The Anti-Economist — January 3, 2013, 1:17 pm

America Is Having the Wrong Fiscal Argument

The question should be whether to cut the deficit right now, not how

This week’s agreement on the fiscal cliff is disappointing. Although President Obama can claim victory on such important measures as extending unemployment insurance for the long-term unemployed, he agreed to raise the income threshold for the tax hikes he sought from $250,000 to $450,000. Most important, he failed to secure an agreement to mitigate future social-spending cuts, meaning Social Security and Medicare will still be on the table in the next few months. This leaves the Republicans in a position to once again employ brinksmanship when it comes time to raise the debt ceiling, which could be as soon as mid-February. At that time, they may well succeed in their demands for serious and unnecessary social-spending cuts.

It’s more than a little unfortunate that the United States was boxed into the fiscal-cliff situation in the first place. That the nation is adopting a contractionary policy with an unemployment rate of nearly 8 percent is absurd. And that there is such a widespread consensus — accepted by the media as simple common sense — that substantial deficit reductions must be made in 2013 to solve a deficit problem that won’t begin seriously until in the 2020s, is a question for future historians and maybe psychologists. Even the current compromise, which rescinds the payroll tax cut and includes significant tax breaks for others, takes significant spending power out of an economy that is too weak to withstand the move.

The fiscal cliff, recall, was effectively imposed on America by Republicans who in 2011 threatened to cause an unprecedented default on U.S. debt by not raising the legal debt limit. At the time, an agreement to reduce sharply the budget deficit across ten years was put in place, intensifying the pressure to cut social-program (and military) spending. The central battle now is whether deficit-cutting should be weighted toward higher taxes or sharp cuts in social spending — but it should be about whether deficit reductions of $4 trillion to $5 trillion over ten years are necessary at all, especially if they’re to start now. We have already seen caps placed on valuable social programs, including on the National Institutes of Health, on subsidies for low-income housing, and on college loans, which all told amount to about $1.5 trillion in future spending reductions.

Deficit-cutting under the current circumstances is bad economics, according both to theory and to historical precedent. Austerity economics are palpably and tragically failing in Europe, yet the same types who urge austerity on Greece, Italy, Portugal, Spain, and even France — not to mention the non-Eurozone giant, Britain — are also urging it in broad consensus in America. And they are succeeding. Dedicated to their polite even-handedness, meanwhile, the media have tended to blame both sides and to assume unquestioningly that deficit reduction is required, rather than identifying the clear culprits responsible for sustaining our economic mess. These culprits are not evenly distributed across the political spectrum. In order of importance, they are:

First and foremost, the small-government, tea-party Republicans who have been working for an economic policy driven by ideology and a hatred of most social policies. True, small-government ideologues — there are a few — would also seek to cut the military, but this group’s target is solely what it thinks of as the nanny state.

Second are the self-appointed “common sense” centrists, who agree that the federal deficit is our biggest problem, and thereby lend credibility to the right-wing extremists. These are the seemingly serious and purportedly moralistic practitioners of the anti-Keynesian austerity economics that are failing so badly in Europe. They include the powerful Campaign to Fix the Debt, which has aggressively signed up supporters across political and racial spectrums, and the Concord Coalition, as well as the Committee For a Responsible Federal Budget, which is financed by investment-banking billionaire Pete Peterson. But it is dominated by CEOs, almost all of whom have massive retirement funds and health-care benefits, yet demand cuts in Social Security, Medicare, and Medicaid.

Their great public-relations tool is the budget-balancing committee appointed by President Obama and led by Clinton Administration official Erskine Bowles and Republican former senator Alan Simpson. With heavy support from the groups mentioned above, the conservative document this group produced has come to be seen as the common-sense middle ground. Alarmingly, it calls for federal spending to be capped at 21 percent of GDP, the average since the 1970s, in order to control the deficit. Such an average cannot accommodate an aging population, rising health-care costs, and new public investments. It would require sharp cuts in social spending. The press nevertheless seems to trust the document and Simpson and Bowles are paid handsomely by deficit hawks, reportedly led by Peterson, to make speeches around the country in support of their views.  

Third is the Congressional Budget Office, which is almost never mentioned as a partisan in the debate because it is legally bipartisan, answerable both to Democrats and Republicans. This distinction is almost meaningless. The CBO’s economics are utterly neoclassical, which means it is conservative, in that it almost always favors less government spending. Its projections generally assume that high budget deficits will crowd out private investment and slow economic growth. This is simply biased economics. It also presumes that higher taxes reduce the incentive to work — a dubious conjecture at current levels of taxation, to say the least.

Guided by such assumptions, the office frequently arrives at questionable conclusions. For example, its long-term projections have suggested broadly that it would have been better to go over the fiscal cliff than to arrive at the sort of compromise reached this week. In its long-term outlook, the CBO claims that had the drastic spending cuts and tax hikes of the fiscal cliff gone into force, the economy would have bounced back robustly from an ensuing modest recession with 9 percent unemployment. Unemployment would thereafter have fallen to nearly 5 percent, and that federal deficits as a percentage of GDP would have fallen sharply, to 2 percent or so between the late 2010s and 2022. (The CBO’s assumption here is that the recession would lead to lower interest rates and rapid capital investment — that economies are basically self-adjusting, a profoundly conservative notion.)

The fiscal-cliff compromise, by contrast, will in the CBO’s eyes lead to bigger deficits and ultimately higher taxes, therefore robbing the economy of growth. Deficits would rise to 4 or 5 percent, and debt as a percent of GDP will soar. This is austerity economics, pure and simple. If you read the fine print, the CBO provides alternative projections based on milder assumptions about the impact of deficits — assumptions that in my view are much closer to the truth. But the “central’ projections, which are alarmist about the size of the deficit, are the ones the office publishes, and the ones Congress, fiscal hawks, and most of the media take at face value. Economic absurdity, as I say. America badly needs a shadow CBO that publishes more realistic projections, unconstrained by neoclassicism.

President Obama may have been able to make a better deal, but the Republicans are formidable enemies thanks to their numbers and their refusal to compromise. Obama made a mistake when he joined the deficit hawks so enthusiastically back in 2009. It is probably too late to change course — the great social programs inspired by the New Deal are now at stake.

Single Page

More from Jeff Madrick:

From the February 2014 issue

How Germany Reconquered Europe

The euro and its discontents

Get access to 165 years of
Harper’s for only $45.99

United States Canada

  • Hopley Yeaton

    Blame universal suffrage – the ability to vote ourselves stuff at the expense someone else. Just on example: an average couple pays $109,000 into medicare over their working life but takes out $330,000 in benefits (data from Urban League). The level of taxation on absolutely everybody (sorry, the rich simply don’t have enough) will strangle the standard of living for the upcoming generations. What we’re asking of our grandchildren (I have four, ages 2 through 5) is completely immoral.

  • PaulPa

    This is a very weak recovery. Isn’t there at least a chance that the massive increase in government spending the last 5 years is playing a part in this. Why will borrowing and spending more and more make it better? It hasn’t so far.

  • Buckeye Nut Schell

    Actually, putting $109,000 over a life time and then withdrawing $330,000 during the last few years seams to be a very nominal return on your investment. If you invested $109,000 in a 401K over a 45 year period and then collected $330,000 during your retirement years, would you feel like you made a killing? You also have to consider that if they only received the same amount they put in, when it ran out, would you just let old folks die? Of course not, someone would have to pick up the tab. If it was your grandparents, you may pick up the tab but it may ruin you financially. Is that better than paying a little bit of taxes now?
    As far as the out of control spending ove the last five years, let’s remember why there has been so much spending… We have fought two unfunded wars against two countries that had absolutely no capability to attack us. Sure, Al Qeada hijacked a few of our own aircraft with box cutters and killed thousands of our citizens. It was a sucker punch. What did we do in response, spent three trillion dollars and another five thousand lives attacking one country that had absolutely nothing to do with it and another country who offered to give them up in exchange for stopping the bombing of their country. Oh yea, and then there was the tax cuts that primarily went to the rich. Never before in history was the a tax cut in a country while it was at war. Oh and there was the massive deregulation that led to a multi-trillion dollar housing bubble that popped and crashed the global economy and required a massive payout to the wealthiest people in the world to avoid them crashing the economy further and then there was all of the free trade agreements that sent all of the good paying jobs to countries that have virtual slave labor and replaced them with “service” jobs at Wal-mart and McDonalds… and then there is the skyrocketing healthcare costs that we signed into legislation that we wouldn’t negotiate so we are paying as much as a thousand times as much for some pills as the same company charges other countries… and…
    Yo have a right to be upset with our government… please be sure to understand what they really did to deserve your anger.

  • g

    I’m a liberal guy. I love Harpers. But here’s the scenario I’m worried about, I welcome you to tell me why I’m wrong:
    We continue amassing debt at 1 trillion per year. In 2020, it would be close to 20 trillion. In 2030 – 30 trillion or more. It’s all fine and dandy if the interest rates remain low. But will they? Not too long ago interest rates were in the teens (70′s & 80′s). Is it inconcievable that they will rise? Now imagine we have to roll over 20 trillion of debt at those interest rates. The interest on this debt could then become a multiple-trillion dollar expense to the federal government annually. The interest would be larger than social & defense spending put together. Our taxes would necissarily go up. A broad recession and/or stagnation would ensue in the U.S.
    Perhaps you’ll say that interest rates can’t go up high if U.S. is in a recession or stagnation. But in the new global economy, interest rates are not set by one country’s economy alone. Am I wrong?

    • looselyhuman

      We’re only amassing debt at this rate because of the recession, and the deficit has been reduced each of the past four years – setting some records I believe (don’t have statistics on hand, but feel free to look it up). We don’t have a debt/deficit issue.

      Two points:

      1.) Interest rates – the overnight rate is controlled by the fed, it’s really not an issue we need to worry about. Also, interest hawks have predicted several times that the bond vigilantes would be all over us… long ago, or certainly by now, or absolutely positively tomorrow… instead the world is begging us to sell them (and ourselves, mostly) safe securities.

      2.) We don’t even need to sell securities to finance the deficit. We are a monetary sovereign and can print and spend as much currency as our economy can use. Inflation isn’t a concern until it is (economy at full capacity) at which point spending can be cut back or taxes raised. That we do issue debt is more of a service to global financial markets (and ourselves, again – especially the SS trust fund, pensions, etc).

      So, yes, you’re wrong.



July 2015

One Day Less

= Subscribers only.
Sign in here.
Subscribe here.

Dressed to Kill

= Subscribers only.
Sign in here.
Subscribe here.

Wrong Prescription?

= Subscribers only.
Sign in here.
Subscribe here.

Travel Day

= Subscribers only.
Sign in here.
Subscribe here.

Fugue State

= Subscribers only.
Sign in here.
Subscribe here.

view Table Content


Avian Voices·

= Subscribers only.
Sign in here.
Subscribe here.

“The mockingbird’s bath is an orgy of thrashing and writhing about. When he has finished, one of the innocents alights on the rim of the basin and looks with disbelief at the thimble of water remaining.”
Illustration by Eric Hanson
Before the War·

= Subscribers only.
Sign in here.
Subscribe here.

“I’m worried that what the Houthis did to push Yemen into a civil conflict in September 2014, the Saudis may end up doing again when they end their campaign by eliminating the Houthis.”
Photograph by Alex Potter
The Speakeasy·

= Subscribers only.
Sign in here.
Subscribe here.

“In order to understand how Marty’s could survive as an institution, I returned a year after my first visit to spend a week at what was sure to be the world’s bleakest comedy club.”
Photograph by Mike Slack
The Lost Land·

= Subscribers only.
Sign in here.
Subscribe here.

“I had first encountered some of these volumes—A Swiftly Tilting Planet, The Giver—as a child, and during adolescence, they registered as postcards from a homeland recently abandoned.”
Photograph by the author
Wrong Prescription?·

= Subscribers only.
Sign in here.
Subscribe here.

“Whatever the slogans suggested, the A.C.A. was never meant to include everyone.”
Illustration by Taylor Callery

Estimated cost of the environmental damage caused each year by the world’s 3,000 largest companies:


Two thirds of U.S. teenagers experience uncontrollable rage.

Beekeepers began extracting 1 million honeybees living beneath the siding of a house in New York State.

Subscribe to the Weekly Review newsletter. Don’t worry, we won’t sell your email address!


Subways Are for Sleeping


“Shelby is waiting for something. He himself does not know what it is. When it comes he will either go back into the world from which he came, or sink out of sight in the morass of alcoholism or despair that has engulfed other vagrants.”

Subscribe Today