Why Progressive Austerians do the Greatest Damage

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This is a syndicated post, which originally appeared at New Economic PerspectivesView original post.

By William K. Black

To many people, it seems paradoxical that conservatives target not the worst social programs, but the best.  There is no paradox.  Bad government programs are desirable from the right’s perspective – they discredit government intervention.  Good government programs pose an existential challenge to conservative memes, so they are the prime target for attack.

The attacks from the right, however, do not provide any guarantee of success.  The right’s immense success has come from convincing large numbers of moderates and liberals to join the assault on successful government programs.  The major financial deregulation bills that have shaped the criminogenic environments that produced the epidemics of accounting control fraud that have driven our recurrent, intensifying financial crises have enjoyed strong, even overwhelming, governmental support.  The Garn-St Germain Act of 1982, the state S&L deregulation laws in Texas and California that “won” the regulatory “race to the bottom”, the “reinventing government” assault on financial regulation, the Gramm-Leach-Bliley Act of 1999, and the Commodities Futures Modernization Act of 2000, all enjoyed broad bi-partisan support.  Laws making it extremely difficult for victims of securities fraud to obtain civil remedies passed with such strong bipartisan support that supporters were able to override President Clinton’s veto.

Just as only a conservative Republican like Nixon could begin to normalize diplomatic relationships with China without bearing a crippling political price, only “liberal” Democrats can safely begin the process of attacking Social Security.  The rationale for the liberal assault on Social Security is “there is no alternative” (TINA).  TINA is a particularly nonsensical argument in this context, however, because we are trying to recover from a Great Recession. There are vastly superior alternatives to cutting Social Security benefits, which could force the economy back into recession.  There is also no need to cut Social Security benefits.  The funding required to meet fulfill our promises is modest (relative to the U.S. economy) and poses no threat to our economy.

There are real needs to reduce the dramatic increase in health care costs.  We know how to reduce those costs by following programs that are exceptionally effective and popular in other nations, but the right remains intractable in its opposition to reducing health care costs while increasing health care services.

The U.S. right assumes that Europe is a continent dominated by the left, but it is badly out of date.  One of our leading exports to Europe is bad economics.  The dominant economic theory in Europe, the Berlin Consensus, has become austerity über alles – and that dominance grew as austerity became an ever more destructive policy because of the Great Recession.  Economics is the old field of social science that has degraded instead of improving over the last 50 years.  European austerity has proven pro-cyclical – it intensifies the recession throughout the euro zone and forced several nations of the periphery into Great Depression levels of unemployment.  The human cost has been terrible, and it has been ignored by Berlin under the fiction of TINA.  If there is no alternative there is no point in worrying about spilt Europeans.

The catastrophic damage done to Europe and Europeans has not had any discernible impact on the U.S. austerians of the right.  The Ryan budget would hurl the U.S. into a Great Depression.  Every major Republican candidate, including Governor Romney, supports the Ryan budget.  Many commentators that purport to be centrists treat the Ryan budget as “bold” or “serious” rather than the operable word – “suicidal.”  The Washington Post, which the right still thinks of as leftist, has long been a bastion of austerians and nothing in economics or observed reality (Europe’s suicide) shakes them from their belief in austerity and TINA.

The progressive austerians are all the more remarkable because the economists and economic theories they rely on were wholly discredited even before Europe’s suicidal experiment with austerity.  The neoclassical and Austrian economists that push austerity were the same economists who (1) propounded the anti-regulatory policies that caused the global crisis, (2) the opponents of counter-cyclical fiscal policies who predicted that pro-cyclical U.S. fiscal policies would speed the U.S. recovery while counter-cyclical policies would fail to spur growth and would cause inflation, and (3) the deficit hawks who claimed that counter-cyclical U.S. monetary and fiscal policies would cause hyper-inflation.  The predictions of the proponents of austerity have proven consistently wrong and the proponents of counter-cyclical fiscal policies have proven consistently correct.  The predictions of the proponents of counter-cyclical fiscal policies proved correct as to both the direction and the magnitude of the economic recovery.  We argued from the beginning that the stimulus package was far too small and that there would be a financial disaster among many states and localities absent a program of federal revenue sharing.

The progressive austerians, however, have exhibited a fatal attraction to the austerity nostrum de jour despite this track record of failure on their part and success on the part of progressive economists.  The overwhelmingly bulk of economists support counter-cyclical fiscal policies, but the progressive historians seem to view the heterodox nature of the far right austerians’ claims as part of the attraction.  As progressive heterodox economists we find those on the left who have (1) embraced the hard-right austerians despite their track record of being wrong about all the most important issues and (2) rejected progressive heterodox economists’ views despite our track record of being correct about the most important issues to be mystifying.  The austerians of the left are rarely economists, but they do often come from business backgrounds or are journalists who primarily interview business executives or politicians who are primarily funded by business.

Brad Plumer is a member of this Washington Post group of austerians of the left.  The economists who are austerians know that their claims have been falsified by the disaster that austerity has inflicted on Europe.  There is only one place their anti-governmental dogma can take them when they try to defend austerity.  They hate government services, particularly government services that have broad public support, for the reasons I explained.  Their response to the failure of austerity has to be that the European governments improperly implemented austerity by raising taxes (right-wing austerians view taxes as evil) rather than cutting public services.  This is precisely the claim that a hard-right austerian has made.  Klein reports on this austerity de jour claim without noting its roots in hard-right dogma.

Here’s how Plumer frames the discussion.  On the one side, “Some economic commentators like Paul Krugman and Martin Wolf have argued that Europe in particular is relying too heavily on austerity, period.”  Well, no.  Economists overwhelmingly believe that that the Berlin Consensus’ demand for pro-cyclical austerity is causing catastrophic damage and have rejected any claim that an even more aggressive slashing of public expenditures for the poor is the secret to bleeding an economy into a robust recovery.

http://www.washingtonpost.com/blogs/ezra-klein/post/what-austerity-looks-like-around-the-world/2012/05/22/gIQAMTrBiU_blog.html?hpid=z3

Plumer tells his readers that we should find an OECD graph “helpful.”

“Here’s a helpful graph from the OECD’s latest Economic Outlook.  It shows the projected change in the “primary balance” of the world’s wealthiest countries between 2011 and 2013. (This is the budget after accounting for the effects of economic growth — after all, if there’s a recession and tax receipts go down as a result, we don’t want to count that as a “tax cut.”)

Some countries, like Italy, are relying heavily on tax increases. Others, like Spain and Greece, are relying far more heavily on spending cuts:

(And yes, these forecasts could prove wrong. The OECD, for instance, expects that the United States will improve its primary balance through a balanced mix of spending cuts and tax increases in the next year — but that assumes that Congress will let all of the various tax cuts expire at the end of 2012, which is far from certain.)”

Well, no.  The graph is useless, except to show that neither the OECD nor Plumer understand the most basic aspect of national budget deficits and to reveal that Plumer is so austerian that he no longer recognizes when he is presenting long-falsified austerian dogma as if it were undisputed fact.  The most basic aspect of national budget deficits that the austerians fail to understand that a nation cannot decide, and dial in, its preferred budget deficit or surplus. When a nation in recession, for example, it can try to cut its deficit by some combination of raising taxes and cutting public expenditures – but there is no assurance that the effort will succeed.

The primary reason “these forecasts could prove wrong” is not the lack of certainty that Congress will actually raise tax rates and actually cut budgeted expenditures.  Even if it were certain what tax rate cuts and budgeted expenditure cuts Congress would make there would be no certainty what the results would be. Raising tax rates can cut private sector demand (already deeply inadequate in a severe recession) and cause a recession which will reduce actual tax revenues despite the increased tax rate.  Similarly, slashing government spending for services to the poor can directly cut already inadequate public and private sector demand by reducing government expenditures and monetary transfers to the private sector.

Most public expenditures provide income to private merchants (suppliers), so the cuts in governmental spending further reduce already inadequate private sector demand.  The cuts in governmental spending can cause a recession that will simultaneously reduce tax revenues and increase the cost of governmental services for the unemployed.  As more people become unemployed other workers will fear losing their jobs and may reduce their expenditures (and businesses will tend to delay refilling inventory).  This can exacerbate the recession, as can deflation.  All of these things can cause austerity efforts to increase the budgetary deficit rather than reducing it.  If you do not understand this point, and the chart and the language I quoted demonstrate that the OECD and Plumer do not understand this point, then you do not understand the core concepts of fiscal policy and you cannot discuss the issues intelligibly.

The last quoted sentence illustrates the presentation of false austerian dogma as if it were indisputable fact.

“The OECD, for instance, expects that the United States will improve its primary balance through a balanced mix of spending cuts and tax increases in the next year — but that assumes that Congress will let all of the various tax cuts expire at the end of 2012, which is far from certain.”

Well, no.  First, the OECD makes the mistake I’ve just explained.  It assumes that if we cut taxes and federal spending during a weak recovery the U.S. “will improve its primary balance” (reduce the budget deficit).  The results of austerity could increase the deficit rather than reduce it.  Second, if the U.S. “let all of the various tax cuts expire at the end of 2012” we would push America – and most of the world – into a Great Depression.  The Congressional Budget Office (CBO) has just warned that the year-end austerity the OECD assumes would throw the economy off a “fiscal cliff” and back into recession.

Plumer then presents the right-wing apologia for the catastrophic failure of austerity in Europe.

“Some conservatives, by contrast, have recently started arguing that it’s not austerity per se that’s the problem — it’s the type of austerity. In the National Review, Veronique de Rugy argues that many European countries are relying too heavily on tax increases to rein in their deficits. (This mainly seems to describe Austria, Italy, Belgium, and the Netherlands — the rest are leaning more heavily on cuts.) She cites a few economists, including Scott Sumner, who argue that spending cuts combined with more stimulus from Europe’s Central Bank is the way to go.

There aren’t many countries around, the world that have pursued this route, however. Sweden stands out as one country that has cut spending a bit while enjoying a big monetary stimulus from the Riksbank. By contrast, there are plenty of euro zone countries that are leaning very heavily on cuts — especially Spain, Portugal, Greece, and Ireland, the most troubled nations. They’re not faring much better growth wise, than euro zone countries relying largely on tax increases to curb deficits. On the other hand, none of these countries are getting a big boost from Europe’s central bank, so perhaps that’s the relevant variable here.”

So the reader is left with this, one economist (Krugman) (ignore noting that he is a Nobel Laureate) thinks austerity is destructive, while “a few economists” think that if austerity consisted of slashing public expenditures for the poor and not raising taxes all would be well.  The impression Plumer tries to leave with the reader is that the debate about whether austerity targeted at the poor is a desirable policy is a toss-up with a slight edge toward austerian economists.  What the facts actually shows, as Plumer concedes, is that if “Spain, Portugal, Greece, and Ireland” are the poster children for the wonders of austerity targeted at the needy for the greedy then their austerity strategy is “not faring much better growth wise.”  Well, yes, but surely one must draw a stronger conclusion.  Spain, Portugal, Greece, and Ireland are all nightmares in terms of growth (austerity targeted at the needy for the greedy has forced Spain and Greece into Great Depressions).  When one adds the dramatic increase in inequality and human suffering caused by targeting vital expenditures for the poor while cutting taxes for the wealthy the results are intolerably destructive and inhumane.

The right will always be in favor of slashing aid for those in need and taxes for those in greed.  They do not need the aid and comfort of progressive austerians.  To be an austerian one must attack successful progressive program.  The goal of the austerians is to set the progressives in conflict with each other – to force us to recurrently make versions of Sophie’s choice – to force us to do their dirty work of gutting progressive programs.

TINA is the most dangerous lie.  It is both the product of the death of progressive thought and the demonstration of the death of imagination and reason.  Real economics does not support TINA.  Real economics shows the falsity of TINA and the abundance of vastly superior alternatives to suicidal austerity.  If you are not aware of these alternatives please read the UMKC economics blog: New Economic Perspectives.

Progressive programs created the aspect of life we most enjoy and value as a people.  They have proven to be spectacular successes.  The people pushing austerity are the same people that hate progressive policies because their success falsifies their anti-government dogma.  The austerian economists were the architects of the global financial crisis, the great depression of the European periphery, and the assault on the needy.  They have proven wrong about every important issue.  When moderates and progressives adopt the suicidal austerian policies of these architects of disaster they become the most destructive members of the austerian movement.

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