On Monday, the House finally passed a deal to raise the debt limit after weeks of wrangling with a cadre of reactionary, Tea Party-endorsed lawmakers. The measure, which will force some serious cuts to public spending, is expected to easily pass in the Senate. When it does, a painful second "dip" into recession becomes far more likely -- all the conditions are there.
Last week, a depressing report on economic growth caught many observers by surprise. The take-away was that gross domestic product (GDP) – the measure of economic activity within our borders – has been growing at a snail's pace in the first half of this year -- far slower than analysts had predicted. Researchers at the Federal Reserve tell us that since 1947, about half of the times we've had six months of growth as weak as we've seen in 2011, the economy sank into recession in the following year. But many of those slow periods occurred in a different era; today, with Washington obsessed with cutting spending, the chances are certainly greater than 50/50.
We got into this recession when the American people lost not only jobs, but also $14 trillion in wealth during the crash, and pulled back on spending as a result. But we're stuck treading water, two years after the “recovery” officially began, in large part because of the age of austerity – due to cuts forced on us by this misguided and shortsighted view that large deficits are a cause, rather than an effect, of the downturn.
Last year, with the private sector economy continuing to slump, an analysis by Moody's Analytics found that almost one in five dollars in American consumers' wallets came from one government program or another. The public sector has already seen deep cuts, and that trend will only worsen with Washington's relentless focus on deficit reduction. Without those dollars, there will be fewer consumers demanding American companies' goods and services, and the private sector will continue to have little incentive to hire. That's our core economic problem at this time.
The American economy is heading into dark waters, but the coming "austerity recession" won't only be a result of the tireless efforts of a small band of conservative ideologues bent on dismantling the social safety net that emerged during the last century. It will also be a consequence of a crippling intellectual crisis among our elites.
Propaganda Trumps Research
For almost a century, the prevailing economic paradigm has held that when the private sector is in recession, and people aren't spending money, the public sector needs to step in and act as a “buyer of last resort,” running deficits to keep people working until the economy gets going again. While the fine details of “Keynesian” theory have been the subject of debate, in broad strokes, it remains the thinking shared by most economists across the political spectrum. But even as it remains the dominant economic paradigm, a network of deep-pocketed conservative donors has, to a large degree, successfully discredited that idea in the political realm, replacing it with the simplistic and ahistorical narrative that deficits "destroy jobs.”
As Think Progress reported, “Since the end of the Bush presidency, shadowy right-wing groups, many of them formed for this very purpose, have primed the public with a sophisticated public relations campaign to shift the national discourse to a focus on debt reduction.” That's resulted in what Washington Post blogger Greg Sargent describes as a “deficit feedback loop,” in which “the relentless bipartisan focus on the deficit convinces voters to be worried about it, which in turn leads lawmakers to spend still more time talking about it and less time talking about the economy.” Sargent highlighted a study released in May by the National Journal confirming his thesis. It found, “a dramatically shifting landscape of coverage over the past two years, as the debate over how to fix the federal deficit has risen to prominence and the question of how to handle still-high unemployment has faded from the media's consciousness.”
It's not just the corporate media that's embraced the dubious narrative that deficits are hurting rather than helping the moribund economy. In his deficit address, Barack Obama said, “The greatest long-term threat to America's national security is America's debt.” Many Democrats in Congress – and even a plurality of “progressive” pundits – agree. That's the environment in which lawmakers cut a debt limit deal that, while not as bad as it might have been, will nonetheless drag down this fragile “recovery.”
In a typical piece of he said/she said reporting, the Washington Posttold readers that “liberals” say that “the weak gross domestic product figures showed that massive government cutbacks were unwise, while conservatives said that lowering the budget deficit should be the priority.” But as economist Jared Bernstein noted,“the evidenceeasily supports the contention that government spending cutbacks have been a large drag on growth in recent quarters and have led to sharp losses in state and local employment. And while you can surely find some economist to support the "lowering the budget deficit" priority, the vast majority will tell you that fiscal contraction now or in the near future would slow growth.” And, he added, “they’re not be any means all liberals. CBO says so. Business investors/economists say so too.”
He's right. JP Morgan economists warned that "Consumer spending growth [is] at recession-like levels," and Mohammed El-Erian, CEO of the bond investment firm Pimco, told ABC News that if the deal is passed, “unemployment will be higher than it would have been otherwise, growth will be lower than it would be otherwise, and inequality will be worse than it would be otherwise.” He explained, “We have a very weak economy, so withdrawing more spending at this stage will make it even weaker.”
The ultimate irony in this madness is that the obsession with cutting spending will not only result in a lot of pain, but it also may make our long-term fiscal picture worse. The leading cause of the deficit to date is not the Bush tax cuts or our grinding wars overseas but the recession itself, and the huge drop in tax revenues it triggered. We should be running high deficits and spending that money to get people back to work; it's the responsible way out of a deficit when the economy has a ton of excess capacity: idle workers, plants and equipment. As economist Paul Krugman put it:
On one side, interest rates on federal borrowing are currently very low, so spending cuts now will do little to reduce future interest costs. On the other side, making the economy weaker now will also hurt its long-run prospects, which will in turn reduce future revenue. So those demanding spending cuts now are like medieval doctors who treated the sick by bleeding them, and thereby made them even sicker.
But while interest rates are low, the brinkmanship surrounding the debt ceiling appears to be pushing them higher. Budget guru Stan Collender noted that “the interest rate the U.S. government has to pay has already increased by as much as 40 basis points compared with what it otherwise would be. This means higher federal borrowing costs and deficits, and overall higher interest rates on everything from car loans to mortgages to credit cards.” Higher interest rates also depress growth and hurt the labor market.
The Debt Limit Deal
It is for these reasons that, according to economist John Irons, the debt ceiling deal passed on Monday will further depress growth and cost our ailing economy somewhere around 325,000 jobs next year. As Lawrence Mishel, president of the Economic Policy Institute, put it to the Huffington Post, the "deal represents a consensus of policymakers to look the other way at America's persistent high unemployment.” Some analysts argue that it won't be too bad because the spending cuts are, for the most part, back-loaded to kick in after 2012 (among other reasons). That's largely true – the cuts next year will amount to around $30 billion in discretionary spending.
In 2013, far deeper cuts kick in, just as the last of the stimulus dollars evaporate and as extended unemployment benefits are expiring. The administration is betting that the economy will be robust at that point, a belief for which there is little basis.
What will those cuts – worth $2.4 trillion over the next decade -- look like? The president assures us that the deal “protects core investments from deep and economically damaging cuts.” But as economist Dean Baker explains, “the proposed cuts are a bit more than 5 percent of projected spending. However, large categories of the budget are protected. More than $27 trillion of projected spending goes to Social Security, Medicare, Medicaid and interest. If these areas escape largely untouched, the projected cuts would be around 13 percent of the remaining portion of the budget.” The “remaining portion of the budget” includes both spending on defense and on infrastructure and transport, scientific research, and training and education – the very “core investments” to which the president referred.
The New York Timesdescribes the deal as a bipartisan agreement “to spend and invest less money in the American economy, a step that economists said risks the reversal of a faltering recovery, in the hope of improving the nation’s long-term prosperity.” There is precedent for that view. Just months after the UK launched a painful austerity program, GDP growth across the pond has ground to a halt. Shadow Economic Minister Ed Balls told the Guardian, "Families, pensioners and businesses can feel that tax rises and spending cuts which go too far and too fast are hurting, but it's increasingly clear that they aren't working."
While we worry about the credit ratings agencies' threats to downgrade the U.S. government's debt, the Guardian notes that “weak growth is fueling fears that Britain could lose its AAA credit rating unless the economy picks up sharply in the third quarter.” In other words, anemic growth also makes a country less credit-worthy.
Another Lost Decade?
The sum total of Washington's relentless focus on cutting spending during a crushing economic downturn is likely to result in a “lost decade” for working America. I should say another lost decade – median incomes were lower in 2007, before the crash, then they had been before the dot-com bubble burst in 2001.
The true tragedy is that economic historians will look back on this as an era in which policy-makers damaged Americans' welfare with ideologically driven, self-inflicted wounds. As Harvard economist Lawrence Katz put it, "Despite years and years of study by economic historians that we shouldn't repeat the mistakes of 1937, we seem to be doing it again.”