I’ve been saying this for some time: austerity budgets, particularly spending cuts, are the worst and last thing California needs if we are to have economic recovery. We’ve had four summers of spending cuts, dating back to 2007, and what’s happened to our economy? We now have the worst unemployment rate in the state in 60 years, no real growth, and gutted public services that make it difficult to see real recovery.
Now others are making this point as well. Richard Koo, an economist who is very familiar with the Japanese experience of the last 20 years – characterized by deflation, stagnation, and occasional downward lurches into recession – is pointing out that austerity will merely “crush” economies and produce worse budget deficits.
Koo’s argument is that we are in what he calls a “balance sheet recession” where the private sector is deleveraging – purging debt. That is inherently deflationary and destroys economic growth. Unless government supports the economy with deficit spending and increased budgets, the deleveraging will become economically destructive.
I wrote about Koo’s assessment a year ago when assessing Arnold’s 2009-10 budget. Here’s how one analyst summarized Koo’s concept of a “balance sheet recession”:
Richard Koo goes further in his book “The Holy Grail of Macro Economics.” Here, he argues that the unwind of great bubbles suffers from what he labels a ‘balance sheet recession.’ In essence, companies go from maximizing profits, as they had done in normal times, to a post-bubble concern of reducing debt. Regardless of how much priming of the pump monetary authorities do, the psychology of debt reduction will limit the effectiveness of monetary policy as a policy tool.
In sum, the psychology after a major bubble is very different than the psychology before its collapse. The post-bubble emphasis becomes debt reduction and savings, making monetary policy ineffective, not because financial institutions are unwilling lenders but because companies and individuals are unwilling borrowers. These are forces to be reckoned with for some to come.
In the video at right, Koo points out that in 1997 Japan went ahead with massive budget cuts, an austerity that produced a serious and deep recession, prolonging and worsening Japan’s ongoing “lost decade.”
We’re going to see the same thing in California if Arnold’s reckless austerity budgets aren’t rejected. This recession is indeed different than the last three, which were ended by debt-fueled asset bubbles. The solution for the state in those recessions was to cut spending temporarily, and when debt began to fuel a new asset bubble and new growth, suddenly the budgets looked good, economic health looked to be restored, and all was good.
This recession is totally different. California austerity will prolong and deepen the recession, because consumers need help to purge the debt. They need a safety net – if people are worried about losing their job, they’ll stop spending in order to pay down debts and build up savings, wrecking the economy. They need reduced costs – if people have to pay more for transportation because of bus and rail cuts, if they have to pay more for health care and child care because of spending cuts, if they have to pay more for education because of spending cuts, then that leaves less money freed to both purge the debt and spend at the local business.
Who knows whether Arnold Schwarzenegger understands any of this or not. It may be irrelevant to him, since his entire governing philosophy is “protect the rich and the large corporations at all costs.”
For the rest of us, it’s very important that we understand the reality of this recession and why further budget cuts will be so damaging and destructive.
Only, Japan has been running massive deficits for years — to the point where it has the largest debt of any wealthy nation. Might as well blame the 1997 car tax cut for today’s problems in California.
Plus, the state constitutionally must run, at least on paper, a balanced budget. And tax increases in a recession are equally austere.
It’s like the far right thinks those who are disabled and the working poor need to be punished and told to leave California. All cause their just trying to exist and in the case of the working poor, trying to improve themselves if they can with some help(not everyone can do It by the far rights so called bootstraps) and yet the far right sees this as theft out of their pockets and so they would rather rip the supports out from under people, And charitable? Give Me a break, most would just spend the extra money on themselves. I don’t think the far right cares one bit, They just have bought the propaganda of the party higher ups, So far I see no rallies or such at least, But the ugly hate/demonizing is being stoked. I’ll be glad when November is here and gone.
We’re going to see the same thing in California if Arnold’s reckless austerity budgets aren’t rejected.
by the Democrats, you mean? these actual Democrats in Sacramento?
but to reject austerity and balance the budget, that would mean that Democrats would have to raise taxes on somebody.
who will do that – or even discuss it as a possibility in public? Not the Speaker. Not the party leadership. Not the presumptive candidate for Governor.
i mean, i agree absolutely. but this is not an issue that can be driven from below. people’s native instinct is to cut spending because, as Koo describes, that’s what they’re doing themselves, and because people generally don’t know what government really spends money on, conflate local state and federal taxes and spending into one big bucket, and think it’s mostly being stolen or wasted. that’s not just a conservative thing, either, it’s across the board.
we need to lead and educate, and that needs known and trusted public figures to make the case. the risk is, of course, that voters won’t buy it. someone might not get re-elected. we can’t have that.