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Government austerity in the U.S.: Good for profits, bad for workers and oppressed

Commentary by Fight Back! Editors |
March 20, 2014
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For the last three to four years, the U.S. government has gone an historic bout of austerity, by raising taxes and cutting spending. This has contributed to a weak economic recovery, with workers still facing an official unemployment rate of 6.7%, which would be even higher if millions of unemployed had not given up looking for work. At the same time corporate profits have boomed to record highs.

Austerity has hit oppressed nationalities (African Americans, Chicanos, Mexicanos and other Latinos, Asian Americans and others) hard. These groups have even higher unemployment and poverty rates, and suffer even more from government cuts to unemployment and other services. Women, who also have lower incomes and who are more likely to bear the brunt of child rearing, have also been hit hard by government cuts.

Government austerity began as state and local governments began to raise taxes and cut spending after the 2007 start of the deep recession. Because almost all state and local governments have to balance their budgets, they began to raise tax rates and cut spending as their income, property and sales tax revenues sank with the recession. By the end of 2013, state and local government spending in the U.S., adjusted for inflation, was down to the level of early 2001, even though the overall economy has grown 25% since then.

These cuts hit poor and working people the hardest as governments cut spending in programs funded by TANF (Temporary Aid to Needy Families, commonly known as welfare) and Medicaid (government health insurance for low income children and others). State and local government workers, including public school teachers, who are disproportionately African Americans and women, saw layoffs, furloughs and pension cuts. Many states raised their sales tax rates to increase tax revenues, but sales taxes fall the hardest on low-income families who have to spend all of what they earn.

While federal government spending did go up and federal taxes were cut to combat the worst of the recession and financial crisis, by 2010 federal spending on goods and services peaked and started to decline. With the worst of the crisis behind them, and Wall Street and corporate profits back on the rise with the help of hundreds of billions of dollars of bailout aid, the federal government turned to cutting the budget deficit which had grown dramatically. This path was formalized in the 2011 Budget Control act that started the sequestration process of forcing cuts in future spending.

The passage of the Budget Control Act in 2011 was another example of how Washington D.C. is beholden to Wall Street, not the working people of this country. While the unemployment rate was 9.0% and there were more than 6 million fewer jobs than the recession began in December of 2007, corporate profits had recovered to pre-recession levels in 2010, and by 2011, were hitting new record highs. With the banking and auto industries stabilized by the federal government bailouts and Federal Reserve loans, working people, both with and without jobs, were put back on the chopping block by both Republicans and Democrats.

The payroll tax cut, which mainly benefitted working people, was allowed to end, leading to what was in effect a 2% increase in the payroll tax rate for working people. This hit lower income workers the hardest, since they often pay more in payroll taxes than income taxes. In addition federal extended unemployment benefits were first cut back and then again allowed to expire, even though long term unemployment continued at record high levels. The sequestration process has also led to cutting 57,000 low-income children from the federal Head Start program and imposes cuts in wages and pension benefits for federal workers.

Over the last two years while payroll taxes have increased by 18%, mainly because of the end of the payroll tax cut, corporate tax revenues have actually fallen 1.2%. This is during the same time that corporate profits in the U.S. grew by 9% to hit all time record highs. At the same time the median, or typical household incomes, adjusted for inflation, have dropped to levels last seen in 1999. So working people, with fewer jobs and lower incomes, are paying more in federal taxes, while corporations, which are making record profits, are paying less.

While the budget deal in December of 2013 softened some of the near-term austerity by increasing cuts in the future, this was offset by the end of federal Extended Unemployment Insurance benefits. The Budget Control Act of 2011 and the December 2013 budget deal set the course for years of federal government austerity in the future.

In addition to specific tax increase and spending cuts that hurt working people, the policy of austerity is an overall drag on the economy, keeping unemployment higher than it otherwise would be. The combined tax increases and spending cuts at all levels of government are the greatest in at least 50 years, causing a total drag on the economy equivalent to almost 2% of GDP, or $300 billion dollars, and the loss of millions of jobs, both directly as government workers are cut, and indirectly as the tax increases and spending cuts reduce economic activity and employment.

Both Democrats and Republicans use the federal budget deficit as the main reason why there is a need for austerity. The politicians claim that without austerity, that the U.S. could end up like Greece. But this is wrong on two fronts. First of all, the Greek government debt crisis happened only because the Greek government bonds are all in euros, so there is a risk (and reality) that the government can default on its debt. This is what happened to Russia in 1998 and Argentina in 2001, where both countries sold a lot of their government debt in foreign currencies that they couldn’t pay back.

In contrast, Japan’s government debt is more than 50% larger than Greek government debt, compared to the size of each country’s economy, and has had no debt crisis. But Japanese government debt is all in Japanese yen, allowing the government to print money to pay off the debt if necessary, so there is no default risk. Similarly, U.S. government debt is all in U.S. dollars, so the U.S. could also print money if necessary to avoid default.

The other problem with using the example of Greece to push austerity is that much of Greece’s economic decline has come from their extreme austerity policies. Under pressure from the European Union and the International Monetary Fund (IMF), the Greek government has imposed extreme austerity. Government spending on medical services has been cut by some 40%, and the drag of higher taxes and less spending has pushed the unemployment rate in Greece to more than 25%.

Perhaps the only good thing to be said about U.S. government austerity is that it could be worse. Government austerity here in the U.S. is not as bad as in Greece, Spain, Portugal and other European countries that are being arm-twisted into raising taxes and cutting deficits. In addition, so far Social Security has been off the chopping block, despite Wall Street’s effort to privatize Social Security and replace it with individual investment accounts, managed, of course, by big banks and other financial institutions.

With the federal government on course for another ten years of austerity, the fight to maintain and even expand Social Security and to restore and expand the federal government safety net, starting with federal Extended Unemployment benefits, will be important for working people, oppressed nationalities and women in the U.S.

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