The Economy, The Deficit And The Austerity Class

by: Rortybomb

Imagine an alien from Mars who was trained in basic macroeconomics landed on Earth. If they looked at economic indicators – unemployment high, inflation low, borrowing costs low, job openings low, off-trend economic growth, short-term interest rates at zero – they would think that now is the time for the government to run a larger deficit. They – as opposed to a large number of pundits, think tanks and politicians - certainly wouldn’t think that a smaller deficit would be anything other than a disaster.

Ari Berman has a great piece in the Nation, How the Austerity Class Rules Washington, which provides a roadmap of the people and places who have triggered this focus on the deficit instead of unemployment in the Lesser Depression:

In September the Committee for a Responsible Federal Budget (CRFB), a bipartisan deficit-hawk group based at the New America Foundation, held a high-profile symposium urging the Congressional “supercommittee” to “go big” and approve a $4 trillion deficit reduction plan over the next decade, which is well beyond its $1.2 trillion mandate….The event spotlighted a central paradox in American politics over the past two years: how, in the midst of a massive unemployment crisis—when it’s painfully obvious that not enough jobs are being created and the public overwhelmingly wants policy-makers to focus on creating them—did the deficit emerge as the most pressing issue in the country?

An explanation can be found in the prominence of an influential and aggressive austerity class—an allegedly centrist coalition of politicians, wonks and pundits who are considered indisputably wise custodians of US economic policy….Its members include Wall Street titans like Pete Peterson and Robert Rubin; deficit-hawk groups like the CRFB, the Concord Coalition, the Hamilton Project, the Committee for Economic Development, Third Way and the Bipartisan Policy Center; budget wonks like Peter Orszag, Alice Rivlin, David Walker and Douglas Holtz-Eakin; red state Democrats in Congress like Mark Warner and Kent Conrad, the bipartisan “Gang of Six” and what’s left of the Blue Dog Coalition; influential pundits like Tom Friedman and David Brooks of the New York Times, Niall Ferguson and the Washington Posteditorial page; and a parade of blue ribbon commissions, most notably Bowles-Simpson, whose members formed the all-star team of the austerity class.

My favorite quote is from Maya MacGuineas, president of the CRFB, a quote which I had not seen before: “If we think about massive deficit spending as medicine for a sick economy, we also need to recognize that too much medicine can ultimately kill the patient.” Is the concern that unemployment would get too low under Obama’s watch, spinning out inflation with wage growth? That the bond market would rebel, something that Joe Weisenthal just correctly called the Costliest Mistake In All Of Economics?

The piece has great coverage on how this has all unfolded and the consequences for Obama’s policies within the Great Recession. It includes a favorite around here, the idea of “expansionary austerity”, which, though it has been debunked by the IMF, here and elsewhere, appeared to be a major piece of ideology for both sides during the debt ceiling fights.

There’s a minor debate among left-liberal economics types about how to think about the fact that the economy is in the gutter, with unemployment very high and borrowing costs/inflation very low. Is there a group of people who benefit from this status quo? Some have pointed to rentiers as a potential beneficiary – see Kuttner, Krugman, JW Mason (and the idea of coordination more generally) and myself. Others would say that nobody benefits – or if the economy was better, with growth high and employment up, rentiers and the top 1% would be even better off than this status quo – and we should instead think of this as mostly political partisanship and a failure of institutions and economic ideas – see Brad Delong here, and the fact that places like Goldman and the IMF are calling for more action.

This debate would benefit from look at the austerity class – and Berman is right to name it a class, with interests and ideology – and tracing out the deeper threads among the people and places who got us here. The first read, and I need to think this through, is that people who had a vested interest in shifting the relationship between the state and business seized this crisis to put their ideas first, shock doctrine style. You see this with the Tea Party at the state level, where the first goal is gutting public sector unions, corporate taxes and Planned Parenthood. Might this be relevant lens for the economic debate of the past 3 years?