Possible Austerity Poses Threat to Slow-Moving Recovery

A glimpse, by definition, is a brief preview of what lies ahead.

The last quarter of 2012, last October through December, provided a glimpse of what happens when federal spending is cut.
The economy shrunk. Not much – only 0.1% – but it shrunk. When the economy shrinks for two straight quarters, a recession is declared. That doesn’t have to happen unless we make it happen.

During the third quarter of 2012 (last July, August, and September), the economy grew at 3.1%, almost the nation’s average of 3.2% since the end of World War II.

Over the past three months, the private sec- tor did pretty well. Consumer spending went up. Durable goods like appliances and furniture al- most doubled. Investment in equipment and soft- ware increased six times. Even housing invest- ment increased.

What went down? Federal government spending declined at a 15% rate due to a drop in defense spending. In fact, government spending has declined in 10 of the last 12 quarters slowing the country’s overall economic growth.

Government spending has kept the economy out of recession since 2009. The United States is the only economy on earth, of any size, that has grown in the past three years. Austerity – reductions in government spending – hasn’t worked anywhere in the world except arguably in two small countries.

Greece and Spain are getting a great deal of attention for their economic woes. Their budget cuts have led to downward spirals and 25% un- employment. Great Britain adopted an austerity plan last year and just entered its THIRD recession in five years.
The poster children for “austerity works” are Estonia and Latvia, two Baltic states tucked be- tween Russia, Poland, and Scandinavia and together about the size of Ohio. Their combined population is about 3 million, a little more than half the D.C. metro area. Though their economies are now growing, they are still suffering with unemployment rates of 12-15%.

Government spending matters. Reductions in unemployment benefits, food stamps, and social security hurt small businesses and grocery stores. When housing assistance is reduced, the pain is felt by both landlords with more vacancies and lower rents and by local governments with lower property values and reduced tax collections. Reduced highway construction today puts construction workers out of work and reduces economic growth tomorrow.

Nonetheless, Congress is currently focused only on cutting spending with several deadlines quickly approaching. In two weeks, the “sequester” – automatic across-the-board spending cuts that Congress imposed on the nation when it couldn’t agree on what to cut – take effect. In late March, the nation hits the debt limit – like a credit card limit – that would not allow the government to pay the bills it promised to pay a few months ago. That’s like buying a car and then telling the bank you’re not going to make the payments.
By disagreeing on budget priorities, Congress has kicked the can down the road for three years. Oddly, that’s probably been best for the economy.

The last few months both in the U.S. and Great Britain provide a glimpse into the future. What do we really want? Austerity or more can- kicking? ?