Would GOP Austerity Lead to Growth?

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Paul Jay, Senior Editor, TRNN: Welcome to The Real News Network. I’m Paul Jay in Baltimore.
In the last three months of 2012, the GDP in the United States grew at an anemic 0.1 percent. Compare that to 2011, where the growth reached 2 percent. So how do we explain that 2012 is even slower than 2011 when we are being told by the Obama administration and most economists we’re in the midst of a slow recovery? This doesn’t seem to equal a recovery at all.

So in this interview we are going to look at two propositions. The first is what would happen if the Republican Party was able to pass all the legislation it would like to pass. Would that lead to growth? And then we’re going to ask the question, what if President Obama could pass all the legislation he’s proposed? Would that lead to growth and deal with the questions which both parties say they want to deal with, which is more jobs and less inequality?

Now joining us to discuss all of this is Jeff Faux. He’s the founder and now distinguished fellow of the Economic Policy Institute in Washington, D.C. He’s an economist and a writer. He’s written extensively on issues from globalization to neighborhood development. And his latest book is The Servant Economy: Where America’s Elite Is Sending the Middle Class.
Thanks for joining us again, Jeff.

Jeff Faux, Founder and Distinguished Fellow, Economic Policy Institute: Oh, good to be here, Paul.

Jay: So let’s start with the Republicans. First of all, lay out what they say they would like to do. I guess it has a lot to do with the Paul Ryan budget as sort of the vision they seem to rally around, although it’s a fairly divided Republican Party. But if they could pass the Ryan budget and other legislation they’ve tried to propose or pass in the House and can’t get through the Senate or President Obama, would that lead to growth?

Faux: No. The Republicans, you know, it’s all very complicated, and as you say, they’re a house divided. But their proposals on the economy really come in three—a package of three. One is a budget that aims at pretty grave austerity, cutting federal spending over the next ten years. The second is tax cuts, tax cuts for the business class and the corporate class. And the third is to roll back the regulation that the Obama administration put in in terms of financial controls and generally to roll back the federal government’s role in the economy, except, of course, where it benefits some of their particular financiers.

So we take them one by one. The thing to understand is that in a modern economy, nobody spends, nobody works. And the dilemma that we’re in now is that no one is spending. That is, consumers, as we know, are not spending, because they’ve got credit problems, they’ve got job problems, and we’ve got 12 million or so households whose mortgages are below water. In other words, that means that the house that they own is worth less than the mortgage that they owe on it. So consumers aren’t spending. And consumers, depending on what you were talking about, are between 65 and 70 percent of the economy.

Business is not spending, because consumers aren’t spending. You know, you ask any businessman before or after you get through the sort of initial ideological responses, and you say, well, what is the thing that makes you invest? And of course the thing that makes them invest is customers coming in the door with money in their pocket to spend on their goods. So that’s not what’s happening. And business is full of cash these days, and they’re refusing to invest not because they don’t want to invest but because they don’t see the customer base for selling new products and services.

And the third thing is regulation. And of course what they would like to do is cut back on even the weak teeth that the Frank-Dodd legislation put over the financial community. And, you know, so they’re interested in less regulation. And it was, of course, the deregulation that unstabled the economy, destabled the economy back before the crash.

So of the three things that the Republicans want, none of them will contribute to growth, that is, people spending more money. They want to cut back government spending exactly at the time when this is what we need in order to get people back to work. Nobody works, nobody spends, nobody works. And we learned in the Great Depression that when you’re in a situation like this, which economists call often a liquidity crisis, and that is, it’s a crisis because the business class has got too much money and they don’t want to invest it because they don’t see any market for their goods. So when you’re in that kind of a crisis, the only player in this drama is the government.

Now, you know, you could argue that, well, there is another player, and that is foreign buyers of U.S. goods. But we are still running a huge deficit, which means we are buying more from the rest of the world than we’re selling to it. And the Republican support—and, now, this is bipartisan. We’ll get down to that in a minute. But the Republican support for new free trade agreements means that the anemic markets we have for American goods, net markets, will get even worse. So even if things continue as they’re continuing for a while, with this sputtering recovery—quote, recovery—the Republican program will make it worse.

Jay: Okay. So it would seem to me that if I’m a very wealthy person and multimillionaire or billionaire, what you’re saying should be rather obvious to me. I mean, maybe there’s a few people that really buy the sort of bunkum that if the government gets out of the way, there’ll be more money for investors and the investor class to invest. But as you say, the big corporations and most big investors are actually sitting on piles of cash now. It’s not a shortage of cash that’s stopping them from investing. So they know all this. So in terms of why they want these policies, if it isn’t going to lead to growth—and I agree with you; it seems to me rather obvious it doesn’t, especially when you look at the same kind of policies in Europe. If anybody wants an example of where they lead, it’s right there to be seen.

But then why do they want these policies? ‘Cause they’re very committed to them. And I wonder if it isn’t—if I were to argue—if I was very rich, would I not say or think, you know, maybe we’re going to be at 7 to 8 or 9 percent unemployment for a long time, maybe the economy’s going to stay in this kind of quasi-recession for a long time, but I’m doing alright, Jack. And more than that, what I’m mostly concerned about is that if the government debt keeps increasing and then some day interest rates go up and the cost of servicing that debt does in fact become more meaningful than it is now, they’re going to come after me, number one, for taxes, and I don’t want to pay any more taxes. And number two, I don’t ever want to see some kind of inflation that undermines the value of my assets. I’m a billionaire now. I want that billions of dollars that I have to keep buying billions of dollars worth of stuff based on what things are worth now. So, I mean, from their interest, I know maybe they’re not honestly articulating it, but don’t these policies make sense for them?

Faux: Well, I think there are several answers to this. If you’re in the financial business, the policies certainly make sense. After all, what we have done with the financial institutions is that we’ve put them on a government low-interest diet so that the banks and the big brokerages can borrow money now for less than 1 percent from the U.S. government, go back and get more than that for buying government bonds, and take some of that money and put it in Brazil or other places and get 6, 7, or 8 percent. So their business is doing fine. And so long as we have a macroeconomic policy that relies only on lowering interest rates, lowering interest rates for banks and financial institutions, you know, what’s not to like if you’re on Wall Street?

Now, the people who make things in America, this dwindling number of corporations who actually produce things here, are in a different situation. I would say that if this was 15, 20 years ago, they would be at the White House saying, you’ve got to start spending money ’cause this isn’t working. But, you know, more and more of them are producing overseas. More and more of them are looking at the emerging consumer markets of China and Asia and South America and places like that. So they’re not as dependent on the American consumer as they used to be.

Jay: But, Jeff, hang on for a sec, ’cause, I mean, the numbers I’ve seen, I mean, it’s going to be a long time before consumer demand in India and China comes anywhere close to the American—traditional American level of demand. Isn’t that right?

Faux: Well, that’s true. That’s true. But if you’re asking about, you know, their long term, that’s an important factor.
But there’s another piece to this, and the other piece is more of the class relations in the United States. What the business guys who are not—who are supporting Wall Street in this debate, even though it may be detrimental to their own business, what they really fear is not so much inflation, because they have ways to hedge that and get around that, but they really fear going back to full employment in a atmosphere in which unions are growing and in which they’re going to have to be paying not only more wages, but they’re going to have to start reducing the kind of undermining of labor unions that they’ve done in the last 30 years. There is an issue of relationships here, and it’s the relationships between the working class and the investing class.

Jay: Yeah. I mean, I think this is—what you’re saying now is the most critical point. If it’s a very wealthy Republican were to sit down with a wealthy or not wealthy Keynesian Democrat, it would seem to me this is what they would say to them [incompr.] are you really willing to go back to tipping the balance of power back into the side of labor, at least more than now, so wages really go up because your stimulus policies, unless they’re enormous and last for years and years, they’re not going to change the basic structure that we’ve accomplished now, which is having this dramatic lowering of wages and essentially undermining unions. So, I mean, if a wealthy Republican would say to a pro-Keynesian Democrat, you know, we ain’t going there and I bet you you don’t really want to either—.

Faux: Right. And that’s where the globalization part comes in, because when the United States economy was more self-contained, then those guys needed to see wages rise. They didn’t like it, but they understood what Henry Ford understood at the turn of the last century, that if you don’t pay these people enough, there’s going to be nobody to buy cars. Well, they’re not in that mentality anymore. And the thing that has become more rigid is their sense of class and not wanting to have a situation, not wanting to go back to what they think are the bad old days, when they had to go to the bargaining table as equals with labor. The unions in the United States now are at their lowest percentage of the labor force since 1916. And that’s what they want to keep.

Jay: Right. Okay. Part two of our interview, we’re going to ask the second question I posed in the introduction: if President Obama could pass all the legislation he’d like to pass, would that lead to growth and less inequality in America? Please join us for part two of our interview with Jeff Faux on The Real News Network.