The Austerity Class and the Deficit

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?

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9 Responses to The Austerity Class and the Deficit

  1. If main street could restructure their debts without being required to default first, the result would be far superior to any tax increase or running up of a deficit. In my opinion you are too politically entrenched to offer the real truth.

  2. Tom says:

    Your link to Berman’s article should be

    I think you are right, that the main goal of the austerians is to diminish and dismantle government. The question is why. Is it just some cultish belief that government is bad? Is it a belief that they will be wealthier in an orderly society in which government is weaker? Or is it a looter’s mentality, they want to weaken government to the point where it cannot enforce laws that keep them from ripping off the rest of us?

  3. tarynhart says:

    This is such an interesting issue. It’s very difficult to see who, exactly, benefits from an anemic economy. I think this article presented a compelling argument:
    Specifically, the idea is that monied interests aren’t organized in a way that allows them to have a comprehensive program. But they are instinctively in favor of a certain program:

    “You could make a case that, collectively, the interests of the financially endowed ultimately require a rescue of the real, nonfinancial global economy. Surely, when we take our painful plunge into the second dip of the Great Recession, their wealth will be at risk. But the ability to see it at a system level presupposes either a system-level organization of the class or the existence of individual interests that are transparently systemic. Neither appears to be the case today. From what we (you and me) can see from our vantage point, the ruling demands are to make sure my bonds are serviced, my counterparties pony up, the markets I invest in stay liquid, and expenditures for public welfare (i.e. the losers and chiselers) are slashed.”

    This, to me, made sense of the urge towards austerity by powerful interests even when it’s not necessarily beneficial (if they understood the bigger picture).

    I think Paul Krugman made a similar point – namely, that those influenced by some form of free-market fundamentalism are not generally reading Keynes by night to figure out what’s really going on. People tend to subscribe to certain schools of thought because it’s in their interests, but then their response to new events is generally through the lens of that ideology. (This might lend some credence to the Keynesian notion that it’s “not vested interests, but ideas…” etc.)

    As for the shock doctrine response, this is certainly possible – particularly in light of the astroturfing of the Tea Party. But what is hard for me to make sense of is Europe’s strange austerity fetish. If this were just an American phenomenon, but it’s not – if anything we’ve been less prone to austerity hysterics than Europe.

    So, it’s all very confusing. And I agree with Krugman that the world is certainly upside down when the IMF and Goldman Sachs are making sense (indeed more sense than a Democratic White House).

  4. Ronald says:

    The top 1% are not “happy” with the stautus quo but are concerned that an increase in the national debt (from their current levels) will lead to substantially higher taxes on their cohort. This is the crux of the problem. If you talk to a few from the 1% class, they will voice their concerns as “government tyranny” or “Obama…” but if you listen closely, they are just scared of an increase in taxes. The OWS is scaring this group for the same reason….

  5. My take is that the folks involved are prisoners of their own ideologies, which they believe in so deepy that it defines their self-identities. This creates a kind of hysteresis–not just of policy ideas quite literally of what is thinkable and what is not. One reason we don’t take some of the obvious steps is that they have become unthinkable–much in the same way that it was unthinkable that Saddam didn’t have WMDs, except that in this case the unthinkability goes much deeper and is much more systemitized.

    This isn’t the sole explanation by any means, but it’s an important factor that’s easily overlooked and/or under-appreciated in the other better-developed analyses. For a broad umbrella, call it the neo-liberal “we’re the grown-ups” ideology/identity, but that’s just a first approximation, and of course there are lots of folks involved who are a good deal crazier than that, even.

  6. Dan in Euroland says:

    In contrast to OWS*, the “austerity” movement recognizes that regulatory (gov’t) capture is the norm. But the reason that they are arguing for austerity now, instead of when times are good is because collective action is difficult. Crises are periods when disparate groups can more easily coordinate on common policy goals.

    Opposition to fiscal stimulus arises because of a belief that Fiscal stimulus does not work, and is usually co-opted by special interests. Thus “stimulus capture” leads to policies becoming entrenched and difficult to reverse in the future. For the co-option aspect, economist Kevin Grier has a great example of Obama’s “jobs” bill being less about stimulus and more about protected favored groups:

    *OWS on the other hand accepts the current gov’t as captured but fails to recognize that as the norm.

  7. scott says:

    It is Shock Doctrine stuff, and Naomi Klein explicitly made the point that this approach and way of thinking isn’t narrowly American – all of our global elites believe that the restof us are suitable Soylent Green material. Ultimately, though, this very narrow idea of their own self-interest will ultimately run aground if the economic machinery grinds to a halt (if the rest of us have no money and can’t spend it on anything the economy tanks) or if we rebel in one way or another. Hopefully we choose Plan B.

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