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. 

What Happened to Shared Growth? Institutions vs. Supply and Demand

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."

Fast Food Failure: CEO-to-Worker Pay Disparity

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.

Read more: Fast Food Failure: CEO-to-Worker Pay Disparity

VIDEO: Robert Pollin's Post-Austerity Agenda

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. 

Austerity: Federal Job Creation Program

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: Failed Economics but Persistent Policy

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

Do Budget Cuts Lead to Growth?

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.

Argentina: Diverging from Austerity

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."

Why Do We Ignore the Long-Term Consequences of Recession?

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.

Read more: Why Do We Ignore the Long-Term Consequences of Recession?

Do Budget Cuts Lead to Growth?

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"

The Age of Greed: Opposing Tax Cuts

by Jeff Madrick, SCEPA Senior Fellow

Age of GreedThe current public discourse over cutting the federal budget is not about economics, but politics. Nothing is so striking as the fact that those seriously disturbed by a rising budget deficit and a growing debt-to-GDP level have so little to say about raising taxes—or if they do, it is with little conviction.

To the contrary, most of the officially sanctioned plans include tax cuts as a major component. How can this be? Surely, the great advocates of reducing budget deficits, such as the Committee for a Responsible Federal Budget, should be highly visible advocates of tax increases. If they are not—and they are not—they should justify their position.

The main exception is the refreshing budget recently released by the Congressional Progressive Caucus, a truly enlightened effort to raise taxes judiciously, reform healthcare, and increase public investment.

Read more: The Age of Greed: Opposing Tax Cuts