Economists at the University of Massachusetts and elsewhere have thoroughly discredited research suggesting that cutting government spending will promote economic growth during a time of recession.  Even while scholarship has exposed the fallacy of austerity economics and this news has reached wide audiences through Twitter and the Colbert Report, the United States government is embracing austerity’s policy prescriptions.  While employment has barely kept up with the growth of the labor force and the best measure of the unemployment rate (which accounts for those who have given up on looking for work or who work part time because they can’t find full time employment) remains stuck at 14%, the federal, state and local governments are slashing payrolls and reducing spending in order to meet arbitrary deficit targets. The ghost of bad austerity economics continues to haunt, and even to drive, the living.

In 2007 and 2008, as we entered the Great Recession, economists knew what should be done to prevent another Great Depression.  Drawing on theory developed in the shadow of the Great Depression, Keynesian economists argued that government needed to spend to fill the gap when private spending and investment contracted during an economic crisis.  The work of Milton Friedman, Anna Schwartz, and their students and followers, had persuaded monetary authorities that they needed to act aggressively to provide liquidity to prevent a financial system meltdown.  There was a politics here.  On the left, those who favored a large public sector and a generous social wage seized on the opportunity created by fiscal stimulus to boost public spending while conservatives and their Wall Street allies favored monetary policy because it subsidized banks while avoiding public spending.

These disputes were put aside after the financial market collapse in the Fall of 2008 when both Friedman monetarists and Keynesian fiscalists stared into the abyss.  For a brief moment, economists and policy makers joined in recommending that we walk on both legs and use all the tools available to prevent the Great Recession from becoming a full-fledged Depression.  In striking contrast with the experience of the early 1930s, the Federal Reserve aggressively pushed liquidity into the banking system, and the new Obama Administration pushed an $800 billion stimulus program through Congress.  While the Obama stimulus was much smaller than Keynesian economists recommended, and was further diminished by political bargaining that substituted tax cutting for some needed spending, it did provide funds for infrastructure and for local and state programs threatened by the plunge in state and local revenues that resulted from the recession.  Together with the Federal Reserve’s actions, the Obama stimulus prevented a complete economic collapse.

The stimulus worked well enough that some economists quickly forgot why it was enacted.  Already in 2009, some were denouncing stimulus spending. They defended the Great Recession and its attendant suffering in terms reminiscent of Andrew Mellon’s appreciative analysis of the effects of the Great Depression: “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate . . . It will purge the rottenness out of the system.”  They quickly won over the Republican Party; hating Obama, Republicans never saw any reason to promote economic recovery on his watch.  And when Obama’s stimulus did not cure all ills, they blamed it for those that remained; post hoc ergo propter hoc.

With Republicans in control of the House of Representatives, in a position to block action in the Senate, and in control of many state governments, it has been impossible to prevent spreading austerity.  Sensible economists, of which there are a few even outside of Amherst, have condemned spending cuts and tax increases as the wrong policy during an economic recession.  But the debate is no longer about economics; those who oppose fiscal stimulus do so from a sense of moral outrage.  Advocates of austerity like the Tea Party Patriots have little rational argument about the economics of government stimulus spending but a strong sense of grievance that others are getting away with something. They assume that the allocations of a free market are just and fail to see the substantial benefits they (and all of us) receive from public spending; they conclude, therefore, that government help must be bad because in giving to those who need help, government is subsidizing the wicked.  While we can show them that their economic analysis is wrong, it will have little effect on those whose real goal is not to help the needy or to comfort the afflicted but to punish the guilty.

]]> http://www.populareconomics.org/2013/05/austerity-comes-to-america/feed/ 1 http://www.populareconomics.org/2013/04/cpe-member-thomas-herndon-on-the-colbert-report/ http://www.populareconomics.org/2013/04/cpe-member-thomas-herndon-on-the-colbert-report/#comments Wed, 24 Apr 2013 17:32:57 +0000 CPE Website Admin http://www.populareconomics.org/?p=8710 The Colbert Report Curious for more details? Read the paper that started the fuss! ]]>

Think capitalism isn’t working? Several Massachusetts businesses agree and are doing something about it.

Real Pickles, Green River Ambrosia, and Katalyst Kombucha are fermenters of all kinds in Western Massachusetts, The Just Crust in Cambridge rises up by baking pizzas, and all of these businesses have transitioned into worker-owned cooperatives within the last few months.

A capitalist firm typically has a hierarchal structure of owners, bosses, and workers, with those on top enjoying a disproportionate ownership stake, and hence a disproportionate claim on the profits – at the expense of those on the bottom. A worker-owned cooperative on the other hand, is an enterprise in which all employees have an ownership stake in the business and decision-rights about the goings on in the firm. There are no bosses to be seen. The four recently-converted Massachusetts businesses have chosen to transition to worker-ownership for a number of reasons: to embody their already existing company values, for efficiency gains, and to resolve labor disputes.

Real Pickles has been fermenting pickles, ‘krauts, and all sorts of tasty bits for 11 years in Greenfield. The company made a name for itself with its sustainability initiatives and quality products. The idea to transition into a worker-owned enterprise was based on that strive for sustainability, for both workers and the community. A local newspaper writes, “The decision to convert to a worker-owned cooperative is aimed at ensuring the long-term preservation of the business’ social mission of supporting local, sustainable food systems and creating meaningful jobs.” Real Pickles will also offer the community a stake, by now providing community shares to non-workers.

For some co-ops, access to finance played a strong role in the decision to convert. Katalyst Kombocha and Green River Ambrosia made their home on Fermentation Row in Greenfield for several years, brewing up tasty libations and fermented tea drinks. As members of the Franklin County Community Development Corporation, the businesses already collaborated heavily with each other, and now have officially combined forces under the Artisan Beverage Cooperative. One incentive to cooperatize was the chance to access to capital through the Cooperative Fund of New England, which supports the development of co-ops in the region. Further, the Small Business Association (SBA) changed their outdated regulations to now allow co-ops to be recognized as small businesses. Official recognition by the SBA gives co-ops like the Artisan Beverage Cooperatives even more access to financing.

The Just Crust rises up out of the crumbs of the former Upper Crust in Cambridge, making a more dramatic story of co-op conversion out of the remnants of a serious labor dispute. Last November, Boston-area pizza chain The Upper Crust closed in bankruptcy after a successful class-action lawsuit compelled the business to pay its workers $341,000 in back wages. Now, the lawyer who won the legal battle, Shannon Liss-Riordin, is helping to construct a new business from the remnants of the Upper Crust. The plan is to reopen the Cambridge location as a partially worker-owned business named, now renamed The Just Crust. While some details are not yet resolved, the story is similar to other co-ops that came about after labor disputes, like Collective Copies in Western Massachusetts.

While each of the new co-ops has its own variant of the cooperative structure (i.e. partial worker-ownership, reliance on community shares, etc.), it’s clear that new financial incentives as well as institutional support from organizations like the Valley Alliance of Worker Cooperatives are having a profound influence in developing new cooperatives. And the co-op movement need not be confined to a particular sector, to small-scale business, or to a particular region. Elsewhere in the world, factory occupations by workers are converting formerly capitalist industrial enterprises into full-fledged worker-owned enterprises, like the Cooper tire factory in Mexico and the Vio.Me building materials manufacturing in Greece. Perhaps this new group of worker-owned enterprises will inspire others to rise up and go co-op.

Bill O’Reilly thinks so. But Rick Wolff explains why this is not so in this interview clip from Democracy Now!

This article from The Guardian explains how the Mondragon worker co-operatives of Spain have handled the economic crisis. (Spoiler: not by laying off workers.)

Last year student debt ballooned to $1 Trillion. Months earlier in the previous year, it surpassed outstanding credit debt in total, making it a substantial part of the American household debt portfolio. This year, policy discussion is finally taking place to tackle both ends of the problem: Federal and private student loan debts.

As the so-called student loan crisis loomed, the Obama administration began to make small patches to the Federal side of the problem. The reforms that came packaged with health care legislation established an income-based repayment option (IBR) for Federal student loans and consolidated lending and services practices. IBR allows Federal loans to be repaid on a sliding scale based on a percentage of yearly earnings. The repayment schedule is roughly 10% of income, or lower for those near the poverty line, and is applied to the principal of the loan. Interest may continue to accrue, however after 25 years of qualifying payments under IBR, the remaining balance is forgiven. In the future, all Federal loans will be serviced directly by the government instead of using corporations such as Sallie Mae as intermediaries. With the important exception of IBR which can be applied for with outstanding loans, most of the new practices will only apply to loans originated after 2014. Baby steps, but in the right direction.

While the IBR program is meant to offer relief to borrowers, the policy itself may suffer from framing problems, making it underutilized by those who need it. The Roosevelt Institute Campus Network recently published a series of student essays called “A New Deal for Students”. Their first proposal was automatic enrollment in IBR for Federal loans. Behavioral economists have used experiments to show that even when some money or stress saving option exists, having to go through the process of enrollment often shies people away from enrolling in a program, even if it makes them much better off. The Roosevelt essay by UCLA student Razmig Sarkissian explains concisely:

“Many borrowers are either unaware that the IBR program exists or are deterred by a complicated application process. In a June 2012, President Obama acknowledged this problem, “Too few borrowers are aware of the options available to them to help manage their student loan debt, including reducing their monthly payment through IBR,” Obama wrote. “Additionally, too many borrowers have had difficulties navigating and completing the IBR application process once they have started it.”(6)”

In other words, the transactions cost of dealing with IBR enrollment makes it, in the moment, not worth it or impossible to deal with for many. By making IBR the default option, this could relieve a number of borrowers who would ordinarily end up in default or delinquencies. Making IBR the default option would prevent loan defaults.

But what about the rest of student loan borrowers, who are cash strapped by payments for private student loans?

The Consumer Financial Protections Agency (CFPB) may have a solution. Private student loans represent a fast growing segment of all student loans, and of personal household debt in general. With a 25% annual growth rate, private loans will eventually eclipse Federal loan totals, as Federal loan amounts get maxed out and tuitions continue to rise. Private loans, like their Federal counterpart, cannot be discharged under bankruptcy, yet unlike Federal loans they offer little flexibility in repayment. These loans are often funded by corporate bond offerings from financial industry players like Sallie Mae Corporation, which just recently sold $1.1 billion in student loan asset backed securities (SLABS). These SLABS, which remain a hot go-to safe asset on bond markets, bear an eerie resemblance to the MBSs that took down the financial system (and the rest of the economy with it) back in 2008. Here’s another form of private debt, rebundled for financial profit, except unlike a mortgage foreclosure is not an option. For private student loans, payment negotiation also remains difficult.

So what’s the solution? The CFPB has announced its support for IBR for private student loans. Like the mortgage modification policy that helped relieve some borrowers from financial stress, IBR and refinancing of private student loans would ease the crunch. Instead of waiting for the crisis to happen though, the CFPB is recommending this more pro-active approach, with director Richard Chopra stating, “”If you think everything in this market is hunky-dory, you’re missing the warning signs. Waiting any longer is just not an option.” Let’s hope the government policy-makers hear the warning signals this time. 

The CFPB will be taking public comments on Student Loan Affordability policy until April 8, 2013.

In this interview on the Real News Network, James Boyce explains how economic inequality affects the environment. (Hint: it’s not good.)