The Austerity Trap

"This is junior's 'read my lips,'" gloats
former Clinton campaign adviser Paul Begala. Bush has broken his pledge not to
dip into the Social Security surplus. Democrats are rolling out town meetings,
television ads, and a press offensive to castigate Bush for "squandering the
surplus" and to tell him to "keep his hands off Social Security and Medicare."
This, Democratic pollsters argue, will discredit the Bush tax cut, derail his
plan to privatize Social Security, rally the base of the Democratic Party, and
set Democrats up as the party of fiscal responsibility for the 2002 elections.
"This is the defining moment of the Bush presidency," crows Terry McAuliffe,
chairman of the Democratic National Committee.

McAuliffe is right: It is a defining moment--but more for the
post-Clinton Democratic Party than for Bush. With the nation tottering on the
verge of recession, layoffs mounting daily, and the federal budget in massive
surplus, Democrats are calling for more austerity and making the first priority
paying off the national debt. They sound like the party of Calvin Coolidge, not
the party of Franklin Roosevelt. This makes no sense either as policy or as
politics. Understanding that--and understanding how Democrats have dug themselves
into this hole--may be the first step in turning the party into an instrument of
progressive reform again.

Austerity Run Amok

No doubt, Bush's mendacity has contributed to the Democratic
dementia. He misrepresented the price of his tax cut, masked the cost of his
military buildup, and now is cooking the books to pretend that he's not dipping
into the Social Security portion of the surplus. But in exposing Bush's fuzzy
math and clear lies, Democrats are implying that they are for raising taxes or
cutting spending even as the economy sinks. House minority leader Dick Gephardt,
ordinarily a resolute liberal, went on nbc's Meet the Press to scold Bush for
fiscal irresponsibility. He called on the president to submit a new budget that
wouldn't touch the trust fund surpluses and volunteered to help identify the
spending cuts necessary--even in education or health care.

Hello? When he comes back to Washington, Gephardt might want to take
another look around. The economy is in deeper trouble than anyone predicted. In
the United States, growth has stalled completely. Companies are slashing
investment and laying off employees. Manufacturing has been in a free fall for a
year. States are cutting spending to balance budgets. There's no lift from the
rest of the world--with Japan sinking, Europe slowing, and Latin America in
crisis. Much depends on U.S. consumers, who are burdened with record-high
personal debt and are continuing to spend more than they earn. But with the
dot-com bubble burst, the telecom collapse, and family insecurity spreading,
consumers are starting to tighten their belts. Alan Greenspan's Fed has lowered
interest rates repeatedly with little effect to date. In John Maynard Keynes's
classic metaphor, when there is massive over-capacity and inadequate demand,
monetary policy--lowering interest rates--is a lot like pushing on a string.

Clearly, this is when the federal government should step in to help kick-start
the economy with some combination of tax cuts for working families and increased
spending. And America has glaring investment needs to address. Forty-four
million people without health care. Overcrowded classrooms in decrepit schools. A
dire shortage of affordable housing. Jammed airports. Inadequate mass transit.
Collapsing sewers.

Deficit spending, not debt reduction, should be the order of the day. At the
very least, the federal government certainly shouldn't be running a $160-billion
surplus, the second-largest in history, as Bush now projects. Democrats should be
excoriating Bush for enforcing austerity in a time of trouble and for turning his
back on working families in distress. And they should be pushing for greater tax
relief for middle- and low-income earners, expanded unemployment benefits, wage
supports for older workers thrown out of work, and special assistance to the
families of poor mothers who will be the first to be laid off. For the medium
term, Democrats ought to make the case for badly needed public investments that
will put people to work, generate demand, help get the economy going--and make
America better.

Current Democratic posturing is particularly disingenuous. The short-term
surplus has declined because the economy has slowed, lowering tax receipts, and
because of the onetime tax rebate. But the rebate--the only defensible part of
the tax package--was a Democratic initiative, not part of the Bush tax plan.
Democrats argued, correctly, for front-loading the initial tax cuts to help boost
the economy. (Even then, the rebate was paltry in size--and limited in
effect--because Democrats didn't want to "raid" the trust fund surpluses.) Now
Democrats are ceding Bush credit for their own initiative by charging that "his
tax cuts" are plundering the trust funds.

But neither the checks that people are getting in the mail nor this year's
declining surplus is what's wrong with the Bush tax cut. Democrats should attack
it for what it is: an unconscionable giveaway to the already rich--"the haves and
have mores" whom Bush calls "my base"--that wastes money that might better be
invested in schools, in health care, in mass transit.

Moreover, Democrats are misleading citizens when they suggest that spending
the surpluses generated by payroll taxes endangers Social Security and Medicare.
The trust funds are credited with government bonds for every dollar of surplus,
no matter what is done with the money. Both parties "raided" the trust fund
surpluses for years without anyone even noticing. What changed isn't federal
accounting but a combination of political tactics gone astray and conservative
economic orthodoxy run amok. A long-term adjustment of Social Security may be
necessary--but not for another three decades.

Clinton's Poisonous Ploy

Tarred by scandal and struggling to fend off Republican tax
cuts when the surpluses first began to show up in 1998, Clinton came up with a
dramatic political ploy in his State of the Union address. "Save Social Security
first," he said, calling on Congress to devote the Social Security surplus to
paying off the national debt until Social Security was reformed. This quickly
turned into a bipartisan commitment to "lock" the trust fund surpluses into a
"box" and devote the funds to paying off the national debt. Of course, Social
Security didn't actually need to be "saved." Even under the most conservative
assumptions, the trust fund can meet its obligations for 35 years or so--and pay
retirees more than they now receive thereafter even if no changes are made. The
trust fund is in better shape than it was in the 1950s, 1960s, and 1970s.

But Robert Reischauer, former head of the Congressional Budget Office
(cbo), and Bob Greenstein, the liberal and widely respected head of the Center on
Budget and Policy Priorities, gave intellectual heft to Clinton's gambit. They
were happy to trump Republican tax cuts with Social Security and debt repayment.
Paying down the debt, they argued, would make it easier to pay off obligations in
future years, when the baby boomers retired. It would reduce the annual charge
of interest to the federal budget and free up money for federal programs. And it
would--in the conservative economic theory that Reischauer and Treasury Secretary
Robert Rubin helped propagate--add to national savings and thus help generate
investment and growth.

Clinton's tacticians and allies bragged that they'd frustrated Republican tax
cuts for the wealthy. But Clinton was also booting away the best opportunity in a
generation to make the case for much-needed public investments. The fervid
embrace of fiscal austerity precluded Democrats from proposing anything that
might require substantial investment, even at a time of "surpluses as far as the
eye can see." With Republicans in control of Congress, Greenstein argued, no
money would go to social programs anyway. But when the surpluses continued to
rise, Democrats had no investment agenda to counter Republican calls for tax cuts
and the military lobby's demand for more money.

Today, Clinton's tactical ploy has become a bipartisan totem, worshipped with
greater and greater fervor even as it makes less and less sense. Clinton proposed
debt reduction when the economy was growing and unemployment was low. Now the
economy is in trouble and needs help. And Bush's election amid cascading
surpluses enabled Republicans to get their tax cut anyway. So pressure to lock
away the surplus pushes against spending, not against tax cuts. And worse, the
misleading rhetoric about "raiding Social Security" only adds to the big lie that
Social Security is in dire straits and helps Bush huckster people into accepting
deep cuts in guaranteed benefits in exchange for private accounts they can get
their hands on.

The Austerity Lobby

Clinton's strategy reflected decisions that were made by his
administration in its first days and touted by nominally liberal Democratic
economists and think tanks. After just a few months in Washington, Clinton
abandoned the promise of the campaign to "put people first." Instead, under the
tutelage of Rubin, a Wall Street millionaire, and in response to pressure from
Greenspan and budget experts like Reischauer, Clinton put deficit reduction ahead
of the investments he'd promised in his election campaign.

Rubin argued that it was necessary to reduce spiraling deficits in
order to reassure the bond market and to keep Greenspan from raising interest
rates. Reischauer's cbo argued that federal deficits were crowding out private
investment and savings. Austerity budgets, they claimed, would lead to lower
interest rates and an increase in private savings and investment.

The Clinton years that followed sanctified the belief that austerity generates
growth. By 2001, federal spending as a percentage of gross domestic product was
lower than it had been since the 1950s, and the country had enjoyed a decade of
growth. The New Democrats of the Democratic Leadership Council, anxious to
consolidate the corporate wing of the party and separate Democrats from their old
big-government past, made fiscal responsibility their central mantra. Each
tactical concession Clinton made under pressure from the Republican
Congress--announcing the end of the "era of big government," embracing an
agreement to balance the budget, calling for a lockup of the surpluses--was
celebrated by the DLC as a New Democrat triumph and enshrined as an economic

The only problem with the austerity-generates-growth theory is that there is
little evidence that the world works this way. Politically, Clinton had little
choice but to clean up the Reagan deficits. But political necessity shouldn't be
confused with economic wisdom. The 1990s witnessed a long period of respectable
growth, with wage gains over the past few years broadly based. However, growth
rates in this business cycle have been the slowest of any since World War II. The
economy grew faster under Ronald Reagan while he was running up record deficits
than under Clinton when the deficits turned to surpluses. Nor did austerity
produce the predicted effects. Lower federal deficits did not lead to any notable
increase in private investment or private saving. The share of GDP going to
investment was virtually unchanged from 1989, even though the deficits had turned
to surpluses. Corporations and households racked up record debt during the
decade. Real interest rates weren't any lower from the deficit-ridden 1980s.

The first thing that led the recovery in the 1990s was soaring private
consumption, not soaring investment. And what spurred consumption was a hot stock
market, which created more than $8 trillion in new paper wealth from 1993 to
1999. Stockholders spent more and saved less. And this spending kept the economy
going as the deficit shrank. The "distinctive New Democrat growth agenda" was
spurred not by austerity but by consumers spending more than they earned because
of a classic speculative stock bubble. A second factor in the growth of the
1990s was the effect of new technologies that matured during that decade and
yielded higher rates of productivity. This, likewise, had nothing to do with
budget politics.

Things Fall Apart

Now the world has changed. Evidently, whenever a Bush gets
near the White House, the economy sinks. Much of the nation's paper wealth has
evaporated along with many of the dot-coms. Consumer spending is starting to
slow. It is at this point that the newfound Democratic love affair with
austerity becomes truly perverse. It's time for Democrats to make the case for
government investment again.

Under Clinton, bad policy was often justified as the price of
political survival. But Clinton at least was too smart to believe his own
blarney. He'd turn an argument on its head if it fit his needs. Democrats should
remember that, for the current "austerity uber alles" posture is not only bad
policy--it is likely to be bad politics, too. Democrats win as the party of
working people. When the economy gets into trouble, they benefit by championing
the concerns of working families. Until Reagan, Republicans were the hair-shirt
party of balanced budgets. They stood against big government even when people
were in distress. And for years, Democrats won elections while Republicans held
onto fiscal probity. Now Democrats are donning Republican garb. They're arguing
that debt reduction is more important than meeting social needs. They say this is
the way to challenge Bush's tax cuts, but Democrats won't win elections by
promising debt reduction instead of tax cuts. They'll win by contrasting Bush's
tax cuts for the wealthy with investments in public schools, in prescriptions
drugs, in making college affordable.

And Democrats aren't likely to benefit if they insist on austerity in a time
of trouble. Republicans will push for more tax cuts to get the economy going, and
Democrats will argue for what--spending cuts to pay down the debt? If their
rhetoric handcuffs government as layoffs spread across the country, Democrats not
only won't win; they won't deserve to win.