The Layman’s Case Against Austerity

Published on New Economic Perspectives, by Stephanie Kelton, May 4, 2013.

Steve Kraske of The Kansas City Star recently interviewed me for a piece about austerity.  The story ran in today’s paper. It doesn’t provide much depth (unlike bloggers, journalists have strict space constraints!), so I followed up with a few comments on the Star’s website.  I thought I’d share them here, since I’m always trying to improve the way I communicate these ideas with non-economists.  So here’s my best effort to make the anti-austerity case in simple terms:

  • 1. When we allow our economy to operate below full employment (as now), we are sacrificing trillions of dollars in lost output and income each year. We can never go back and recover it.  It is gone forever.  You’ve seen the debt clock?  Here’s the lost output clock.  
  • 2. Capitalism runs on sales. In survey after survey, we find that the Number One reason businesses are slow to hire and invest in new plant & equipment is a lack of demand for the things they produce.  Businesses hire and invest when they’re swamped with customers.  See this story in The Wall Street Journal.
  • 3. The two decades after WWII certainly aren’t the only time that robust growth reduced the DEBT/GDP ratio.  During the late 1990s and early 2000s, the economy grew at an above average clip.  Unemployment fell to 3.7%.  Inflation remained modest.  There was a job vacancy for every job seeker in America — genuine full employment.  Because people were working, there was less spending to support the unemployed (food stamps, unemployment compensation, etc.) and more people paying income taxes. The deficit disappeared, and the national debt fell to around 40% of GDP.  So you do not need post-WWII conditions to support the argument that economic growth is the way to reduce the debt.
  • 4. The debt/GDP ratio falls when the denominator grows faster than the numerator.  Right now, just about everyone is fixated on using austerity (raising taxes and slashing spending) to reduce the numerator (DEBT).  The problem, as Europe has kindly shown us for years, is that austerity “works” by crushing incomes, which in turn crush sales (or what we call GDP).  So instead of bringing the ratio down, austerity hampers growth, which causes deficits and debt loads to rise


  • 8. We have a serious infrastructure problem in this country.  The American Society of Civil Engineers just released its 2013 Report Card, and it is ugly. Our ports, roads, waterways, etc. are in serious disrepair.  This makes it more expensive for businesses to produce/ship goods, which raises U.S. prices and reduces our global competitiveness.  Meanwhile, we have millions of out-of-work construction workers and manufacturing workers — the people with exactly the kinds of skills that are needed to repair and rebuild our national infrastructure.  So we have useful work that needs to be done, millions of people who want to contribute and policymakers with no plan to connect the two.
  • 9. What holds us back?  Fear of the Chinese? Fear of bond vigilantes?  Fear of the ratings agencies?  Fear of becoming the next Greece?  Fear of turning into Zimbabwe?  Fear of sticking our grandchildren with a huge tax bill?  This is what they tell us as they impose austerity.  None of it — I repeat — none of it has the slightest bearing on our reality.
  • 10.  Final (and most important) point: The United States of America has sovereign money.  The US dollar comes from the US government.  It cannot come from anywhere else.  We can never run out of dollars or be forced into default like Greece, which does not have its own currency.  We do not need to borrow from the Chinese to do the things that we decide to do for our economy.  As long as the real resources (labor, raw materials, factory capacity) are available, the financial resources (money) can always be there.    This can be done without causing inflation as long as the additional spending does not outstrip the economy’s capacity to produce.  We can afford to cut taxes and spend more money to improve our infrastructure without burdening the next generation.  Failing to get the economy back to full employment will burden us all for years to come.

(full text).


Plutocracy on en.wikipedia: …  also known as plutonomy or plutarchy, is rule by the wealthy. Its first known use was in 1652.[1] Unlike systems such as democracy or anarchism, plutocracy is not rooted in an established political philosophy and has no formal advocates. The concept of plutocracy may be advocated by the wealthy classes of a society in an indirect or surreptitious fashion, though the term itself is almost always used in a pejorative sense …;

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