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Why Jobs Should be Obama’s Top Priority -- Not Suicidal Austerity

The "Grand Bargain" talk around D.C. is chock full of lies and incoherence.
 
 
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President Obama gave a major speech this week on his legislative agenda.  He said that the overriding national priority had to be jobs.  We agree. 

David Brooks’ November 8, 2012 columncalled on the Republican Party to become “The Party of Work.”  He put his primary message in his final paragraph for emphasis:

“Don’t get hung up on whether the federal government is 20 percent or 22 percent of G.D.P. Let Democrats be the party of security, defending the 20th-century welfare state. Be the party that celebrates work and inflames enterprise. Use any tool, public or private, to help people transform their lives.”

Other than the gratuitous and inaccurate slap at the Democratic Party, we agree.  The problem is that Republicans and Democrats are pushing a “Grand Bargain” that would reduce jobs.  (The so-called Grand Bargain would also produce a “Great Betrayal” that would begin the process of shredding the safety net.)

The Republican and Democrats are incoherent about austerity.  The immediate context for the budgetary discussion is the Congressional Budget Office (CBO) report on the “fiscal cliff" -- a misnomer because it is not a cliff, but a product of the deal made on the debt limit.  It would produce (gradual) decreases in spending and tax increases that would begin to take effect in January 2013.  The gradual nature of the decreases in spending and the near certainty that any tax reductions Congress make in 2013 will be made retroactive to the beginning of the year combine to mean that the fiscal cliff is a gradual decline into a self-destructive policy of austerity.   We have months to prevent the self-destruction.

The CBO, of course, knows Congress very well and knows that there is no fiscal cliff. But it also knows that there is political advantage to be gained from warning that absent Congressional action there would be a disaster.  The CBO deliberately issued its report immediately after the election to attempt to create a sense of Congressional urgency and push the adoption of the Great Betrayal.

The internal inconsistency of relying on the CBO report to adopt austerity should be clear, but is almost entirely ignored by the Beltway types. I spent nearly two hours listening to MSNBC’s midday coverage of the issue without hearing a single journalist, commentator, or politician recognizing the incoherence.  MSNBC claims to be the great defender of the safety net and the stimulus program.  The CBO report’s primary thrust is that if Congress took no action during 2013 to reduce the tax and spending austerity measures that begin to take effect in 2013, then the result would be a serious loss of jobs and a gratuitous recession. We agree. The Obama administration says it agrees. The Republicans are indicating that they agree. 

Let’s step back and analyze the implications of the paragraph above. The truth is that virtually everyone powerful inside the Beltway is now saying that they agree that “austerity now” (i.e., prior to achieving economic recovery from the Great Recession) would be a terrible, self-destructive policy.  We agree.  Keynes has again proven correct.  Europe adopted austerity and needlessly and destructively hurled the Eurozone back into recession.  We would have to be insane to engage in such financial suicide. In light of that truth, here are some things to think about:

  • The U.S. came exceptionally close to adopting austerity in 2011 through the “Great Bargain” negotiated by Speaker of the House Boehner and President Obama.  The 2011 version of the Great Bargain would have imposed draconian austerity and begun the Great Betrayal of the safety net.  Austerity results from budget cuts and tax increases, and the 2011 Grand Bargain was designed to impose both forms of austerity.   
  • Consider what would have happened in the 2012 elections had Obama struck the Grand Bargain (more accurately, the Great Betrayal) in July 2011. It would have thrown the nation into a gratuitous recession. The CBO says that a far smaller austerity program, delayed by over two years (2013 v. 2011) to a date where the economy is less vulnerable to a renewed recession, would throw the nation back into recession and cause a substantial increase in unemployment.  The 2011 Grand Bargain, therefore, would have caused us to fall into a deeper recession and it would have done so more quickly than would the possible tax increases and spending cuts that would phase in during 2013.
  • The gratuitous second recession would have begun in late 2011 and deepened during 2012 due to the 2011 Great Betrayal’s austerity provisions.  Unemployment would have gone up – and the unemployment rate in July 2011 was 9.1% so the unemployment rate would be well over 10% and would have been increasing throughout election year 2012.
  • In addition to the austerity-induced second recession, Obama would have agreed in the Great Betrayal to large cuts in the safety net.  He would have adopted the Republican Party’s false claims that the safety net was unsustainable and a grave threat to the nation.  This would have made it safe politically for the Republicans to make drastic cuts in the safety net as soon as they controlled the Senate.  That is why the fauxGrand Bargains are really the Great Betrayals.
  • The combination of the second recession, unemployment above 10 percent – and rising – and the Great Betrayal of beginning to unravel the safety net while making severe cuts in government programs that the Democrats strongly support would have caused catastrophic election losses to Democratic Party candidates in 2012.  Obama would have lost by huge margins.  The Republican Party would have taken control of the Senate and greatly expanded its majority in the House.  Obama would have been thrown from office as the Great Failure and the Great Betrayer. 
  • None of the problems I have described would have been avoided if the Bush tax cuts for the wealthy were repealed.  None of the problems come from “unbalanced” austerity (e.g., far more program spending cuts than tax increases) – they come from austerity.  Tax fairness is not irrelevant, but a “balanced” system of (net) tax increases combined with program cuts would send the nation back into a recession.
  • Guess who insisted on creating the fiscal cliff and ensuring that it had a “trigger” that made it automatic absent a Great Betrayal?  That would be Obama – with the full support of the Republicans.   Obama insisted on mandating austerity, particularly cuts in Medicaid and Medicare, if austerity failed.  That was significantly insane economically and politically.  The people who caused the insanity now tell us we must end their insane austerity – by adopting the Great Betrayal and its austerity.  “Incoherent” does not begin to capture the incoherence of both parties on austerity. 
  • The obvious question is why Obama and Boehner would agree try to agree to a Great Betrayal that they knew (if you believe them now) would be certain to throw the nation back into recession and begin to unravel the safety net and then when they failed to reach agreement created another austerity program known as the “fiscal cliff.”  The obvious answer is that the administration and Boehner were clueless about basic economics.
  • The budget deficit is not a “crisis.”  The budget deficit is a symptom of the Great Recession.  In a severe recession, government revenue falls sharply as unemployment grows and causes personal and corporate income, sales, and property values to fall.  Demand for government services such as unemployment insurance and food stamps grow.  The result is a large, rapidly growing budget deficit.  The federal income tax is one of our “automatic stabilizers.”  It operates in a counter-cyclical manner (tax revenues fall during periods of strong economic growth and falls during a recession.  The automatic stabilizers cause recessions to be less severe and the recovery from recessions prompter.  The federal budget deficit is too small.  You did not misread that sentence.  It is a logical consequence of the CBO’s reasoning in warning in its November 2012 report against the austerity of the “fiscal cliff.”  We would have recovered more quickly from the recession if we had increased more substantially our governmental spending and reduced (net) taxes.  Both parties’ leaders purport to understand (hence their embrace of the CBO report) the suicidal nature of austerity, but both pander to the electorate by railing at the deficit.  It is as dishonest as it is economically illiterate and it has created a massive barrier to getting the public to back rational policies.  The U.S. has had much larger deficits (relative to our GDP) during and after World War II.  Those deficits allowed us to defeat the Axis powers, recover from the Great Depression, attain full employment, extend the safety net, and achieve robust economic growth without destructive inflation.
  • The administration and Boehner are claiming that (a) austerity via the fiscal cliff (which they deliberately created) would cause a national disaster and that, therefore, (b) we need to reach an agreement (the Great Betrayal) with Boehner imposing austerity and beginning to unravel the safety net because austerity is the only way to avoid causing a national disaster.  If that seems crazy to you, it’s the Beltway herd that’s crazy, not you.
  • Nations cannot determine whether they will run a budget deficit or surplus with any assurance.  That is a necessary implication of the CBO report.  The two seemingly obvious means to reduce a budget deficit are to increase taxes and cut spending.  The Grand Bargain proposes to do both.  CBO warns, correctly, that (net) increases in taxes and cuts in spending can reduce already inadequate private sector demand and public sector demand.  This can cause (or deepen) a recession and increase unemployment and the size of the deficit.  The idea that a nation can mechanically choose to run a budget surplus is an illusion.
  • U.S. federal budget deficits and the national debt are not “immoral,” they do not imperil our children and grandchildren, and they do not allow China to control us. When we adopt austerity and throw America into a second recession, we cause millions of people to be unemployed.  That throws millions of children to fall into poverty and to lose their homes.  It causes budget deficits and the national debt to grow dramatically.  If you care about children, you should oppose the Great Betrayal as the greatest threat to them. China has no power over us due to debt.  We have no trouble selling our debt at trivial interest rates.  Indeed, we do not have to issue debt.  The Fed routinely creates money via computer keystrokes.
  • It does not require “courage” to adopt austerity and attack the safety net.  It requires shameful acts of cowardice in which we cut the programs most needed by those in need in order to benefit wealthy Americans and Wall Street (whose greatest dream is the privatization of Social Security – which would lead to Wall Street making hundreds of billions).
  • Obama needs a real jobs guarantee program for every American able and willing to work.  There is no greater waste than leaving over 20 million Americans underemployed, and Republicans’ ideological fantasies about the unemployed cannot survive a jobs guarantee program. The administration should also fund revenue sharing.  The original stimulus plan had a major revenue sharing component, but a coalition of conservative (“blue dog”) Democrats and Republicans killed it. This was a travesty.  A national government with a sovereign currency is not like a state or local government.  It can and should run a deficit in response to a recession.  A state or local government cannot do so.  It was certain that state and local governments would suffer severe drops in revenues at the same time that the need for increased state spending to help the unemployed.  The inevitable result was that state and local governments would have to fire over one hundred thousand workers and add to unemployment during the Great Recession.  The win-win is revenue sharing – a Republican policy initiative.  The federal government transfers hundreds of billions of dollars to the state and local governments, which allows them to avoid firing the workers and cutting social services when they are most needed.  All of this allows the economy to recover more quickly and eventually reduces the deficit.  It also makes America vastly more humane.   

 

 

William Black is the author of The Best Way to Rob a Bank Is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as executive director of the Institute for Fraud Prevention, litigation director of the Federal Home Loan Bank Board and deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.