By Dan Kervick

For most Americans, the news that the US economy contracted by 0.1% in the fourth quarter of 2012, the first quarter of negative growth since the pit of the Great Recession 2009, has undoubtedly come as a disappointing shock. For readers of this blog and the other MMT blogs, however, the emotion felt is probably closer to bitter frustration, since we have all been warning for a very long time about the danger of the utterly misguided austerity drive that has wrecked the European economy, and was officially imported last year to the United States.

Alan B. Krueger, the White House’s Chairman of the Council of Economic Advisers, sought to put the best possible face on this terrible news. As usual with the defenders of the austerity agenda in both the Republican and Democratic camps, they seek to put the blame on “uncertainty” rather than the actual contraction of the government’s fiscal position. This time the uncertainty allegedly resides in the military sector.

Bad economic news connected with military spending no doubt comes at a touchy time for the White House, which is launching a new effort to reduce defense outlays. The White House will try to convince the public that the economic pain is the necessary price for needed budget austerity and defense spending reform. Republicans will seize on this warning sign of a new recession to block reductions in military spending. The conservative American Enterprise Institute, a leading tank of what passes for Republican thinking these days, is already seeking to reposition Republican forces away from austerity and debt-reduction.

They are both wrong. The White House is right about the need for military cuts but dead wrong on austerity. Born-again military Keynesians on the right are correct about the need for federal government fiscal support for the economy, but dead wrong about the desirability of preserving the bloated Bush-era military. After a decade of war, military spending should be cut. But rather than using those cuts to reduce overall government spending, the cuts should be offset and exceeded by expanded government spending on vitally needed, job-creating public investment projects. Taxes on the rich should be increased. But rather than using those increases to reduce the deficit and push a Shared Painer austerity agenda, every dollar of tax increases on the rich should be offset and exceeded by more spending or additional tax breaks for everyone else.

Americans everywhere, understanding the budgetary constraints on their own households and businesses caused by diminishing incomes and debt overhang, have embraced the Washington-lead agenda of tightening the federal government’s budget through some combination of spending cuts and tax increases. Whether we call this agenda “austerity” or “fiscal restriction” or “tightening the government’s belt”, the impulse behind it, understandable as it is from a psychological point of view, is dead wrong from an economic point of view. It is a matter of fundamental, mathematical accounting fact that the budgetary balances of the federal government sector and the non-government sectors in our economy must add up to zero. If the federal government has a deficit, then the portion of spending in our economy falling outside the federal government’s responsibilities – a portion that includes American households and businesses, state and local governments, and foreign households and firms who do business with Americans in the dollar-based economy – must have a spending surplus. If the federal government moves to a smaller deficit, that reduces the spending surplus of the rest of the dollar-based economy. In other words, if the government reduces its deficit, things get tighter for the rest of us.

We are now seeing the effects of the wrongheaded Washington austerity drive. The White House and Congress spent last summer wrangling over the precise shape of a massive government austerity package and a “grand bargain” on the budget. Although full agreement was never reached, the outcome of the negotiations was a fiscal double-whammy that is being implemented in two further negotiated stages. The first hit came with the fiscal cliff deal, which walloped the economy with a substantial package of spending cuts and tax increases. The impact that was felt right away by most Americans was the cancellation of the payroll tax holiday, which resulted in an immediate decrease in take-home pay after the 1st of the year. Not surprisingly, consumer confidence decreased to its lowest level since November, 2011.

The next hit to the economy will come when the sequestration package of spending cuts and tax increases that was also part of last summer’s provisional budget deal begins to take effect in March. This package will implement a $1.2 trillion reduction in the federal government’s net contribution to the economy. Some Americans might be under the impression that the upcoming battle between the White House and Congress is over whether or not to implement that contraction. Not really. It is an argument over how to rework it so that that the same or greater contraction takes place, but with a different mix of tax increases and spending cuts. The White House has spoken of upping the long-term budgetary wallop from $1.2 trillion to $1.5 trillion. Goldman Sachs estimates an overall fiscal drag of about 1.5% of GDP as a result of this two-staged reduction in federal government support for the economy. Given that we just had a quarter of negative growth, experiencing that kind of a drag probably means a new US recession.

Europe continues to struggle. While Europe might no longer be experiencing an acute financial crisis, they are plunged in a deep crisis of low growth, sagging production and massive unemployment. What optimism there is in Europe lately has seemed to come from the feeling that the US is poised to lead the world into a strong recovery. Recent rises in the US stock market and housing market, fueled to some extent by speculation, along with the surge of US fossil fuel fracking, have given some sense of economic hope to Europeans laboring under their own insane and punishing campaign of disaster capitalism austerity and neoliberal restructuring of national governments by Europe’s financial bosses. The global clown prince of austerity, David Cameron, recently had to try to explain away his country’s own recent news of negative fourth quarter growth. It is almost incomprehensible that US political leaders are now copying Cameron’s comical record of manifest, triple-dipping failure. But the bad news from the US will no doubt come as a further blow to Europe, along with China, whose export-dominated economy had also seemed to right itself and surge recently.

Paul Krugman is now leading a growing chorus of mainstream economists with the courage to buck the conventional wisdom and resist the absurd bipartisan mania for austerity. It remains to be seen whether politicians can show similar courage, admit to the public that the economic strategy they have been pursuing is a mistake, and call for a dramatic change in direction. The major politician who shows this kind of courage first is the one who will reap the lion’s share of the political benefits.

Here is what we must do right away: cancel the sequestration. Don’t renegotiate it; don’t modify it; don’t replace a Republican package of cuts-only austerity or a Democratic package of shared pain austerity. Just cancel it.

Next, we need a new commitment to expanded public enterprise and an expanded net federal government contribution to the US economy. An energetic progressive program of public enterprise will finally enable us to break out of the pattern of stagnation, needless suffering, mass unemployment, feckless drift and visionless neglect to which our two foolish and cowardly political parties have been all too happy to consign it since 2008. We have run out of gimmicks. Federal Reserve financial asset games will not bail us out and save the politicians from their responsibilities. We can’t be pulled out of economic failure by QE, QE2, Operation Twist, and other maneuvers that merely adjust the term structures of assets held by the financial sector without directly impacting the real economy where people work and produce to build the country and build prosperity. There is no central bank fix for a sick economy groaning under persistent public underinvestment. The politicians must act.

And even if we are able to frack ourselves into some sort of recovery, a period of growth fueled by a short-term fossil fuels binge is not what most Americans signed on for in the last two elections. Most Americans want Washington to get to work on re-engineering our energy systems to give us a more sustainable economy and healthier planet. A national project to create that new system will create jobs and prosperity. President Obama passed up a golden political opportunity to launch this kind of national project during the BP oil spill disaster, and instead pressed forward with the deficit-reduction austerity politics being sold by Pete Peterson’s minions: the deficit hawks whom Obama appointed to his woefully mistimed and counterproductive Deficit Reduction Commission. These debt hysteria zombies still walk among us in the form of Fix the Debt, another Peterson-funded outfit run by the same cast of characters. It’s time for these nattering nabobs of negativity to take a hike, and get out of the way of national development and progress. Perhaps Obama can find the courage now that he lacked as he stood on a beach in Louisiana in 2010 to watch the Gulf of Mexico fill up with poison.

In 1937, the political leaders of a US economy that was just beginning to emerge from a terrible depression made a tragic decision. They prematurely reduced the US government’s support for the American economy in a misguided effort to move toward budget balance, and plunged the United States back into recession. The Washington of 2013 has a similarly fatal choice. They can either repeat the mistake of 1937 or they can decide to be real, visionary national leaders for a change, and not the small-minded and economically blinkered bean-counters they have become since the global economic crisis began in 2007 and 2008. If they choose to continue with the pusillanimous bean-counting, they will surely pay a heavy political price for their failure, in addition to whatever further price they inflict on the struggling American people and our future generations.