Monday, October 31, 2011

Austerity Class Warfare

We all know that during high unemployment and a stagnant economy, what is needed is a boost from the federal government -- or what one might call "stimulus."  (As John Maynard Keynes explained 75 years ago, and Robert Reich continues to instruct us today, when consumers and businesses can’t boost the economy on their own, the responsibility must fall to the government.)  But instead, the focus over the last two years has been on the need for less federal spending and the overarching concern has been to reduce the long-term deficit.  Only recently, thanks to Occupy Wall Street and the President's belated "pivot" to jobs has the conversation begun to change.  But this still leaves the question why the deficit fetishists remain so prominent  -- why failed policies of the past that involve tax cuts for the rich, reduced federal spending and more federal regulation continue to remain so influential -- and not just in Republican circles.

Ari Berman, in a great new piece in The Nation, describes this as "a central paradox" in American politics:
How, in the midst of a massive unemployment crisis—when it’s painfully obvious that not enough jobs are being created and the public overwhelmingly wants policy-makers to focus on creating them—did the deficit emerge as the most pressing issue in the country? And why, when the global evidence clearly indicates that austerity measures will raise unemployment and hinder, not accelerate, growth, do advocates of austerity retain such distinction today?
Berman provides the answer:
An explanation can be found in the prominence of an influential and aggressive austerity class—an allegedly centrist coalition of politicians, wonks and pundits who are considered indisputably wise custodians of US economic policy. These “very serious people,” as New York Times columnist Paul Krugman wryly dubs them, have achieved what University of California, Berkeley, economist Brad DeLong calls “intellectual hegemony over the course of the debate in Washington, from 2009 until today.”

Its members include Wall Street titans like Pete Peterson and Robert Rubin; deficit-hawk groups like the CRFB, the Concord Coalition, the Hamilton Project, the Committee for Economic Development, Third Way and the Bipartisan Policy Center; budget wonks like Peter Orszag, Alice Rivlin, David Walker and Douglas Holtz-Eakin; red state Democrats in Congress like Mark Warner and Kent Conrad, the bipartisan “Gang of Six” and what’s left of the Blue Dog Coalition; influential pundits like Tom Friedman and David Brooks of the New York Times, Niall Ferguson and the Washington Post editorial page; and a parade of blue ribbon commissions, most notably Bowles-Simpson, whose members formed the all-star team of the austerity class.
This "austerity class" is a relentless presence in Washington and in the mainstream media.  Its various strands "form a reinforcing web that is difficult to break. Its think tanks and wonks produce a relentless stream of disturbing statistics warning of skyrocketing debt and looming bankruptcy, which in turn is trumpeted by politicians and the press and internalized by the public."  The result is what Greg Sargent calls "a Beltway Deficit Feedback Loop, wherein the hypothetical possibility of a US debt crisis somewhere in the future takes precedence over the very real jobs crisis now."

In addition, much to our misfortune, this group is profoundly influential over the current Administration:
Obama and his main economic advisers (Tim Geithner, Orszag, Larry Summers) were devotees of former Clinton Treasury Secretary and Goldman Sachs/Citigroup alum Rubin, who co-founded the pro–Wall Street Hamilton Project think tank at the Brookings Institution in 2006. The Hamiltonians had warned of “the adverse consequences of sustained large budget deficits” during the Bush administration and advocated “painful adjustments,” namely cuts to social insurance programs like Social Security and Medicare in exchange for more liberal policies like tax increases and healthcare reform. Obama entered office with the Hamilton plan in his back pocket.
It is thus no coincidence that in February 2009, "just weeks after the stimulus passed, Obama pivoted to the deficit, holding a Fiscal Responsibility Summit at the White House and assuring Blue Dog Democrats he supported a special deficit-reduction commission."  And that in his 2010 State of the Union address, Obama "announced a three-year freeze on nondefense discretionary spending . . . along with the creation of Bowles-Simpson."  Adopting the Republican framing of economic policy, he told us:  “Families across the country are tightening their belts and making tough decision. The federal government should do the same.”

Of course, this was exactly the wrong prescription.  As Jared Bernstein, former chief economist to Vice President Biden explains, “When families are tightening their belt in a recession, the government has to loosen its belt.”
 “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.
As Berman continues, "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."

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.
Obama's budget for 2012 "proposed cutting discretionary spending to its lowest share of GDP since the Eisenhower administration."  Still not good enough for the Republicans, who demanded even more cuts.  And "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)."

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.
With most dissident voices sidelined, the "Washington debate seems permanently skewed to the right," and it is doubtful that "Obama’s belated pivot back to jobs will break the power of the austerity class."  This is in large part due to "the administration’s schizophrenic approach to the economic crisis has left voters perplexed about where it stands on the biggest issue of the day."  Obama's current position, "more spending to boost the economy, followed by deficit reduction once the economy recovers" is pretty nuanced, while the “the Republicans’ message, ‘Government spending is a problem,’ is much easier to penetrate.” Unfortunately, the administration is failing to make the point that creating jobs will reduce the deficit.

Berman concludes that "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 [Jared] Bernstein. 'But there are times when that argument is absolutely correct.'  Now is one of those times."


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