Lessons from the Collapse


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We are obviously living history that no one in the future would like to repeat.  So, what are the lessons to be learned?

There are many small-scale lessons.  Wash your hands more often.  Don’t touch your face so much. 

But what are the lessons we can learn from the big policies which have been implemented in the run up to this catastrophe? 

At the federal level it is fair to say that, at least when it comes to economics, the policy has been to cut taxes, run deficits, and slash most non-military spending.  Apparently, this was supposed to result in a wonderful path for our country.  We now know that these choices have brought us an epic economic catastrophe.  Let’s elaborate on these truths.

The consensus among economists is that deficits should operate countercyclically. That is, during good times deficits should decline so that during bad times deficit spending can be used to shore up the economy. But, over the last three years of expansion our federal deficit has skyrocketed, for reasons which I will discuss in a moment. 

So now that the country is faced with unprecedented increases in unemployment, and many of these people now need government support, the bipartisan solution – the $2 trillion CARES Act – requires a massive boost to the deficit.

Essentially, the credit card was maxed out prior to the catastrophe and now we are increasing the limit. And it is unlikely $2 trillion will be enough.

Will credit markets allow us to borrow still more?  We really don’t know – and that is exactly why most economists counsel against increased deficits during an expansion.

The largest driver of this irresponsible and ill-advised deficit spending over the past three years was tax cuts. 

How much did expansion-era tax cutting boost the economy? Economic performance has been only average, and now is imploding.

And who benefitted from this tax cut? 

According to the Heritage Foundation (not exactly a liberal outfit) regions like Connecticut’s 4th Congressional District, aka Fairfield County, received an average tax savings which was 64% larger than any of the other Congressional districts in Connecticut.  The least in need received the largest boost. 

Tax cuts were one side of a coin, the other was a direct frontal assault on almost all non-military federal functions.  Foxes were placed in charge of all the hen houses.  For example, the Centers for Disease Control funding decreased by 6% in real terms since 2016.  In stark contrast the Department of Defense budget increased by over 9% in real terms.  I think we can all agree that our health system, more generally, was given inadequate attention in the run up to this pandemic. This is the monetary manifestation of a philosophy which denigrates non-military public servants. 

Here in Connecticut we have our own version of this failed, hostile philosophy towards public servants.  Some are calling for a cut to state employee pay.  Why would we cut the pay of state police?  They’re needed now more than ever to ensure public safety.  Prison guard pay cuts?  Those places are potential hotbeds of lethal outbreaks.  That’s just cruel.  Cuts to educators?  It is abundantly obvious that our lack of wisdom brought us here.  And it is research by those dedicated to the study of science who will save our country, hopefully.  Cuts to nurses employed by the state? I don’t even know where to begin with that one.  

Cut to state employee pay is not just cruel it is also just bad economics during a downturn.  Say’s Law states that supply creates its own demand.  That is, paying employees permits them to buy things (which in turn allows business to pay their employees, ad infinitum). 

Slashing those providing public safety, or health care, or education right now will only harm private enterprise in the end. Perhaps instead it is time for the 1% to give back their tax cuts. They never really needed them to begin with.

Brendan Cunningham is professor of Economics at Eastern Connecticut State University.