The Key to Prosperity is Growth, Not Austerity

Obviously, spendthrifts will not thrive. My mother gave me a simple rule she advised me to follow, and it goes something like this:

Income $20, expenditures $19 equal financial success; Income $20, expenditures $21 equal financial ruin.

 She was right of course. I did not follow the rule, and I paid the price.

But I am not a country of more than 300 million people or a world of seven billion people. And rules that apply to me do not necessarily apply to the United States – or the global economy. The macro economy is based on debt. Without debt, growth may be possible but it would be far from easy, and it certainly could not sustain the kind of population explosion this world is experiencing.

It is debt that made Americans the richest people on earth. The power of capital drives the U.S. economy. Money borrowed from the banks and put to productive use is like the yeast in bread. Money invested by individuals, pension funds, and so on yields dividends to reward investors for their thrift. When the system works, it is a powerful engine for growth.

Obviously, the system is not working. The stewards entrusted with the global economy have hijacked it and are syphoning off the profits for themselves.

Unless something is done to remedy that situation, nothing governments or international organizations do to save the world’s economy is going to work.

But assuming the powers that be come to their senses and chase the thieving money changers from the temple, the economy will still need to grow, not shrink. The current craze for austerity is a real and present danger. Cost cutting leads to lower revenues and inevitably to more cost cutting – a financial whirlpool that eventually sucks an economy into freefall.

Austerity has proven time and again to be a sure route to recession – and it could even lead to another Great Depression (picture above).

Borrowing – sensible borrowing – is necessary to sustain capitalism. 

The key is to make the borrowed capital productive. It is all very well to talk about education, and even infrastructure, as long-term necessities for a prosperous economy. That’s motherhood. But these investments pay dividends in the long term. America needs to make investments that yield results fast.

That takes imagination and daring, both of which seem to be in critically short supply. America is especially in need of something – the Next Big Thing – to power its economy. Bill Clinton was lucky; he had the Internet. Barack Obama has nothing going on that I can see.

It looks to me as if President Obama is being seduced by Milton Friedman conservatives who are totally – and dangerously – wrong. But the president is not entirely to blame for the country’s economic stalemate.

In their blind zeal to slash spending, the conservatives in Congress refuse to free up capital not only for infrastructure but also for desperately needed research and development. It was the government’s encouragement that gave us the Internet. It was government-funded research that developed fracking, which opened up the vast natural-gas resource powering mini-booms in places like North Dakota. What is the government doing now?

And where do we go from here? Robbing the old, the sick and the poor to enrich global corporations is surely not the way to fuel productivity.  It is ideological fanatacism – and economic suicide.

While the American elite argues over he best way to inflict misery on the population, China is going full-speed ahead in developing “green” energy. America has all but lost its chance of finding the pot of gold at the end of that rainbow. It has failed even to provide a modern electrical grid that would move wind and solar power to the marketplace.

And – perhaps most urgent – it is neglecting the exploration required to find the Next Big Thing.

The world’s greatest economy cannot continue to thrive if it persists in buying more from other countries than it sells to them. But choking off the money available to American consumers would be a lousy way to address that problem.

Will somebody tell the president to stop playing footsy with the radical – and radically misguided – “fiscal conservatives” before it’s too late.

Click here to read why austerity economics won’t work.

Click here to read about the threat of neoliberalism.

Click here to read more about Milton Friedman.