Get off the fiscal cliff, already! (or, It’s not austerity, stupid)

taxVgdp4-24-12All this hand-wringing about the fiscal cliff is really annoying, not because it’s not a serious problem, but because it’s not so difficult to resolve. Democrats propose raising taxes for the top two percent. The Republicans like to say that the real problem isn’t taxes, it’s spending. They want to double down on spending cuts because a prime goal of theirs is to starve the beast— to eviscerate the government except, of course, for defense spending, which they would not limit, not even to current levels, but increase.

The real problem, folks, is jobs. When people go back to work, they pay taxes and spend the money they’ve earned. The latter boosts the economy, and both increase revenue. A return to the pre-crisis employment rate would go a long way towards eliminating the deficit. When more people are working, it’s not only income tax revenue that increases. The goods and services employees purchase are also taxed. In addition, higher employment results in lower government spending on parts of the safety net like unemployment benefits.

On the other hand, the austerity measures and cutbacks on discretionary spending proposed by the right result not only in the death of Big Bird, but also in the gutting of essential services such as transportation and education. One effect of cutting sharply into transportation is an increase in costs to businesses that depend on roads, railways and air travel to move their goods to market. Repairs to our crumbling infrastructure would be sharply curtailed, encouraging accidents and increasing unemployment in construction and other sectors of the economy. Paring down education also harms business, as the pool of qualified workers in every field— already a serious problem— would be further diminished.

And since more than half of discretionary spending is for security and defense, which Republicans would increase, it’s the social agencies that would shatter under the austerity axe. Again and again polls show that Americans give a much higher priority to job creation than to deficit reduction, which they would solve by raising taxes on the wealthy and reducing defense spending. Republicans would lower tax rates for the wealthy and increase defense spending while slashing mandatory spending on social programs that benefit the poor and the middle class, e.g., food stamps, Medicare and Medicaid, programs that voters vigorously approve.

Mandatory spending consumes more than half of the federal budget. It is three times the military budget, and 1 1/2 times all discretionary spending. Social Security and Medicare are the largest items. They represent more than half of mandatory spending, yet cuts to those programs have to be carefully devised, as they will adversely affect the poor, the middle class and seniors almost exclusively. This is the reason Democrats refuse to accept balancing the budget “on the backs of” the neediest members of society.

Defunding government agencies and departments invariably means firing people. Thanks to mandated cuts, at least 600,000 government workers lost their jobs and more than 132,000 teachers were laid off in 2011. If state and local governments had been allowed to hire at their previous rate, calculates David Leonhardt, they would have added half a million jobs to the economy. Instead, as of 15 months ago, austerity had “cost the economy about one million jobs.”

I’m not an economist, and perhaps the devil is in the details, but it seems obvious to me that austerity increases unemployment and decreases GDP. Austerity consequently will achieve the opposite of its intended purpose of reducing the deficit. If the proponents of austerity were to look at the European economies that have instituted severe cost-cutting measures, they would see that those countries are sinking into devastating recessions.

Since austerity won’t work to reduce the deficit, what will? 

Comprehensive immigration reform will help by enlarging the labor pool. Social Security, the largest item in mandatory spending, is funded by a payroll tax on current workers, but demographics are working against us. The number of workers is rapidly shrinking with the retirement of the Baby Boomers, and by 2017 there will be too few workers to sustain Social Security.

At the same time, Boomers are expanding the ranks of Medicare beneficiaries. Medical costs on the supply side have to be sharply reined in. Giving Medicare the ability to negotiate drug costs with pharmaceutical companies is one way.

Only the federal government has the ability to borrow— yes, to borrow and thereby increase the deficit temporarily— in order to create jobs. Higher taxes, contrary to Republican conviction, do not depress the economy. Increased government spending as a stimulus to job growth, not austere cutbacks, will invigorate the American economy and consequently reduce the deficit.

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