Austerity will make this recession worse (with Mike Konczal)

Episode Summary

Executive Summary: The episode argues that austerity during a recession or pandemic is economically harmful and politically motivated. Host Nick Hanauer and economist Mike Konczal explain that when private demand collapses, government should spend more—especially via federal aid to states, unemployment support, and automatic stabilizers—because cutting budgets deepens recessions, slows recovery, and causes long-term damage to GDP, wages, and public services.

Main Topics: Why austerity worsens recessions (Priority: 5/5): The hosts argue that cutting public spending in a downturn reduces demand, triggers layoffs, and creates a downward spiral that makes recessions longer and deeper. Federal vs. state fiscal capacity (Priority: 5/5): Mike Konczal distinguishes the federal government’s ability to borrow and issue currency from states’ balanced-budget constraints, arguing federal aid is essential because states cannot safely counteract the crisis alone. Path dependence and long-term economic scarring (Priority: 5/5): The conversation emphasizes that recession policy choices shape the future economy; slow recovery can permanently lower GDP, productivity, wages, and expectations of income growth. Empirical evidence against austerity (Priority: 4/5): The hosts cite Europe during the Great Recession and U.S. states as natural experiments showing that places with more retrenchment experienced weaker growth than those that spent more. Need for automatic stabilizers and permanent stimulus (Priority: 4/5): Konczal calls for extended or automatic aid triggered by unemployment thresholds so support continues without repeated political fights during prolonged crises. Political misuse of deficit rhetoric (Priority: 4/5): The episode criticizes Republican claims about fiscal crisis and blue-state bailouts as tactics to punish political opponents and justify cuts to Social Security, Medicare, and state aid.

Key Arguments: Austerity is counterproductive in recessions because it removes demand precisely when households, businesses, and governments are all trying to save at once. Government should act opposite to the private sector in a downturn: when private spending falls, public spending must rise to stabilize the economy. States are especially vulnerable because they cannot print money and are often bound by balanced-budget rules, so federal support is necessary. Historically low and even negative real interest rates mean federal borrowing is cheap and the market is effectively asking the government to spend more. Budget cuts reduce employment and income, which lowers consumption, hurts businesses, and lengthens the recession. Economic downturns are path-dependent: slower growth today can permanently lower future output, wages, and productivity. Recovery policies should be open-ended and automatic, tied to unemployment thresholds, rather than requiring repeated legislative battles. Claims of an imminent federal fiscal crisis are not supported by the data; inflation and interest-rate dynamics are more relevant than headline deficit fears. The states’ revenue collapse will be nationwide, not limited to blue states, because sales taxes and other revenues are falling everywhere. A stronger response would include direct payroll backstops, expanded unemployment insurance, and aid to states and households until the crisis ends.

Data Points: Estimated state revenue shortfall aid needed: $500 billion - Konczal says roughly half a trillion dollars would cover state revenue losses and prevent austerity. Potential additional federal relief needed: $2 trillion - Konczal suggests another large relief package may be needed, targeted to states, payrolls, and households. Unemployment forecast: Above 10%, at times above 15% in 2021 - The CBO projections are cited to show the scale and persistence of the labor market संकट. Real interest rates: Negative - Used to argue that borrowing is inexpensive and that markets want the federal government to spend more. Government workforce share: About 10% of the workforce / 20 million workers - The hosts note that public-sector employment is a major part of the economy and matters for recovery. Target unemployment trigger for automatic aid: 5% to 8% - Konczal proposes programs that automatically extend when unemployment remains above preset thresholds. Great Recession recovery comparison: Growth never returned to prior trend - The discussion describes a ratchet-down effect in GDP, productivity, and wages after recessions. Timeframe for unemployment recovery cited from CBO: Not under 10% until end of 2021 - Used to underscore the prolonged nature of the downturn and need for sustained support.

Pivotal Quotes: "Not everyone can save at the same time. And this is why austerity is such a terrible idea." — Nick Hanauer: The host frames the core Keynesian argument against simultaneous belt-tightening during a downturn. "The idea that the United States is on a cliff where it might fall off is nowhere reflected in the financial data." — Nick Hanauer: He rejects deficit panic and argues that long-term fiscal crisis claims are unsupported. "Austerity is the economic equivalent of a cytokine storm, your body's own immune system overreacting." — David Goldstein: Goldstein uses a pandemic analogy to explain how reflexive spending cuts can worsen the economic damage.

Implications: The episode urges listeners to support federal stimulus, state bailouts, and automatic stabilizers now. It warns that austerity will deepen inequality, prolong unemployment, and permanently weaken future growth unless policymakers act aggressively.