policies. It should not choose austerity.