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.

Share
Single Page

More from Jeff Madrick:

Context July 16, 2015, 12:59 pm

A Deeply Integrated Europe

The euro and its discontents

Context July 10, 2015, 10:15 am

How Germany Reconquered Europe

The euro and its discontents

From the February 2014 issue

How Germany Reconquered Europe

The euro and its discontents

Get access to 167 years of
Harper’s for only $45.99

United States Canada

CATEGORIES

THE CURRENT ISSUE

December 2017

Document of Barbarism

= Subscribers only.
Sign in here.
Subscribe here.

Destroyer of Worlds

= Subscribers only.
Sign in here.
Subscribe here.

Crossing Guards

= Subscribers only.
Sign in here.
Subscribe here.

“I am Here Only for Working”

= Subscribers only.
Sign in here.
Subscribe here.

Dear Rose

= Subscribers only.
Sign in here.
Subscribe here.

The Year of The Frog

= Subscribers only.
Sign in here.
Subscribe here.

view Table Content

FEATURED ON HARPERS.ORG

Article
Destroyer of Worlds·

= Subscribers only.
Sign in here.
Subscribe here.

In February 1947, Harper’s Magazine published Henry L. Stimson’s “The Decision to Use the Atomic Bomb.” As secretary of war, Stimson had served as the chief military adviser to President Truman, and recommended the attacks on Hiroshima and Nagasaki. The terms of his unrepentant apologia, an excerpt of which appears on page 35, are now familiar to us: the risk of a dud made a demonstration too risky; the human cost of a land invasion would be too high; nothing short of the bomb’s awesome lethality would compel Japan to surrender. The bomb was the only option. Seventy years later, we find his reasoning unconvincing. Entirely aside from the destruction of the blasts themselves, the decision thrust the world irrevocably into a high-stakes arms race — in which, as Stimson took care to warn, the technology would proliferate, evolve, and quite possibly lead to the end of modern civilization. The first half of that forecast has long since come to pass, and the second feels as plausible as ever. Increasingly, the atmosphere seems to reflect the anxious days of the Cold War, albeit with more juvenile insults and more colorful threats. Terms once consigned to the history books — “madman theory,” “brinkmanship” — have returned to the news cycle with frightening regularity. In the pages that follow, seven writers and experts survey the current nuclear landscape. Our hope is to call attention to the bomb’s ever-present menace and point our way toward a world in which it finally ceases to exist.

Illustration by Darrel Rees. Source photographs: Kim Jong-un © ITAR-TASS Photo Agency/Alamy Stock Photo; Donald Trump © Yuri Gripas/Reuters/Newscom
Article
Crossing Guards·

= Subscribers only.
Sign in here.
Subscribe here.

The Ambassador Bridge arcs over the Detroit River, connecting Detroit to Windsor, Ontario, the southernmost city in Canada. Driving in from the Canadian side, where I grew up, is like viewing a panorama of the Motor City’s rise and fall, visible on either side of the bridge’s turquoise steel stanchions. On the right are the tubular glass towers of the Renaissance Center, headquarters of General Motors, and Michigan Central Station, the rail terminal that closed in 1988. On the left is a rusted industrial corridor — fuel tanks, docks, abandoned warehouses. I have taken this route all my life, but one morning this spring, I crossed for the first time in a truck.

Illustration by Richard Mia
Article
“I am Here Only for Working”·

= Subscribers only.
Sign in here.
Subscribe here.

But the exercise of labor is the worker’s own life-activity, the manifestation of his own life. . . . He works in order to live. He does not even reckon labor as part of his life, it is rather a sacrifice of his life.

— Karl Marx

Photograph from the United Arab Emirates by the author. This page: Ruwais Mall
Article
The Year of The Frog·

= Subscribers only.
Sign in here.
Subscribe here.

To look at him, Sweet Macho was a beautiful horse, lean and strong with muscles that twitched beneath his shining black coat. A former racehorse, he carried himself with ceremony, prancing the field behind our house as though it were the winner’s circle. When he approached us that day at the edge of the yard, his eyes shone with what might’ve looked like intelligence but was actually a form of insanity. Not that there was any telling our mother’s boyfriend this — he fancied himself a cowboy.

“Horse 1,” by Nine Francois. Courtesy the artist and AgavePrint, Austin, Texas
Article
Dead Ball Situation·

= Subscribers only.
Sign in here.
Subscribe here.

What We Think About When We Think About Soccer, by Simon Critchley. Penguin Books. 224 pages. $20.

Begin, as Wallace Stevens didn’t quite say, with the idea of it. I so like the idea of Simon Critchley, whose books offer philosophical takes on a variety of subjects: Stevens, David Bowie, suicide, humor, and now football — or soccer, as the US edition has it. (As a matter of principle I shall refer to this sport throughout as football.) “All of us are mysteriously affected by our names,” decides one of Milan Kundera’s characters in Immortality, and I like Critchley because his name would seem to have put him at a vocational disadvantage compared with Martin Heidegger, Søren Kierkegaard, or even, in the Anglophone world, A. J. Ayer or Richard Rorty. (How different philosophy might look today if someone called Nobby Stiles had been appointed as the Wykeham Professor of Logic.)

Tostão, No. 9, and Pelé, No. 10, celebrate Carlos Alberto’s final goal for Brazil in the World Cup final against Italy on June 21, 1970, Mexico City © Heidtmann/picture-alliance/dpa/AP Images

Factor by which single Americans who use emoji are more likely than other single Americans to be sexually active:

1.85

Brontosaurus was restored as a genus, and cannibalism was reported in tyrannosaurine dinosaurs.

Moore said he did not “generally” date teenage girls, and it was reported that in the 1970s Moore had been banned from his local mall and YMCA for bothering teenage girls.

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

HARPER’S FINEST

Report — From the June 2013 issue

How to Make Your Own AR-15

= Subscribers only.
Sign in here.
Subscribe here.

By

"Gun owners have long been the hypochondriacs of American politics. Over the past twenty years, the gun-rights movement has won just about every battle it has fought; states have passed at least a hundred laws loosening gun restrictions since President Obama took office. Yet the National Rifle Association has continued to insist that government confiscation of privately owned firearms is nigh. The NRA’s alarmism helped maintain an active membership, but the strategy was risky: sooner or later, gun guys might have realized that they’d been had. Then came the shootings at a movie theater in Aurora, Colorado, and at Sandy Hook Elementary School in Newtown, Connecticut, followed swiftly by the nightmare the NRA had been promising for decades: a dedicated push at every level of government for new gun laws. The gun-rights movement was now that most insufferable of species: a hypochondriac taken suddenly, seriously ill."

Subscribe Today