How the Austerity Class Rules Washington
“Having gotten a stimulus that he knew was too small, Obama should have said, This is a good first step, but we’re likely going to need more,” says Dean Baker, co-director of the Center for Economic and Policy Research. “And gone on the offensive. Instead he turned to balancing the budget. That set the stage for the Tea Party and the Peterson crowd, because ‘deficits’ were all anyone heard.” Indeed, conservatives were emboldened by Obama’s speech. “If the arguments in the coming years are between spending freezes and spending cuts, then we’ve already won,” wrote Jim Geraghty of National Review in January 2010.
By June 2010, austerity had gripped the globe, as the G-20 nations agreed to cut their deficits in half by 2013 and pursue “growth friendly” fiscal consolidation. In the midst of the recession, the notion of “expansionary austerity” became a kind of magical elixir for the deficit hawks, much as the Laffer Curve did for Reaganomics. Harvard economist Alberto Alesina pioneered the theory, arguing in 2009 that “spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions.” The CRFB, David Brooks, the American Enterprise Institute and the House Republican leadership quickly amplified his view. “Alesina has provided the theoretical ammunition fiscal conservatives want,” wrote Bloomberg Businessweek. It seemingly made no difference that his findings had been thoroughly debunked by the likes of The Economist, the IMF and the Center for Budget and Policy Priorities (CBPP), which found that in only nine of the 107 cases surveyed by Alesina had austerity measures led to increased growth. Yet to this day, leaders like Texas Representative Jeb Hensarling (co-chair of the supercommittee) insist that “deficit reduction will be a jobs plan.”
The austerity-class chorus grew louder following the release of the Bowles-Simpson report shortly after the 2010 midterm elections and framed the debate for 2011. (It was led by a conservative Democrat and a conservative Republican, evidently the definition of “balance” in Washington. Few in the media noted that Peterson-backed groups had staffed the commission and organized town hall events on its behalf, ostensibly underwriting what was purported to be an independent government entity.)
“Bowles-Simpson was not a deficit-reduction package,” says Stiglitz, “but a downsizing-government package.” Instead of rolling back the Bush administration policies that had turned Clinton’s surplus into a deficit—such as the Bush tax cuts, Medicare Part D plan and costly wars in Afghanistan and Iraq—the commission took aim at the social safety net and promoted pet conservative causes, like cutting the federal workforce by 10 percent, cutting funds for the Corporation for Public Broadcasting and capping medical malpractice lawsuits. It called for “serious belt tightening” beginning in 2012, when few economists believed the economy would have recovered from the recession.
In his budget for 2012, Obama proposed cutting discretionary spending to its lowest share of GDP since the Eisenhower administration. The debate in Washington was thus the administration’s “cut and invest” strategy versus the GOP’s “cut and grow” plan, noted Post blogger Sargent. Both proved illusory, as the country saw neither investments nor growth, only more cuts. The deal to avert a government shutdown included billions in cuts. By the time of the summer debt ceiling showdown, the parties were trying to out-cut each other, with the president increasingly espousing conservative talking points (such as the discredited ideas that government budgets are like family budgets, that spending cuts will create jobs and that slashing the deficit will return “confidence” to the market). Even Nancy Pelosi, the country’s highest-ranking progressive Democrat, declared in July, “It is clear we must enter an era of austerity.”
The triumph of the austerity class set the stage for Obama’s “grand bargain” offer to House Speaker John Boehner, which included $3 trillion in spending cuts in exchange for $800 billion in new revenue (roughly the equivalent of letting the Bush tax cuts for the rich expire). Times columnist Brooks called it “an astonishing concession” by the White House and “the deal of the century” for the GOP. Yet Boehner balked when Obama asked for $400 billion in additional revenue to help balance the lopsided plan. The parties agreed instead to $917 billion in cuts over the next decade, with the supercommittee tasked with finding $1.2 trillion in additional savings. The austerity debate is guaranteed to last until Christmas, at the very least.
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The unholy alliance between the austerity class and supply-side conservatives, who talk a good game about deficits but in fact care principally about cutting taxes and government spending, has shifted the debate over the economy and the deficit far to the right since Obama took office. By promoting an age of austerity, the deficit hawks have enhanced the power of “starve the beast” conservatives like Grover Norquist, whose goal for years has been to shred the New Deal. The austerity class’s infatuation with Representative Paul Ryan is a prime example of this addled love affair.
In 2008, when Ryan introduced his radical budget road map—which called for turning Medicare into a voucher system, privatizing Social Security and redistributing income upward by drastically cutting taxes for the wealthiest Americans and largest corporations—MacGuineas praised his “tremendous courage and leadership.” When Ryan reintroduced his plan in 2010, the CRFB lauded his “thoughtfulness and courage.” The CRFB failed to mention that Ryan’s plan would increase the deficit, from a debt-to-GDP ratio of 60 percent in 2010 to 175 percent by 2050. “Paul Ryan added a huge amount to the deficit,” says John Irons, policy director at the Economic Policy Institute (EPI). “To call that even remotely fiscally responsible was not a correct analysis. It’s almost as if they said, We don’t care what your plan does—as long as you talk tough on deficits we’re going to support you.”
Indeed, in January the CRFB, the Concord Coalition and the Comeback America Initiative (all funded by the Peterson Foundation) gave Ryan a cherished fiscal responsibility award, despite his deficit-exploding budget, hostility to tax increases and votes in favor of the Bush administration’s deficit spending. Bob Bixby, executive director of the Concord Coalition, introduced Ryan by quoting Time magazine: “The irony of Ryan’s rise is that he has vaulted to popularity by embracing historically unpopular ideas.” Said Bixby, “And I thought to myself, now there is a deficit hawk…. If we limit ourselves to popular ideas, we’re never going to solve the problem.”
MacGuineas said the award honored Ryan for being the first politician to put forth a budget plan in 2011, which she called “the most fiscally responsible of any of the plans.” Technically, that’s true. Ryan’s budget, a modified version of his road map, achieves a modest $155 billion in savings over ten years by proposing what the CBPP calls “the most severe and wrenching budget cuts in US history—two-thirds of which would come from programs for people of low or moderate incomes” (i.e., Medicaid, Pell grants, food stamps and low-income housing).
The award to Ryan illustrates just how dangerously obtuse the austerity class’s definition of fiscal responsibility is. The deficit hawks succeed by making the debate over the deficit a pure accounting game, with no acknowledgment of the adverse impact a plan like Ryan’s would have on the broader economy and on so many Americans if it became law. “If [you’re] willing to slash spending so that long-run deficits are brought under control, then it’s fiscally responsible,” Jim Horney, vice president for federal fiscal policy at CBPP, says of the Ryan plan. “But if by fiscally responsible you mean putting the budget on a sustainable path but making sure that government is able to meet the needs of the people of the United States, then I think it’s a terribly irresponsible plan.”
The deficit hawks once again sided with Ryan and his GOP colleagues during the debt ceiling standoff. “Failing to use this debt ceiling ‘hammer’ to force serious fiscal reforms would be a dangerous lost opportunity,” the CRFB wrote in July. That demand became the official position of Congressional Republicans, turning what should have been a routine debt ceiling increase into a months-long hostage situation, which spooked financial markets, damaged a weak economy and further polarized the political system. “One of the biggest strategic mistakes these deficit groups made is to allow themselves to be captured by the right wing of the Republican Party and to allow themselves to validate those claims,” says Stan Collender, a longtime budget expert at Qorvis Communications. “They just fed into the frenzy.”
When Standard & Poor’s downgraded the US credit rating in August, MacGuineas called it a “heck of a wake-up call” and once again urged Congress to enact “at least a $4 trillion deficit reduction plan—probably more” without acknowledging her group’s role in perpetuating the manufactured crisis or the utter unfeasibility of achieving the sort of grand bargain that Republicans had just rejected. As economists increasingly called for more, not less, stimulus to boost the sluggish economy, the CRFB refused to budge from its hard line. Just a month later, the group backed the House Republican leadership by demanding that emergency disaster relief spending in the wake of Hurricane Irene be offset by spending cuts, which almost forced yet another government shutdown.
“I am about as frustrated with the CRFB as you can get,” says Collender, who has consulted for the group in the past. “They’ve become zealots and fanatics, as opposed to realists and pragmatists. It’s one thing to be a counterbalance to those who always want to spend more and tax less. It’s another thing to be pushing deficit reduction no matter what the economic situation is and whether it makes sense or not.”
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It was only after Boehner rejected Obama’s grand bargain and the economy slowed to a halt that the president finally bowed to reality and introduced a new jobs plan. It may well be too little, too late, but Obama’s energetic campaign in support of the legislation has begun to redirect the debate over the economy away from austerity and back toward jobs.
Much of the mainstream media, however, remain enthusiastic cheerleaders for austerity. A recent story in the Washington Post, Experts Dubious of Obama Deficit Plan, featured criticism from MacGuineas, Bixby, an unnamed GOP aide and a corporate tax lobbyist as its lone sources. “That’s fair and balanced budget reporting at the Washington Post,” joked Dean Baker.
Austerity-class pundits have also advanced the myth that both parties are equally responsible for, and equally unwilling to fix, the deficit problem. Columnists like Brooks and Friedman at the Times and Fred Hiatt at the Post have gone to extraordinary lengths to make this argument, seemingly forgetting that not so long ago Obama offered Boehner exactly the kind of grand bargain they’re now advocating. “I keep thinking he’s a few weeks away from proposing serious tax reform and entitlement reform,” Brooks wrote of Obama. “But each time he gets close, he rips the football away.”
One wonders why it’s so difficult for the Brookses of the world to acknowledge reality. “There is no equivalency,” says the CBPP’s Horney. “It is absolutely the Republicans’ refusal to consider meaningful changes in revenues that is blocking real deficit reduction at this point.” A clear illustration: Obama proposed a plan that was weighted three-to-one on a ratio of spending cuts to tax increases, but at a recent GOP presidential debate, all the candidates said they would oppose a plan that was even ten-to-one.
Indeed, the austerity class has done such a good job of sidelining dissident voices—with the exception of the Times’s Krugman and a few other high-profile Keynesian economists—that the Washington debate seems permanently skewed to the right. “On one side you have deficit obsession to the point where Republicans use this as an excuse to threaten to shut the government down over a couple billion dollars,” says Bernstein. “On the other side you pretty much have people talking balance. You have no one on the other extreme saying, Our main worry about the deficit, with unemployment at 9 percent, should be: Is it large enough to provide the boost that the private sector is not capable of providing right now?”
It’s doubtful that Obama’s belated pivot back to jobs will break the power of the austerity class. The administration’s schizophrenic approach to the economic crisis has left voters perplexed about where it stands on the biggest issue of the day. “When you ask people, ‘What is Obama’s economic policy?’ they have no idea,” says Democratic pollster Stan Greenberg. “They think maybe it’s healthcare reform.” Obama’s latest position—more spending to boost the economy, followed by deficit reduction once the economy recovers—may be too nuanced for the public to grasp (some in the austerity class, in an attempt to retain credibility at a time of economic peril, now echo Obama’s view). “The Republicans’ message, ‘Government spending is a problem,’ is much easier to penetrate,” says the EPI’s Irons. “The administration is missing a simple point, which is that you need jobs to reduce the deficit.” That’s why the EPI advocates a moratorium on austerity measures until the unemployment rate is back down to 6 percent.
“Right now, front-loaded deficit reduction would be a disaster,” says Stiglitz. “But a commitment to future deficit reduction, if it’s out of tune with the economic recovery, as Bowles-Simpson was, would also be a disaster. Even if it happens in the future, it could have an adverse effect today. People will say, If I’m going to be poorer in the future, I’m going to have to put more money away today.” Trading unemployment insurance now for Social Security cuts later, for example, is not exactly going to reassure an anxious public. “I’ll feel progress when this notion that short-term spending has to be offset by cuts to Social Security and Medicare gets the boot,” says University of Texas economist James Galbraith.
The austerity class has done such a good job of demonizing deficits that it’s difficult to make the case for their necessity, even in the short term. “The damn thing has such a bad rap, it’s almost unimaginable for a policy-maker to argue that we need a bigger deficit,” says Bernstein. “But there are times when that argument is absolutely correct.” Now is one of those times.