Austerity top priority as economy sputters, Americans suffer
from The Huffington Post
Posted: August 3, 2011
WASHINGTON – This week’s big debt deal has left progressives despairing over a disconnect between Washington and the rest of the country that they say has possibly never been wider. Their concern arises from the fact that while the country suffers from a sputtering economy and a grinding jobs crisis, elected officials are celebrating the passage of a massive deficit-reduction bill almost guaranteed to even further slow the economy and cost jobs.
For the weeks leading up to the agreement, Democratic and Republican leaders were essentially trying to out-austere each other. It’s that bipartisan enthusiasm for reducing the government’s budget – and the speed with which both parties abandoned a job-creating agenda – that left-leaning analysts say demonstrate how beholden elected officials from both parties have become to the rich, and how out of touch they are with the problems of the poor and the middle class.
“If these people were rational policymakers, they would not focus on deficit reduction right now,” said Neera Tanden, chief operating officer at the Center for American Progress. “They would focus on stimulus right now.”
“What’s crazy about Washington is that the only thing we talk about is deficit reduction; that nobody talks about jobs,” Tanden said. “It’s borderline insane.”
To liberal economists like University of Texas professor James Galbraith, the explanation lies in what he calls the Washington elite’s “deficit hysteria.” From this perspective, the spending cuts signed into law Tuesday were the culmination of the investment of hundreds of millions of dollars by moneyed interests into the development and inculcation of a specific Washington consensus that anyone who doesn’t believe the government is dangerously overextended — and who doesn’t consider the danger of deficits as very, very serious — is a wild-eyed radical.
“The rich have drawn a political box around what can be done here,” said Damon Silvers, policy director for the big umbrella union AFL-CIO. “They are gutting the modern state in order to avoid a real conversation about taxes.” While Washington lauds its cuts, the traditional arguments in favor of deficit reduction probably have never been weaker than they are right now.
THE ARGUMENT AGAINST AUSTERITY
None of the economic signs that augur for deficit reduction are remotely visible. Quite to the contrary: A high unemployment rate, enormous unused capacity, inadequate market demand, cheap capital and record-low interest payments, incipient deflation, crumbling infrastructure and underwater homeowners all point to this being an ideal time to increase government borrowing – to invest in infrastructure, provide debt relief to homeowners and generally increase demand and create jobs.
With American banks and other businesses sitting on trillions of dollars they refuse to lend or invest, one can hardly accuse deficit-spawned borrowing of “crowding out” private loans. And with people lining up to lend money to the U.S. government for long periods of time at near record-low rates, one can hardly argue that the deficit is driving up interest rates.
Thomas Palley, an economist at the New America Foundation, says Republicans’ focus on the deficit regardless of economic conditions is logically consistent because their core interest is limiting government.
But Democrats have been brought in, too. The fully bipartisan nature of Washington’s deficit obsession was brought home in early 2010, when President Barack Obama created a commission to reduce the deficit and chose a pair of deficit hawks to be its leaders.
“What is going on now I think has everything to do with the fact that you have almost a second generation of deficit obsessives who occupy all the strategic positions in public policy discourse,” said Galbraith. And over time, Democratic leaders haven’t just embraced deficit reduction as a goal, they have explicitly bought into government austerity as the primary solution.
There is, of course, another way to reduce the deficit: Stimulate economic growth and grow out of it. “We have a huge deficit because we have a huge recession,” said Larry Mishel, head of the left-leaning Economic Policy Institute. Democrats could have, as an anti-deficit strategy, decided to put all their energy into pushing for a pro-growth agenda. But they chose not to. Last November, when Obama decided to make a statement about the deficit, he did so by freezing pay for federal workers.
It’s not hard to see whose financial interests are served by a consistent pressure to reduce the deficit and shrink government’s reach: the wealthy, and especially Wall Street – or, as Rob Johnson, a senior fellow at the liberal Roosevelt Institute put it, “people who don’t want to pay taxes in the future.”
For wealthy people who own a lot of bonds and other long-term financial assets, deficit spending means a threat of higher interest rates and inflation.
From the Wall Street perspective, “inflation is a huge risk,” said Troy Davig, U.S. economist at Barclays Capital, the British investment bank. That’s because inflation erodes the value of bonds. “It’s implicitly defaulting on the debt,” he said. Banks and major corporations have another incentive to oppose government borrowing: They would rather be the lenders themselves, so they can charge interest and assess fees. Another assumption among progressives is that the financial sector has its eye on the money flowing through the big entitlement programs.
“If you can use deficit hysteria to privatize Social Security and Medicare, there is a lot of money to be made,” said Robert Kuttner, the co-editor of the American Prospect. Having Wall Street manage retirement accounts could “generate a ton of fee income and prop up the stock market.” Palley said even a reduction in benefits or coverage could be lucrative for Wall Street. “The less effective Social Security is as a savings vehicle, the hope is the more private savings will be directed toward finance,” he said.
HOW IT HAPPENED
Progressives say Washington’s governing class absorbed its bias toward austerity – and, implicitly an agenda favoring the wealthy – by osmosis. “The people who do fundraisers are the people who don’t want to pay taxes,” Johnson said.
Politicians “spend an awful lot of time calling people with assets,” said Robert Borosage, co-director of the Campaign for America’s Future, a liberal think tank. “You don’t spend a lot of time with people who aren’t affluent, and you certainly don’t have extended discussions with them about economic policy.” Over time, Borosage said, “you develop a set of self-justifying rationalizations,” he said.
It helps that the Washington elite hasn’t suffered from the financial downturn much, if at all, Palley noted. “There’s no doubt that they live in a bubble,” he said. “They’re not feeling the pain that the country is feeling.”
Then there are the groups that Galbraith calls the “Washington agitprop operations,” which have been working for years to create and propagate a reflexive distrust of deficits. Lead among them is former investment banker Peter G. Peterson’s eponymous foundation, home of a billion-dollar campaign to force Washington to confront what it calls the nation’s “gargantuan longer-term structural deficits.” “[Peterson]’s been screaming that the sky is going to fall for decades,” said Borosage, adding, “if you put up a billion-dollar institution you can buy an awful lot of folks.”
The foundation holds swanky fiscal summits for pillars of the Washington establishment. It oversees a media empire that has produced its own documentary, funds its own news outlet and underwrites financial coverage elsewhere. The Democrats have their own banker-funded deficit-hawk proselytizers as well, including the Hamilton Project, founded by former Treasury secretary Robert Rubin, which hosts frequent star-studded events devoted to “long-term prosperity.”
HEADING FOR A CRASH?
Pretty much across the board, economic analysts recognize the new deficit agreement will hurt economic and job growth, and therefore make a double-dip recession that much more likely. Tanking the economy would seem to be in no one’s interest, but Kuttner points out: “Despite three years of a bad real economy, Wall Street’s executives are doing better than ever. So it doesn’t seem to bother Wall Street that the rest of the economy’s going down the toilet.” As wealthy investors and corporations operate more and more on a global scale, they become less concerned about the health of the U.S. economy and more concerned about U.S. taxes.
“I’d say the social contract has broken down, domestically, because so much of our production is now being outsourced,” Johnson said.
Some supporters of deficit reduction are so adamant, Johnson said, that they may be willing to see and seize an opportunity in crisis, it even if the immediate, direct consequences will be grim. “When people’s backs are against the wall, that’s when you can push them to do things they wouldn’t do,” he said. Those who favor massive deficit reduction may well think, “We’ll never be able to do it in a time of expansion,” said Robert Pollin, an economist at the University of Massachusetts at Amherst.
Davig, the investment banker, said economic growth is not the most significant issue for Wall Street. “Everyone can live with a little bit of fiscal drag if there’s a little bit more stable macro landscape,” he said. “They’re happy to live with a little bit of fiscal drag.”
And Galbraith said he thinks some of the super-rich out there, sitting on all that cash, are actually hoping for the economy to crash and burn. “The strategy of pursuing a deflationary strategy is a strategy that greatly benefits people with cash,” said Galbraith. “If you’re interested in deflating asset values, and you have cash with which to buy assets when things hit rock bottom, then you have a powerful interest in a deep depression.”
“That’s certainly consistent with the banks holding 1.4 trillion [dollars] of reserves, which is absolutely unprecedented,” said Pollin, who backs a tax on excess reserves. “That’s ten percent of GDP.”