The Return of Hooverian Economics

Sacrificing Education
By ANTHONY DiMAGGIO

Those celebrating the end of the recession may be in for a rude awakening, as a deeper crisis may be right around the corner. While the economy grew nationally by 3.2 percent in the first quarter of 2010, looming and quite massive budget cuts being discussed at the state level threaten to derail what limited recovery has taken place. The national unemployment rate is at its highest point since the 1982-1983 recession; it represents the second highest unemployment spell since the end of the Great Depression more than 70 years ago. As of March 2010, unemployment stood at 9.7 percent, just .3 percent lower than the 10 percent high in October 2009, and more than three percent higher than the unemployment level in October 2008, which stood at 6.6 percent. To make matters worse, national home prices have dropped by nearly 4 percent during early 2010, while interest and foreclosure rates are on the rise again.

Although long cast into the dustbin of history, Hooverian economics appears to be making a major comeback in state and national politics. The return of this long maligned model is disturbing, but not unexpected in a country which has a collective memory of no longer than a few years. For those who are unfamiliar, Hooverian economics refers to the do-nothing approach to dealing with economic crises. It assumes that government is always “part of the problem” when it comes to promoting the public good. This most recent strain of Hooverian economics is accompanied by a hypocritical promotion of massive corporate subsidies and bailouts, in which a majority of Republicans (along with the former Bush administration) endorse. As the theory goes, the best way to ensure economic recovery is to get the government “out of the way” of the private sector when it comes to “excessive” and “unneeded” regulations and interference. But how is this approach related to the modern day electoral politics of the Republican Party? One need do little more than look at the rhetoric of national and state Republicans to find out.

As of last month, Illinois Republican Gubernatorial candidate Bill Brady attacked current Democratic Governor Pat Quinn for his plan to increase the income tax from three to four percent, lamenting: “the citizens of Illinois are sick and tired of politicians who continue to dip into their pockets.” Brady railed against “out of control borrowing and spending” and instead supported a plan to “make meaningful cuts to government overspending” in light of the state’s $13 billion deficit. Brady’s opposition to a tax increase has been nudged along by the reactionary Illinois Policy Institute (IPI), which is calling for as much as $3.5 billion in cuts to the 2011 budget ($1.5 billion more than Quinn has called for if he is unsuccessful in pushing a tax hike). IPI Chairman John Tillman dismissed concerns about the soon to be unemployed, working poor, and middle class who will inevitably be hurt by this plan, explaining that “You’ve gotta’ make tough choices.” Such callous and elitist rhetoric is eerily similar to and conceptually indistinguishable from Hoover’s own words, expressed more than 80 years ago, that “economic depression cannot be cured by legislative action or executive pronouncement” and that “prosperity cannot be restored by raids upon the public treasury.”

Hooverian dogmas are also evident at the national level, where Congressional Republicans attack the Obama administration’s 2009 stimulus as an unwarranted government intrusion into the wondrous efficiency of the “free market.” John McCain lamented the Obama stimulus, instead supporting a plan to further starve the states by “make[ing the Bush] tax cuts permanent” and “reduce[ing] spending to get our budget in balance.” House Minority Leader John Boehner lambasted Obama for dooming future generations with today’s deficit spending: “at the end of the day, how much debt are we going to pile on future generations?”

I hoped that we were beyond Hoover’s brain dead economic philosophy, which assumes that only “the market” can solve our problems at a time when the nation’s banks and major investment firms are still on the brink of extinction, home foreclosures are again on the rise, and states are facing crippling budget deficits due to rabid opposition to tax increases from Republican and Democratic officials alike. The Hooverian experiment was undertaken long ago and it was an abysmal failure. Sadly, few in the corporate press have the courage to call out Hooverians for their arrogance and incompetence today.

Keynesian spending has long been understood by most economists as the primary means of pulling economies away from the precipice of total collapse. For those unfamiliar with John Maynard Keynes’ work, I’ll briefly summarize his major argument: during times of economic crisis, national and state governments are forced to manufacture demand for products and services since the private sector is either unable or unwilling to do so (as we have so painfully seen over the last year and a half). Stimulating public demand for products and services is financed through short term borrowing and deficit increases – in order to keep the economy running at a time when banks refuse to loan out cash and private corporations are shedding workers in the millions so as to reduce operating expenses and cut their losses. In such dire situations, individual consumers are unwilling to increase their spending, as they seek to conserve their cash in the case of a greater emergency. The government, then, becomes the only actor able to provide a stimulus of last resort.

While the virtues of Keynesian economics have been understood for decades, right-wing government officials (along with centrist Democrats) have undertaken a radical campaign to sell the public on cutting social services as a solution to “balancing the budget.” The Obama stimulus is lambasted by high profile Republicans like John Boehner, who complains that “taxpayers aren’t getting their money’s worth out of the trillion-dollar ‘stimulus’ and struggling families and small businesses are rightly asking ‘where are the jobs?’” A simple answer to this question is available for those who bother to read newspapers (Boehner and other stimulus critics apparently don’t). Jobs haven’t been created despite federal stimulus spending in the hundreds of billions of dollars, in large part because states are using stimulus money to make up for their budget shortfalls, rather than raising taxes to compensate for those shortfalls. In short, stimulus money is being used to replace declining budget revenues; by elementary logic, then, there can be no stimulus if federal funds are simply filling in the holes that were already present in state deficits.

According to the Center for Economic and Policy Research (CEPR), the $787 billion federal stimulus had the effect of subsidizing states that were in the process of cutting their budgets and social services. As CEPR estimates “state and local budget deficits to the tune of $100 billion a year will offset the stimulative effect of the president’s American Recovery and Reinvestment Act. Stimulus dollars used to cover deficits will have no stimulative effect.” In at least 16 states, the General Accounting Office (GAO) found that federal stimulus money (that went to states for education spending) was being used to retain teachers who would otherwise have been laid off: “overall, states reported using Recovery Act funds to stabilize state budgets and to cope with fiscal stresses…the funds helped them maintain staffing for existing programs and minimize or avoid tax increases as well as reductions in services.”

Without stimulus money, the economic decline in 2009 to 2010 would surely have been far worse. As the Center on Budget and Policy Priorities (CBPR) explains: “Because states also face legal requirements to balance their budgets, they must enact program cuts [or] tax increases to close their budget gaps.” Budget cuts, CBPR concludes, “reduce demand for goods and services, making a weak economy even weaker. Without federal funds, states would have to take even more dramatic measures that, by reducing demand, would cost jobs and make the recession even more severe.” This last sentence should be kept in mind when we discuss the future effects of further state budget cuts. States are likely to worsen the recession if they pass draconian budget reductions. While Democratic and Republican officials promise that cutting spending will help balance the budget, the effects will likely be the opposite, with budget revenues declining even further due to large numbers of state and local employees being fired from their jobs and contributions to state tax revenues declining further because of the mass firings. This has already happened, with massive cuts in the private sector leading to huge reductions in state budgets. Such job losses will put additional strains on the public sector, and justify additional pressures for another round of budget cuts and job losses. Such practices create a cyclical process whereby budget cuts and further economic deterioration become mutually reinforcing and contribute to a greater downward spiral in reducing tax pools and increasing budget deficits.

Noted economist Joseph Stiglitz is right to criticize officials in states like Illinois, New York, and California (among the largest state economies in the country) as “very foolish” for refusing to raise taxes, preferring instead to downsize government services in a time of crisis. Stiglitz estimates that state budget cuts will have “a negative stimulus of half the magnitude of the positive stimulus that is coming out of Washington” if they are left in place. Stiglitz should know – he spent years as the chief economist of the International Monetary Fund – which specializes in promoting neoliberal economic reforms that terminate government spending in countries suffering during economic crisis. Such reforms have had disastrous consequences, contributing to the crumbling of entire national economies over night at a time when Keynesian spending would have greatly helped those in need and stimulated economic stabilization and recovery. One wouldn’t know any of this, however, by listening to the rhetoric of Republicans and Democrats today who celebrate the virtues of non-government interference, while millions suffer under the economic crisis.

Current suffering parallels that suffered by the unemployed, poor, and homeless during the Great Depression. By 1932, and in light of years of do-nothing Hooverian economics, U.S. unemployment had officially reached nearly 25 percent, up from only a few percent prior to the stock market crash. Thousands of Americans – homeless as a result of the depression and the refusal of Hoover to intervene in favor of the working class and poor – increasingly congregated in “Hoovervilles” – the label given to the shanty towns that began to spring up around the country. While Hoover did eventually implement a very limited public works program and increases tax to try and help pay for it, the damage had already been done to a country that suffered for three years under a government that consistently refused to intervene to promote economic stability, recovery, and assistance to the poor.

Many conservatives today criticize Obama’s massive public works programs (itself a classic manifestation of Keynesian spending) for failing to bring the country out of crisis. Such attacks are highly deceptive and propagandistic, and display a stupefying ignorance of historical facts. Those who’ve studied the New Deal period (and its public works program) are well aware of the fact that FDR’s deficit spending contributed to a major decline in unemployment from a high of nearly 25 percent in 1932 to less than 15 percent by 1937. Of course, unemployment again rose to nearly 20 percent by 1938, primarily due FDR’s own unfounded fears about the dangers of deficit spending – which caused him to scale back on public works spending and throw workers out of their jobs in mass. Upon seeing the disastrous effects of efforts to “balance the budget” during a depression, FDR promptly reversed course, reinstituting massive public works spending, which eventually contributed to a decline in unemployment to approximately 10 percent by 1941. In short, Keynesian deficit spending helped reduce U.S. unemployment from a high of nearly 25 percent to about 10 percent over less than a decade. All this took place prior to the mass economic mobilization resulting from wartime spending, which succeeded in further reducing unemployment to negligible numbers by the end of the Second World War.

Think tank policy wonks and affluent politicians naturally find it easy to make the “tough choice” to support budget cuts when the costs are paid by the less fortunate. And there are certainly tough times ahead of the American public. As of March 2010, Illinois is already the 9th highest state for unemployment in the U.S., according to the Bureau of Labor Statistics. Governor Quinn’s own proposed cuts in the Illinois budget (should his tax increase fail) will lead to an estimated 17,000 layoffs for public school teachers and as many as 400 layoffs for state troopers. Medicaid recipients’ benefits will also be cut, as will be the beneficiaries of the widely popular Kidcare program that provides health care for needy children.

Higher education is already being lacerated across the country. In Colorado, public colleges are bracing for a 10 percent cut in their budgets – the equivalent of losing hundreds of millions of dollars a year. In Illinois, universities and community colleges are owed more than $750 million by the state. Budget shortfalls are leading to talk of as much as an 18 percent tuition hike in one year for students of some state institutions, followed by increases in campus housing costs. At the University of Illinois, Chicago, where I completed my Ph.D. course work, there has been serious talk of firing virtually all the administrative staff in the social science departments, while at Illinois State University, where I’ve taught for years, departments are planning on eliminating virtually all of their non-tenure track faculty, decreasing course offerings, increasing tuition costs, and increasing class sizes. Sacrificing a decent education, the IPI and state officials tell us, is the price that must be paid for achieving “progress” under the “free market” system.

A majority of economists supported some sort of government stimulus package in 2009, and many felt the Obama stimulus should have been much larger. According to USA Today, most economists feel that the federal government should do more than its already done to stimulate job growth. The majority of Americans also supported the stimulus, with 53 percent in favor and 36 percent opposed according to a January 2009 Gallup poll. Contrary to the dogmas now spread by both the Democratic and Republican parties, most Americans feel the amount of taxes they currently pay are “fair.” When asked about their policy priorities, 57 percent of Americans favor the government “stimulating economic recovery” rather than “reducing the deficit (CNN poll, December 2009) – in blatant opposition to the reactionary policies pursued by state Republicans and Democrats. Similarly, large majorities of the public (more than 80 percent) favor using federal funds to provide “unemployment insurance and health insurance to people who have lost their jobs,” “increased spending on construction on federal roads and bridges,” and “increased spending on trains, buses and other forms of mass transit” despite official fear mongering over deficit spending during a recession.

Unfortunately, state officials remain recalcitrant in their refusal to consider tax hikes. They prefer to rely on propagandistic claims that the public will not support tax increases – despite the obvious fact that the public strongly supports Keynesian spending to stabilize a weak economy. The public is not fueling the campaign to downsize government and social welfare; rather, the current round of budget cuts are the product of a bi-partisan neoliberal ideology that is contemptuous of social welfare spending and opposed to increased taxation of the affluent in the name of helping the poor. Democrats – although the legislative majority in the state of Illinois – refused to consider a tax increase last year, and are likely to do so again this year. Their contempt for Keynesian welfare spending exceeds even that of Hoover himself, who eventually conceded that some sort of tax increase would be necessary to promote economic recovery.

Conservatives complain that deficit spending is the equivalent of “mortgaging away our children’s futures.” But what good is it to speak of the future of our children when we’re already flushing away their present? What good is it to talk of “balanced budgets” in the future when families today can’t pay for their mortgages, utilities, car payments, or basic necessities such as food, health care, or clothing? Republican and Democratic concerns with “our children’s futures” begin to look extremely disingenuous in light of the desperation and suffering that are already occurring – a misery in which they have literally no interest in addressing. The notorious conservative Grover Norquist screams at the government to “leave us alone” – presumably referring to the tiny segment of the American public that still believes in libertarian “free market” capitalism and opposes taxation by the national government. We can send a message to Norquist and other neoliberal reactionaries in office by pressuring our state leaders to abandon their support for mass budget cuts. It’s time for us to send out our own message: leave public education alone, leave our health care programs in place, and stop throwing public employees out of their jobs when they’re at their most vulnerable. In short, it’s time for the neoliberal corporatists to “leave us alone!”