Strangled by the Purse Strings: Austerity After the Shutdown

Strangled by the Purse Strings: Austerity After the Shutdown

Lost in the political theatrics of the shutdown and its resolution lies a simple and uncomfortable truth: if congressional Republicans failed miserably in their gambit to defund the Affordable Care Act or put Social Security on the chopping block, they succeeded in further cementing fiscal austerity as the organizing principle of national politics. The sequester is the new baseline. New budget talks loom. The question is not if we cut, but where and how much.

This is a dangerous and counterproductive path. In the long run, of course, it threatens the funding of basic public goods and services. There is little enthusiasm for this even among many conservatives—a fact underscored by the congressional concession (during the course of the shutdown) to shuffle federal services—one program, one cadre of employees, one national park at a time—to the “essential” side of the ledger.

In the short run, austerity stands as the steepest obstacle to economic recovery. In a smart and succinct summary assessment, the Economic Policy Institute’s Josh Bivens underscores the fact that such restraint on the recovery side of the business cycle is unprecedented in modern American history. As a general rule across postwar business cycles, recovery was bolstered by a 10 to 20 percent increase in public spending (by local, state, and federal governments) in the four years following the recessionary trough. Not this time. The sequester cut short the stimulus and erased its impact. Public spending in real (inflation-adjusted) dollars is essentially flat—up only .2 percent—since the recovery began in June 2009. We have shed over 650,000 public sector jobs in the last five years.

The impact is summarized in the graphic below. Following Bivens’s lead, the blue lines show public spending for eleven postwar recessions. These lines are indexed to zero in the quarter in which recovery begins, and show the percentage change over the next four years (sixteen quarters). The red lines do the same for jobs, pegging them at zero for the onset of recovery, and showing change over the recovery phase.

The historical pattern is not hard to discern. In recovery after recovery, increases in public spending and job growth go hand in hand. Across the last business cycle, however, we see a starkly different picture. For about a year and a half (the first six quarters) after June 2009, stimulus spending pushes the blue line up. But then the sequester hits in early 2013 and spending drops off. Not surprisingly, job growth remains anemic. By EPI’s estimates, simply spending at the rate we did in the previous three recoveries would win us back over 5 million of our missing 8 million jobs.

This point has been made tirelessly by economists on the left, but it is also the quiet consensus of the Federal Reserve—whose recent decision to continue with an expansionary monetary policy was quite clearly animated by the hope that it could undo some of the damage done by Congress. The recently released minutes of the September meeting of the Fed’s Open Market Committee make this clear—listing fiscal restraint among the “headwinds that have been slowing the pace of recovery” and concluding bluntly that “fiscal policy is restraining economic growth” [emphasis added].

Colin Gordon is a professor of history at the University of Iowa. He writes widely on the history of American public policy and is the author, most recently, of Growing Apart: A Political History of American Inequality, published by the Institute for Policy Studies at www.inequality.org