Deficit Hawks on Steroids

With the election of a Republican House, we can expect even louder calls to shrink government. These come linked to demands for a smaller deficit, though Republican pressure to extend the Bush tax cuts would increase the federal deficit by about $4 trillion over a decade.

The only way to shrink the deficit and reduce taxes, of course, would be to massively cut government spending. Some federal outlay, such as the bloated military budget, is ripe for cutting. Other spending, disguised as tax loopholes, also deserves reduction. But for the most part, reducing spending in a deep recession is bad economics. Were it not for the emergency spending of the February 2009 Recovery Act, the unemployment rate would be around 12 percent, according to the Congressional Budget Office.

But public outlay, though the necessary cure for a deep recession, is doubly on the defensive -- once from newly feisty Republicans and again from an elite army of deficit hawks.

During the next several weeks, there will be a carefully orchestrated drumbeat of demands for a massive budget cutting as the improbable cure for a prolonged economic slump. Two privately funded commissions and one presidential commission will all be issuing reports calling for austerity.

The Prospect, in partnership with Demos, has just published a special report on the case for growth rather than austerity. Our report rebuts the arguments of the deficit hawks. For even more ammunition, see the new website,

The mastermind behind the austerity effort is investment banker and former Nixon Cabinet official Peter G. Peterson. He's written four books over two decades, warning that Social Security would crash the economy -- though the culprit turned out to be financial deregulation of the sort that helped create Peterson's fortune as a private-equity mogul. Peterson, who cashed in his stake in the private-equity investment firm Blackstone just before the collapse, is spending a billion dollars through the Peter G. Peterson Foundation to promote the austerity gospel.

Peterson helps fund the Concord Coalition, one of the original budget-balance crusaders, and the first executive director of his foundation, David Walker, was one of the main advocates for the commission on fiscal reform created by President Barack Obama.

The Peterson Foundation is also a leading underwriter of private commissions promoting austerity. One of them, a partnership with the Pew Charitable Trusts and the Committee for a Responsible Federal Budget, is due to issue its latest report in mid-November. The Pew-Peterson Commission calls for stabilizing the national debt at 60 percent of gross domestic product by 2018, regardless of the condition of the economy. That would require massive cuts in spending and/or increases in taxes, exactly the opposite of sensible policy in a deep slump.

A second task force, chaired by Republican deficit hawk Pete Domenici and Democrat austerity advocate Alice Rivlin, will soon issue parallel recommendations. This body, run through the Bipartisan Policy Center, sounds uncannily like other deficit hawk alarmists. Its premise:

Currently, America's future is threatened by prospects of enormous and unsustainable deficits and debt in the coming years that will be driven by the aging of the population, the rapid growth in health care costs, and the structural mismatch between spending and revenues.

But this view conflates the short-term crisis of a deep recession with the need for long-term fiscal balance and puts the cart before the horse. The Domenici-Rivlin panel is also due to issue a high-profile report this month.

Then comes the main event -- the Dec. 1 release of the report of President Obama's own Commission on Fiscal Responsibility and Reform. This commission was sold to Obama by his former budget director, Peter Orszag, and others as a way to insulate Obama from the charge of being a reckless big spender. The commission, created last February, was also intended to appease the congressional Blue Dogs, many of whom wanted to create a congressional commission. The idea was that it would issue its report safely after the 2010 midterms. Now that hour has come round.

But the commission creates a trap for Obama. If the commission does recommend a program of belt-tightening, including cuts in Social Security and Medicare, it will be awkward for the president to reject its advice. The commission is stacked with deficit hawks. Out of its 18 members, there are just four progressives, Reps. Jan Schakowsky and Javier Becerra, Sen. Dick Durbin, and former SEIU President Andy Stern.

At this writing, the co-chairs, former White House chief of staff Erskine Bowles and former Republican Sen. Alan Simpson, joined by executive director and Democratic Leadership Council stalwart Bruce Reed, have been meeting with non-legislative members one at a time, trying to promote a draft recommendation that would include cuts in Social Security, Medicare, military spending, and some closing of tax loopholes but no tax increases. Their hope is that if they can get all of the non-legislative appointees on board, they can then pressure the congressional members one at a time.

Even if the commission does not produce a consensus report, which requires the votes of 14 out of its 18 members, the commission's majority report plus the work of the private commissions will add up to a potent austerity lobby. And there will be plenty of legislative opportunities, such as the next vote on raising the national debt ceiling, to advance this policy agenda.

Two things could save us from this fate -- Republican aversion to raising taxes under any circumstances and a belated recognition by President Obama that the economy needs first and foremost recovery and jobs. If we can get a strong recovery going, the deficit will subside and the task of getting back to fiscal balance down the road will be far less arduous.

Embracing austerity in a recession is bad medicine. Social Security has nothing to do with the present deficit -- it will be in surplus for the next 27 years. Medicare will not be meaningfully reformed without reforming the broader health system. Obama's health reform, now under siege, goes part way toward that goal, but more is required.

This will be one of the early and defining battles of the next Congress. And if you think Obama is politically on the ropes now, imagine what will happen if he adopts a posture of eat your spinach: austerity is good for you. It isn't.

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