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Austerity Not a Solution Pt.3 with Robert Pollin

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I’m Paul Jay in Washington. One of the big debates in the coming November elections is about the stimulus plan. Did it have any real effect? Was it just a waste of money? According to certain forces, the Republicans and libertarians and other economists, stimulus just doesn’t work. The multiplier effect, they say, is a myth. And their proof? Well, just look at the unemployment numbers. The Obama administration thought or said that unemployment would be down around 7 percent by now. And we actually haven’t seen much of a change. It’s still hovering around 10 percent, the official rate. Unofficially, or at least if you include all the people who have given up looking for work, it could be as high as 20 percent. So does all that mean stimulus just doesn’t work, and leave it to the private sector? Joining us now to talk about this idea is Bob Pollin. He’s the codirector of the PERI institute, Amherst, Massachusetts. And he teaches there. Thanks for joining us, Bob.


JAY: So, again, you’ve written a paper called Austerity Is Not the Solution, and in that, if I understand correctly, you think stimulus is part of a solution. So what do you make of this argument, the proof is in the pudding, stimulus just didn’t do anything?

POLLIN: First of all, you’re obviously correct that the Obama administration did say that, okay, you guys, let’s pass this stimulus, and by mid-2010, around now, unemployment’s going to be around 7.5 percent. So that is the single strongest piece of evidence that the stimulus program failed. Obviously, the people that said that on behalf of Obama were engaging in a bit of happy talk. They of course didn’t know that unemployment would really be down at 7.5 percent, and it was a mistake for them to have said it. But, anyway, that’s that. Now, why hasn’t the stimulus brought unemployment down? There’s a bunch of factors, but let me just point to the two biggest ones. The first one is the magnitude of the recession and the financial collapse is so severe that basically we saw the evaporation of about $13 trillion in household wealth over the course of two years, over the course of the recession. And that was a loss of about 20 percent—households on average lost 20 percent of their wealth. Now, when you experience that level of wealth decline, you also then tend to stop spending money to the same extent. And some of the research tells us that, okay, for every $1.00 of wealth that you lose, you’re going to spend about $0.03 to $0.05 less every year. And so, as a result of that $13 trillion evaporation in wealth, we would expect that households are going to spend about $300-400 billion less money. So that’s almost half the size of the stimulus right there. So that’s step one. Now, step two, okay, we can say, okay, that’s ancient history; the wealth was just part of a bubble anyway, and now people are adjusting. Let’s say that’s true. Now, the second part is that the financial markets are completely locked up. Now, people say, okay, yes, but monetary policy’s very, very loose. Yes, monetary policy is loose, in this sense that the Federal Reserve has set the interest rate, its policy interest rate (called the federal funds rate), at essentially zero. That means, though, that’s a rate only at which private banks borrow and lend among each other. So private banks can borrow and lend at basically free money back and forth, and they can get it from the Fed, basically, for free. The problem is that they’re sitting on that money. The problem is they’re now sitting on this unprecedented $1.1 trillion in cash reserves. That money isn’t being injected into the economy.

JAY: Why?

POLLIN: Why? Well, because both on the parts of borrowers and lenders, they don’t see the advantage, because the markets are so weak, so they don’t see—well, why should I gamble, why should I risk my money in this lousy economy? So what—the notion that we have of very loose monetary policy is extremely misleading, because while we have a zero percent interest rate for banks, we have relatively high interest rates for business borrowers, especially small business borrowers. And so they don’t see any advantage in borrowing money to put it into investments and hiring people. So the real thing that we need in addition to a fiscal stimulus is—I won’t even call it monetary policy. Let’s call it credit policy. It very aggressively lowers the risks for borrowers and lenders to get the money out there, and then taxes these what we could call excess reserves of the banks so they stop sitting on the money and start doing their job, which is to go out and find productive activities to lend money and to support people that want to invest and create jobs.

JAY: Well, if I was sitting on a several trillion dollar pile of cash, maybe another strategy would be, let’s have austerity and let the economy crash and burn, and then I’ll buy everything up for a song. So, in other words, stay liquid and preach austerity.

POLLIN: Well, yes. That is another option. That doesn’t look like a very rosy option to me.

JAY: Well, it’s pretty rosy if you’re sitting on the three-quarters or a trillion dollars.

POLLIN: Yeah, yeah, but it’s also a very high-risk option because, as we were discussing earlier, the austerity—. Look, nobody really knows, if we really go through austerity, like they’re going through in Greece, that likely means deflation. Deflation means that the value of debts go up. That means it’s harder for people to pay off their debts. That means we could spin into another financial crisis as a result of austerity. That is a very real possibility. Chairman of the Fed, Bernanke, is aware of that possibility—not that he necessarily knows what to do about it, but he’s aware of it. So what you say is true. It’s possible. But it carries extreme risks, and beside which it certainly doesn’t benefit hundreds of millions of ordinary people that aren’t sitting on $1 trillion.

JAY: I’m only speaking on behalf of my investment bank, ’cause we’re sitting on so much dough. So let’s break down the stimulus just a little bit more. A big piece of the stimulus went to state governments. And one of the arguments is is that maybe unemployment didn’t come down further, but it would have been much worse, ’cause there would have been much bigger layoffs in the state governments and municipalities. I mean, is that true? But also the stimulus running out—aren’t we about to then see that?

POLLIN: Yeah, absolutely true. Again I can cite my own employer right here, the University of Massachusetts. I was sitting on our university budget committee, and we were about to start layoffs. Then we got a $50 million check from the federal government, and that enabled us to prevent layoffs. Now, there wasn’t any new hiring that was done. So you can say, well, wait a minute, the stimulus didn’t do anything; where are all the jobs? Well, the jobs are this term that’s become kind of a term of derision, jobs preserved, not jobs created. But those jobs that are preserved are real. Again, I know it firsthand from what went on at UMass. I know about people who were afraid ’cause they were about to lose their jobs and didn’t lose them. Now, what we faced at UMass, and at hundreds of other institutions around the country like UMass with the money running out, is to come right back to that conversation we had two years ago and say, well, now is when we have to start the layoffs. And that’s what’s being experienced in state and local governments, and not just in those institutions but in the communities where those institutions reside, like right here in Amherst, Massachusetts, in western Massachusetts. We will start to see a downspinning of the economy if there are significant layoffs, if there isn’t another stimulus to help get us out of this recession.

JAY: Now, part of the other argument about stimulus is tax cuts versus direct spending. I think 24 percent of the Obama stimulus of, what, $787 billion, 24 percent was in tax cuts. What is the argument, tax cuts versus direct spending, on creating jobs?

POLLIN: Well, you know, the problem right now with tax cuts is that both businesses and households, again, they’re hard up, so if you give them a tax cut, yes, they’ll have more money, but they’re using the money to pay off their debts, which is okay. They’re using the money to keep their homes, as opposed to going underwater and losing their homes—very important. Businesses are keeping the money to try to build up their reserves. All okay. But none of those things add up to more spending in the economy. So the strength of direct spending measures is that it is actually injecting spending for businesses into the private economy. And until we see evidence of major increases in the level of spending in the economy, then it’s going to be very difficult to convince businesses to invest on their own. And what you’d need is that positive momentum where the government’s spending, gives opportunities for businesses, creates jobs, and then that creates this positive momentum. And then the investor says, look, actually, things seem to be getting better; it’s time for us to invest, time for us to expand. That’s how you get out of a recession, including a severe recession.

JAY: So you’re arguing for a bigger stimulus.

POLLIN: Well, I definitely think we need to continue the stimulus, and I think we should scale the level of the stimulus relative to the problem so that, for example, state and local governments today face about $100 billion in budget shortfalls. Now, either they are going to get the money from the federal government or they’re going to retrench by $100 billion. So rather than, like, scaling the stimulus relative to GDP, let’s say we can’t let those $100 billion in cuts to state and local governments go through. The federal government has to continue to support them. Obviously, the result is political posturing around unemployment insurance. You can’t let people who are unemployed, the ones who are suffering the consequences of Wall Street hyperspeculation, you can’t let them bear the brunt of the crisis. At the very least, we have to continue unemployment insurance. So, again, the number is the number that’s needed so that the unemployed people don’t lose their benefits. Those are the ways that I think we calculate the level of the stimulus.

JAY: So in the next segment of our interview, we’ll talk about another piece of this argument. Peter Peterson, a well-known billionaire who is one of the prime or leading advocates for austerity and getting the debt-to-GDP ratio into what he calls a more manageable amount, says that it’s only a matter of time until other countries simply lose faith in the dollar, starting with China and the rest of the global economy; US loses its position as the reserve currency, which is a big advantage; and the whole thing starts to unravel. So join us for the next segment of our interview with Bob Pollin on The Real News Network.

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Robert Pollin is Professor of Economics at the University of Massachusetts in Amherst. He is the founding co-Director of the Political Economy Research Institute (PERI). His research centers on macroeconomics, conditions for low-wage workers in the US and globally, the analysis of financial markets, and the economics of building a clean-energy economy in the US. His latest book is Back to Full Employment. Other books include: A Measure of Fairness: the Economics of Living Wages and Minimum Wages in the United States, and Contours of Descent: US Economic Fractures and the Landscape of Global Austerity.