Government austerity costs in jobs, wages

Retreat from efforts to promote recovery has been bipartisan

Bloomberg News

The United States is paying a big price in growth, jobs and wages by practicing the kind of fiscal austerity that it criticizes European nations for pursuing.

If federal, state and local governments were cutting taxes, increasing spending and expanding hiring as they did during all but one recovery since World War II, the economy would be growing 3% a year rather than slightly over 2%, the average of the past six years, according to a Bloomberg analysis of data.

About 2.4 million more Americans would be employed, helping to push up lagging wages, the analysis estimates.

“There’s really nothing in the postwar that compares with the current expansion,” said Brookings Institution economist Barry Bosworth. “We threw in the towel on fiscal stimulus way too soon.”

The government’s role in the economy has taken on new significance in light of concerns that growth may have ground to a temporary halt in the first quarter of the year, slowing a recovery that has already taken longer than normal to reach prerecession levels.

Opponents of using fiscal tools, especially higher government spending, focus on what they regard as a greater threat than tepid growth: federal deficits and debt. “Government can’t spend its way back to a strong economy,” said Rep. Kevin Brady, a Texas Republican and member of the House Ways and Means Committee.

The Obama administration and Congress agreed in 2009 on an $830 billion stimulus plan to help break the economy’s fall during the recession that began in December 2007, then abruptly dropped the effort after growth resumed. By many measures, the federal government’s actions since then have been the most fiscally contractionary since the rapid demobilization of troops after World War II.

Bloomberg News reviewed government tax, spending and hiring data for each expansion since 1945, looking especially at those that were at least as long as the latest upswing so they could be measured at the same point in the cycle. Among the findings: In past long recoveries, government hiring added an average of almost 14% to overall job growth. This time, it has subtracted more than 6%.

Government consumption and investment previously contributed an average of more than a half-point to annual growth of the gross domestic product. This time, they have shaved off an average of a quarter of a point.

Personal income tax burdens were cut during prior recoveries by an average of 10% to encourage consumer spending. That is less than the 25% reduction early in the current expansion. But while over half the cuts in past upswings remained in place for six or more years, well over half of the reductions this time were unwound by the end of the third year.

The nation’s retreat from tax cuts and spending increases to promote the recovery has been a bipartisan affair. Democratic President Barack Obama and Republican House Speaker John Boehner agreed in 2011 to apply the fiscal brakes by negotiating $1 trillion in spending cutbacks over 10 years and a process to impose more.

Now the driving political force is largely one party. Congressional Republicans recently passed a budget outline for next fiscal year that calls for further cuts, which the nonpartisan Congressional Budget Office estimates would knock a half-point or more off growth through 2018. Not a single Democrat backed the measure.

Brady, who also is vice chairman of the congressional Joint Economic Committee, said that even if extra spending helped growth, Washington can’t afford it because of debt. Federal debt held by the public is at its highest level relative to the size of the economy since the years immediately after World War II — 74% of GDP, according to the Congressional Budget Office.

All the government can do, Brady said, is “get itself out of the way of a stronger economy” by removing regulatory and other barriers to private investment.

Fiscal policy advocates counter that with recordlow interest rates, borrowing is cheap and that stronger growth is the best cure for the debt.

“There’s really nothing in the postwar that compares with the current expansion. We threw in the towel on fiscal stimulus way too soon.”

Barry Bosworth,

Brookings Institution