350 Economists Warn President and Congress: Bad “Grand Bargain” on Deficits Could Kill Recovery.
Nov 14, 2012

350 prominent economists issued a statement on Wednesday warning that “the fragile recovery is threatened by obsessive concern with cutting deficits that has infected both parties.” The economists from universities and research groups across the U.S. and the world reminded politicians that the U.S. economy in the post-election period is still “marked by mass unemployment, rising poverty, and declining wages.” And they warned that big spending cuts aimed at reducing deficits could throw the economy back into recession.
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At a press conference today introduced by Borosage, the Jobs, Not Austerity statement was released with remarks by two of the signers, Robert Pollin, University of Massachusetts Economist and co-director of Political Economy Research Institute (PERI) and Teresa Ghilarducci, Director of the Schwartz Center for Economic Policy Analysis at the The New School.

Borosage said “the voters in this election told politicians exactly what these economists are saying: getting the economy growing and creating jobs is far more important than cutting deficits in this still-weak recovery. But we are also reminding the self-styled ‘deficit hawks’ that, as the statement declares, `If you cut spending and consumer purchasing power in an already depressed economy, unemployment rises and revenues fall — and the goal of a smaller deficit keeps receding like a mirage in a desert. When private purchasing power is depressed by the aftermath of a financial collapse, only public investment can make up the gap.’“

Teresa Ghilarducci said, "The debt burden is not the number `out of whack.’ At 7.9 percent the unemployment rate is extremely high for this point in a recovery. The high deficits are driven by the long drawn out recession. The deficits will fall when the unemployment rate falls.
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The U.S. economy, once in free-fall toward a new depression, has begun to recover. But we are still mired in a prolonged slump marked by mass unemployment, rising poverty, and declining wages. And the fragile recovery is threatened by obsessive concern with cutting deficits that has infected both parties.

As even Federal Reserve Chairman Ben Bernanke recognizes, it is long term unemployment, not excessive deficits or debt, that is now inflicting the greatest human toll and economic damage. Polls show that voters agree joblessness and a bad economy are much higher priorities than deficits.

Yet too many in Washington are fixated on cutting public spending to balance the budget, not on how to put people back to work and get our economy going. There is no theory of economics that explains how we can deflate our way to recovery. Businesses are not basing investment decisions on how much Congress cuts the debt in 2023. As Great Britain, Ireland, Spain and Greece have shown, inflicting austerity on a weak economy leads to deeper recession, rising unemployment and increasing misery.

[font color="blue"]In a deep recession, deficit reduction is a moving target. If you cut spending and consumer purchasing power in an already depressed economy, unemployment rises and revenues fall — and the goal of a smaller deficit keeps receding like a mirage in a desert. When private purchasing power is depressed by the aftermath of a financial collapse, only public investment can make up the gap.

The budget hawks have the sequence backwards. Public outlay for jobs and recovery come first, growth is restored, and revenues follow. Budget cuts in a deep slump lead only to a deeper slump. [/font]
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