The University of Massachusetts Amherst
Categories
Center for Popular Economics Friedman

Austerity Comes to America

This post by UMass Amherst Department of Economics Professor Gerald Friedman was originally published on May 20, 2013 by the Center for Popular Economics.

Gerald Friedman
Gerald Friedman

Austerity Comes to America
by Gerald Friedman

Economists at the University of Massachusetts and elsewhere have thoroughly discredited research suggesting that cutting government spending will promote economic growth during a time of recession.  Even while scholarship has exposed the fallacy of austerity economics and this news has reached wide audiences through Twitter and the Colbert Report, the United States government is embracing austerity’s policy prescriptions.  While employment has barely kept up with the growth of the labor force and the best measure of the unemployment rate (which accounts for those who have given up on looking for work or who work part time because they can’t find full time employment) remains stuck at 14%, the federal, state and local governments are slashing payrolls and reducing spending in order to meet arbitrary deficit targets. The ghost of bad austerity economics continues to haunt, and even to drive, the living.

In 2007 and 2008, as we entered the Great Recession, economists knew what should be done to prevent another Great Depression.  Drawing on theory developed in the shadow of the Great Depression, Keynesian economists argued that government needed to spend to fill the gap when private spending and investment contracted during an economic crisis.  The work of Milton Friedman, Anna Schwartz, and their students and followers, had persuaded monetary authorities that they needed to act aggressively to provide liquidity to prevent a financial system meltdown.  There was a politics here.  On the left, those who favored a large public sector and a generous social wage seized on the opportunity created by fiscal stimulus to boost public spending while conservatives and their Wall Street allies favored monetary policy because it subsidized banks while avoiding public spending.

These disputes were put aside after the financial market collapse in the Fall of 2008 when both Friedman monetarists and Keynesian fiscalists stared into the abyss.  For a brief moment, economists and policy makers joined in recommending that we walk on both legs and use all the tools available to prevent the Great Recession from becoming a full-fledged Depression.  In striking contrast with the experience of the early 1930s, the Federal Reserve aggressively pushed liquidity into the banking system, and the new Obama Administration pushed an $800 billion stimulus program through Congress.  While the Obama stimulus was much smaller than Keynesian economists recommended, and was further diminished by political bargaining that substituted tax cutting for some needed spending, it did provide funds for infrastructure and for local and state programs threatened by the plunge in state and local revenues that resulted from the recession.  Together with the Federal Reserve’s actions, the Obama stimulus prevented a complete economic collapse.

The stimulus worked well enough that some economists quickly forgot why it was enacted.  Already in 2009, some were denouncing stimulus spending. They defended the Great Recession and its attendant suffering in terms reminiscent of Andrew Mellon’s appreciative analysis of the effects of the Great Depression: “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate . . . It will purge the rottenness out of the system.”  They quickly won over the Republican Party; hating Obama, Republicans never saw any reason to promote economic recovery on his watch.  And when Obama’s stimulus did not cure all ills, they blamed it for those that remained; post hoc ergo propter hoc.

With Republicans in control of the House of Representatives, in a position to block action in the Senate, and in control of many state governments, it has been impossible to prevent spreading austerity.  Sensible economists, of which there are a few even outside of Amherst, have condemned spending cuts and tax increases as the wrong policy during an economic recession.  But the debate is no longer about economics; those who oppose fiscal stimulus do so from a sense of moral outrage.  Advocates of austerity like the Tea Party Patriots have little rational argument about the economics of government stimulus spending but a strong sense of grievance that others are getting away with something. They assume that the allocations of a free market are just and fail to see the substantial benefits they (and all of us) receive from public spending; they conclude, therefore, that government help must be bad because in giving to those who need help, government is subsidizing the wicked.  While we can show them that their economic analysis is wrong, it will have little effect on those whose real goal is not to help the needy or to comfort the afflicted but to punish the guilty.

Categories
Undergraduate Students

Sanjay Singh ’13 represents economics at SBS Senior Celebration

Sanjay Singh
Sanjay Singh

Sanjay Singh ’13 was the Department of Economics student speaker at the 2013 SBS Senior Celebration held on May 11 at the Mullins Center. As a student, Singh served as 2012-2013 UEC Board of Governor, was co-founder of the Massachusetts Undergraduate Journal of Economics, and worked as a staff member at the Center for Education Policy and Advocacy. Post-graduation, Singh will be entering the corporate Human Resource Development Program at Liberty Mutual in Boston, complementing his interests in labor economics, human resources, and industrial relations. His remarks are below.

 

Good afternoon. I’m proud to say that I am a graduate of the UMass Economics Department. Studying Economics at UMass has triggered my curiosity about the world around me, leading me to ask questions such as: How did I get a 40% average in Intermediate Microeconomics with Professor Katzner, and still end up with an A? Should I double check my spreadsheet for errors? How many years does Machmer Hall realistically have before it collapses?

Economics has allowed me to see the world through a new lens. It has taught me that one must understand the Neoclassical model, but also not be afraid to question it.  Economics has taught me to always consider the costs and benefits before making a decision. Lastly, Economics has taught me to always maintain a dynamic worldview, when reality proves that our economic models were wrong. Like in 2007.

On behalf of all Economics graduates, I’d like to thank all members of the Economics faculty, all graduate student assistants, all of our peers, and all of our families, for supporting us along the way. None of us would be here today if it weren’t for you all.

Congratulations, class of 2013, and good luck on all of your future endeavors!