The homemade U.S. crisis known as the “fiscal cliff” throws into stark relief the fact that the U.S. can’t fix its economy and fix its budget deficits at once because fixing the economy requires more government spending, and fixing the budget requires less spending.
Cutting spending too much too soon could tip the U.S. back into a recession and a downward spiral like those Europe’s austerity programs created: low growth, lost jobs, falling tax revenues, bigger deficits.
As Paul Krugman recently wrote in “Class Wars of 2012,” what U.S. voters clearly said in the November elections “was no to tax cuts for the rich, no to benefit cuts for the middle class and the poor. So what’s a top-down class warrior to do? The answer, as I have already suggested, is to rely on stealth—to smuggle in plutocrat-friendly policies under the pretense that they’re just sensible responses to the budget deficit…. Whenever some deficit-scold group talks about ‘shared sacrifice,’ you need to ask, sacrifice relative to what?'”
Revitalizing the economy will require investing in infrastructure and people. Investments in so-called “human capital” (economics-speak for “people”) pay off dramatically best on children under five. This means that fixing the budget deficit by sacrificing 4-year olds and HeadStart is not only hard-hearted but foolish.
The argument that governments must impose austerity measures to forestall a calamitous downgrade of their credit rating is nonsense. After the credit rating agencies stripped France and the U.S. of their triple AAA ratings, their sovereign bond sales were stronger than ever.
What’s more, the global bond market “disagreed with Moody’s and S&P more often than not this year when the companies told investors that governments were becoming safer or more risky,” according to data compiled by Bloomberg. Small wonder, given the companies’ outsize role in causing the 2007-08 financial crisis by slapping triple-A ratings on risky mortgage-backed securities.