“The Austerians Attack!” an article by James Crotty, UMass Amherst economics professor emeritus, is the featured cover story for the February issue of In These Times.
In the article Crotty writes about recent austerity measures, like public-sector layoffs and budget cuts, that have been imposed as a way to reduce the deficit. Crotty argues that it is possible to shrink the public debt burden without compromising important social spending. Crotty’s article offers a historical context to the current deficit and to possible solutions. (In These Times, 1/30/12)
Fronts in the austerity war
The state and local government battle: The Right has mounted a ferocious attack on New Deal programs at the federal, state and local government levels.
But excessive long-term growth in social spending did not cause the large current and prospective deficits at the state and local levels. The four main causes of these deficits are:
1. Slow economic growth since 2001.
2. The deep recession that hit in mid 2008. In 2009, 20010 and 2011, state revenues fell by an average of 13 percent each year – a revenue loss unprecedented in the post-World War II era.
3. A collapse in the value of pension fund assets as a result of the financial meltdown. Between mid-2007 and mid-2009, pension fund accounts lost $900 billion in value.
4. An erosion of the tax base. Thanks to a decades-long process of corporate tax cuts, state corporate income taxes fell from 10 percent of state revenue in the 1970s to 5.4 percent by 2010. Tax erosion has been exacerbated by the fact that in response to the crisis – and even in the face of exploding deficits – many states have further cut corporate taxes. Governors justify such tax cuts on the grounds that they will help attract new business to their states. But these cuts create a typical “race to the bottom” dynamic in which, as a whole, states gain no additional investment.
The combination of revenue losses and the rise in spending on the social safety net, caused by the recession, generated a total estimated annual budget gap of $140 billion in 2010, or 21 percent of state spending commitments. Federal grants covered about one-third of the gap that year, but those funds are drying up. Since almost all states are legally required to avoid deficits, and since most states refuse to raise taxes substantially (if at all), the gap has to be eliminated primarily through spending cuts. Thus, the austerity war rages.
States are cutting funds for programs such as healthcare for the poor, home care for the infirm, and support for education at the elementary, high school and college levels. From the official end of the recession in June 2009 to June 2011, more than 467,000 state and local jobs were lost, including 188,000 jobs in schools. At a similar point after the end of the 2001 recession, 249,000 jobs had been added.