Dean Baker argues US stimulus spending has boosted growth

Dean Baker of the Center for Economic and Policy Research in the US was interviewed for Radio 4′s Today programme by Mark Mardell, where he argued that stimulus spending had created jobs and growth, in direct contrast to the UK’s austerity programme which has seen growth fall and unemployment increase.

 

Listen again to the item at 2hr33.

 

Mark Mardell:
Obama has to make the point forcefully in an election year, when the stimulus was devised, he told his advisers he wanted spending on what he called a moonshot project, something big and memorable like the New Deal’s Hoover Dam. Instead he got small scale instantly forgettable plans with little political impact. But Dean Baker from the Center for Economic and Policy Research says it’s worked and it’s a pretty cut and dried case.

Dean Baker:
Well it seems to me it’s a text book Keynesian story that when you’re in the middle of a downturn, if you cut back, if you have austerity, as the UK has done, then you have slower growth or recession depending on how far they’ll actually go but in any case its really dampened growth there.

In the United States we haven’t had the same sort of austerity, we haven’t had as much stimulus as some of us would think would be appropriate but the economy is still growing. Most put the stimulus as having created three million jobs, adding around 2 percentage points to GDP growth and that looks pretty much right to me, so he certainly made a big difference and I think he deserves credit for it.

Mark Mardell:
But UK fans of cuts would argue the US has been saved from a profligate stimulus by its system of government. There has been austerity. There have been many cut backs in individual states from California to Illinois. Just as fast as Obama pumped money into the economy, they pumped it out. But Dean Baker doesn’t think that helped…

Dean Baker:
States have been a drag on growth, so if you look we lost probably 3-4 tenths a percentage point of growth because most of the states have been forced to cut back to balance their budget. Also, the fact that the stimulus ended. The bulk of the stimulus took place in the year 2009-2010. The economy slowed to a crawl in the first half of 2011, when the stimulus was winding down, so all this fits the Keynesian story really to a T.

 

Lessons from America

I’ve always been a sceptic of Barack Obama. From his sensational win in the Iowa caucus to the euphoric scenes on November 4th 2008, I was always concerned his rhetoric of hope and change was raising expectations to levels which he knew he would never to be able to fulfil. On many counts, I’ve been proved right: Guantanamo Bay remains in operation over three years on, healthcare reform has been limited and the USA continues to uncritically back Israel at the United Nations. On the biggest issue facing ordinary Americans today, however, the Obama administration has – just about – got it right.

This week Obama announced budget proposals for the next financial year (from October 1st rather than April 1st as it is in the UK) with increased funding in cash terms on key areas such as energy and infrastructure, cuts to defence and increased taxation on the wealthiest Americans. The proposals are far from perfect and many of the progressive measures will face stiff opposition in Congress. They do however emphasise the key difference in approach with that currently taken in the United Kingdom. While making comparisons between the UK and US is always dangerous given the different economic conditions and political cultures there are broadly two lessons that can be learnt.

Firstly, the Keynesian approach works. Obama was elected to the US presidency in the midst of a recession. Like Gordon Brown, his response was a fiscal stimulus package enacted in the 2009 American Recovery and Reinvestment Act. This Act invested hundreds of billions into the US economy through investment and tax cuts to low and middle income earners. It also increased the federal deficit. By the end of the 2009 US financial year the federal budget deficit had risen from 3.21 % to 10.08%. While Obama initially proposed to halve the deficit by the end of his term as president his approach has since shifted towards prioritising jobs and growth. The deficit has come down but only by around 1.5% and in his latest speech he outlined proposals to reduce it further over a longer ten year period. As he put it in April last year “we have to use a scalpel and not a machete to reduce the deficit”.

The scalpel may yet cut too deeply too swiftly and many on the left in the USA are raising very legitimate concerns at the current time. So far, however, the US economy is reaping the rewards of sustained investment with ten successive quarters of economic growth. In the same period, the UK has only managed only 7 (or 8 if you count the 0% growth in quarter 2 last year). US unemployment peaked at 10% in November 2010 and has fallen reasonably steadily since then to 8.3% (lower than the UK rate for the first time since 2008). Around 3.7 million more Americans have been employed in this time.

Politically too, we can learn from Obama. Like Labour, he faces opportunistic opponents, a rabid right wing media and powerful vested financial and commercial interests (including the unaccountable credit ratings agencies which downgraded the US economy in August 2011). He has challenged them all by fighting the economic argument on its merits and if the current polls are replicated in November he is likely to reap the electoral reward. The two Eds should look across the Atlantic and be emboldened.