“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.
The following working paper by James Crotty is now available on our website:
The Great Austerity War: What Caused the Deficit Crisis and Who Should Pay to Fix It?
Rapidly rising deficits at both the federal and state and local government levels, along with longterm financing problems in the Social Security and Medicare programs, have triggered a onesided austerity-focused class war in the US. Similar class conflicts have broken out around the globe. A coalition of the richest and most economically powerful segments of society and conservative politicians who represent their interests has demanded that deficits be eliminated by public-sector austerity – severe cuts at all levels of government in spending that either supports the poor and the middle class or funds crucial public investment. These demands constitute a deliberate attempt to destroy the New Deal project, begun in the 1930s, whose goal was to subject capitalism to democratic control. The right-wing coalition seeks to replace that project with a modernized version of the ‘free-market’ capitalism of the 1920s. In this paper I argue that our deficit crisis is the result of a shift from the New-Deal-based economic model of the early post-war period to today’s neoliberal, free-market model, a shift initiated under Ronald Reagan and continued under the presidents who succeeded him. The new model has generated slow growth, rising inequality and rising deficits. Rising deficits in turn created demands for austerity. After tracing the long-term evolution of our current deficit crisis, I show that this crisis can be resolved by raising taxes on upper-income households and large corporations, cutting war spending, and adopting a Canadian or European style health care system. There is no need to accept austerity. Calls for austerity should be seen as what they are – an attack by the rich and powerful against the basic interests of the American people.
The Institute for New Economic Thinking (INET) has awarded grants to two UMass Amherst projects:
Arin Dube (& Ethan Kaplan, Columbia University)
A Spatial Approach to Macroeconomic Inference
Many of the most important questions in contemporary macroeconomics have proven elusive and thus have yet to be answered in a convincing way. This is in part due to heavy reliance by empirical macroeconomists on time series variation of economic aggregates to find answers.
The project will be conducted through three separate research projects with a common methodological approach using spatial cross-sectional variation in addition to time series variation to identify effects. The projects will focus on: (1.) estimating fiscal multipliers, (2.) estimating the impact of anti-predatory lending laws on housing prices, default rates and foreclosures, (3.) estimating the impact of raising wages during recessions. The end product of the project will make both methodological and substantive contributions to modern macroeconomics.
Gerald Epstein & James Crotty
How Big is Too Big? What Should Finance Do and How Much Should It Be Cut Down to Size?
The financial sector has grown significantly over the last several decades and some have suggested that the sector is now too big. Yet we have no obvious theoretical framework nor clear metric to measure the social usefulness of financial activities to help us determine the desirable size of the financial sector.
Building on James Tobin’s concept of “functional efficiency,” this project will develop new micro and macro data sets to: 1) estimate the size of “functionally inefficient” financial activity and to 2) estimate the share of financial innovations that are “socially inefficient.” We will then utilize these data sets to study the impacts of financial regulations, financial taxes and other safety enhancing financial measures that affect the level of “functionally efficient” finance. Finally, we will study the impact of financial size on political capture, and then add those impacts to the study of the socially desirable size and character of the financial system.
Launched in October 2009 with a $50 million commitment from George Soros and driven by the global financial crisis, the Institute for New Economic Thinking (INET) is dedicated to empowering and supporting the next generation of economists and scholars in related fields through research grants, Task Force groups, academic partnerships, and conferences. INET embraces the professional responsibility to think beyond current paradigms. Ultimately, INET is committed to broadening and accelerating the development of innovative thinking that can lead to insights into and solutions for the great challenges of the 21st century and return economics to its core mission of guiding and protecting society.
A column promoting breaking up large banks cites research done by Gerald Epstein, James Crotty and Iren Levina, Political Economy Research Institute, on financial industry concentration. Their research shows that between 1993 and 2009, the top five commercial banks in the U.S. went from having 16.56 percent of total bank assets to 45.23 percent. The top five investment banks had 36.43 percent of overall revenue in 1993 and 65.61 percent by 2009, they say. (Huffington Post, 5/5/10)
James Crotty, UMass Economics Professor
James Crotty, UMass Amherst economics professor, discusses the recent financial collapse and why he believes it was caused by speculative bubbles based on “false values” and “structural blackmail” within huge financial firms. (The Real News Network, 1/10/10; Firedoglake.com, 1/11/10)
James Crotty, UMass Economics Professor
James Crotty, UMass Amherst economics professor was interviewed earlier this month by The Real News Network. Crotty discusses executive compensation in the finance sector and the role it has played in the current crisis.
January 8, 2010
The Real News Network
Executive compensation: “Heads I win tails you lose”
In her regularly featured New York Times Economix blog, UMass Prof Nancy Folbre draws on new research by UMass’s James Crotty to look at the large bonus payments to bankers, even in the years of the finance-led crash.
Banker Bonus Rain by Nancy Folbre Wall Street firms have always been famous for their generous bonuses to managers and traders — their so-called rainmakers. …What is especially striking is the high level of these bonuses in 2007 and 2008, years in which profits were negative. [Read the rest at http://economix.blogs.nytimes.com/2009/11/02/banker-bonus-rain/]