Deficit hawks are killing the recovery

Consumer spending is 70 percent of the American economy, so if consumers can’t or won’t spend we’re back in the soup. Yet the government just reported that consumer spending stalled in April – the first month consumers didn’t up their spending since last September.

Instead, consumers boosted their savings, probably because they’re worried about the slow pace of job growth (next Friday’s report will likely show gains, but the number will continue to be tiny compared to the overall ranks of the jobless), as well as a lackluster “recovery.” They’re also still carrying enormous debt burdens. One in four home owners is still underwater. And median wages are going nowhere.

So what’s Congress doing to stoke the economy as consumers pull back? In a word, nothing. Democratic House leaders yesterday shrank their jobs bill to a droplet. They jettisoned proposed subsidies to help the unemployed buy health insurance, as well as higher matching funds for state-run health programs such as Medicaid. And they trimmed extended unemployment insurance.

“Members who are from low unemployment areas are very concerned about the deficit,” Nancy Pelosi explained. She might have added that so-called Blue Dog Democrats have the same warped view of fiscal policy as most Republicans. They fail to distinguish between short-term deficits (good) and long-term debt (bad).

Deficit-cutting fever has also struck the Senate – except when it comes to the military, of course. Last night the Senate okayed a $60 billion war-funding bill for Afghanistan.

So far this year, the Afghan war has cost more than the war in Iraq, in part because the infrastructure in Afghanistan is so much more primitive than in Iraq that our tax dollars are needed to build it so troops and tanks can move more easily over the terrain. But spending on road-building in Afghanistan does little to boost the American economy.

Meanwhile, state and local governments continue to slash and burn. They’re laying off even more teachers, fire fighters, social workers, and police; cancelling more programs for the poor and working class; and raising sales taxes. The fiscal drag from all of this will be around $150 billion in 2010.

Without consumers opening their wallets, and without government making up the difference, we’re careening toward a double-dip recession. The long-term deficit (i.e. Medicare as boomers become seniors) needs attention, but right now it’s critical for government to spend. Otherwise we have no hope of getting free of the gravitational pull of this recession.

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