The Hoax of Austerity Economics
Robert B. Reich

We are in the most anemic recovery in modern history. The president is talking about boosting the economy and rebuilding the middle class, but Washington isn't doing squat.

In fact, apart from the Fed -- which continues to hold down interest rates in the quixotic hope that banks will begin lending again to average people -- the government is heading in exactly the wrong direction: raising taxes on the middle class and cutting public spending. It's called austerity economics.

Washington is still acting as if the budget deficit were the most important economic problem. It's not. Unemployment and declining wages are.

American employers added only 157,000 jobs in January. That's fewer than they added in December. The overall unemployment rate remains stuck at 7.9 percent, just about where it's been since September.

The share of people of working age either who are working or looking for jobs also remains dismal -- close to a 30-year low. (Yes, older boomers are retiring, but the major cause for this near-record low is simply the lack of jobs.) And the long-term unemployed, about 40 percent of all jobless workers, remain trapped. Most have few, if any, job prospects, and their unemployment benefits have run out, or will run out shortly.

It would be one thing if we didn't know what to do about all this. But we do know. It's not rocket science.

The only reason for employers to hire more workers is if they have more customers. But American employers have not had enough customers to justify much new hiring.

There are essentially two sources of customers: individual consumers and the government. (Forget exports for now; Europe is contracting, Japan is a basket case, China is slowing, and the rest of the world is in economic limbo.)

American consumers -- whose purchases constitute about 70 percent of all economic activity in the U.S. -- still can't buy much, and their purchasing power is declining. The median wage continues to drop, adjusted for inflation. Most can't borrow because they don't have a credit record sufficient to allow them to borrow much.

And now their Social Security taxes have increased, leaving the typical worker with about $1,000 less this year than last. Meanwhile, many states are hiking sales taxes, which will hit the middle class and the poor hardest. And deficit hawks in Washington are contemplating additional tax hikes on the middle class.

The only people doing well are at the top -- but they save a large part of what they earn instead of spending it. And their savings go all over the world in search of the highest return.

It's true that overall personal income soared by 8 percent in the final three months of 2012 compared with an increase of just over 2 percent in the third quarter. But this income didn't go into the pockets of the middle class. It went into the pockets of people at the top. Wages and salaries grew a measly six-tenths of one percent.

Most of the rise in personal income was from companies rushing to pay dividends before taxes were hiked in 2013, and from an upturn in personal interest income. Both of these sources of income went mostly to the well-to-do.

So if we can't rely on consumers to stoke the economy, what about government? No chance. Government spending is dropping, too.

The major reason the economy contracted in the fourth quarter last year was a large drop in government outlays -- especially military spending, which fell 22.2 percent. That was mainly due to reduced spending on the war in Afghanistan, combined with worries by military contractors about further anticipated cuts. State and local spending also continued to fall.

Personally, I'm glad we're spending less on the military. It's the most bloated part of the government. But right now the military is America's only major jobs program. Cutting the military without increasing spending on roads, bridges, schools and everything else we need simply means fewer jobs.

Government spending continues to drop. The White House has already agreed to major spending cuts, some to go into effect this year.

Coming showdowns over the next fiscal cliff, appropriations to fund government operations, and the debt ceiling will likely result in more cuts.

More jobs, better wages and faster growth should be the most important objectives now. With them, everything else will be easier to achieve -- protection against climate change, immigration reform, long-term budget reform. Without them, everything will be harder.

Yet we're moving in the opposite direction -- following Europe's sorry example of failed austerity economics. But austerity economics is a cruel hoax. America shouldn't be fooled.