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Austerity is Not the Solution

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Robert Pollin

Robert Pollin

The latest figures show both GDP growth and unemployment stuck in the mud. The federal government must continue to aggressively fight mass unemployment created by Wall Street hyper-speculation and promote recovery through both spending measures and credit market interventions. Austerity is not a solution.

The federal government is not in a fiscal crisis. Interest payments on the federal debt are at a near-historic low of 7.7 percent of total spending. Under Ronald Reagan and George H.W. Bush, interest payments averaged more than 16 percent of total spending. Government can and should expand spending on education, health care, public safety, family support, traditional infrastructure and the green economy, as well as unemployment insurance.

Credit must also be channeled to small business. Credit markets remain locked up, while banks are holding an unprecedented $1.4 trillion in cash reserves. These are cash hoards which the banks built up mainly through the Federal Reserve’s zero interest rate policy for banks. Two initiatives — one carrot and one stick — can deliver lower rates and risks to businesses. The carrot is an expansion of existing federal loan guarantees, focused on benefiting small businesses. The stick is a 1 to 2 percent tax on the excess cash reserves now held by banks, to push them to become more bullish on loans for job-creating investments. If Congress won’t pass such a tax on banks’ cash hoards, then the Fed can establish a maximum requirement on banks’ cash holdings to achieve the same end. If banks want to hoard free money, they will have to pay a fee.


Robert Pollin, professor of economics and co-director of the Political Economy Research Institute PERI, is the author of Back to Full Employment.

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  • Anonymous

    There is absolutely no reason to even have an “economy” other than for the health and wellbeing of the society it is meant to serve. It is a sick economy indeed that heartily feeds only 1 or 2% of its population while letting the rest struggle in poverty and severe need. That type of economy must be ended. If austerity is needed it should be applied to the warmongers in gov’t who spent their way through unnecessary wars and who generously offered the people’s money to massive banks who deserve to live or die by their own sword of free reign capitalism. The people’s money should be used for the welfare of the people. Stop telling us you are broke when it comes to helping the people with their own money. The wild eyed GOP loudly proclaim “we are broke”. How come they could not figure out the consequences of all their spending on credit for wars and lining the pockets of the super rich corporations?? Now we are all of a sudden to broke to help the American people who did nothing but sit on the sidelines watching the antic of their own gov’t misuse the money they were made to fork over.

  • Done

    We continue to make the profound error in our base assumptions that the top 0.1% care AT ALL about HOW they get their profits. They don’t. We can study all the possible solutions that WE think need to happen – but the bottom line is that the owners of the capital do not care about ‘full employment’, the working classes, or the planet. Our current system of robber baron capitalism promotes narcissistic and psychotic behavior by those who own the Congress and other global governments, and those who serve them, regardless of the dire consequences to the vast majority of the populace. They DON’T CARE. We are talking seriously anti-social, sociopathic behavior here – and we desperately need to understand this…