Posted: 01/30/2013 1:25 pm EST | Updated: 01/30/2013 1:46 pm EST
WASHINGTON — Lawmakers were stunned Wednesday to learn that the U.S. economy officially dove toward a double-dip recession at the end of 2012, contracting for the first time in three and a half years amid steep declines in government spending and sluggish exports.
Policymakers were similarly stunned in Europe when reductions in government spending led to continued economic malaise, leading top economists there to question the logic behind austerity recommendations. European austerity programs are a major driver of the slowdown in U.S. exports, and several economists have argued that reductions in government spending, here and abroad, are almost solely responsible for the suddenly tanking economy.
“Austerity has been terrible for Britain and the rest of Europe,” said Chad Stone, an economist with the Center on Budget and Policy Priorities, a liberal think tank. “We’ve not been as bad as them, but we haven’t given our economy the support it needs.”
Congress is still driving headlong into the forced austerity known as sequestration, scheduled to take effect in March, which requires across-the-board spending cuts at the Pentagon and among domestic policy programs.
“Today’s GDP numbers show the toll that political conflict over fiscal policy is taking on U.S. economic growth,” said Adam Hersh, an economist at the Center for American Progress, a think tank closely allied with the Obama administration. “The 0.1 percent economic contraction puts the United States on the precipice of recession. Our economy would certainly have grown at a faster rate last quarter, were it not for political brinkmanship over the debt ceiling and the risk of sharp fiscal contraction in the form of automatic ‘sequestration’ budget cuts. That contraction is now unfolding.”
Warnings about the dangers of austerity have been growing louder in recent months, even from sources that conventionally applaud austerity regimes. In October, the International Monetary Fund issued a report concluding that global policymakers had dramatically underestimated the significance of government spending during a recession. As a result, lawmakers expecting modest drags from austerity instead saw their economies plunge back into a devastating recession. The United Kingdom, where unemployment now stands at 7.7 percent, has experienced a triple-dip recession. In Spain and Greece, unemployment is over 25 percent, with savage humanitarian consequences: HIV infections in Greece are up by over 1,500 percent since the austerity campaign began in 2010.
“This is a warning about the sequester,” Stone said.
“As Europe has shown and the IMF has warned, inflicting austerity on a weak economy is ruinous and is likely to drive us back into a recession,” said Robert Borosage of the liberal Campaign for America’s Future. “Those dismissing the downturn as due to an odd drop in government spending should consider that more of these are on the docket.”
And yet austerity has been the dominant policy focus of Congress since the expiration of President Barack Obama’s economic stimulus package in mid-2010.
The congressional emphasis on austerity is most heavily concentrated in the Republican Party, which has been advocating deep spending cuts at every opportunity. On Sunday, House Budget Committee Chairman Paul Ryan (R-Wis.) continued the push to cut government spending, including the massive upcoming defense and social safety net cuts included in the sequester.
“I think the sequester is going to happen, because that $1.2 trillion in spending cuts — we can’t lose those spending cuts. That was to pay for the last debt ceiling increase, let alone any future increase,”Ryan said on “Meet the Press.”
But deficit-conscious Democrats, including President Obama, have taken many steps to fuel the austerity fire. Obama spent much of his first term rhetorically conceding to austerity in his talking points, saying that the government “can’t create jobs,” a point that he continued to make throughout his reelection campaign. In 2010, Obama froze federal worker pay, a move intended to signal his seriousness about implementing cuts.
In early January, Democrats and Republicans agreed to allow the payroll tax cut to expire — functionally a 2 percent tax hike on American workers. That decision will suck $125 billion out of the economy and deal a 0.6 percent hit to GDP over the next year, according to JPMorgan economist Michael Feroli.
“It’s certainly the case that the disappearance of the payroll tax holiday is a drag on the economy,” Stone agreed.
That tax cut threatens to undermine one of the relatively bright spots in Wednesday’s GDP report. As Alan Kreuger, chairman of Obama’s Council of Economic Advisors, emphasized in a blog post, “Several private sector components of GDP continued to make positive contributions to growth in the fourth quarter. Personal consumption expenditures, the single largest component of GDP, increased by 2.2 percent.” But the smaller paychecks resulting from the payroll tax increase will mean lower consumer spending numbers in 2013.
With serious fiscal support from Congress and Obama off the table, Washington has focused on peripheral — and perhaps ultimately destructive — efforts to create jobs.
In the fall of 2011, Obama pushed through free trade agreements with Panama, Colombia and South Korea, promising an increase in American exports. Exports to those three countries have declined since the deals were approved.
In April 2012, Obama and congressional Republicans celebrated the passage of “The JOBS Act,” a corporate deregulation bill that both White House advisers and GOP leaders said would unlock economic growth.
Neither of these efforts has had any significant effect on the economy.
“The trade stuff was always a joke and everyone knew it. Giving them their best case, you were talking about incredibly trivial impacts on trade. In a best-case world, maybe the total increase in trade from these deals would be $50 billion a year in each direction (netting out near zero), and this would be over the course of a decade. You can’t find that in the GDP numbers,” said economist Dean Baker, co-director of the Center for Economic and Policy Research.
“The [JOBS Act and free trade deals], I would go with ‘worthless jokes’ as jobs legislation,” said Josh Bivens, an economist with the liberal Economic Policy Institute.
“Growth has been sh***y,” said Kevin Hassett, an economist with the conservative American Enterprise Institute.