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

June 2018

Family History

= Subscribers only.
Sign in here.
Subscribe here.

Combat High

= Subscribers only.
Sign in here.
Subscribe here.

The Last Best Place

= Subscribers only.
Sign in here.
Subscribe here.

The Sound of Madness

= Subscribers only.
Sign in here.
Subscribe here.

Looking for Calley

= Subscribers only.
Sign in here.
Subscribe here.

Comforting Myths

= Subscribers only.
Sign in here.
Subscribe here.

view Table Content

FEATURED ON HARPERS.ORG

Article
Combat High·

= Subscribers only.
Sign in here.
Subscribe here.

Afew months before the United States invaded Iraq, in 2003, Donald Rumsfeld, the defense secretary at the time, was asked on a radio show how long the war would take. “Five days or five weeks or five months,” he replied. “It certainly isn’t going to last any longer than that.” When George W. Bush departed the White House more than five years later, there were nearly 136,000 US soldiers stationed in the country. 

The number of troops has fallen since then, but Bush’s successors have failed to withdraw the United States from the region. Barack Obama campaigned on ending the wars in Iraq and Afghanistan, only to send hundreds of troops into Syria. For years Donald Trump described America’s efforts in Afghanistan as “a waste” and said that soldiers were being led “to slaughter,” but in 2017 he announced that he would deploy as many as 4,000 more troops to the country. “Decisions are much different when you sit behind the desk of the Oval Office,” he explained. Every president, it seems, eventually learns to embrace our perpetual war.

With the Trump Administration’s attacks on affordable health care, immigration, environmental regulation, and civil rights now in full swing, criticism of America’s military engagements has all but disappeared from the national conversation. Why hasn’t the United States been able—or willing—to end these conflicts? Who has benefited from them? Is victory still possible—and, if so, is it anywhere in sight?

In March, Harper’s Magazine convened a panel of former soldiers at the United States Military Academy at West Point, New York. The participants, almost all of whom saw combat in Iraq or Afghanistan, were asked to reflect on the country’s involvement in the Middle East. This Forum is based on that panel, which was held before an audience of cadets and officers, and on a private discussion that followed.

Illustration (detail) by John Ritter
Article
Comforting Myths·

= Subscribers only.
Sign in here.
Subscribe here.

Before he died, my father reminded me that when I was four and he asked what I wanted to be when I grew up, I said I wanted to be a writer. Of course, what I meant by “writer” then was a writer of Superman comics. In part I was infatuated with the practically invulnerable Man of Steel, his blue eyes and his spit curl. I wanted both to be him and to marry him—to be his Robin, so to speak. But more importantly, I wanted to write his story, the adventures of the man who fought for truth, justice, and the American Way—if only I could figure out what the fuck the American Way was.

Artwork by Mahmood Sabzi
Article
The Sound of Madness·

= Subscribers only.
Sign in here.
Subscribe here.

Sarah was four years old when her spirit guide first appeared. One day, she woke up from a nap and saw him there beside her bed. He was short, with longish curly hair, like a cherub made of light. She couldn’t see his feet. They played a board game—she remembers pushing the pieces around—and then he melted away.

After that, he came and went like any child’s imaginary friend. Sarah often sensed his presence when strange things happened—when forces of light and darkness took shape in the air around her or when photographs rippled as though shimmering in the heat. Sometimes Sarah had thoughts in her head that she knew were not her own. She would say things that upset her parents. “Cut it out,” her mother would warn. “This is what they put people in psychiatric hospitals for.”

Painting (detail) by Carlo Zinelli
Article
Looking for Calley·

= Subscribers only.
Sign in here.
Subscribe here.

In the fall of 1969, I was a freelance journalist working out of a small, cheap office I had rented on the eighth floor of the National Press Building in downtown Washington. A few doors down was a young Ralph Nader, also a loner, whose exposé of the safety failures in American automobiles had changed the industry. There was nothing in those days quite like a quick lunch at the downstairs coffee shop with Ralph. Once, he grabbed a spoonful of my tuna-fish salad, flattened it out on a plate, and pointed out small pieces of paper and even tinier pieces of mouse shit in it. He was marvelous, if a bit hard to digest.

The tip came on Wednesday, October 22. The caller was Geoffrey Cowan, a young lawyer new to town who had worked on the ­McCarthy campaign and had been writing critically about the Vietnam War for the Village Voice. There was a story he wanted me to know about. The Army, he told me, was in the process of court-martialing a GI at Fort Benning, in Georgia, for the killing of seventy-five civilians in South Vietnam. Cowan did not have to spell out why such a story, if true, was important, but he refused to discuss the source for his information.

Photograph © Bettmann/Getty Images
Article
The Last Best Place·

= Subscribers only.
Sign in here.
Subscribe here.

The family was informed they would be moving to a place called Montana. Jaber Abdullah had never heard of it, but a Google search revealed that it was mountainous. Up to that point, he and his wife, Heba, had thought they’d be moving from Turkey to Newark, New Jersey. The prospect of crime there concerned Heba, as she and Jaber had two young sons: Jan, a petulant two-year-old, and Ivan, a newborn. 

Montana sounded like the countryside. That, Heba thought, could be good. She’d grown up in Damascus, Syria, where jasmine hung from the walls and people sold dates in the great markets. These days, you checked the sky for mortar rounds like you checked for rain, but she still had little desire to move to the United States. Basel, Jaber’s brother, a twenty-two-year-old with a cool, quiet demeanor, merely shrugged.

Illustration (detail) by Danijel Žeželj

Average amount Microsoft spends each month assisting people who need to change their passwords:

$2,000,000

Chimpanzees who join new groups with inferior nut-cracking techniques will abandon their superior techniques in order to fit in.

Trump leaves the Iran nuclear deal, Ebola breaks out in the Democratic Republic of Congo, and scientists claim that Pluto is still a planet.

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