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Markets before People

Last week the G20 - group of nations representing 20 of world’s largest economies - said its time to abandon expanding fiscal stimulus and time to start cutting.  This is definitely one way to throw the economy into a recession or worse the Second Great Depression.  If the private sector is not fully healed, which it is not, then government sector has to carry the load.  This assumes we want economic growth but G20 leaders seem to be more concerned about the bond markets then the people they represent. 

The inspiration for this title and story came from Professor Bill Mitchell’s story: Amazing reversals … democratic repression.

This is what G20 leaders said in part (here is the full “communique”):

The global economy continues to recover faster than anticipated, although at an uneven pace across countries and regions. However, the recent volatility in financial markets reminds us that significant challenges remain and underscores the importance of international cooperation. The G20’s strong policy response to the crisis has played a pivotal role in restoring growth and we stand ready to safeguard recovery and strengthen prospects for growth and jobs. We welcome the determined actions taken by the European Union, the European Central Bank and the IMF. We will pursue well coordinated economic policies. The recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, growth-friendly measures, to deliver fiscal sustainability, differentiated for and tailored to national circumstances.  Those countries with serious fiscal challenges need to accelerate the pace of consolidation. We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions. Within their capacity, countries will expand domestic sources of growth, while maintaining macroeconomic stability. This will help ensure ongoing recovery.

This is a lot of diplomatic gobbledygook for “we are going to cut spending to please the bond markets and screw our own people” - the relevant passages are in bold.  The U.S. is not immuned from the same flawed thinking.  Deficit hawks are pushing congress to cut government spending and Democrats in congress are listening:

Even after Democratic leadership scaled back its bill to reauthorize several domestic aid programs, reducing its impact on the federal budget deficit by $50 billion, conservative rank-and-file Democrats remain unhappy.

For another good read check Professor Robert Reich’s story: Why Deficit Hawks Are Killing the Recovery.

The problem is that recessions that are caused by the financial sector are deep and nasty.  The choices are: 1) do nothing and endure weak economic growth and high unemployment plus all the high social costs related to high unemployment or 2) whip out the “whoopass stick” - implement policies that target full employment (which have been lacking so far).  Yes, that means more spending or tax cuts but if done right such as a direct jobs program, or better public infrastructure spending or/and tax cuts that target low income and middle income families we can achieve better and stronger growth much sooner. 

As for the deficit, why do people particularly talking heads in the media, always ignore the full equation of a budget deficit.  They ignore the revenue side of the equation.  Recessions cause tax revenue to drop - no surprise.  So, if we get the economy working again and reach full employment that will reduce the deficit and probably do it much sooner than if we cut, cut, cut or do nothing.  But no, deficit hawks and Democrats would much rather appease the bond market than help the people they represent. 

Let’s be clear austerity on behalf of deficit hawks and bond market will only hurt the rest of us particularly the most vulnerable in our country: children, retirees and unemployed.

Good luck.