In the first week of March, the Dow Jones broke a record. No, I don’t mean that it reached its highest point since the stock market took a pummeling by the economic crisis. The Dow hit its highest level – ever. You may be scratching your head. Isn’t the unemployment rate still hovering just under 8 percent? Isn’t Congress deadlocked over how to reduce the deficit because there’s no money out there?
Democrats and Republicans both saw the fight over the fiscal cliff to be about the best way to reduce the government debt. This obsession with the public debt is dangerous and misplaced. The real threat to a robust recovery isn’t public borrowing – it’s the mountain of debt households are buried under, thanks to the financial crisis.
In 2007, before the worst of the crisis unfolded, the debt owed by U.S. households amounted to 111% of what American’s got from their jobs each year, according to the Federal Reserve’s Flow of Funds Accounts. This is up from 51% back in 1981. This level of debt dragged down spending in the economy, fueling the on-going crisis and insuring persistently high unemployment. One explanation for the burgeoning debt is that growing inequalities prompted unsustainable levels of consumption as households struggled to “keep up with the Joneses.” But the story looks more complicated when we take into account trends in household wealth.
The global economic crisis has ushered in a new era of budget austerity. As concerns over declining revenues and rising debts has intensified, the burden of adjustment has fallen on government spending. Much less attention has been paid to tax policy. In Europe, the name of the game has been budget consolidation – which, translated, means sizeable spending cuts rather than efforts to raise tax revenues, according to a review of budget policies across a range of countries published by the Friedrich Ebert Stiftung Foundation. In the U.S., austerity budgets also emphasize scaling back public expenditures, rather than mobilizing resources. Congressman Ryan’s budget proposal, “The Path to Prosperity,” aimed to reduce spending by $5 trillion over 10 years by drastically cutting Medicare, Medicaid, and other federal programs, apart from social security.
James Heintz is Research Professor at the Political Economy Research Institute at the University of Massachusetts, Amherst. His work ranges widely on issue of employment in both the advanced economies and developing world; poverty reduction; financial markets; public sector investments; and macroeconomic policy. He is currently serving as an advisor to the United Nations Development Programme on their annual Human Development Report. He previously served as a consultant to the U.S. Department of Energy on the question of green economy investments and job creation.