THE GLOBAL IMPACT OF FLAWED ECONOMIC THEORIES
November 4, 2013: Recently, LIUNA General President Terry O’Sullivan led a delegation of U.S. labor leaders to meet with their Irish counterparts. Just as sequestration, budget cuts, and hard-core debt reduction threaten to derail our recovery from the Great Recession, so an extreme austerity program has been crushing the Irish economy.
In his speech before Sinn Fein’s 2013 In Common Cause conference, O’Sullivan decried austerity and the economic ideas that drive it as “the demolition of social services, government functions, infrastructure spending, and the lives and futures of working class families.” He connected the injustices of Ireland’s forced austerity to the problems we have been facing in this country, and urged that we invest more, not less, in programs and services that generate economic growth. Speaking before this gathering of Irish and American trade unionists and their allies, O’Sullivan said:
We do not deny the economic challenges we all face, and the need to find solutions, but there is a right way to do this and a wrong way. Driving wages down, taxing the poor more than the rich, and hollowing out the middle and working classes is the wrong way. Such policies are not only unjust, unfair, and immoral; they are short-sighted, counterproductive, and deeply harmful to the entire economy. . . . [The right way involves] jobs, not cuts; spending, not austerity; greater public investment, not less…. The Celtic Tiger and the American Eagle may be down, but they’re sure as hell not out, and the answer is to feed them, not to starve them!
To be fair, and in the interest of full disclosure, O’Sullivan, LIUNA, and LIUNA members stand to gain from increased government spending, especially on critical infrastructure projects. But there is a good deal of objective evidence to support their position.
There is nothing new about austerity, sequestration, and deep tax and budget cuts. They are the latest manifestation of Ronald Reagan’s trickle-down economics, which holds that tax cuts, and especially tax cuts at the highest income brackets, spur economic growth and increase government revenues. When the opponents of trickle-down economics (including George H.W. Bush, who denounced it as “voodoo economics”) argued that cutting taxes almost by definition could not increase revenues, and that doing so would merely impoverish essential services, they had little evidence other than common sense to back up their claims. Thirty years later, the evidence that the critics were right is substantial.
Last year, the non-partisan Congressional Research Service published a report by Thomas L. Hungerford that analyzed economic data compiled between 1945 and 2010, looking for links between cuts in the highest bracket tax rates and growth. Hungerford could find no such links. There were, however, links between such cuts and rising income inequality.
The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. . . . However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. (Page 16)
Hungerford’s report, not surprisingly, has gotten its share of criticism from proponents of trickle-down economics, but its conclusions are borne out by the reality that our economy continues to struggle, and income inequality continues to grow.
Both Stephen Herrington and Tim Donovan, writing in the Huffington Post and Salon, respectively, provide succinct, readable critiques that demonstrate what should be obvious to anyone who has been paying attention for the past three decades: trickle-down economics does not work.
In “Fix the Debt by Creating Jobs,” Center for Budget and Policy Priorities economist Chad Stone argues that our obsession with the national debt is misplaced. The real threat to our economy is the jobs deficit, and the best way to tackle this, Stone writes, is to spend money on programs that create jobs.
Restoring employment to normal levels in a reasonable period of time requires stronger economic growth and faster job creation. But since the economic boost from the 2009 Recovery Act peaked in 2010, fiscal (tax and spending) policy at the federal, state and local level has been marked by austerity measures (spending cuts and tax increases) that have hampered the recovery. Spending cuts have dominated at the federal level, largely in the form of cuts in discretionary (non-entitlement) spending.
There’s nothing inherently wrong with . . . addressing our longer-term fiscal challenges. In fact, my colleagues and I at the Center on Budget and Policy Priorities agree on the need to do so. It’s dangerous, however, if “fixing” the debt is portrayed as so important that it overpowers the need to fix the jobs deficit.
Sadly, far from being discredited, over the past few years, austere, trickle-down, fix-the-debt-first policies have spread like wildfire across the globe. In Ireland, and throughout Europe, austerity measures have gutted essential services, increased unemployment, widened the gap between rich and poor, and eroded the middle class. Faced with greater unemployment and less public and private spending, instead of trying something different, governments have doubled down, convinced that they have not slashed spending and tax rates enough.
Writing in the New York Times recently, Eric Liu and Nick Hanauer suggest that the flawed metaphor of economy-as-predictable-machine may be to blame for the largely unquestioned assumption that lower taxes and fewer regulations lead to stronger economic growth. When the economy is viewed as an efficient machine, taxes are seen as sapping its fuel, and regulations are viewed as gumming up its gears. Liu and Hanauer suggest that economies are more like gardens that need watering (spending) and tending (sensible regulation) to grow in an orderly, beneficial way.
Our economic garden is in poor shape right now. Our roads and bridges are crumbling, our water and sewer pipes are leaking and bursting, our airports and waterways are congested, private sector investment is lagging, and unemployment continues to be a problem, especially in construction. Austere, trickle-down, budget-slashing economic policies are not the solution to this problem, they are the problem.