Austerity Advocates Risk Devastating Deflation

Mark Trahant
6/24/13

 

 

You would think that the broader economy would be part of any discussion about austerity. If the economy is getting stronger, well, then government budget cuts are more easily absorbed. On the other hand, if the economy is fragile, then budget cuts make it worse because the government itself is such an important part of the economy.

So government as an engine of growth – something that is absolutely a fact in Indian country – is rarely considered by conservatives in the political context. Unless it’s about Defense-related jobs.

A study last month, for example, said the Pentagon could manage the sequester far more effectively if it permanently cut its civilian workforce by tens of thousands of jobs. But Congress doesn’t like that idea and is hostile to closing more bases as a way to save money. One Virginia Republican is proposing legislation that, according to Government Executive magazine, would “prohibit the department from proposing, planning or initiating another round of Base Realignment and Closure.”

But when it comes to the economy, especially long term, the choices of where government invests money is important to growth. Just think what it would mean if education spending had the same sort of passion from Congress as the military with specific legislation that prohibited the closing of a school or university. (Or even better: laws requiring full funding.)

One power the government does have to invest in economy, save an economy, or just meddle in an economy (depending on your point of view). But it is that role that the government last week hinted that it is backing away from. Federal Reserve Chairman Ben Bernanke has been using extraordinary tools to do what it could to prop up the economy without support from Congress. As Paul Krugman wrote in The New York Times yesterday: “For the most part, Ben Bernanke and his colleagues at the Federal Reserve have been good guys in these troubled economic times. They have tried to boost the economy even as most of Washington seemingly either forgot about the jobless, or decided that the best way to cure unemployment was to intensify the suffering of the unemployed.” Krugman’s conclusion is that it’s the “wrong signal to be sending given the state of the economy. We’re still very much living through what amounts to a low-grade depression — and the Fed’s bad messaging reduces the chances that we’re going to exit that depression any time soon.”

Other economic observers fear an even bigger problem, deflation. Ambrose Evans-Pritchard, a European columnist in The Telegraph wrote: “I hope the Fed knows what it is doing.” He points out that a tighter monetary policy makes less sense when the core inflation metric is lower now than when the Fed began using its powers. “America is one shock away from a slide into outright deflation, and the eurozone is half a shock away.”

We live inflation. We go to the store and it costs more for our basic supplies, food, gas, even sending children to college. Then the deal was we would get a bigger paycheck to make up for these increasing costs.

But that has not been happening. And if you look at the larger economy, inflation itself has been extraordinary low. For its part, the Fed says it is still watching this trend. One Federal Reserve Bank president told Bloomberg News that if inflation remains low, despite what Bernanke said, the Fed might need to find a way to “provide more accommodation.”

How will deflation impact Indian country? The answer is that tribes, or individuals, with a lot of cash will be fine because their purchasing power will be stronger. But tribes, and individuals, that carry a lot of debt will be in tough shape because while the value of the debt stays the same, it will be harder to raise the money required to pay back that debt.

The Fed might change its mind and do what it can to prevent deflation. But that doesn’t mean a thing to Congress. The austerity crowd is bent on shrinking government. No matter the human toll.

The author Mark Blyth in his new book, “Austerity: The History of a Dangerous Idea,” describes the threat this way. “Austerity is a form of voluntary deflation in which the economy adjusts through the reduction of wages, prices, and public spending to restore competitiveness, which is (supposedly) best achieved by cutting the state’s budget, debts, and deficits.”

“Voluntary” deflation? More like a self-inflicted wound.

 

Mark Trahant is a writer, speaker and Twitter poet. He lives in Fort Hall, Idaho, and is a member of The Shoshone-Bannock Tribes. Join the discussion about austerity. A Facebook page is open at: www.facebook.com/IndianCountryAusterity.

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