The New Democrats’ Addiction to Austerity Will Not Die

Cross-posted at New Economic Perspectives

By William K. Black

I know the Republicans are complete hypocrites about federal deficits and debt.  I know their dishonesty and faux deficit and debt hysteria, when a Democrat is president, harms the Nation and the world through the infliction of self-destructive austerity.  Austerity’s primary victims are the working class and government social programs for the poor and working class.  That means that the Democrats should never mimic the Republicans’ dishonesty, hysteria, and willingness to inflict austerity on the people of America and the world.

Cui Bono?

Unfortunately, the New Democrats embraced the economic malpractice of austerity with the passion of a convert.  Michael Meeropol, an economist whose work I respect greatly, has rightly chastised me for failing to explain that fiscal austerity produces enormous winners, not just losers, and that this fact helps explain why the economic malpractice of austerity is so common.  Austerity is a policy that aids the wealthy and harms the non-wealthy.  One of the greatest triumphs of the wealthy is to get vast numbers of the non-wealthy to fail to understand this point.   The New Democrats’ passionate support for austerity reflects the interests of its primary donors – Wall Street elites.

Austerity produces higher unemployment rates.  It can cause deflation.  It leads to cuts in public employment and funding for social programs.  High unemployment allows CEOs to force lower wages and creates a political climate in which CEOs are able to get legislation and rule changes embracing “labor flexibility.”  That phrase is a euphemism for making it easier for firms to fire workers without.  CEOs use high unemployment to induce an international race to the bottom on worker protections and wages under the pretext that doing so is essential for U.S. firms to maintain “global competitiveness.”

Deflation is a superb situation for (net) creditors.  They get repaid in a currency that is gaining value.  Deflation reduces interest rates, so the market value of existing long-term fixed rate debt instruments (bonds) can increase substantially.

Federal fiscal austerity could be implemented through tax increases, including tax increases on the wealthy and corporations.  But this would harm rather than aid the wealthy so it increasingly rare to see it done because it would harm legislators’ wealthy patrons (donors).

President Obama Embraced the New Democrats’ Desire to Inflict Austerity

President Obama famously told Congressional New Democrats that they represented his views.  Obama reluctantly agreed to a stimulus program that was considerably less than half of what economists knew was needed.  Even that inadequate stimulus spurred our (inadequate) recovery from the Great Recession and, unlike the eurozone’s austerity policies that through many nations into Great Depression levels of unemployment, the U.S. growth rate soon surged and unemployment rates fell.

Obama’s reaction to the meaningful success of (inadequate) stimulus was to abandon it and join the Republicans’ condemnation of stimulus.  In his January 27, 2010 State of the Union address he complained that when he took office he inherited “a government deeply in debt.”  The implication, which is false, is that the U.S. would be better off if there were no federal debt or at least dramatically less federal debt.  The U.S. would be worse off in either circumstance, for the alternatives – not winning World War II or having longer, deeper recessions – were very bad and the U.S. national debt causes no serious problems for our people or the people of the world.

Obama knew that was true.  In the same address he explained.

Because of the steps we took, there are about two million Americans working right now who would otherwise be unemployed.  (Applause.)  Two hundred thousand work in construction and clean energy; 300,000 are teachers and other education workers.  Tens of thousands are cops, firefighters, correctional officers, first responders.  (Applause.)  And we’re on track to add another one and a half million jobs to this total by the end of the year.

The plan that has made all of this possible, from the tax cuts to the jobs, is the Recovery Act.  (Applause.)  That’s right -– the Recovery Act, also known as the stimulus bill.  (Applause.)  Economists on the left and the right say this bill has helped save jobs and avert disaster.

Obama then admitted that recent U.S. expansions had been based on bubbles and scams.

We can’t afford another so-called economic “expansion” like the one from the last decade –- what some call the “lost decade” -– where jobs grew more slowly than during any prior expansion; where the income of the average American household declined while the cost of health care and tuition reached record highs; where prosperity was built on a housing bubble and financial speculation.

The politics of how Obama phrased this point are clear – he only wanted to talk about the last decade during which President Bush held power.  But Obama’s logic actually covered the last two decades and included both of President Clinton’s terms in which the supposed economic expansion “was built on a housing [and high tech] bubble and financial speculation.”  “Speculation” is Obama’s euphemism for elite financial fraud such as the Enron-era frauds (which grew large under Clinton but collapsed under Bush) and the three great epidemics of mortgage fraud by elite bankers that hyper-inflated the bubble and drove the financial crisis and the Great Recession.  Obama’s address repeated two of the New Democrats’ most destructive financial memes.

We need to make sure consumers and middle-class families have the information they need to make financial decisions.  (Applause.)  We can’t allow financial institutions, including those that take your deposits, to take risks that threaten the whole economy.

No, financial education of the 320 million of Americans up to the level of the Wall Street predators that prey on them is a preposterous answer that echoes the dishonesty of Milton Friedman’s “Freedom to Choose” nostrums.  We can never provide a Wall Street level of financial expertise to 320 million Americans, indeed, we cannot do so for one million Americans.  “Financial education” is the excuse New Democrats give for not regulating and prosecuting the Wall Street elites who run the frauds that devastate the global economy.  It puts the blame on the consumer and the small investor – if only you had educated yourself properly your pension fund would not have been defrauded by the cartel that rigged LIBOR.  Education has never worked and will never work against elite financial fraud – or VW or Takata’s frauds in the automobile industry.  Education about fish will not protect you from being defrauded by the common practice of selling filets of cheap fish that purport to be filets of expensive fish.

The crisis had nothing to do with “financial institutions” deciding “to take risks that threaten the whole economy.”  Humans take risks, not “institutions.”  Humans are, overwhelmingly risk averse.  The critical person who makes decisions about what financial institutions will do is the CEO.  CEOs frequently prefer what George Akerlof and Paul Romer aptly described in their 1993 article “Looting: The Economic Underworld of Bankruptcy for Profit” as a “sure thing” rather than a “risk.”  Fraud, particularly accounting frauds that loot the bank they control, is a “sure thing.”  The behavior of bank CEOs who caused the massive losses that drove the crisis is not consistent with them being honest, rational gamblers.  It is consistent with the “recipe” for accounting control fraud.  Indeed, the bank CEOs used the same recipe in largely the same manner that their savings and loan predecessors had made infamous in the 1980s.  Akerlof and Romer said the fraud option would become highly preferable when the risk of prosecution appeared low.  Under Obama, the risk of elite bankers being prosecuted for leading the three epidemics of mortgage fraud that drove the crisis became nil.

The supposed economic successes of the Clinton years (and austerity) have been exposed as fictional.  The Clinton expansion was driven by the two largest bubbles in world history and the four greatest epidemics of elite financial fraud in history.  The first of these epidemics was the Enron-era frauds.  The other three epidemics of mortgage fraud began under Clinton, but blew up on Bush’s watch.  Bush’s “wrecking crew” was even worse than Clinton’s assault on effective regulation, so you should not feel sympathy for Bush.  The lost two decades have extended during Obama two terms of office.  Significant wage gains only began in the U.S. in 2016.  In particular, blacks and Latinos have suffered catastrophic wealth losses due to the fraud-driven financial crisis and the predatory for-profit schools.  Black and Latino households’ wealth losses have not been regained under the Obama recovery.  The top one-ten- thousandth of one-percent have been the massive winners in income and wealth under Obama.

Obama next flaunted his New Democrat colors, saying we needed to create trade deals to increase the number of U.S. jobs.  He portrayed the deals as unambiguously good for workers and jobs – with no losers.  He proposed nothing to help the millions of U.S. workers that could lose their existing jobs under the trade deals.

The 2010 presidential address was already a nightmare at that point, but it was at this juncture that Obama decided to channel his inner New Democrat dogmas and become a champion for the glories of austerity.  He went on at length, so I will reproduce the relevant passages to provide the context.  His signature metaphor and simile were not simply economically illiterate; they were knowingly false and exceptionally harmful to the American people, particularly the working class.  That means they Obama’s austerity plans were also a betrayal of the working class by the New Democrats, who had radically changed a party that once defined itself as the champion of the working class.  The consequences for the Democratic Party would soon prove horrific.  I’ll comment after each paragraph of Obama’s address on the joys of austerity.

Now, even as health care reform would reduce our deficit, it’s not enough to dig us out of a massive fiscal hole in which we find ourselves.  It’s a challenge that makes all others that much harder to solve, and one that’s been subject to a lot of political posturing.  So let me start the discussion of government spending by setting the record straight.

Obama had just asked everyone for ideas about how to contain health costs, claiming he knew of no better way to do so.  Obama, of course, in his deal with the health insurers, had agreed not to adopt the most effective means of cost containment.  Here, he was disingenuous.

At the beginning of the last decade, the year 2000, America had a budget surplus of over $200 billion.  (Applause.)  By the time I took office, we had a one-year deficit of over $1 trillion and projected deficits of $8 trillion over the next decade.  Most of this was the result of not paying for two wars, two tax cuts, and an expensive prescription drug program.  On top of that, the effects of the recession put a $3 trillion hole in our budget.  All this was before I walked in the door.  (Laughter and applause.)

Yes, good point – recessions produce large federal budget deficits.  Now explain that this is good – it is an “automatic stabilizer” that occurs without any need for new legislation or rules, so it acts far more quickly and reduces the length and severity of recessions.  Obama, of course, takes the opposite tack – a tack he knows to be a lie – and presents the growth in the deficit as a bad thing.  Note that he ignores the fact that President Bush inherited a recession that officially began in March 2001 at the start of his term so important parts of Bush’s earlier deficits were also the product of automatic stabilizers acting desirably.

But we should start with the budget surplus in 2000.  Obama portrays this as unambiguously wonderful, but he presents no basis for his implicit claim.  Every time the U.S. has run a substantial budget surplus it has been followed by a depression or the Great Recession.  That does not prove the surpluses caused the depressions and the Great Recession, but it certainly puts the burden on anyone trying to tout the desirability of running a budget surplus in the United States, particularly given the balance of trade.  Obama presents it as if it were axiomatic that any deficit under Bush was harmful, but presents no evidence that it was.

Now — just stating the facts.  Now, if we had taken office in ordinary times, I would have liked nothing more than to start bringing down the deficit.  But we took office amid a crisis.  And our efforts to prevent a second depression have added another $1 trillion to our national debt.  That, too, is a fact.

No, it is not a “fact” that “our efforts to prevent a second depression have added another $1 trillion to our national debt.”  It is a falsehood.  Had Obama immediately inflicted austerity rather than his modest and deeply inadequate stimulus our recovery would have been vastly worse.  The eurozone’s recovery was crippled by austerity.  If our recovery had been far worse, then the national debt would have risen by even larger amounts.  Why would Obama have “liked nothing more than to start bringing down the deficit” had he “taken office in normal times”?  We all know that is true because he is a self-proclaimed believer in the New Democrats’ failed dogmas, but what is his rationale?  The phrase “like nothing better” is meant to indicate that deficit reduction would be one of his highest priorities and that he would do so with great enthusiasm.  Why?  Would the U.S. have been better off in 2010 with austerity?  It would have been worse off.  As Obama moved toward austerity he slowed the economic recovery.  Had the Tea Party coalition not blocked his “Grand Bargain” with the GOP leadership the even greater austerity would have choked off the recovery and made Obama a one-term president.

I’m absolutely convinced that was the right thing to do.  But families across the country are tightening their belts and making tough decisions.  The federal government should do the same.  (Applause.)  So tonight, I’m proposing specific steps to pay for the trillion dollars that it took to rescue the economy last year.

This is the metaphor from Hell.  It is a favorite metaphor of Jack Lew, who Obama would soon name his budget director and eventually his Treasury Secretary.  In January 2010, when Obama made this address, Lew and Treasury Secretary Geithner were Rubinites who were extreme deficit hawks even from the perspective of the New Democrats.  Geithner denounced stimulus as providing only a harmful “sugar” rush.  The “tightening their belts” metaphor violates the most fundamental macroeconomic truth in dealing with a severe recession or depression.  Lew is a lawyer.  Geithner has boasted that he took only one class in economics – and couldn’t understand it.  Rubin was not an economist.  Their austerity dogmas were the product of ignorance of economics, but what Rubin, Obama, Geithner, and Lew have in common is a devotion to the interests of Wall Street CEOs.

In a serious contraction, particularly one following a credit-driven bubble, consumers are worried about losing their jobs.  They begin to repay their debts and reducing consumption.  This is perfectly rational from their perspective.  CEOs react to the fall in consumer demand in an equally rational manner – they reduce output and spending on investments.  Banks are likely to constrain credit and try to build capital.  This too is rational.  The result is that there is inadequate demand and unemployment and business failures rise.  At the very time that demand is most inadequate and the need for spending on consumption and investment would be most helpful to the economic recovery, consumers and CEOs are likely to do the opposite.  Economists call this “the paradox of thrift.”

There is one entity that is an ideal position to do the opposite – to increase demand in response to a recession or depression.  This entity is not credit-constrained by bankers.  The entity is a government with a sovereign currency that borrows only in that currency and allows that currency to freely float.  The U.S. is such a nation.  It is critical that our federal government provide fiscal stimulus, in addition to the automatic stabilizers, to counter the recession or depression.

Obama’s metaphor is exactly the opposite of economic literacy.  If “families across the country are tightening their belts” then it is particularly essential that the federal government do the opposite – not “the same” – to counter the effects of the sharp fall in effective demand.

No, the federal government need not and should not “pay for the trillion dollars” you spent on stimulus (and, the federal government did not spend a $1 trillion on stimulus).  If you “pay for” the stimulus by austerity you will harm the recovery and the people of America and likely increase the ultimate debt.  Economic growth is the key to deficits and debt of a sovereign nation.

Starting in 2011, we are prepared to freeze government spending for three years.  (Applause.)  Spending related to our national security, Medicare, Medicaid, and Social Security will not be affected.  But all other discretionary government programs will.  Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t.  And if I have to enforce this discipline by veto, I will.  (Applause.)

Count the number of times New Democratic dogmas drew applause.  First, particularly given Obama’s increasing embrace of austerity, but also given the terrible scale of the Great Recession, 2011 was far too soon to even be thinking of inflicting austerity on the Nation.  The results were sure to slow the recovery and harm Americans.  That is what happened.

Second, this is the paragraph that presents Obama’s simile from hell about austerity.  “Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t.”  The simile is a variant on the economic illiteracy of Obama’s metaphor from hell.  Yes, families are “cash-strapped” when a credit expansion leads to a Great Recession.  Families’ incomes and wealth drop as the stock market tanks and their homes lose market value.  Families react to seeing neighbors losing their jobs and their homes by decreasing consumption.  Families see credit being constrained by banks’ tighter credit policies.  Families see interest rates fall sharply on their savings accounts, further reducing their income.  It is precisely because families are “cash-strapped” and fearful of further losses that they reduce their consumption – exacerbating the already inadequate demand and deepening the Great Recession.

The United States government is not – and cannot be except through self-inflicted insanity such as austerity and debt limits – “cash-strapped.”  The U.S. creates cash.  The U.S. can be resource constrained, but not cash or credit constrained.  The U.S., with debt levels that Obama is about to describe in his address in histrionic terms, was able to borrow essentially unlimited amounts of money at interest rates near zero.  (More to the point, the U.S. does not have to borrow its sovereign currency because it makes its sovereign currency.)  These facts explain why Obama’s logic is reversed – it is essential that the U.S. not act as if it were “cash-strapped” in response to a Great Recession.

Third, Obama adds to his inanity by promising to be more of an austerity hawk than Republican legislators and “veto” any bill that would address a growing problem, such as the Zika virus becoming epidemic through increased government spending.  This is mind-numbingly stupid as a policy, and the rationale Obama offers for the stupidity rests solely on an economically illiterate simile.

We will continue to go through the budget, line by line, page by page, to eliminate programs that we can’t afford and don’t work.  We’ve already identified $20 billion in savings for next year.  To help working families, we’ll extend our middle-class tax cuts.  But at a time of record deficits, we will not continue tax cuts for oil companies, for investment fund managers, and for those making over $250,000 a year.  We just can’t afford it.  (Applause.)

Getting rid of programs that do not work and cannot be fixed is a good thing.  But we can “afford” anything that does not produce a serious constraint on real resources needed elsewhere in more critical applications.

Now, even after paying for what we spent on my watch, we’ll still face the massive deficit we had when I took office.  More importantly, the cost of Medicare, Medicaid, and Social Security will continue to skyrocket.  That’s why I’ve called for a bipartisan fiscal commission, modeled on a proposal by Republican Judd Gregg and Democrat Kent Conrad.  (Applause.)  This can’t be one of those Washington gimmicks that lets us pretend we solved a problem.  The commission will have to provide a specific set of solutions by a certain deadline.

What is the point of Obama calling the federal budget deficit “massive”?  Yes, it is a huge number.  The Great Recession officially began in the fourth quarter of 2007.  The automatic stabilizers began to kick in almost immediately and greatly reduced the length and severity of the Great Recession.  Indeed, it officially ended in the second quarter of 2009 shortly after Obama took office – and well before his stimulus program could take effect.  The dates on which recessions begin and end is a technical matter that is inherently decided after the fact.  It does not mean that the economy was doing well before the official onset of the recession or after the official end of the recession.  Indeed, it is typical that the economy was doing very badly before and after the official start and end dates of the recession.

The point is that a huge portion of the Bush deficit that Obama inherited was the product of the automatic stabilizers working well to limit the depth and length of the Great Recession.  That was a good thing.

Obama’s “fiscal commission” was an obscenity.  It was a creature of Pete Peterson, the Wall Street billionaire whose greatest dream is privatizing Social Security.  Obama stacked it with pro-austerity officials.  Despite this fact, the commission failed to reach the super-majority required under its own governing documents to make recommendations.  The co-chairs, two infamous deficit fanatics, ignored the commission’s own governing documents to present their recommendations.  In this article I do not address the supposed crises in the safety net.  Again, the short answer is that the meaningful constraint is real resources, and the safety net does pose any serious risk of causing a constraint in real resources.

Now, yesterday, the Senate blocked a bill that would have created this commission.  So I’ll issue an executive order that will allow us to go forward, because I refuse to pass this problem on to another generation of Americans.  (Applause.)  And when the vote comes tomorrow, the Senate should restore the pay-as-you-go law that was a big reason for why we had record surpluses in the 1990s.  (Applause.)

In the last sentence Obama shows he is among the most extreme of the New Democrats in his embrace of austerity.  First, the “record surpluses in the 1990s were built on the non-foundation of the two largest bubbles in history – the dot.com and housing bubbles.  Second, the record surpluses set the stage for the Great Recession.  As I noted, prior federal budget surpluses were followed closely by depressions.  Third, “pay-as-you-go” is an example of mindless austerity.

 Now, I know that some in my own party will argue that we can’t address the deficit or freeze government spending when so many are still hurting.  And I agree — which is why this freeze won’t take effect until next year — (laughter) — when the economy is stronger.  That’s how budgeting works.  (Laughter and applause.)  But understand –- understand if we don’t take meaningful steps to rein in our debt, it could damage our markets, increase the cost of borrowing, and jeopardize our recovery -– all of which would have an even worse effect on our job growth and family incomes.

Ah, a completely unfunny attempt at a joke.  I’d like to start austerity now, but the legislative process takes time so I won’t be able to inflict austerity on the American people until next year.  It’s a dumb, not funny line for multiple reasons.  Tens of millions of Americans were guaranteed to be “still hurting” in 2011, when Obama threatened to begin inflicting austerity.  Austerity in 2011 was guaranteed to be a self-inflicted wound.  The Democratic Party should be a party in which every congressional member (not “some”) reject inflicting austerity when tens of millions of Americans are in agony as a result of the Great Recession and unemployment rates and rates of leaving the work force are high.

The last sentence of the paragraph is even worse for every argument it makes is a lie.  Stimulus was a huge gain to our “economy.”  Stimulus did not “increase the cost of borrowing.”  Austerity did “jeopardize our recovery” – reducing job growth and family income.

From some on the right, I expect we’ll hear a different argument -– that if we just make fewer investments in our people, extend tax cuts including those for the wealthier Americans, eliminate more regulations, maintain the status quo on health care, our deficits will go away.  The problem is that’s what we did for eight years.  (Applause.)  That’s what helped us into this crisis.  It’s what helped lead to these deficits.  We can’t do it again.

Obama proposed to “make fewer investments in our people” – that is precisely what austerity did.  It is not true that Bush’s elimination of “more regulations … helped us into this crisis.”  It was Clinton that eliminated key financial regulations.  More importantly, it was the combination of Clinton and Bush that desupervised finance – desupervision proved to be far more destructive than Clinton’s deregulation.  Bush’s earlier deficits had nothing to do causing the crisis.  His deficits once the economy slowed and then went into the Great Recession were the product of the automatic stabilizers and they “helped us” out not “into this crisis.”

Rather than fight the same tired battles that have dominated Washington for decades, it’s time to try something new.  Let’s invest in our people without leaving them a mountain of debt.  Let’s meet our responsibility to the citizens who sent us here.  Let’s try common sense.  (Laughter.)  A novel concept.

“Common sense” is not common.  People extrapolate to the federal government what they know best – the nature of the household and its budget constraints.  They desperately need the President of the United States, the Treasury Secretary (Geithner), and the soon-to-be-appointed head of the Office of Management and Budget (Jack Lew) explain why the federal government is not remotely similar to a household when it comes to constraints and why that means the federal government has the unique ability and moral duty to use fiscal stimulus and serve as the employer-of-last-resort to reduce the severity and length of recessions and provide full employment to all those willing and able to work.

The NYT Resurrects Its Love for Austerity

On January 9, 2017, the NYT’s op ed guy who spent his summer attacking Bernie Sanders and praising Hillary Clinton turned his sights on Donald Trump and congressional Republicans in a piece entitled “The Betrayal of Fiscal Conservatism.”  That is his euphemism for austerity.  He began his ode to austerity with this assertion.

The label of “fiscal conservative” used to mean something.

It referred to people — mostly Republicans — whose top priority was the health of the federal government’s balance sheet. They favored a small deficit, or no deficit at all.

He is writing in 2017, when even the IMF admits that stimulus was a success and austerity a failure.  We can observe the difference in growth between the eurozone, which mandates austerity, and the U.S. where even a grossly inadequate stimulus program produced far superior growth.  But none of this penetrates this writer who so loves the New Democrats’ ever present desire to inflict self-destructive austerity on Americans, particularly the working class.  What could go wrong?

A federal budget is not “health[y]” when it is in surplus and sick when it is in deficit.  A federal budget deficit due to the automatic stabilizers’ powerful response to the Great Recession is a sign of health.  An even larger (short-run) budget deficit through a stimulus program is an even greater sign of economic health that should be celebrated.  People who seek to inflict austerity on the people in such circumstances are not “fiscal conservative[s].”  They may be well meaning, but ignorant of economics.  However, as I explained in response to Dr. Meeropol’s chastisement of my failure to note who wins under austerity, they may want to enrich their wealthy donors and themselves.

Why would a NYT op ed celebrate Republicans “whose top priority” was austerity?  The “top priority” of members of Congress should be the welfare of Americans, particularly the non-wealthy.  Austerity is not a logical goal of a nation with a sovereign currency, much less its “top priority.”

The NYT op ed ends with this obscenity.

The original meaning of “fiscal conservative” may be gone. In fact, Democrats have had a better claim on the label in recent years than Republicans. But it’s important to remember that the concept is as legitimate as ever. The United States does indeed face a long-term budget deficit that eventually will require a solution, and cuts to government spending almost certainly need to be part of that solution.

So the next time that you hear a politician describe himself or herself as a “fiscal conservative,” I recommend deep skepticism. But I also hope that Washington one day has more real fiscal conservatives than it does today.

Yes, New Democrats are far more consistent proponents of inflicting austerity on Americans, particularly the working class, than are Republicans – and that is a travesty.  The NYT op ed was written after Trump’s election driven by the wholesale rejection of the New Democrats’ agenda by the white working class.  The New Democrats have learned nothing from that defeat.  They continue to push the message of Wall Street and the wealth – the infliction of self-destructive austerity – as their defining mantra.  They continue down the disastrous path that Tom Frank has been warning them about for over a decade.  (Yes, I know that Trump will continue to betray the white working class.)  We desperately need a “Washington” and a political party in which no official buys the Wall Street dogmas favoring austerity.  Austerity is to economics as bleeding a patient is to medicine.  Among the last things that “Washington” needs is to have “more” Wall Street sycophants pushing austerity “than it does today.”

And no, “cuts to government spending” are not “almost certainly” essential in the “long-term.”  Growth is what is essential, and austerity is the great enemy of American growth.  Clinton’s “growth” was not the product of austerity and it was not real.  It was the product of the two largest bubbles in history.  The U.S. had far higher deficits relative to GDP in and after World War II.  Does anyone think austerity was the proper answer to Hitler, the attack on Pearl Harbor, or the Great Depression?

Hillary’s Threat to Wage Continuous War on the Working Class via Austerity Proved Fatal

By William K. Black

Cross-posted at New Economic Perspectives.

I’ve come back recently from Kilkenny, Ireland where I participated in the seventh annual Kilkenomics – a festival of economics and comedy.  The festival is noted for people from a broad range of economic perspectives presenting their economic views in plain, blunt English.  Kilkenomics VII began two days after the U.S. election, so we added some sessions on President-elect Trump’s fiscal policy views.  Trump had no obvious supporters among this diverse group of economists, so the audience was surprised to hear many economists from multiple nations take the view that his stated fiscal policies could be desirable for the U.S. – and the global economy, particularly the EU.  We all expressed the caution that no one could know whether Trump would seek to implement the fiscal policies on which he campaigned.  Most of us, however, said that if he wished to implement those policies House Speaker Paul Ryan would not be able to block him.  I opined that congressional Republicans would rediscover their love of pork and logrolling if Trump implemented his promised fiscal policies.

The audience was also surprised to hear two groups of economists explain that Hillary Clinton’s fiscal policies remained pure New Democrat (austerity forever) even as the economic illiteracy of those policies became even clearer – and even as the political idiocy of her fiscal policies became glaringly obvious.  Austerity is one of the fundamental ways in which the system is rigged against the working class.  Austerity was the weapon of mass destruction unleashed in the New Democrats’ and Republicans’ long war on the working class.  The fact that she intensified and highlighted her intent to inflict continuous austerity on the working class as the election neared represented an unforced error of major proportions.  As the polling data showed her losing the white working class by staggering amounts, in the last month of the election, the big new idea that Hillary pushed repeatedly was a promise that if she were elected she would inflict continuous austerity on the economy.  “I am not going to add a penny to the national debt.”

The biggest losers of such continued austerity would as ever be the working class.  She also famously insulted the working class as “deplorables.”  It was a bizarre approach by a politician to the plight of tens of millions of Americans who were victims of the New Democrats’ and the Republicans’ trade and austerity policies.  As we presented these facts to a European audience we realized that in attempting to answer the question of what Trump’s promised fiscal policies would mean if implemented we were also explaining one of the most important reasons that Hillary Clinton lost the white working class by such an enormous margin.

Readers of New Economic Perspectives understand why UMKC academics and non-academic supporters have long shown that austerity is typically a self-destructive policy brought on by a failure to understand how money works, particularly in a nation like the U.S. with a sovereign currency.  We have long argued that the working class is the primary victim of austerity and that austerity is a leading cause of catastrophic levels of inequality.  Understanding sovereign money is critical also to understanding why the federal government can and should serve as a job guarantor of last resort.  People, particularly working class men, need jobs, not simply incomes to feel like successful adults.  The federal jobs guarantee program is not simply economically brilliant it is politically brilliant, it would produce enormous political support from the working class for whatever political party implemented it.

At Kilkenomics we also used Hillary’s devotion to inflicting continuous austerity on the working class to explain to a European audience how dysfunctional her enablers in the media and her campaign became.  The fact that Paul Krugman was so deeply in her pocket by the time she tripled down on austerity that he did not call her out on why austerity was terrible economics and terrible policy shows us the high cost of ceasing to speak truth to power.  The fact that no Clinton economic adviser had the clout and courage to take her aside and get her to abandon her threat to inflict further austerity on the working class tells us how dysfunctional her campaign team became.  I stress again that Tom Frank has been warning the Democratic Party for over a decade that the policies and the anti-union and anti-working class attitudes of the New Democrats were causing enormous harm to the working class and enraging it.  But anyone who listened to Tom Frank’s warnings was persona non grata in Hillary’s campaign.  In my second column in this series I explain that Krugman gave up trying to wean Hillary Clinton from her embrace of austerity’s war on the working class and show that he remains infected by a failure to understand the nature of sovereign currencies.

What the economists were saying about Trump at Kilkenomics was that there were very few reliable engines of global growth.  China’s statistics are a mess and its governing party’s real views of the state of the economy are opaque.  Japan just had a good growth uptick, but it has been unable to sustain strong growth for over two decades.  Germany refuses, despite the obvious “win-win” option of spending heavily on its infrastructure needs to do so.  Instead, it persists in running trade and budget surpluses that beggar its neighbors.  England is too small and only Corbyn’s branch of Labour and the SNP oppose austerity.  “New Labour” supporters, most of the leadership of the Labour party, like the U.S. “New Democrats” that served as their ideological model, remain fierce austerity hawks.

That brings us to what would have happened if America’s first family of “New Democrats” – the Clintons – had won the election.  The extent to which the New Democrats embraced the Republican doctrine of austerity became painfully obvious under President Obama.  Robert Rubin dominated economic policy under President Clinton.  The Clinton/Gore administration was absolutely dedicated toward austerity.  The administration was the lucky beneficiary of the two massive modern U.S. bubbles – tech stocks and housing – that eventually produced high employment.  Indeed, when the tech bubble popped the economy was saved by the hyper-inflation of the housing bubble.  The housing bubble collapsed on the next administration’s watch, allowing the Clintons and Rubinites to spread the false narrative that their policies produced superb economic results.

When we think of the start of the Obama administration, we think of the stimulus package.  In one sense this is obvious.  The only economically literate response to a Great Recession is massive fiscal stimulus.  When Republicans control the government and confront a recession they always respond with fiscal stimulus in the modern era.  Obama’s stimulus plan was not massive, but it sounded like a large number to the public.  Two questions arise about the stimulus plan.  Why was Obama willing to implement it given his and Rubin’s hostility to stimulus?  Conversely, why, given the great success of the stimulus plan, did Obama abandon stimulus within months?

Rubin and his protégés had a near monopoly on filling the role of President Obama’s key economic advisors.  Larry Summers is a Rubinite, but he is infamous for his ego and he is a real economist from an extended family of economists.  Summers was certain in his (self-described) role as the President’s principal economic adviser to support a vigorous program of fiscal stimulus because the Obama administration had inherited the Great Recession.  Summers knew that any other policy constituted economics malpractice.  Christina Romer, as Chair of the President’s Council of Economic Advisers and Jared Bernstein, Vice President Biden’s chief economist, were both real economists who strongly supported the need for a powerful program of fiscal stimulus.  Each of these economists warned President Obama that his stimulus package was far too small relative to the massive depths of the Great Recession.

Rubin’s training was as a lawyer, not as an economist, so Summers was not about to look to Rubin for economic advice.  In fairness to Rubin, he was rarely so stupid as to reject stimulus as the appropriate initial response to a recession.  He supported President Bush’s 2001 stimulus package in response to a far milder recession and President Obama’s 2009 stimulus package.  Rubin does not deserve much fairness.  By early 2010, while Rubin admitted that stimulus is typically the proper response to a recession and that the 2009 stimulus package was successful, he opposed adding to the stimulus package in 2010 even though he knew that Obama’s 2009 stimulus package was, for political reasons, far smaller than the administration’s economists knew was needed.

Here’s ex-Treasury Secretary Robert Rubin–one of the chief architects of the global financial crisis–articulating the position of his proteges at 1600 Pennsylvania Ave.

Robert Rubin: “Putting another major stimulus on top of already huge deficits and rising debt-to-GDP ratios would have risks. And further expansion of the Federal Reserve Board’s balance sheet could create significant problems…. Today’s economic conditions would ordinarily be met with expansionary policy, but our fiscal and monetary conditions are a serious constraint, and waiting too long to address them could cause a new crisis….

In the spirit of Kilkenomics, we were blunt about the austerity assault that Rubin successfully argued Obama should resume against America’s working class beginning in early 2010.  It was inevitable that it would weaken and delay the recovery.  Tens of millions of Americans would leave the labor force or remain underemployed and even underemployed for a decade.  The working class would bear the great brunt of this loss.  In modern America this kind of loss of working class jobs is associated with mental depression, silent rage, meth, heroin, and the inability of working class males and females to find a marriage partner, and marital problems.  It is a prescription for inflicting agony – and it is a toxic act of politics.

Prior to becoming a de facto surrogate for Hillary and ceasing to speak truth to her and to America, Paul Krugman captured the gap between the Obama administration’s perspective and that of most of the public.

According to the independent committee that officially determines such things, the so-called Great Recession ended in June 2009, around the same time that the acute phase of the financial crisis ended. Most Americans, however, disagree. In a March 2014 poll, for example, 57 percent of respondents declared that the nation was still in recession.

The type of elite Democrats that the New Democrats idealized – the officers from big finance, Hollywood, and high tech – recovered first and their recovery was a roaring success.  Obama, and eventually Hillary, adopted the mantra that America was already great.  Our unemployment rates, relative to the EU nations forced to inflict austerity on their economies, is much lower.  But the Obama/Hillary mantra was a lie for scores of millions of American workers, including virtually all of the working class and much of the middle class.  As Hillary repeated the mantra they concluded that she was clueless about and indifferent to their suffering.  As we emphasized in Kilkenny, Obama and Hillary were not simply talking economic nonsense, they were committing political self-mutilation.

Krugman used to make this point forcefully.

[T]he American Recovery and Reinvestment Act, aka the Obama stimulus … surely helped end the economy’s free fall. But the stimulus was too small and too short-lived given the depth of the slump: stimulus spending peaked at 1.6 percent of GDP in early 2010 and dropped rapidly thereafter, giving way to a regime of destructive fiscal austerity. And the administration’s efforts to help homeowners were so ineffectual as to be risible.

Timothy Geithner, a proponent of austerity, is famous for remarking that he only took only one economics class – and did not understand it.  In the same review of Geithner’s book by Krugman that I have been quoting, Krugman gives a concise summary of Geithner’s repeated lies about his supposed support for a larger stimulus.  Jacob Lew, the Rubinite who Obama chose as Geithner’s successor as Treasury Secretary, was also trained as a lawyer and is equally fanatic in favoring austerity.  In 2009, no one with any credibility in economics within the Obama administration could serve as an effective spokesperson for austerity as the ideal response to the Great Recession.

But Romer, Summers, and Bernstein experienced the same frustration as 2009 proceeded.  The problem was not simply the Rubinites’ fervor for the self-inflicted wound of austerity – the fundamental problem was President Obama.  Obama’s administration was littered with Rubinites because Obama was a New Democrat who believed that Rubin’s love of austerity and trade deals was an excellent policy.  Of course, he had campaigned on the opposite policy positions, but that was simply political and Obama promptly abandoned those campaign promises.  Fiscal stimulus ceased to be an administration priority as soon as the stimulus bill was enacted.  Romer and Summers recognized the obvious and soon made clear that they were leaving.  Bernstein retained Biden’s support, but he was frozen out of influence on administration fiscal policies by the Rubinites.

By 2010, the fiscal stimulus package had begun to accelerate the U.S. recovery.  Romer left the administration in late summer 2010.  Summers left at the end of 2010.  Bill Daley (also trained as a lawyer) became Obama’s chief of staff in early 2011.  Timothy Geithner, and finally Jacob Lew dominated Obama administration fiscal policy from late 2010 to the end of the administration in alliance with Daley and other Rubinite economists.  It may be important to point out the obvious – Obama chose to make each of these appointments and there is every reason to believe that he appointed them because he generally shared their views on austerity.  In the first 60 days of his presidency he went before a Congressional group of New Democrats and told them “I am a New Democrat.”

Obama began pushing for the fiscal “grand bargain” in 2010.  The “grand bargain” would have pushed towards austerity and begun unraveling the safety net.  As such, it was actually the grand betrayal.  Obama’s administration began telling the press that Obama viewed achieving such a deal with the Republicans critical to his “legacy.”  There were two major ironies involving the grand bargain.  Had it been adopted it would have thrown the U.S. back into recession, made Obama a one-term president, and led to even more severe losses for the Democratic Party in Congress and at the state level.  The other irony was that it was the Tea Party that saved Obama from Obama’s grand betrayal by continually demanding that Obama agree to inflict more severe assaults on the safety net.

Obama adopted Lew’s famous, economically illiterate line and featured it is in his State of the Union Address as early as January 2010.  What follows is a lengthy quotation from that address.  I have put my critiques in italics after several paragraphs.  Obama’s switch from stimulus to austerity was Obama’s most important policy initiative in his January 2010 State of the Union Address.

The White House

Office of the Press Secretary

For Immediate Release

January 27, 2010

Remarks by the President in State of the Union Address

Now — just stating the facts.  Now, if we had taken office in ordinary times, I would have liked nothing more than to start bringing down the deficit.  But we took office amid a crisis.  And our efforts to prevent a second depression have added another $1 trillion to our national debt.  That, too, is a fact.

Why would Obama normally have been thrilled to “start bringing down the deficit?”  A budget deficit by a nation with a sovereign currency such as the U.S. is normal statistically and typically desirable when we have a negative balance of trade.  No, it is not a “fact” that stimulus “added another $1 trillion to our national debt.”  Had we not adopted a stimulus program the debt would have grown even larger as our economy fell even more deeply into the Great Recession.

I’m absolutely convinced that was the right thing to do.  But families across the country are tightening their belts and making tough decisions.  The federal government should do the same.  (Applause.)  So tonight, I’m proposing specific steps to pay for the trillion dollars that it took to rescue the economy last year.

Obama admits that stimulus was desirable.  He knows that his economists believed that if the stimulus had been larger and lasted longer it would have substantially speeded the recovery.  One of the most important reasons why dramatically increased government fiscal spending (stimulus) is essential in response to a Great Recession is that the logical and typical consumer response to such a downturn is for “families across the country” to “tighten their belts” by reducing spending.  That reduces already inadequate demand, which leads to prolonged downturns.  Economists have long recognized that it is essential for the government to do the opposite when consumers “tighten their belts” by greatly increasing spending.  To claim that it is “common sense” to “do the same” – exacerbate the inadequate demand – because it is a “tough decision” makes a mockery of logic and economics.  It is a statement of economic illiteracy leading to a set of policy decisions sure to harm the economy and the Democratic Party.  In particular, it guaranteed a nightmare for the working class.

No, no, no.  I can feel the pain of my colleagues that are scholars in modern monetary theory (MMT).  The U.S. has a sovereign currency.  We can “pay” a trillion dollar debt by issuing a trillion dollars via keystrokes by the Fed.  What Obama meant was that he would propose (over time) to increase taxes and reduce federal spending by one trillion dollars.  Such an austerity plan would harm the recovery and reduce important government services.  Again, the working class were sure to be the primary victims of Obama’s self-inflicted austerity.

Starting in 2011, we are prepared to freeze government spending for three years.  (Applause.)  Spending related to our national security, Medicare, Medicaid, and Social Security will not be affected.  But all other discretionary government programs will.  Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t.  And if I have to enforce this discipline by veto, I will.  (Applause.)

First, the metaphor is economically illiterate and harmful.  A government with a sovereign currency is not a “cash-strapped family.”  It is not, in any meaningful way, “like” a “cash-strapped family.”  Indeed, the metaphor logically implies the opposite – that it is essential that because the government is not like a “cash-strapped family” only it can spend in a counter-cyclical fashion (stimulus) to counter the perverse effect of “cash-strapped famil[ies]” cutting back their spending due to the Great Recession.

Let’s take this slow.  In a recession, consumer demand is grossly inadequate so firms fire workers and unemployment increases.  We need to increase effective demand.  As a recession hits and workers see their friends fired or reduced to part-time work, a common reaction is for workers to reduce their debts, which requires them to reduce consumption.  Consumer consumption is the most important factor driving demand, so this effect, which economists call the paradox of thrift, can deepen the recession.  Workers are indeed cash-strapped.  Governments with sovereign currencies are, by definition, not cash-strapped.  They can and should engage in extremely large stimulus in order to raise effective demand and prevent the recession from deepening.  Workers will tend to reduce their spending in a pro-cyclical fashion that makes the recession more severe.  Only the government can spend in a counter-cyclical fashion that will make the recession less severe and lengthy.

We will continue to go through the budget, line by line, page by page, to eliminate programs that we can’t afford and don’t work.  We’ve already identified $20 billion in savings for next year.  To help working families, we’ll extend our middle-class tax cuts.  But at a time of record deficits, we will not continue tax cuts for oil companies, for investment fund managers, and for those making over $250,000 a year.  We just can’t afford it.  (Applause.)

Now, even after paying for what we spent on my watch, we’ll still face the massive deficit we had when I took office.  More importantly, the cost of Medicare, Medicaid, and Social Security will continue to skyrocket.  That’s why I’ve called for a bipartisan fiscal commission, modeled on a proposal by Republican Judd Gregg and Democrat Kent Conrad.  (Applause.)  This can’t be one of those Washington gimmicks that lets us pretend we solved a problem.  The commission will have to provide a specific set of solutions by a certain deadline.

The Democrats have to stop attacking Republicans for running federal budget deficits.  I know it’s political fun and that the Republicans are hypocritical about budget deficits.  Deficits are going to be “massive” when an economy the size of the U.S. suffers a Great Recession.  We have had plenty of “massive” deficits during our history under multiple political parties.  None of this has ever led to a U.S. crisis.  We have had some of our strongest growth while running “massive” deficits.  Conversely, whenever we have adopted severe austerity we have soon suffered a recession.  In 1937, when FDR listened to his inept economists and inflicted austerity, the strong recovery from the Great Depression was destroyed and the economy was thrust back into an intense Great Depression.

As to the debt “commission” to solve our “debt crisis,” it was inevitable that such a commission would be dominated by Pete Peterson protégés and that they would demand austerity and an assault on the federal safety net.  That would be a terrible response to the Great Recession and the primary victims of the commission’s policies would be the working class.

Now, yesterday, the Senate blocked a bill that would have created this commission.  So I’ll issue an executive order that will allow us to go forward, because I refuse to pass this problem on to another generation of Americans.  (Applause.)  And when the vote comes tomorrow, the Senate should restore the pay-as-you-go law that was a big reason for why we had record surpluses in the 1990s.  (Applause.)

For a nation with a sovereign currency, there is nothing good about the “record surpluses in the 1990s.”  Such substantial surpluses have occurred roughly nine times in U.S. history and each has been followed shortly by a depression or the Great Recession.  This does not prove causality, but it certainly recommends caution.  Similarly, “pay-as-you-go” has been the bane of Democratic Party efforts to help the American people.  Only a New Democrat like Obama would call for the return of the anti-working class “pay-as-you-go” rules.

Now, I know that some in my own party will argue that we can’t address the deficit or freeze government spending when so many are still hurting.  And I agree — which is why this freeze won’t take effect until next year — (laughter) — when the economy is stronger.  That’s how budgeting works.  (Laughter and applause.)  But understand –- understand if we don’t take meaningful steps to rein in our debt, it could damage our markets, increase the cost of borrowing, and jeopardize our recovery -– all of which would have an even worse effect on our job growth and family incomes.

No.  It wouldn’t have damaged our markets, increased interest rates or jeopardized our recovery.  We had just run an empirical experiment in contrast to the Eurozone.  Stimulus greatly enhanced our recovery, while interest rates were at historical lows, and led to surging financial markets.  Austerity had done the opposite in the eurozone.

From some on the right, I expect we’ll hear a different argument -– that if we just make fewer investments in our people, extend tax cuts including those for the wealthier Americans, eliminate more regulations, maintain the status quo on health care, our deficits will go away.  The problem is that’s what we did for eight years.  (Applause.)  That’s what helped us into this crisis.  It’s what helped lead to these deficits.  We can’t do it again.

Rather than fight the same tired battles that have dominated Washington for decades, it’s time to try something new.  Let’s invest in our people without leaving them a mountain of debt.  Let’s meet our responsibility to the citizens who sent us here.  Let’s try common sense.  (Laughter.)  A novel concept.

Let’s try actual common sense instead of metaphors that are economically illiterate.  Let’s try real economics.  Let’s stop talking about “mountains of debt” as if they represented a crisis for the U.S. and stop ignoring the tens of millions of working class Americans and Europeans whose lives and families were treated as austerity’s collateral damage and were not even worth discussing in Obama’s ode to the economic malpractice of austerity.  Austerity is the old tired battle that we repeat endlessly to the recurrent cost of the working class.

Trump is not Locked into Austerity

I note the same caution we gave in Ireland – we don’t know whether President Trump will seek to implement his economic proposals.  Trump has proposed trillions of dollars in increased spending on infrastructure and defense and large cuts in corporate taxation.  In combination, this would produce considerable fiscal stimulus for several years.  The point we made in Ireland is that if he seeks to implement his proposals (a) we believe he would succeed politically in enacting them and (b) they would produce stimulus that would have a positive effect on the near and mid-term economy of the U.S.  Further, because the eurozone is locked into a political trap in which there seems no realistic path to abandoning the self-inflicted wound of continuous austerity, Trump represents the eurozone’s most realistic hope for stimulus.

Final Cautions

Each of the economists speaking on these subjects in Kilkenny opposed Trumps election and believe it will harm the public.  Fiscal stimulus is critical, but it is only one element of macroeconomics and no one was comfortable with Trump’s long-term control of the economy.  I opined, for example, that Trump will create an exceptionally criminogenic environment that will produce epidemics of control fraud.  The challenge for progressive Democrats and independents is to break with the New Democrats’ dogmas.  Neither America nor the Democratic Party can continue to bear the terrible cost of this unforced error of economics, politics, and basic humanity.  I fear that the professional Democrats assigned the task of re-winning the support of the white working class do not even have ending the New Democrats’ addiction to austerity on their radar.  They are probably still forbidden to read Tom Frank.