The Uncommon Sense Of Austerity

“Regular households are tightening their belts, and the government needs to do the same!” “If I ran my business the way these people run the government, I would be out of business!”

The power of these statements comes from their simplicity, and their direct appeal to the experience of the everyman. The danger in these statements comes from their simplistic view of economics, and their direct appeal to the lack of economic experience by the everyman. Folks that work for a living, raise kids, and try to have a life, have little time to learn the (boring) fundamentals of economics. Folks that earn their livings off the back of the everyman have made a habit over the last thirty years of abusing this knowledge gap. It is high time the gap was closed.

It may not be common sense, but basic fiscal policy isn’t terribly difficult to follow when (honestly) using your personal situation as a guide. For example, what is the principal on your mortgage? If you are middle of the pack, the value is about $165,000, and you pay more than $900 per month servicing the note. If you and your significant other are middle of the pack income-wise, your household take-home pay is around $4,000 per month (note that roughly half of the nation’s households will fall above these numbers, and half below.) If you had no other debts (student loans, credit card, medical installment payments, revolving charges, auto loans), and you were a country, you would be spending about 23% of your GDP servicing your debt. If you were that country, your debt to GDP ratio would be north of 250%.

For 2011, the United States’ debt to GDP ratio will be right at (if not a hair under) 100%, and our nation will have spent less than 2% of GDP servicing that debt (about $240 billion). Even if you abandoned GDP as a measuring stick, and went with tax receipts, the annual debt service of this country (what we pay in interest) is less than 10% of what we take in tax revenues. Folks, we aren’t talking about political ideology, talking points, spin, or campaign rhetoric…these are the numbers.

What our democracy is telling us, via historic and current reporting of financial data, is that fiscal austerity is uncommon sense. The short terms challenge to fiscal stability is the jobs deficit, not the budget deficit. The jobs deficit means consumers have less money to buy the goods and services of businesses big and small. The jobs deficit and massive top-end tax cuts are the reasons revenues have fallen.

When the Austerity Hawks invoke the phantom of common sense, they are trusting that you won’t actually look at the numbers. They are confident, when they scream about earmarks, that you won’t notice that stripping every earmark out of the budget would close less than 10% of the deficit. They are certain that, when they use a really big number for working class ears, like say $3 million, that you won’t notice that the number is actually a really small fraction of the budget, like say 0.0001% of the budget. They will scream about belt-tightening, and tell the world that spending is bad, when all of the historical data points to the opposite conclusion.

Spending, my friends, is a good thing. When this country, under the auspices of our democracy, spends money in this country, people go to work and businesses grow. Large deficit spending with a domestic focus pulled us out of the Depression (well before the onset of World War II), it pulled us out of the crippling recession of 1981-1982 (via the stateside focus of Reagan’s defense buildup), and via the Stimulus Law, the Great Recession. (Yes friends, the Stimulus worked, according to the majority of the work done on the question. Its principal drawback was that it was too small.) And it isn’t just the average homeowners and our entire country that appreciates the value and role of deficit spending. The corporate world understands the healthy role that debt capital plays, and generally accept debt to earnings ratios of 20% as positive figure; leverage is not something to run from if one is a corporate financial manager.

But too much leverage is, indeed, a bad thing. Trend is definitely a consideration, and budget deficits are on a dangerous trend…but why? Why is the first question that any business manager would ask, because fixing the why is the only way to fix the problem. In the case of the United States, the why’s are fairly simple: long term medical cost inflation, the systematic overvaluing of the dollar, and perverse construction in our free-trade agreements. Note please that welfare, the FAA, Planned Parenthood, NASA, and PBS are not drivers of long term deficits. That Social Security and Medicare have questionable futures is directly related to the realities of the first point; the absurd structure of our medical marketplace.

When real managers in real businesses use common sense to fix problems, they begin by honestly and accurately identifying the actual problems. They proceed to the common-sense step of fixing the actual problems. But when the Austerity Hawks talk of balancing the budget, tightening the belt, and practicing their version of fiscal responsibility, honesty and accuracy aren’t their concerns; the value and future performance of their bond portfolios, however, is right there next to their hearts. We have spent 30 years slowly rolling back the tax levels, union relations, and jobs policies that defined the golden age of this nation…has the rollback translated to a better life for you and yours? Answer the question this November.

 

The Rational Middle is listening…