Tuesday, October 22, 2013

Cuts Aren't Smart

No one can say we didn't try to warn everyone. As the latest and greatest G-O-TEA induced manufactured crisis was underway, we were warning of the consequences it would have on an already fragile economic recovery. And now, we have a better sense of just how fragile our economy was going into the manufactured crisis.

Since that very crisis delayed the release of the official US unemployment numbers, we had to wait until this morning to see them. But now, we know that the American labor market added 148,000 jobs (non-farm) last month as the unemployment rate slipped slightly to 7.2%. The good news here is that all those jobs were added. In addition, it looks like the unemployment rate did not drop as a result of dropping workforce participation (as it has occasionally before).

Yet with this being said, these numbers indicate continued slow recovery and meddling jobs improvement. And remember, this is before the latest and greatest manufactured crisis kicked in.

We've talked about this before. Austerity is holding us back. It's difficult for the economy to grow if the federal government keeps cutting investment in the nation. That means fewer sales and fewer jobs.

After all, investment begets growth. So why is the fiscal conversation in Washington revolving around cuts and contraction? Wonkblog's Neil Irwin has been asking the same question this morning.

The sequestration policy of automatic spending cuts that went into effect in March really are having an effect. It hasn't showed up much in the jobs reports in ways that can be easily measured (though federal government employment excluding the Postal Service is down 73,000 jobs over the last year, a 3.4 percent decline).

But the workhorse economic models used in places like the Congressional Budget Office and Federal Reserve and private sector forecasters all show that the spending cuts should ripple through the economy and translate into less economic activity, and the soft job growth of the last few months fits that story to a tee.

Perhaps the best evidence for federal spending cuts as the culprit behind weak growth is this: It's the only culprit left standing when you consider the other possibilities. Financial markets have been on a tear, and business and consumer confidence has been strong this year (at least until the October shutdown). Consumers have made major progress reducing their debt burdens. The housing market has stabilized, and is no longer a drag on the economy. [...]

In other words, there's every reason to think this should have been a good year for the American economy. Yet here we are back in the doldrums, experiencing the same ambling pace of recovery that has been all too common since the technical end of the Great Recession in the summer of 2009. Americans can probably look to Washington to assign blame -- and that's before the tumultuous last few weeks exact whatever toll they will exact on growth.

So why are G-O-TEA politicians demanding even more austerity? And why is anyone in Washington taking their seriously as "smart fiscal policy"? It's not. In fact, this is the stupidi-TEA that's holding us back.

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