The End of the Austerity Crusade?

Is President Obama planning to reverse course on deficit reduction? You will recall that the president joined the deficit-hawk crowd in calling for more than $4 trillion of deficit reduction over the next decade; that he has offered to cut Social Security and Medicare as part of a grand bargain (that the Republicans mercifully rejected); that it was Obama who appointed the Bowles-Simpson Commission; and that his own budget for FY 2014 includes substantial spending cuts.

But, with the 2014 midterm election looming and the recovery stuck in second gear with mediocre job creation, there is zero chance of a grand-budget bargain that includes tax increases, and interest rates are creeping up (which will slow the recovery further). Europe demonstrates that austerity economics are a proven failure. Even the International Monetary Fund says so

So let us read the tea leaves.

First, the president has just named Jason Furman to chair the Council of Economic Advisers (CEA). Furman was a protégé of Robert Rubin, a man who has been promoting a grand bipartisan bargain to cut deficits for decades. Furman came to the Obama campaign after directing Rubin’s Hamilton Project, a centrist policy shop that promoted small-bore strategies for weak forms of social insurance, and had little interest in such progressive causes as full employment or a high wage economy.

Furman served as economic-policy coordinator of the 2008 campaign, and was part of a shift that displaced more progressive advisers such as Paul Volcker in favor of the Larry Summers-Tim Geithner team. Furman was an early deficit hawk and proponent of cutting the annual Social Security cost of living adjustment, a proposal in Obama’s 2014. He has been good on a few issues such as reform of the ability of corporations to avoid taxation by stashing profits offshore, but this is also part of the deficit-cutting strategy.

On the other hand, ever since the National Economic Council (an invention of Robert Rubin in 1993) displaced the older Council of Economic Advisers, the CEA has been a decidedly second-tier institution. The administration’s current power players on economic issues are Treasury Secretary Jack Lew and National Economic Council Director Gene Sperling. Lew is a confirmed deficit hawk, Sperling a sometime growth advocate.

It’s kind of a shame that the Council of Economic Advisers, once chaired by truly great economists such as Walter Heller under John Kennedy and Joseph Stiglitz under Clinton, is now the province of apparatchiks. If the administration does decide to jettison deficit reduction in favor of a frank embrace of more public investment and more rapid growth, it will be decided above Furman’s pay grade.

A second intriguing straw in the wind is the recent report by the Center for American Progress, “It’s Time to Hit the Reset Button on the Fiscal Policy Debate,” written by Michael Linden, CAP's director of economic policy. 

Basically, the report concludes that the push for deficit reduction is both a political and an economic failure:

  • The key argument that high debt causes slower growth has crumbled.
  • Countries around the world have experimented with austerity, and those experiments have failed spectacularly.
  • The U.S. economy has not healed nearly as swiftly as was projected when the budget cutting began.
  • The push for immediate debt reduction has resulted in some perverse policy outcomes.
  • These changes should dramatically affect the debate on federal economic policy in general and the federal budget in particular.

What’s surprising, and encouraging, is that CAP itself has long been one of the principal advocates of deficit reduction as the key to recovery. As recently as last December, CAP put out a high profile report signed by Robert Rubin and Lawrence Summers among others, calling for a long-term plan to cut the deficit by $4.1 trillion, though that report did emphasize progressive tax reform and urged that public investment come first and deficit cuts afterward. The Economic Policy Institute's Larry Mishel has a nice analysis of the significance of CAP's shift.

According to Michael Linden, his new report was the subject of extensive internal discussions and re-drafts at CAP over the past six months. Linden says the CAP position changed because the facts changed—austerity was not only a proven failure, but “the frame of deficit reduction as the main policy goal made for a stale debate. It had a lot of costs.”

CAP has long been known as the White House’s favorite think tank. It has occasionally been a shade to the left of Obama, but makes sure never to embarrass the president. Linden would not confirm whether the report was the topic of explicit discussions with the White House, though he did say, “To the extent that it helps create political space for a shift in the emphasis from deficits to jobs and growth, it helps them.”

Though the CAP report is less than a White House trial balloon, it’s not conceivable that it would have been released if the Obama administration considered it an unfriendly act.

The deficit hawks have literally spent billions of dollars trying to make budget cutting a populist cause, and have fallen flat. Deficit reduction is the center of policy debate only within the beltway. The Washington Post editorial page is one of the principal malefactors. Austerity has failed as economics, but lives on as politics.

To the extent that CAP’s new report helps change shift the conventional wisdom, inside Washington and inside the White House, it is to be hugely welcomed. Let’s hope Jason Furman reads it, and passes it along to his boss.

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