Age of Austerity

In response to the economic downturn that followed the 2008 financial crisis, many nations, including the United States, experimented with austerity policies that constricted public spending and investment in the name of boosting business confidence. We now know that - far from restoring economic growth - slashing government spending on education, social welfare, retirement, health, and infrastructure has fostered economic decline and a slow, inadequate recovery. 

This blog documents the failure of austerity policies that persist politically despite economic stagnation. As an alternative, SCEPA economists offer concrete policies to create economic growth and prosperity for everyone. 

On March 10, 2015, David Kotz, Professor of Economics at University of Massachusetts Amherst and Distinguished Professor of Economics at Shanghai University of Finance and Economics presented a seminar on his new book, "The Rise and Fall of Neoliberal Capitalism." 

Kotz began studying neoliberal capitalism in the 1990s and was one of the few academic economists to predict the economic collapse of 2008. His presentation provided a historical trajectory of neoliberal capitalism from the Carter administration through the aftermath of the Great Recession.  

Wage Stagnation: The Unsustainable Outcome of Neoliberalism
Kotz imageKotz's analysis reveals that neoliberalism provided a long period of economic growth with low inflation, but that the corresponding decrease in wages had three significant side effects, including increasing inequality, asset bubbles, and financial institutions' increasingly risky behavior.

This precarious situation was initially supported by the growth in housing values. However, once the bubble burst, the unsustainability of neoliberal capitalism became clear in the rising household and financial debt, the spread of toxic financial assests and capacity in excess of demand. The recession and financial crisis that followed resulted in the structural crisis we experience today - stagnation.

Austerity: A Doomed Answer to the Structural Crisis
According to Kotz, labor force participation has been dropping since 2007. And while the profit rate bounced back immediately after the recession due to the federal rescue of financial institutions, capital accumulation did not. Kotz points to austerity policies, or curtailing public spending, as a doomed attempt to" double-down" on neoliberalism, but the conditions necessary to promote consumer spending are no longer present. According to Kotz's reading of history, "stagnation will continue unless and until there is a major institutional restructuring." 

The Real Answer: Restructuring 
Kotz gives us three potential scenerios for the future. First is a nationalist form of capitalism that relies on military growth to prop up spending and demand. Second is a return to neoliberalism's predecessor, regulated capitalism, which was built on a coalition between labor and capitol. Third is a transition to an alternative socialist system. 

Of the many possible critiques of the first two options, Kotz highlights that any system that rapidly accelerates economic growth will also accelerate climate change. However, the third option holds open the door to a transition beyond capitalism that increases social welfare while decreasing the production of goods. 

The event was part of the Spring 2015 Seminar Series hosted by The New School Economics Department. 

David HowellBrad DeLong, a widely-read economist and blogger, cites SCEPA economist David Howell's work investigating the causes of wage inequality and unshared productivity growth as today's "Morning Must-Read." Howell's research with the Washington Center for Equitable Growth asks, what happened to shared growth?

"Most economists continue to explain the explosion of earnings inequality with conventional supply-and-demand stories, in which worker compensation is believed to accurately reflect the contribution workers make to production. Thus, in this view, CEOs and financiers have received skyrocketing salaries, especially since the mid-1990s, because they are now contributing dramatically more to their firms and to the economy as a whole.

Similarly, the bottom 90 percent have seen stagnant and falling wages because they've fallen behind in the "race between education and technology." The computerization of the workplace requires greater cognitive skills, but workers have not kept up, as indicated by the slowdown in college graduation rates. Assuming (nearly) perfectly competitive markets, the explosion in wage inequality in this view must reflect a similarly explosive increase in skill mismatch (too many low skill workers, too few high skill ones).

Such arguments leave little or no room for labor market institutions and public policies in determining changes in the distribution of earnings up and down the income ladder. An alternative view is that institutionally-driven bargaining power is a critical piece of the story, whether it is the noncompetitive "rents" earned by top managers and financiers, or the collapsing power of hourly wage employees."

Catherine RuetschlinDemos recently published a report by New School PhD Candidate in Economics, Catherine Ruetschlin, "Fast Food Failure: How CEO-to-Worker Pay Disparity Undermines the Industry and the Overall Economy."

The report studies CEO-to-worker compensation ratios across industries, finding Accommodation and Food Services to be the most unequal sector in the economy. This fact is driven by the extreme pay disparity of the fast food industry, which is also one of the fastest growing employers in the nation.

Demos' research supports the renewed call, started by Robert Reich's  Inequality for All and Thomas Piketty's Capital in the Twenty-First Century, among others, to question increasing inequality, it's link to economic instability and what is driving it.

The Annual Robert Heilbroner Lecture on the Future of Capitalism:
Towards Full Employment, Financial Stabilization & Environmental Sustainability


The failure of austerity policies in both the United States and Europe is clear. But it's time to move beyond documenting failure. Now we need solid policy solutions that promote long-term economic recovery for working people, the poor, and the middle class - not just the 1%.

On February 12, Economist Robert Pollin presented SCEPA's annual Robert L. Heilbroner Memorial Lecture on the Future of Capitalism. Pollin proposed a post-austerity policy agenda that lays out a clear path to job creation and lowering public debt - while advancing greater equality and environmental sustainability.

Robert Pollin, Distinguished Professor of Economics at the University of Massachusetts-Amherst, received his PhD from The New School and studied under Robert Heilbroner. He is co-director of the Political Economy Research Institute (PERI) and co-author of a recent study that debunks the notion that austerity policies can promote economic growth by starving social spending.

This event celebrated the fall issue of The New School's Social Research journal, "Austerity: Failed Economics but Persistent Policy." It was jointly sponsored by Social Research: An International Quarterly, the Center for Public Scholarship, and the Environmental Policy and Sustainability Management Program at the Milano School. 

On December 4, 2013, The New York Times published an op-ed, "Federal Law Requires Job Creation" written by William Darity, Jr., professor  and director of the Research Network on Racial and Ethnic Inequality at Duke University.

Darity's piece reflects research done with co-authors Alan Aja, Daniel Bustillo and Darrick Hamilton for an essay published in The New School's Fall 2013 edition of the Social Research journal, "Austerity: Failed Economics but Persistent Policy." In their article, "Jobs Instead of Austerity: A Bold Policy Proposal for Economic Justice," the authors propose policies to address the consequences of austerity, including high unemployment and increasing inequality.

Specifically, Darity holds the United States accountable to comply with the Full Employment and Balanced Growth Act of 1978, commonly known as the Humphrey-Hawkins Act. The law requires the public sector to create jobs if the private sector doesn't bring the economy to full employment.

Darity and his co-authors argue that the only way to accomplish and enforce full employment is through Keynesian stimulus spending and the creation of a federal job guarantee. To do so, they call for the creation of a "National Investment Employment Corps" to both fulfill the mandate of the federal job guarantee and address the nation's need for environmentally-friendly infrastructure. This would put the United States on the road to full employment while mitigating against the adverse effects of climate change.

They estimate that - 25 years later - the Humphrey-Hawkins Act mandate of zero unemployment could finally be fulfilled.

austerity coverFollowing a debilitating federal shutdown that failed to resolve conflicts over government spending and economic recovery, SCEPA economists both edited and contributed to an upcoming journal publication that critiques the mainstream acceptance of austerity policies.

Austerity: Failed Economics But Persistent Policy,” is the November 1st issue of Social Research: An International Quarterly, a publication produced by The New School’s Center for Public Scholarship. The volume includes thirteen essays by leading economists, including Teresa Ghilarducci (co-editor), Robert Pollin, Rick McGahey (co-editor), and Willi Semmler, offering tools to escape austerity’s ill-advised vision and concrete policies to create economic growth and prosperity for all people, rather than just a wealthy few.

The volume describes austerity policies both here and abroad, how implementation has restricted economic growth, and why government officials continue to support these policies in spite of their poor track record. Specifically, authors argue that austerity policies hamper economic recovery, but remain popular among elites as a tool to lower labor costs and taxes while increasing profits. A real path to economic recovery and long-term fiscal health requires refocusing the debate from how to eliminate debt to how to eliminate mass unemployment.

Alternative policy proposals include a federal loan guarantee program for small businesses (Pollin), creation of a permanent federal government job guarantee program (Hamilton), and an expansion of Social Security to stabilize the economy and bolster the bargaining power of labor (Ghilarducci).

This issue can be ordered online

On April 17, 2012, SCEPA organized an event to discuss, "What the U.S. Should Learn From Austerity's Fallout in Europe and Latin America?"

Policymakers around the world have embraced austerity measures as the solution to the continuing economic malaise. Yet, the evidence of recent experience does not support this prescription. To encourage a broader discussion for the United States' future budgetary decisions, New School economists offer a different vision to create stability and growth.

Specifically, they review the theoretical foundations of austerity economics and the experiences of austerity and intervention in the European Union and South America. The event includes a discussion of the practicality of the pursuit of austerity policies in the United States and an analysis of the assumptions made by supporting politicians and policymakers.

Panelists and Presentations:

"Spend Now, Cut Later: Fiscal Policy and Economic Growth"
Richard McGahey, Professor of Professional Practice, Public Policy and Economics, Urban Policy Program, New School for Public Engagement

"The North Can Learn from the South"
Michael Cohen, Professor of International Affairs and Director, Graduate Program in International Affairs, New School for Public Engagement

"Labor Market, Labor Institutions and Social Protection in Latin America"
Roxana Maurizio, Researcher-Professor, Universidad Nacional de General Sarmiento and CONICET, Argentina, and visiting CONICET Fellow at GPIA.

"Madmen in Authority and the Scientific Foundations of Austerity Policies"
William Milberg, Professor of Economics and Chair, Department of Economics, New School for Social Research

Moderator: Teresa Ghilarducci, Professor of Economics, New School for Social Research

This was the second in a series of SCEPA discussion's regarding the political power of austerity in the United States' response to the recession. The first event, "Do Budget Cuts Lead to Growth?," was held on December 13, 2011.

Michael Cohen, director of The New School's graduate program in international affairs, discusses how Argentina's successful response to the global economic recession of 2008 was not to slash the budget to reduce debt, but to invest in their economy. He presents an alternative to U.S. policy makers who are intensely focused on a path of austerity and shows that austerity is not the only path. The graph below is discussed in the video and exemplifies how targeted stimulus spending can be very effective.

This discussion follows Cohen's presentation at a SCEPA panel discussion on austerity in politics and economics held in late 2011, "Do Budget Cuts Lead to Growth." SCEPA will be holding a second panel discussion on this theme on April 17, 2012. The event will focus on "What the US Should Learn From Austerity’s Fallout in Europe and Latin America."

by Jeff Madrick, SCEPA Senior Fellow

It is rare that I highly recommend a piece by Samuel Brittan, an intelligent and thoughtful, but often conservative, veteran Financial Times columnist. His column on February 10, 2012, entitled "Why the World Economy is Still Spluttering Away," is worth a look. He lays out in effortless brevity nine approaches being recommended to deal with the overhang of savings in the world, a glut led by the Chinese, and to many the source of our slow growth. To many of us, a glut is a misnomer, it is really a lack of demand. Brittan is weighed down by some free-market ideological baggage of his own, but he is typically an unstubborn pragmatist. He lists the approaches, almost all of which he thinks are wrong-headed, with the exception of demand stimulus. Most of these approaches are making matters worse, some much worse.

Will Milberg Richard McGahey   Michael Cohen

On December 13, 2011, SCEPA hosted a panel of New School economists to discuss the deep divide among economists around questions of austerity and to analyze policy responses outside the U.S. The event featured a lively discussion between panelists and audience members of how draconian budget cuts came to be the dominant policy prescription, why so many economists and policymakers support the illogical contention that cutting public sector jobs and spending will spur employment and consumption, and alternatives to the  dominant economic voices advocating austerity as a cure for slow growth. 

The presentations included:

William Millberg, Professor of Economics and Chair, Department of Economics, NSSR: "Austerity and Growth in Economics"

Richard McGahey, Professor of Professional Practice, Public Policy and Economics, Urban Policy Program, Milano School: "Congressional Supercommittees and the End of Berlusconi: the US and Europe"

Michael Cohen, Professor of International Affairs and Director, Graduate Program in International Affairs, Milano School: "Do Budget Cuts Lead to Growth? The Experience of Latin America"