By Bill Black, 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. Jointly published at New Economic Perspectives and Naked Capitalism
I know the Republicans are complete hypocrites about federal deficits and debt. I know their dishonesty and faux deficit and debt hysteria, when a Democrat is president, harms the Nation and the world through the infliction of self-destructive austerity. Austerity’s primary victims are the working class and government social programs for the poor and working class. That means that the Democrats should never mimic the Republicans’ dishonesty, hysteria, and willingness to inflict austerity on the people of America and the world.
Unfortunately, the New Democrats embraced the economic malpractice of austerity with the passion of a convert. Michael Meeropol, an economist whose work I respect greatly, has rightly chastised me for failing to explain that fiscal austerity produces enormous winners, not just losers, and that this fact helps explain why the economic malpractice of austerity is so common. Austerity is a policy that aids the wealthy and harms the non-wealthy. One of the greatest triumphs of the wealthy is to get vast numbers of the non-wealthy to fail to understand this point. The New Democrats’ passionate support for austerity reflects the interests of its primary donors – Wall Street elites.
Austerity produces higher unemployment rates. It can cause deflation. It leads to cuts in public employment and funding for social programs. High unemployment allows CEOs to force lower wages and creates a political climate in which CEOs are able to get legislation and rule changes embracing “labor flexibility.” That phrase is a euphemism for making it easier for firms to fire workers without. CEOs use high unemployment to induce an international race to the bottom on worker protections and wages under the pretext that doing so is essential for U.S. firms to maintain “global competitiveness.”
Deflation is a superb situation for (net) creditors. They get repaid in a currency that is gaining value. Deflation reduces interest rates, so the market value of existing long-term fixed rate debt instruments (bonds) can increase substantially.
Federal fiscal austerity could be implemented through tax increases, including tax increases on the wealthy and corporations. But this would harm rather than aid the wealthy so it increasingly rare to see it done because it would harm legislators’ wealthy patrons (donors).
President Obama Embraced the New Democrats’ Desire to Inflict Austerity
President Obama famously told Congressional New Democrats that they represented his views. Obama reluctantly agreed to a stimulus program that was considerably less than half of what economists knew was needed. Even that inadequate stimulus spurred our (inadequate) recovery from the Great Recession and, unlike the eurozone’s austerity policies that through many nations into Great Depression levels of unemployment, the U.S. growth rate soon surged and unemployment rates fell.
Obama’s reaction to the meaningful success of (inadequate) stimulus was to abandon it and join the Republicans’ condemnation of stimulus. In his January 27, 2010 State of the Union address he complained that when he took office he inherited “a government deeply in debt.” The implication, which is false, is that the U.S. would be better off if there were no federal debt or at least dramatically less federal debt. The U.S. would be worse off in either circumstance, for the alternatives – not winning World War II or having longer, deeper recessions – were very bad and the U.S. national debt causes no serious problems for our people or the people of the world.
Obama knew that was true. In the same address he explained.
Because of the steps we took, there are about two million Americans working right now who would otherwise be unemployed. (Applause.) Two hundred thousand work in construction and clean energy; 300,000 are teachers and other education workers. Tens of thousands are cops, firefighters, correctional officers, first responders. (Applause.) And we’re on track to add another one and a half million jobs to this total by the end of the year.
The plan that has made all of this possible, from the tax cuts to the jobs, is the Recovery Act. (Applause.) That’s right -– the Recovery Act, also known as the stimulus bill. (Applause.) Economists on the left and the right say this bill has helped save jobs and avert disaster.
Obama then admitted that recent U.S. expansions had been based on bubbles and scams.
We can’t afford another so-called economic “expansion” like the one from the last decade –- what some call the “lost decade” -– where jobs grew more slowly than during any prior expansion; where the income of the average American household declined while the cost of health care and tuition reached record highs; where prosperity was built on a housing bubble and financial speculation.
The politics of how Obama phrased this point are clear – he only wanted to talk about the last decade during which President Bush held power. But Obama’s logic actually covered the last two decades and included both of President Clinton’s terms in which the supposed economic expansion “was built on a housing [and high tech] bubble and financial speculation.” “Speculation” is Obama’s euphemism for elite financial fraud such as the Enron-era frauds (which grew large under Clinton but collapsed under Bush) and the three great epidemics of mortgage fraud by elite bankers that hyper-inflated the bubble and drove the financial crisis and the Great Recession. Obama’s address repeated two of the New Democrats’ most destructive financial memes.
We need to make sure consumers and middle-class families have the information they need to make financial decisions. (Applause.) We can’t allow financial institutions, including those that take your deposits, to take risks that threaten the whole economy.
No, financial education of the 320 million of Americans up to the level of the Wall Street predators that prey on them is a preposterous answer that echoes the dishonesty of Milton Friedman’s “Freedom to Choose” nostrums. We can never provide a Wall Street level of financial expertise to 320 million Americans, indeed, we cannot do so for one million Americans. “Financial education” is the excuse New Democrats give for not regulating and prosecuting the Wall Street elites who run the frauds that devastate the global economy. It puts the blame on the consumer and the small investor – if only you had educated yourself properly your pension fund would not have been defrauded by the cartel that rigged LIBOR. Education has never worked and will never work against elite financial fraud – or VW or Takata’s frauds in the automobile industry. Education about fish will not protect you from being defrauded by the common practice of selling filets of cheap fish that purport to be filets of expensive fish.
The crisis had nothing to do with “financial institutions” deciding “to take risks that threaten the whole economy.” Humans take risks, not “institutions.” Humans are, overwhelmingly risk averse. The critical person who makes decisions about what financial institutions will do is the CEO. CEOs frequently prefer what George Akerlof and Paul Romer aptly described in their 1993 article “Looting: The Economic Underworld of Bankruptcy for Profit” as a “sure thing” rather than a “risk.” Fraud, particularly accounting frauds that loot the bank they control, is a “sure thing.” The behavior of bank CEOs who caused the massive losses that drove the crisis is not consistent with them being honest, rational gamblers. It is consistent with the “recipe” for accounting control fraud. Indeed, the bank CEOs used the same recipe in largely the same manner that their savings and loan predecessors had made infamous in the 1980s. Akerlof and Romer said the fraud option would become highly preferable when the risk of prosecution appeared low. Under Obama, the risk of elite bankers being prosecuted for leading the three epidemics of mortgage fraud that drove the crisis became nil.
The supposed economic successes of the Clinton years (and austerity) have been exposed as fictional. The Clinton expansion was driven by the two largest bubbles in world history and the four greatest epidemics of elite financial fraud in history. The first of these epidemics was the Enron-era frauds. The other three epidemics of mortgage fraud began under Clinton, but blew up on Bush’s watch. Bush’s “wrecking crew” was even worse than Clinton’s assault on effective regulation, so you should not feel sympathy for Bush. The lost two decades have extended during Obama two terms of office. Significant wage gains only began in the U.S. in 2016. In particular, blacks and Latinos have suffered catastrophic wealth losses due to the fraud-driven financial crisis and the predatory for-profit schools. Black and Latino households’ wealth losses have not been regained under the Obama recovery. The top one-ten- thousandth of one-percent have been the massive winners in income and wealth under Obama.
Obama next flaunted his New Democrat colors, saying we needed to create trade deals to increase the number of U.S. jobs. He portrayed the deals as unambiguously good for workers and jobs – with no losers. He proposed nothing to help the millions of U.S. workers that could lose their existing jobs under the trade deals.
The 2010 presidential address was already a nightmare at that point, but it was at this juncture that Obama decided to channel his inner New Democrat dogmas and become a champion for the glories of austerity. He went on at length, so I will reproduce the relevant passages to provide the context. His signature metaphor and simile were not simply economically illiterate; they were knowingly false and exceptionally harmful to the American people, particularly the working class. That means they Obama’s austerity plans were also a betrayal of the working class by the New Democrats, who had radically changed a party that once defined itself as the champion of the working class. The consequences for the Democratic Party would soon prove horrific. I’ll comment after each paragraph of Obama’s address on the joys of austerity.
Now, even as health care reform would reduce our deficit, it’s not enough to dig us out of a massive fiscal hole in which we find ourselves. It’s a challenge that makes all others that much harder to solve, and one that’s been subject to a lot of political posturing. So let me start the discussion of government spending by setting the record straight.
Obama had just asked everyone for ideas about how to contain health costs, claiming he knew of no better way to do so. Obama, of course, in his deal with the health insurers, had agreed not to adopt the most effective means of cost containment. Here, he was disingenuous.
At the beginning of the last decade, the year 2000, America had a budget surplus of over $200 billion. (Applause.) By the time I took office, we had a one-year deficit of over $1 trillion and projected deficits of $8 trillion over the next decade. Most of this was the result of not paying for two wars, two tax cuts, and an expensive prescription drug program. On top of that, the effects of the recession put a $3 trillion hole in our budget. All this was before I walked in the door. (Laughter and applause.)
Yes, good point – recessions produce large federal budget deficits. Now explain that this is good – it is an “automatic stabilizer” that occurs without any need for new legislation or rules, so it acts far more quickly and reduces the length and severity of recessions. Obama, of course, takes the opposite tack – a tack he knows to be a lie – and presents the growth in the deficit as a bad thing. Note that he ignores the fact that President Bush inherited a recession that officially began in March 2001 at the start of his term so important parts of Bush’s earlier deficits were also the product of automatic stabilizers acting desirably.
But we should start with the budget surplus in 2000. Obama portrays this as unambiguously wonderful, but he presents no basis for his implicit claim. Every time the U.S. has run a substantial budget surplus it has been followed by a depression or the Great Recession. That does not prove the surpluses caused the depressions and the Great Recession, but it certainly puts the burden on anyone trying to tout the desirability of running a budget surplus in the United States, particularly given the balance of trade. Obama presents it as if it were axiomatic that any deficit under Bush was harmful, but presents no evidence that it was.
Now — just stating the facts. Now, if we had taken office in ordinary times, I would have liked nothing more than to start bringing down the deficit. But we took office amid a crisis. And our efforts to prevent a second depression have added another $1 trillion to our national debt. That, too, is a fact.
No, it is not a “fact” that “our efforts to prevent a second depression have added another $1 trillion to our national debt.” It is a falsehood. Had Obama immediately inflicted austerity rather than his modest and deeply inadequate stimulus our recovery would have been vastly worse. The eurozone’s recovery was crippled by austerity. If our recovery had been far worse, then the national debt would have risen by even larger amounts. Why would Obama have “liked nothing more than to start bringing down the deficit” had he “taken office in normal times”? We all know that is true because he is a self-proclaimed believer in the New Democrats’ failed dogmas, but what is his rationale? The phrase “like nothing better” is meant to indicate that deficit reduction would be one of his highest priorities and that he would do so with great enthusiasm. Why? Would the U.S. have been better off in 2010 with austerity? It would have been worse off. As Obama moved toward austerity he slowed the economic recovery. Had the Tea Party coalition not blocked his “Grand Bargain” with the GOP leadership the even greater austerity would have choked off the recovery and made Obama a one-term president.
I’m absolutely convinced that was the right thing to do. But families across the country are tightening their belts and making tough decisions. The federal government should do the same. (Applause.) So tonight, I’m proposing specific steps to pay for the trillion dollars that it took to rescue the economy last year.
This is the metaphor from Hell. It is a favorite metaphor of Jack Lew, who Obama would soon name his budget director and eventually his Treasury Secretary. In January 2010, when Obama made this address, Lew and Treasury Secretary Geithner were Rubinites who were extreme deficit hawks even from the perspective of the New Democrats. Geithner denounced stimulus as providing only a harmful “sugar” rush. The “tightening their belts” metaphor violates the most fundamental macroeconomic truth in dealing with a severe recession or depression. Lew is a lawyer. Geithner has boasted that he took only one class in economics – and couldn’t understand it. Rubin was not an economist. Their austerity dogmas were the product of ignorance of economics, but what Rubin, Obama, Geithner, and Lew have in common is a devotion to the interests of Wall Street CEOs.
In a serious contraction, particularly one following a credit-driven bubble, consumers are worried about losing their jobs. They begin to repay their debts and reducing consumption. This is perfectly rational from their perspective. CEOs react to the fall in consumer demand in an equally rational manner – they reduce output and spending on investments. Banks are likely to constrain credit and try to build capital. This too is rational. The result is that there is inadequate demand and unemployment and business failures rise. At the very time that demand is most inadequate and the need for spending on consumption and investment would be most helpful to the economic recovery, consumers and CEOs are likely to do the opposite. Economists call this “the paradox of thrift.”
There is one entity that is an ideal position to do the opposite – to increase demand in response to a recession or depression. This entity is not credit-constrained by bankers. The entity is a government with a sovereign currency that borrows only in that currency and allows that currency to freely float. The U.S. is such a nation. It is critical that our federal government provide fiscal stimulus, in addition to the automatic stabilizers, to counter the recession or depression.
Obama’s metaphor is exactly the opposite of economic literacy. If “families across the country are tightening their belts” then it is particularly essential that the federal government do the opposite – not “the same” – to counter the effects of the sharp fall in effective demand.
No, the federal government need not and should not “pay for the trillion dollars” you spent on stimulus (and, the federal government did not spend a $1 trillion on stimulus). If you “pay for” the stimulus by austerity you will harm the recovery and the people of America and likely increase the ultimate debt. Economic growth is the key to deficits and debt of a sovereign nation.
Starting in 2011, we are prepared to freeze government spending for three years. (Applause.) Spending related to our national security, Medicare, Medicaid, and Social Security will not be affected. But all other discretionary government programs will. Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t. And if I have to enforce this discipline by veto, I will. (Applause.)
Count the number of times New Democratic dogmas drew applause. First, particularly given Obama’s increasing embrace of austerity, but also given the terrible scale of the Great Recession, 2011 was far too soon to even be thinking of inflicting austerity on the Nation. The results were sure to slow the recovery and harm Americans. That is what happened.
Second, this is the paragraph that presents Obama’s simile from hell about austerity. “Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t.” The simile is a variant on the economic illiteracy of Obama’s metaphor from hell. Yes, families are “cash-strapped” when a credit expansion leads to a Great Recession. Families’ incomes and wealth drop as the stock market tanks and their homes lose market value. Families react to seeing neighbors losing their jobs and their homes by decreasing consumption. Families see credit being constrained by banks’ tighter credit policies. Families see interest rates fall sharply on their savings accounts, further reducing their income. It is precisely because families are “cash-strapped” and fearful of further losses that they reduce their consumption – exacerbating the already inadequate demand and deepening the Great Recession.
The United States government is not – and cannot be except through self-inflicted insanity such as austerity and debt limits – “cash-strapped.” The U.S. creates cash. The U.S. can be resource constrained, but not cash or credit constrained. The U.S., with debt levels that Obama is about to describe in his address in histrionic terms, was able to borrow essentially unlimited amounts of money at interest rates near zero. (More to the point, the U.S. does not have to borrow its sovereign currency because it makes its sovereign currency.) These facts explain why Obama’s logic is reversed – it is essential that the U.S. not act as if it were “cash-strapped” in response to a Great Recession.
Third, Obama adds to his inanity by promising to be more of an austerity hawk than Republican legislators and “veto” any bill that would address a growing problem, such as the Zika virus becoming epidemic through increased government spending. This is mind-numbingly stupid as a policy, and the rationale Obama offers for the stupidity rests solely on an economically illiterate simile.
We will continue to go through the budget, line by line, page by page, to eliminate programs that we can’t afford and don’t work. We’ve already identified $20 billion in savings for next year. To help working families, we’ll extend our middle-class tax cuts. But at a time of record deficits, we will not continue tax cuts for oil companies, for investment fund managers, and for those making over $250,000 a year. We just can’t afford it. (Applause.)
Getting rid of programs that do not work and cannot be fixed is a good thing. But we can “afford” anything that does not produce a serious constraint on real resources needed elsewhere in more critical applications.
Now, even after paying for what we spent on my watch, we’ll still face the massive deficit we had when I took office. More importantly, the cost of Medicare, Medicaid, and Social Security will continue to skyrocket. That’s why I’ve called for a bipartisan fiscal commission, modeled on a proposal by Republican Judd Gregg and Democrat Kent Conrad. (Applause.) This can’t be one of those Washington gimmicks that lets us pretend we solved a problem. The commission will have to provide a specific set of solutions by a certain deadline.
What is the point of Obama calling the federal budget deficit “massive”? Yes, it is a huge number. The Great Recession officially began in the fourth quarter of 2007. The automatic stabilizers began to kick in almost immediately and greatly reduced the length and severity of the Great Recession. Indeed, it officially ended in the second quarter of 2009 shortly after Obama took office – and well before his stimulus program could take effect. The dates on which recessions begin and end is a technical matter that is inherently decided after the fact. It does not mean that the economy was doing well before the official onset of the recession or after the official end of the recession. Indeed, it is typical that the economy was doing very badly before and after the official start and end dates of the recession.
The point is that a huge portion of the Bush deficit that Obama inherited was the product of the automatic stabilizers working well to limit the depth and length of the Great Recession. That was a good thing.
Obama’s “fiscal commission” was an obscenity. It was a creature of Pete Peterson, the Wall Street billionaire whose greatest dream is privatizing Social Security. Obama stacked it with pro-austerity officials. Despite this fact, the commission failed to reach the super-majority required under its own governing documents to make recommendations. The co-chairs, two infamous deficit fanatics, ignored the commission’s own governing documents to present their recommendations. In this article I do not address the supposed crises in the safety net. Again, the short answer is that the meaningful constraint is real resources, and the safety net does pose any serious risk of causing a constraint in real resources.
Now, yesterday, the Senate blocked a bill that would have created this commission. So I’ll issue an executive order that will allow us to go forward, because I refuse to pass this problem on to another generation of Americans. (Applause.) And when the vote comes tomorrow, the Senate should restore the pay-as-you-go law that was a big reason for why we had record surpluses in the 1990s. (Applause.)
In the last sentence Obama shows he is among the most extreme of the New Democrats in his embrace of austerity. First, the “record surpluses in the 1990s were built on the non-foundation of the two largest bubbles in history – the dot.com and housing bubbles. Second, the record surpluses set the stage for the Great Recession. As I noted, prior federal budget surpluses were followed closely by depressions. Third, “pay-as-you-go” is an example of mindless austerity.
Now, I know that some in my own party will argue that we can’t address the deficit or freeze government spending when so many are still hurting. And I agree — which is why this freeze won’t take effect until next year — (laughter) — when the economy is stronger. That’s how budgeting works. (Laughter and applause.) But understand –- understand if we don’t take meaningful steps to rein in our debt, it could damage our markets, increase the cost of borrowing, and jeopardize our recovery -– all of which would have an even worse effect on our job growth and family incomes.
Ah, a completely unfunny attempt at a joke. I’d like to start austerity now, but the legislative process takes time so I won’t be able to inflict austerity on the American people until next year. It’s a dumb, not funny line for multiple reasons. Tens of millions of Americans were guaranteed to be “still hurting” in 2011, when Obama threatened to begin inflicting austerity. Austerity in 2011 was guaranteed to be a self-inflicted wound. The Democratic Party should be a party in which every congressional member (not “some”) reject inflicting austerity when tens of millions of Americans are in agony as a result of the Great Recession and unemployment rates and rates of leaving the work force are high.
The last sentence of the paragraph is even worse for every argument it makes is a lie. Stimulus was a huge gain to our “economy.” Stimulus did not “increase the cost of borrowing.” Austerity did “jeopardize our recovery” – reducing job growth and family income.
From some on the right, I expect we’ll hear a different argument -– that if we just make fewer investments in our people, extend tax cuts including those for the wealthier Americans, eliminate more regulations, maintain the status quo on health care, our deficits will go away. The problem is that’s what we did for eight years. (Applause.) That’s what helped us into this crisis. It’s what helped lead to these deficits. We can’t do it again.
Obama proposed to “make fewer investments in our people” – that is precisely what austerity did. It is not true that Bush’s elimination of “more regulations … helped us into this crisis.” It was Clinton that eliminated key financial regulations. More importantly, it was the combination of Clinton and Bush that desupervised finance – desupervision proved to be far more destructive than Clinton’s deregulation. Bush’s earlier deficits had nothing to do causing the crisis. His deficits once the economy slowed and then went into the Great Recession were the product of the automatic stabilizers and they “helped us” out not “into this crisis.”
Rather than fight the same tired battles that have dominated Washington for decades, it’s time to try something new. Let’s invest in our people without leaving them a mountain of debt. Let’s meet our responsibility to the citizens who sent us here. Let’s try common sense. (Laughter.) A novel concept.
“Common sense” is not common. People extrapolate to the federal government what they know best – the nature of the household and its budget constraints. They desperately need the President of the United States, the Treasury Secretary (Geithner), and the soon-to-be-appointed head of the Office of Management and Budget (Jack Lew) explain why the federal government is not remotely similar to a household when it comes to constraints and why that means the federal government has the unique ability and moral duty to use fiscal stimulus and serve as the employer-of-last-resort to reduce the severity and length of recessions and provide full employment to all those willing and able to work.
The NYT Resurrects Its Love for Austerity
On January 9, 2017, the NYT’s op ed guy who spent his summer attacking Bernie Sanders and praising Hillary Clinton turned his sights on Donald Trump and congressional Republicans in a piece entitled “The Betrayal of Fiscal Conservatism.” That is his euphemism for austerity. He began his ode to austerity with this assertion.
The label of “fiscal conservative” used to mean something.
It referred to people — mostly Republicans — whose top priority was the health of the federal government’s balance sheet. They favored a small deficit, or no deficit at all.
He is writing in 2017, when even the IMF admits that stimulus was a success and austerity a failure. We can observe the difference in growth between the eurozone, which mandates austerity, and the U.S. where even a grossly inadequate stimulus program produced far superior growth. But none of this penetrates this writer who so loves the New Democrats’ ever present desire to inflict self-destructive austerity on Americans, particularly the working class. What could go wrong?
A federal budget is not “health[y]” when it is in surplus and sick when it is in deficit. A federal budget deficit due to the automatic stabilizers’ powerful response to the Great Recession is a sign of health. An even larger (short-run) budget deficit through a stimulus program is an even greater sign of economic health that should be celebrated. People who seek to inflict austerity on the people in such circumstances are not “fiscal conservative[s].” They may be well meaning, but ignorant of economics. However, as I explained in response to Dr. Meeropol’s chastisement of my failure to note who wins under austerity, they may want to enrich their wealthy donors and themselves.
Why would a NYT op ed celebrate Republicans “whose top priority” was austerity? The “top priority” of members of Congress should be the welfare of Americans, particularly the non-wealthy. Austerity is not a logical goal of a nation with a sovereign currency, much less its “top priority.”
The NYT op ed ends with this obscenity.
The original meaning of “fiscal conservative” may be gone. In fact, Democrats have had a better claim on the label in recent years than Republicans. But it’s important to remember that the concept is as legitimate as ever. The United States does indeed face a long-term budget deficit that eventually will require a solution, and cuts to government spending almost certainly need to be part of that solution.
So the next time that you hear a politician describe himself or herself as a “fiscal conservative,” I recommend deep skepticism. But I also hope that Washington one day has more real fiscal conservatives than it does today.
Yes, New Democrats are far more consistent proponents of inflicting austerity on Americans, particularly the working class, than are Republicans – and that is a travesty. The NYT op ed was written after Trump’s election driven by the wholesale rejection of the New Democrats’ agenda by the white working class. The New Democrats have learned nothing from that defeat. They continue to push the message of Wall Street and the wealth – the infliction of self-destructive austerity – as their defining mantra. They continue down the disastrous path that Tom Frank has been warning them about for over a decade. (Yes, I know that Trump will continue to betray the white working class.) We desperately need a “Washington” and a political party in which no official buys the Wall Street dogmas favoring austerity. Austerity is to economics as bleeding a patient is to medicine. Among the last things that “Washington” needs is to have “more” Wall Street sycophants pushing austerity “than it does today.”
And no, “cuts to government spending” are not “almost certainly” essential in the “long-term.” Growth is what is essential, and austerity is the great enemy of American growth. Clinton’s “growth” was not the product of austerity and it was not real. It was the product of the two largest bubbles in history. The U.S. had far higher deficits relative to GDP in and after World War II. Does anyone think austerity was the proper answer to Hitler, the attack on Pearl Harbor, or the Great Depression?