Jobs, Jobs, Jobs — Not Austerity

By William K. Black

Cross-posted at New Economic Perspectives.

Bob Rubin and Alan Greenspan convinced the New Democrats, over a quarter-century ago, that the key to economic growth was to out-Republican the Republican Party in the fervency of their embrace of austerity.  This began the long war of the New Democrats against the working class that culminated in the loss of their candidate, Hillary Clinton, to Donald Trump.  Rubin’s and Greenspan’s support for austerity constitutes economic and political malpractice.  Austerity is the enemy of the general economy and the people of the world, but it targets for its greatest harm the working class.  As I have explained in earlier columns, Hillary was so devoted to austerity that she made it her major new policy theme in the closing weeks of her campaign – even as every poll warned her that she had enraged the white working class, a principal victim of austerity.

The stranglehold that Rubin and Greenspan’s anti-worker dogmas continue to exert over the Democratic Party’s faux centrists’ policies even after Trump’s election is illustrated by a December 5, 2016 New York Times editorialentitled “How to Help Working People” and Larry Summers’ December 4, 2016 op ed entitled “Trump’s tax plans favour the rich and will hamper economic growth: The proposals would threaten to increase federal debt and interest rates.”  Summers is Rubin’s protégé.

Any plan by Democrats to “Help Working People” should begin with the word “jobs.”  But the creation of “jobs” funded by the federal government in its critical role of employer of last resort is not even an option when policy is in the grips of austerity fever.  New Democrats take the bizarre policy position that it is too expensive to pay people who want to work to do useful work, but fine to pay them extended unemployment insurance because there are not enough private sector jobs to employ them full-time.

The NYT editorial is so mixed up that it never mentions either the primary problem – the devotion to self-destructive austerity of New Democrats and Old Republicans – and never mentions the essential policy that would transform our economy and win the devotion of the working class to whatever party puts the policy in place.  That policy is a dedication to permanent full employment by making the federal government the employer of last resort for any American who wants to and is able to work.  Instead, the editorial focuses on a number of desirable policies to help workers who are already fully employed.  Yes, most Americans who wish to work are employed and we should implement policies that help fully employed working class Americans.  But tens of millions of Americans are classified as “underutilized” by the Bureau of Labor Statistics.  Many were so discouraged by the job markets that they dropped out of the work force.  Worse, Americans in general and the working class in particular no longer believe that they have any meaningful job security – that our jobs could disappear without warning within months.  The federal employer of last resort would transform the workplace by restoring job security.

The editorial’s sole emphasis is on increasing the income of fully employed workers.  That is a worthy goal that should be pursued in parallel with the paramount goal – jobs and providing the security to all Americans of always being able to find a job if they are willing and able to work.  More income for the already fully-employed working class is great, but Americans want to work and working class males are the most vulnerable psychologically to being unable to hold a full-time job or the constant fear introduced by the destruction of job security.  When working class males are unable to hold down a steady job the results are horrible for family formation and family success.

Austerity’s Choice

Millions of Democrats are salivating at the prospects of being able (again) to chortle at the hypocrisy of Republicans when it comes to austerity.  Yes, Republicans always say they love austerity, but when they are in power in modern times they always rise above their pro-austerity dogma and adopt at least some stimulus.  Democrats are eager to attack the hypocrisy and Congressional Democrats are gleefully planning to trap Trump in a welter of demands for “revenue neutral” taxes (code for austerity) and “pay fors” (another code for austerity).  The New Democrats are so eager to attack Trump’s “mountains of debt” that they are about to launch a new offensive against the working class in the New Democrats’ long war against the working class via economically and politically illiterate austerity.

And how will the Republicans respond?  Enough will bend to Trump that they will likely do a major infrastructure program.  Then the Republicans will confront the New Democrats with their own odes to austerity and “pay fors” and demand that the New Democrats make an analog to Sophie’s choice.  Austerity demands budget cuts in other fields, so the Republicans will tell the New Democrats to choose which social program they are most desperate to preserve – and consign the other programs to death via austerity.  In sum, the New Democrats are about to replay the same disastrous economic and political mistakes that have caused so much harm to Americans, particularly the working class, and gifted the presidency to Trump.

Please read Randy Wray’s primer or his newest book.  A government with a sovereign currency such as the United States is not “just like” a household or a corporation or the State of Vermont.  A budget surplus or deficit for the U.S. federal government is not a moral issue.  A budget “surplus” or “deficit” is not an intrinsically good or a bad thing – it depends on the economic conditions of the real economy.  For the U.S., with its unique role as the international currency and large trade deficits, federal budget deficits are typically desirable – and typically occur under both Democrats and Republicans.  We do not “burden” our “grandchildren” when we run federal budget deficit in typical circumstances or in response to a Great Recession.  We greatly aid our children and grandchildren by rejecting austerity in such circumstances.  We would help them far more if we provided a federal job guarantee of last resort.

Summers’ Shout Out for Austerity

Summers’ subtitle warns that Trump’s tax proposals “would threaten to increase federal debt and interest rates.”  In other words, Summers is banging the war drums to renew the New Democrats’ long austerity war against the working class.  There are two parts to Summers argument.  First, Trump’s proposed tax cuts are crafted to help the wealthiest Americans.  Second, the tax cuts would increase the budget deficit.  Summers’ first argument is mostly fine, indeed, it is understated.  (He makes the false claim that President Reagan’s tax cuts did not favor the wealthy and represented a “bipartisan” “reform.”)  Trump’s plan is to betray the 99% and rig the system to lock in the power and wealth of the one percent (indeed, the top .0001).  Trump remains, as he has been for decades, a crony capitalist.

Summers’ second argument is “Austerity Forever.”  He leads with another code phrase for austerity, implying that the proper standard for any tax changes is that they be “revenue-neutral reforms.”  That means no net tax cuts.  Why?  What we know, as even Summers agreed, was that President Obama (who told New Democrats that he was a New Democrat) proposed a stimulus program that he knew (because Summers told him) was far too small and then turned his back on stimulus and then in early 2010 in the State of the Union abandoned stimulus and proposed austerity (the code, provided by the Rubinite Jack Lew, was that the federal government should “pull in its belt” in response to the Great Recession because households were doing so).

The 2009 stimulus, though deeply inadequate, materially increased U.S. growth.  The self-destructive switch by January 2010 to supporting austerity greatly extended the recovery time from the Great Recession and weakened job market reovery.  The U.S. economy could benefit greatly from stimulus even now, so why should Democrats be insisting that they will fight any net tax cut?  Summers’ answer, as always, is the need for austerity.  He stresses that Trump’s (net) tax cuts would violate austerity.

It would also mean grave damage to federal budget projections. The envisioned Trump tax cut is about the same size relative to the economy as the 1981 Reagan tax cut. It is worth remembering that Reagan, hardly a fan of reversing course or raising taxes, found it necessary to propose significant tax increases in 1982 and 1984 (the equivalent in today’s economy of $3.5tn over a decade) due to concerns about federal debt.

So, we now have the New Democrats’ lead economist, Summers, telling us we should be in panic mode because Reagan had such a dogmatic belief in austerity that he raised taxes (though, net, Reagan actually cut taxes).  Summers is seriously proposing that the Democrats should take their policy advice on austerity from Reagan!  He claims that Democrats, in response to the revolt of the white working class, should embrace austerity and renew the New Democrats’ long war against the white working class even though he knows that is terrible economics and politics.  Reagan knew next to nothing about macroeconomics.  Let me be explicit – both the Old Republicans like Reagan and the New Democrats shared this embrace of austerity’s long war against the working class.  Reagan’s embrace of austerity was a key contributor to the stagnation of working class wages and the rise of the plutocrats.  This is how out of touch the New Democrats are with the American people – Summers’ sees Reagan as the role model that Democrats should emulate.

Summers goes so far as to claim that stimulus would slow growth.

Today’s budget situation is much more worrisome. The baseline involves much higher levels of debt and deficits. Then the economy was suffering from a deep recession; now it approaches full employment. If extreme tax cuts are legislated in the next months, uncertainty about the federal budget and about further tax adjustments is likely to rise. Finally, I can find no basis in either economic history or logic for Mr Mnuchin’s claim that the proposed reforms would increase the economy’s growth rate from its current 2 per cent rate to the historical 3 to 4 per cent norm. Adult population growth has slowed by nearly a percentage point, the gains generated by more women entering the workforce have been exhausted, and it is far from clear why tax reform will hugely spur productivity growth.

Indeed, because the Trump proposal would redistribute after-tax income towards those most likely to save it, push up long-term interest rates because of debt pressures, increase uncertainty and the advantages of overseas production, it is as likely to retard growth as to accelerate it.

Summers’ second paragraph has some important truth.  As with the second President Bush’s tax cuts, Trump’s proposed cuts go so heavily to the plutocrats that they will have less stimulus effect because so much of the cuts will be saved rather than spent.  The reduces the stimulus of the proposed tax cuts, it does not eliminate it.

The first paragraph is mostly an opportunity for Summers’ to renew his “secular stagnation” claims that suggest that the U.S., and much of the global economy, will suffer from weak growth under austerity for many decades.  If Summers is correct, then stimulus is particularly vital now.  But Summers’ primary cause is austerity, so he claims that we should accept weak growth and higher unemployment.  If Summers were correct about secular stagnation, however, the imperative policy response would be to end the New Democrats and the Old Republicans’ long war of austerity against the working class and ensure that the federal government provided a guarantee that it would serve as the employer of last resort.  Summers, of course, claims that our current condition closely approaches “full employment” and we need not worry about the millions of Americans who have dropped out of the labor force or are unemployed or underemployed.  At the insipid growth rates he believes will become the norm under austerity, the unemployment rates would grow substantially.

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.