Editor’s note: This op-ed is by John Fairbanks, a Vermonter currently living and working in Washington, D.C.
In recent weeks, public policy circles have been afire over the torpedoing of a 2010 scholarly paper austerity advocates used to bolster their claims that reducing the federal debt by cutting spending was an absolute necessity.
The study, “Growth In A Time of Debt,” was published by two respected Harvard economists, Carmen Reinhart and Kenneth Rogoff. Austerians focused on the paper’s statement that growth would head south once the ratio of federal debt to GDP hit 90 percent. This debt level was regarded as the trigger for economic collapse. Aha! clear proof more spending cuts — raising taxes, of course, could not be part of the mix — were necessary.
Problem was, as a trio of University of Massachusetts economists discovered, the paper was fundamentally flawed in several ways, including a basic mistake on an Excel spreadsheet.
The resulting debate has not been just a tempest in an academic/wonk teacup. Important policy arguments, ones that affected millions of Americans, were based on the Reinhart/Rogoff paper. People with a powerful influence over fiscal policy — Rep. Paul Ryan, for one — seized on it with a fervor similar to their embrace of the writings of Ayn Rand. The UMass paper knocked the props out from under that.
Did that change the course of the universe? Hardly. Even President Obama has a certain investment in the idea of cutting social spending, and we have a measure of austerity already at work, in the form of sequestration. Which leads to three points to remember:
• Austerity is the product of ideology, not economics.
• It doesn’t work, at least not in any way that boosts the economy.
• The former means the latter won’t matter.
For example, asked about the debate by the New York Times, Republican economist Douglas Holtz-Eakin, who directed the Congressional Budget Office from 2003-2005, remained steadfast: “There’s nothing about this that will change my view of the universe. The sun still rises in the east. It sets in the west. And a lot of debt is still bad.”
First, while debt, per se, must be managed, national and international economies don’t operate on the same principles as our household budgets. As we’ve seen, economic growth and reasonable taxation can produce balanced budgets.
Aye, there’s the rub, “a lot of debt is still bad.” Few would disagree with that opinion; it is dangerously powerful in its simplicity. However, as the journalist H.L. Mencken once noted, “For every complex problem there is an answer that is clear, simple, and wrong.”
First, while debt, per se, must be managed, national and international economies don’t operate on the same principles as our household budgets. As we’ve seen, economic growth and reasonable taxation can produce balanced budgets.
Second, Holtz-Eakin’s remark does not reflect what austerity is all about. Austerity’s goal isn’t to reduce the debt; it’s to wipe out public program spending, from food stamps and Head Start to Social Security and Medicare. The main premise behind austerity is that it’s desirable to kick millions of people to the curb in order to maintain a stable system.
This is lousy public policy, and now we know it’s also lousy economics. In fact, there is a strong argument that Reinhart/Rogoff and the austerians have it backwards — low growth causes higher debt-to-GDP ratios, not the other way around. If that’s true, then it follows that public investment — the kind that built the Internet, the interstate highway system, our military, and our public education system — that stimulates growth is desirable.
Just as an aside, if debt is such a bad thing, where were the austerians when Congress and the Bush administration wiped out the balanced budget and projected surpluses they inherited from Bill Clinton by passing tax cuts in the early 2000s and putting two major wars on the national credit card rather than raising taxes to pay for them, as had been the traditional practice? Those two things alone account for the bulk of the debt piled up since 2001. By the way, CBO under Holtz-Eakin conducted a study that found that new revenue generated by tax cuts (recall the famously debunked Laffler Curve) does not equal their cost to the budget.
While this debt was being dumped on taxpayers’ backs, then-Vice President Dick Cheney was telling then-Treasury Secretary Paul O’Neill, after the secretary warned the VP that growing budget deficits posed a threat to the economy, “deficits don’t matter.” (Historical note: a month later, O’Neill and his top people were fired.)
Fast-forward a decade, and Rep. Ryan’s own budget proposals, which lacerate public spending, would add to the national debt.
Third, austerity, rather than functioning as advertised, as promoting economic vigor, has sent European economies into stall mode. Here at home, it is well-documented that federal budget cuts, made worse by sequestration, are actually a serious brake on our economy. Depending on which analysis you read, the American version of austerity cuts about a percentage point or more from annual growth and boosts unemployment by about the same degree.
Even Reinhart and Rogoff, who enjoyed rock-star status in some circles after their 2010 paper appeared, have backpedaled some, publishing a piece in Financial Times entitled, “Austerity is not the only answer to the debt problem.”
This is in the same vein — though, given the consequences, not quite at the same level — as Alan Greenspan admitting, after the economy collapsed, that deregulation of the financial markets was “a mistake.”
But, as I said, no amount of proof, no rhetorical contrition, will turn those who insist on piling suffering on others (never themselves) from their course. As economist John Kenneth Galbraith observed, “The modern conservative is engaged in one of man’s oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness.”
