Austerity by Any Other Name
Barack Obama is an austerian, and all year long Paul Krugman has been documenting how austerity has been pure poison to the European economies and has brought Britain to yet a third dip in its Great Recession. This is not unprecedented; in 1937, FDR decided it was time for austerity and drove the U.S. economy into the second dip of its Great Depression. In his column of Thursday (2/28), Krugman applauded Ben Bernanke for noting that:
The federal debt held by the public (including that held by the Federal Reserve) is projected to remain roughly 75 percent of G.D.P. through much of the current decade.
A substantial portion of the recent progress in lowering the deficit has been concentrated in near-term budget changes, which, taken together, could create a significant headwind for the economic recovery.
Besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.
Krugman also noted that “Columbia’s Joseph Stiglitz [is] a Nobel laureate and legendary economic theorist whose vocal criticism of our deficit obsession has nonetheless been ignored.” And, in his column earlier in the week (2/24), Krugman noted that:
[W]illingness to pursue austerity without limit is what defines respectability in European policy circles. This would be fine if austerity policies actually worked — but they don’t. And far from seeming either mature or realistic, the advocates of austerity are sounding increasingly petulant and delusional.
Nations imposing harsh austerity suffered deep economic downturns; the harsher the austerity, the deeper the downturn. Indeed, this relationship has been so strong that the International Monetary Fund, in a striking mea culpa, admitted that it had underestimated the damage austerity would inflict.
Meanwhile, austerity hasn’t even achieved the minimal goal of reducing debt burdens. Instead, countries pursuing harsh austerity have seen the ratio of debt to G.D.P. rise, because the shrinkage in their economies has outpaced any reduction in the rate of borrowing.
Given all of this, one might have expected some reconsideration and soul-searching on the part of European officials, some hints of flexibility. Instead, however, top officials have become even more insistent that austerity is the one true path.
Thus in January 2011 Olli Rehn, a vice president of the European Commission, praised the austerity programs of Greece, Spain and Portugal and predicted that the Greek program in particular would yield “lasting returns.” Since then unemployment has soared in all three countries — but sure enough, in December 2012 Mr. Rehn published an op-ed article with the headline “Europe must stay the austerity course.”
Oh, and Mr. Rehn’s response to studies showing that the adverse effects of austerity are much bigger than expected was to send a letter to finance minsters and the I.M.F. declaring that such studies were harmful, because they were threatening to erode confidence.
All of which brings me back to Obama. I had just finished reading those two columns by Krugman yesterday (3/1), when Obama came on the TV denouncing the Sequester as an apocalyptic disaster, which is exactly what Krugman, Stiglitz, and Bernanke are saying. But, Obama continued a minute or to later:
Look, we’ve already cut $2.5 trillion in our deficit. Everybody says we need to cut $4 trillion, which means we have to come up with another trillion and a half. The vast majority of economists agree that the problem when it comes to deficits is not discretionary spending. It’s not that we’re spending too much money on education. It’s not that we’re spending too much money on job training, or that we’re spending too much money rebuilding our roads and our bridges. We’re not.
The problem that we have is a long-term problem in terms of our health care costs and programs like Medicare. And what I’ve said very specifically, very detailed is that I’m prepared to take on the problem where it exists — on entitlements — and do some things that my own party really doesn’t like — if it’s part of a broader package of sensible deficit reduction. So the deal that I’ve put forward over the last two years, the deal that I put forward as recently as December is still on the table. I am prepared to do hard things and to push my Democratic friends to do hard things.
Let’s be clear, deficit-reduction programs and austerity programs are the same damn thing. They inevitably consist of spending cuts and/or tax hikes, which are supposed to cut deficits but also cut the GDP. And, the vast majority of economists now agree that austerity/deficit-reduction packages are counter productive even when it comes to reducing deficits. That’s because, when they cut the GDP, they also taxes, which increases tax-deficits. The economics of this is well known and obvious.
What is also absurd in the President’s message is the portion that I highlighted above. He claims to what to “take on the problem [of deficits] where the problem exists — on entitlements.” But there are only two entitlements:
- Social Security, which has never contributed a penny to our deficits and is projected to be self supporting for at least the next two decades and, thereafter, to be able to support 80% of the current benefits.
- Medicare, which is an excellent program but is getting killed by the problem of per-capita health-care costs in the U.S., which are two and a half times greater than those of other developed nations and which will continue to exist no matter how much we cut Medicare. He deliberately avoided dealing with those during his so-called “healthcare reform” during his first term, choosing instead to cut political deals with the various healthcare cartels. Now those chickens are coming home to roost, and no amount of cuts to Medicare are going to make them go away.
So what should Obama do about our debt and deficits? On the near term, cover the deficits and pay down the debt with money borrowed at negative interest rates. But, in the long run, those rates will become positive and the “bond vigilantes” may insist on interest rates so high that we cannot afford them. So, in that case, we keep our borrowing down by what Lord Adair Turner, head of the British Financial Services Authority, calls “Overt Monetary Financing,” which can be accomplished under existing U.S. law 31USC5112(k) via platinum-coin seigniorage. (By now those who warn of bond vigilantes should have no more credibility than the boy who cried wolf.)
My bottom-line point is that we should repeal the sequester and NOT replace with cuts to Social Security and Medicare. Austerity sucks, even at reducing deficits. So let’s not do it.