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In a World Without Austerity…

Job fair

SOURCE: AP/Alan Diaz

Job seeker Kelsey Devoe of Miramar, Florida, fills out a contact form at a job fair in Miami Lakes, Florida, Wednesday, August, 14, 2013.

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Thanks to the federal government shutdown, there is an absence of new U.S. job market data for September 2013. Let’s take a moment to imagine the kind of economy we might see in the United States today had we not just lived through three years of fiercely divisive politicking for fiscal austerity—sharp cuts to public services and investments, as well as cuts to taxes on America’s wealthiest people.

If federal and state governments had not adopted policies of fiscal austerity, today’s jobs report from the Department of Labor would likely be telling us, as shown in Figure 1:

  • U.S. employers added more than 260,000 jobs in September.
  • The unemployment rate for September fell below 6 percent.
  • Since December 2010, the U.S. economy has added more than 8.2 million new jobs—or 2.4 million more than have actually been added.

Outcomes of this magnitude would not have required extraordinary rates of government expenditure; the estimates only suppose that government expenditures remained at constant pre-Recovery Act levels, or 36 percent of potential economic output. From January 2011 to the present, rather than contracting by $140 billion, government expenditures would have grown by $300 billion, proportional to the size of the U.S. economy. Applying standard fiscal multipliers—estimates of how much economic activity is generated by a dollar of public spending, about $2 for each dollar of spending—shows that the U.S. economy would be growing at an average of 3.3 percent a year, rather than 1.9 percent since 2010.

Admittedly, these output and employment counterfactuals are rough approximations of the scale of economic loss produced by fiscal austerity, but they give an idea of how costly that policy has been. This yawning gap in economic growth between our present and imagined anti-austerity worlds would make a striking impact on the U.S. jobs situation as well. Rather than adding 5.7 million jobs from January 2011 to the present, an America without the politics of austerity would have added an estimated 8.2 million new jobs—another 77,000 jobs every month.

How did we get here?

After the relatively mild 2001 recession, it took the U.S. economy three-and-a-half years to recover to its pre-recession employment peak—and only thanks to the largest financial and real estate bubble since the Great Depression. Although the official unemployment rate stabilized, the share of the U.S. population employed at work never recovered: The ratio fell from nearly 65 percent in late 2000 to the bubble-economy peak of 63 percent in 2007. Despite the economy’s lofty bubble-blown riches, average inflation-adjusted wages for U.S. production and nonsupervisory workers—essentially, those not in the top few percentiles of U.S. income earners—at the end of 2007 remained at the same level as in 1980.

In short, the U.S. labor market before the Great Recession was not so great. Even people working in good jobs felt increasing financial stress on their families and uncertainty about the U.S. economy’s ability to deliver a middle-class standard of living. Then the bubble burst, the U.S. economy entered recession at the start of 2008, and by the following September, the financial system threatened meltdown, causing a recession in the global economy. By January 2009, the U.S. economy was losing more than 800,000 private-sector jobs per month, and by the time the bleeding stopped in February 2010, the private sector had lost more than 8.7 million jobs.

As its first action in the new session, Congress enacted the American Recovery and Reinvestment Act of 2009 in late January. Tax cuts to families and businesses as well as ramped-up public investment in infrastructure, energy, and education from the Recovery Act, alongside big stimulus from the Federal Reserve and other smaller government policies to boost jobs and growth, helped stop the economic bleeding and return employment growth to positive territory by early 2010. By December 2010, U.S. private employment had recovered nearly 1.3 million of those lost jobs.

While these stimulative efforts saved jobs and maintained public services and investments, the midterm elections in November 2010 infused American government with a caustic new breed of politics—both in Congress and in many state capitols across the country—which, beginning in January 2011, had an immediate chilling effect on jobs and growth policies. In the U.S. Capitol, the threats to shutter government and force a financial default began almost immediately, resulting in the Budget Control Act in August 2011 and paving the way for sharp automatic spending cuts at the end of 2012. At the state and local government levels, the politics of austerity—often coupled with attacks on public service workers, especially teachers—further dragged down employment and workplace standards that underpin local labor markets.

Private-sector forecasters offered the most telling judgment on the economic impact of this political push for spending cuts and the uncertain business investment it created. As the effects of conservative politicking mounted, they downgraded their outlook for U.S. economic growth by more than one-third. Much recent economic research confirms forecasters’ pessimism as it turns out that at times like this—where there is still much business slack in the economy and when interest rates are so low—spending cuts carry a profound negative impact while fiscal stimulus is more powerful at spurring jobs and growth than economists previously realized.

Unfortunately, since 2011, Americans—and the world—have watched the same actors play out the same political drama like a broken record: offering growth-sapping budgets that could not garner a majority of votes and obstructing policymaking with a conservative agenda that found no purchase through legislative, judicial, or electoral means. What might have been if the U.S. economy had not suffered this self-inflicted wound of fiscal austerity?

To be clear, increased government spending on jobs and public investment on its own is no panacea for the myriad economic challenges faced by American families and businesses still emerging from the Great Recession. Bolder policies are needed to bolster U.S. economic competitiveness through education, science, and infrastructure investment, as well as to redress runaway inequality that distorts economic incentives and undercuts America’s middle-class engine of growth.

But none of this is possible when a minority faction can take its own party hostage, paralyzing the government that plays such an indispensable role in our complex, modern market economy.

Adam S. Hersh is an Economist at the Center for American Progress.

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