Like the aftertaste of a bad meal belched up the following morning, calls for fiscal austerity are moving back up the economic agenda, even as inflation continues to decelerate from last year’s levels. The fall in inflation from a high of 9 percent in 2022 to just over 3 percent today (3.2 percent, to be precise) has vindicated the views of economists such as James Galbraith and Isabella Weber (among others), who argued that last year’s inflationary pressures were more a product of Covid-induced supply-side disruptions than an overheating surge stemming from Biden’s 2021 fiscal stimulus, or wage-driven inflation from low unemployment.

You might think the continuing fall in consumer price inflation would be enough to forestall a full-blown return to fiscal deficit hysteria. Of course, that presupposes that reducing inflation is the actual goal here. In reality, fiscal austerity under the guise of an inflation-fighting strategy is merely a political fig leaf for an economic policy designed to arrest the growing leverage of workers in a full-employment economy.

Having had the brief taste of what living in a small European welfare state felt like for a while under Covid (if you needed medical tests, you could get them—and you could even get the treatment you needed as well), today’s robust employment market is giving workers a real chance of rebalancing benefits that until now have largely been restricted to the elites. This rising worker power has triggered alarms among the top tiers. What they want is a weaker labor market, a rising army of unemployment to redress power in their favor. Cue the inevitable calls to cut back government spending, roll back Social Security and other entitlements to reestablish economic precarity, and thereby reduce worker leverage.

What about monetary policy? A patient can’t recover if a doctor refuses to consider all possibilities for the underlying disease and instead sticks with a preconceived diagnosis. Interest rate increases (i.e., tighter monetary policy by the Federal Reserve) have generally been regarded as the optimal weapon to reduce inflation—the argument being that higher interest rates work to slow down economic activity, curb demand, and thereby curb underlying price pressures.

Graph of the U.S. inflation rate.(U.S. Bureau of Labor Statistics)

But the reality is very different: Monetary policy has often been very ineffective as an anti-inflationary weapon—in part because the interest rate tool used to slow down economic activity (and hence inflation) is diffuse: for every borrower hurt by rising rates, there are savers who benefit from the additional income derived from higher rates. This income effect is what former Federal Reserve Chairman Ben Bernanke once described as “the fiscal channel”—the offsetting fiscal boost derived from rising interest payments.

As James Galbraith has noted,

The “fiscal channel” for interest-rate payments is an inconvenient concept for those who wring their hands over the “burden” of public debt. It suggests that Powell’s rate hikes may be powerless to slow GDP. Indeed, additional rate increases could even be expansionary, at least up to a point.

Not only expansionary, but potentially adding to prevailing economic inequality, as the vast majority of savings is held by America’s wealthy elites, who will benefit from the increased income effect of higher rates, even as increasingly indebted working and middle-class Americans suffer from the Fed’s repeated hikes in borrowing costs.

Galbraith argues that this potentially toxic mixture of policies running at crosscurrents from their ostensibly intended effect is the real reason we’re seeing increased calls for fiscal austerity (even as the rationale for it decreases with every falling point in consumer price inflation). The 176-member House Republican Study Committee recently approved a fiscal blueprint that would gradually increase the full retirement age in America to 69 years old for seniors who turn 62 in 2033. This was followed up by House Speaker Kevin McCarthy, who argued: “We have to look at the entire budget.… The majority driver of the budget is mandatory spending. It’s Medicare, Social Security, interest on the debt.”

The House speaker is seemingly oblivious to the potentially expansionary effects of rising rates as described by Galbraith. But one wonders if inflation is the real intended target here, given the weakness of McCarthy’s arguments.

For decades, deficit fetishists—especially in the Republican Party—have never veered from their avowed mission to gut America’s most comprehensive, successful, and popular safety net: Social Security. While they had won a few small battles (most notably, the Greenspan Commission’s huge 1983 payroll tax hikes and two-year increase in the normal retirement age), neither party has ever gained sufficient political traction to “reform” (i.e., significantly cut back) Social Security, despite continually raising spurious national bankruptcy concerns. According to a report issued by the program’s trustees on March 31, the combined Social Security trust funds are projected to run dry in 2034. The funds’ reserves will be depleted, the report claims, and the program’s continuing income will only cover 80 percent of benefits owed.

But the truth is that no national social security system (including ours) can ever become insolvent if the government has sovereignty over its own currency (as the United States does with the US dollar). The Social Security trust fund itself is an accounting fiction, much like the idea of a “lockbox” that supposedly holds funds in trust for SS payments. The reality is that the dollars are spent into existence by the Treasury.

Furthermore, the pursuit of fiscal austerity as a means of accumulating future public spending capacity or averting national bankruptcy undermines the productive capacity of the economy to provide the resources that may be necessary in the future to provide real goods and services to an aging population (as well as impeding that same productive capacity to alleviate supply-side constraints like those largely responsible for the most recent spell of inflation).

These inconvenient facts are ignored by America’s policy-makers (and their donor patrons). After almost half-century of economic gains for workers, the country’s elites remain frustrated that the economy refuses to fall into recession. From their perspective, one of the scariest things has been the relative success of the Biden administration’s fiscal policy. In contrast to President Obama’s paltry response to the 2008 financial crisis, the rebound from the pandemic-induced recession of 2020 has been nothing short of remarkable. Trillions of dollars of fiscal policy largesse erased the calamitous loss of 22 million jobs at breakneck speed and restored the economy to something approaching employment levels not seen since the days of the Korean War. All the while, consumer price inflation has continued to moderate to 3.2 percent.

This has enabled workers to achieve some significant wage gains in real terms, notably the Teamsters’ victory over UPS, which in turn has come against a backdrop of increasing unionization for the first time in decades. A potential strike of 340,000 Teamsters, which would have happened on August 1, would have been the largest work stoppage against a single employer in the history of the United States. Equally significant is that the Teamsters have explicitly tied their prospects for organizing at Amazon (a long-time union-buster) to their ability to win at UPS.

The not-so-secret fact about America’s economic “success” over the past 40 years is that its gains have been exceedingly unevenly distributed in favor of the country’s wealthiest. Accustomed as they are to sustaining and increasing their economic gains at the expense of America’s workers, any marginal change that reduces their advantage invariably leads to the return of the old nonsensical shibboleths: The country is facing national bankruptcy; entitlements like Social Security and Medicare must be therefore “reformed” (i.e., cut). All the while, billions continue to be appropriated for wars of choice and the question of national solvency is never raised.

It is in this context that we ought to consider the conveniently timed calls for increased fiscal austerity. Those calls should be ignored—especially if Biden wishes to retain any hope of winning the next election. Why? Let’s state the obvious: Higher unemployment and a recession during an election year is hardly good for a political incumbent. More fundamentally, the notion of a collective in society is necessary for social stability and cohesion. Attacking the nation’s last, best remaining social safety net will destroy what’s left of the country’s social cohesion. Rising inequality undermines the growth potential of a nation and introduces greater propensity to economic and political crisis. The policy preferences embedded by the fiscal austerians are specious arguments that will only create more economic and political chaos.