Austerity Economics and the Struggle for the Soul of U.S. Capitalism

Amid the wreckage of the 2008-09 Wall Street collapse and Great Recession, orthodox economists and political elites in both the United States and Western Europe have been strongly pushing the idea that austerity is the only viable policy option. The basis for the austerity hawks' claim is that both the U.S. and European economies are being consumed by out-of-control levels of public indebtedness. Public spending must therefore be slashed before economic collapse becomes a real possibility. Are the austerity hawks correct that there is simply no alternative to their agenda? In fact, the austerity hawks’ arguments are wrong across the board. Focusing on the U.S. case, this paper shows that the austerity hawks claims about large deficits causing high inflation and interest rates have been consistently wrong for four years. Moreover, the U.S. is nowhere near experiencing a fiscal crisis in the commonsense definition of the term, which is to say, the government is facing difficulties in meeting its commitments to creditors. The paper then reviews the recent experiences of U.S. state and local governments, which show how the austerity agenda is attacking the foundations of what is already a modest U.S. welfare state. It is becoming increasingly clear that many, if not most, austerity hawks view this period as an opportunity to eviscerate the public sector, labor unions, social insurance and other basic social protections. The paper closes by sketching some ideas capable of countering the austerity agenda, by both moving the U.S. economy toward full employment in the short-term and sustaining full employment in the long term.