Reports from the Economic Front

a blog by Marty Hart-Landsberg

The Budget Cutting Scam

The big push is on to blame government for holding back economic progress.  Slash taxes, cut spending on social programs, and weaken laws that support unions, we are told, and employment and investment will soar.  Of course, we already tried this strategy and the results were not good.

Beginning in the 1980s, tax rates were slashed for corporations and the wealthy, regulations were reduced, unions were weakened, corporate mobility was enhanced—and what did we get: slow growth, declining earnings, greater economic insecurity, and fewer social services.  Why did we stick with this strategy for so long?  The answer is simple: growing income and wealth for those at the very top of the income scale.  

One might have thought that the recent economic crisis would have discredited this “free-market” theory of economic progress.   Afterall, we escaped a major depression only because of a massive government bailout of corporate America.   Yet, ironically, this same corporate America is now claiming that the huge bailout, the very bailout that saved it, is what is keeping us from enjoying future economic growth.  Without any hint of embarrassment, leading corporations are arguing for the very same policies that got us into this mess in the first place.  I guess given how well they did the first time around, who can blame them.

The fact is that cutting taxes and social spending and weakening unions will produce a new disaster for the great majority of us.  We are experiencing economic stagnation.  The housing bubble that supported growth last decade–although not a sound economy–is over.  If we don’t get serious about raising taxes and using that money to finance new government programs aimed at achieving economic restructuring, putting new restrictions on corporate mobility, and implementing new laws that support unionization, majority living and working conditions will worsen.  We have been in an expansion since mid-2009—-these are the “good times.”  Imagine what life will be like when the next downturn comes.

One way to appreciate the strength of stagnationist forces is to look at our banking system and its holdings of excess reserves.  As the chart below reveals, banks are just piling up money.  Excess bank reserves totaled $2 billion as recently as August 2008; they are now almost $1.4 trillion.  Banks are not lending because they don’t see any gain in it.  And they don’t see any gain because of the depressed economic conditions.

Does anyone really believe that cutting government spending will suddenly spur profitable loan opportunities, that business will suddenly become eager to hire workers, increase their pay, and invest in new plant and equipment?  One might think that even the banks would be unhappy with this situation.  Well they might have been except for the “subsidy” they get from the government; the Federal Reserve, since October 2008, is paying banks interest on their excess reserves similar to the rates on short-term Treasury securities.  Banks pay us almost no interest on the money we deposit in them, and then the Federal Reserve pays them a nice interest rate just for holding our money–such a deal. 

No wonder corporate America is happy with the status quo.    

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