By William K. Black
August 2, 2018 Bloomington, MN
Peter Suderman, the managing editor at Reason.com (hard right) has published an op ed in the New York Times entitled “How Republican Hypocrisy Lifts Social Democrats.” His subtitle is “By its astoundingly cynical approach to deficits and debt, the G.O.P. has opened the door to an expansive left.” What is actually astounding is that Suderman never mentions, much less discusses; the situations in which a Nation with a sovereign currency should run deficits.
Stephanie Kelton and I have been trying hard to keep Democrats from, again, rushing into the trap of denouncing Republicans for running federal deficits. Yes, Republicans are hypocrites about debt and deficits. That does not mean that Democrats should repeat Clinton and Obama’s embrace of the Republican’s economically illiterate, harmful, and fake hysteria about debt and deficits. Suderman makes an acute observation about why Republicans pretend to embrace deficit hysteria.
Through their actions, [Republicans] have proven that they cared about the deficit primarily for its usefulness as a political cudgel, an easy way to curtail Democratic policy goals.
My ‘friendly amendment’ would remove the word “primarily” from that sentence.
Suderman’s critique, however, is incomplete in two critical ways. First, New Democrats like the Clintons used the deficit “as a political cudgel … to curtail Democratic policy goals.” The New Democrats are the Wall Street wing of the Democratic Party. In March 2009, shortly after becoming President, Obama told the House New Democrat Coalition “I am a New Democrat.” Clinton and Gore, another New Democrat, used debt hysteria to push bipartisan tax increases and limits on social programs. Clinton and Gore, briefly, attained a federal surplus, which likely prompted the recession in 2000. Historically, federal budget surpluses are a leading indicator of recessions and depressions.
Second, this deficit hysteria cudgel was harmful to the Democratic Party and, far more importantly, people and economies all over the world. Obama’s embrace of deficit hysteria slowed the economic recovery. He infamously championed austerity in his January 27, 2010 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.
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.
Starting in 2011, we are prepared to freeze government spending for three years
None of those Obama claims about deficits in that passage is a “fact.” Obama believed that federal deficits are ‘bad’ and that ending them should be a top priority.
I would have liked nothing more than to start bringing down the deficit.
There is no economic or moral basis for Obama’s claim. Federal deficits have no moral content. Far larger federal deficits in some circumstances could be harmful if they generated inflation by creating asset shortages. Obama’s 2009 State of the Union Address’ comments on deficits were pure New Democrat ideology. The U.S. was slowly emerging from the Great Recession and desperately needed additional fiscal stimulus rather than Obama’s proposed austerity. The New Democrats’ financially illiterate ideology leads them to champion austerity even when responding to the Great Recession, cutting social programs, and raising taxes. The New Democrats’ deficit hysteria harms the public and the economy, but it is also terrible politics.
Obama’s State of the Union Address showed that he did not understand recessions, deficits, debt, or fiscal stimulus.
[O]ur efforts to prevent a second depression have added another $1 trillion to our national debt. That, too, is a fact.
It is not “a fact.” If Obama had responded initially to the Great Recession with austerity rather than fiscal stimulus, the national debt would have increased due to the Great Recession. Tax revenues would still have fallen sharply and expenditures would still have grown due to increased unemployment and poverty. Worse, austerity would have caused the federal debt to grow by more than $1 trillion because it would have thrown the economy into an even deeper and longer recession. The problems with Obama’s fiscal stimulus were that it should have been over twice as large and it should have continued for several more years. Obama’s Address was the opposite of the truth. The preparation of the president’s State of the Union Address is a ‘highest priority’ matter vetted by the most senior administration officials with expertise in the subject matter. How did this anti-fact get into Obama’s address?
Obama’s Address then proposed a metaphor that is an economically illiterate lie.
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.
The opposite is true. A Great Recession characteristically leads consumers to cut consumption in order to pay down their debts, which economists call “the paradox of thrift.” That paradox causes recessions to grow more severe because as consumers reduce their spending, firms reduce production, investment, and employment, which further reduces already inadequate consumer demand. A government with a sovereign currency is in the unique position to be able to increase its expenditures in response to a recession and counter this fall in demand. The fiscal policy should be counter-cyclical in a recession – greatly increasing expenditures.
A government with a sovereign currency does not have to “pay” for its counter-cyclical expenditures by raising taxes or issuing bonds. Readers of this blog understand this basic financial reality. Sadly, Obama did not.
Obama compounded the self-destructiveness of his State of the Union austerity hysteria by seeking a “Grand Bargain” with the Republicans that would have mandated austerity. He also created the Bowles-Simpson commission travesty to shill for austerity. Obama chose Simpson, a far right Republican, and Bowles, a Wall Street New Democrat, to try to ensure that the deficit reduction commission would push for austerity. Fortunately, in what became a meme, the Republicans saved Obama and the New Democrats from their insanity. Simpson unintentionally sparked a revolt against austerity and discredited his own commission when he wrote to the head of the Older Women’s League mocking Social Security as a “cow with 310 million tits.”
The House “Tea Party” members channeled Simpson and refused to accept Obama’s surrender of Democratic Party principles and his politically suicidal “Grand Bargain.” Had Obama been able to consummate what I dubbed the ‘Grand Betrayal,’ he would have agreed to reduce future Social Security benefits and cut social spending – during a fragile and slow recovery from the Great Recession.
Those cuts in the safety net and social programs would have been awful for the public and the Democratic Party in any year, but given the Great Recession the austerity could have pushed our economy back into recession and made Obama a one-term president. Democratic losses in the states and Congress would have been catastrophic if Obama pushed us back into recession. Obama and the Republican leadership reached an agreement in principle on the Grand Betrayal, but the Tea Party snatched defeat from the jaws of victory by blowing up the deal. Adam Green, Progressive Change Campaign Committee, made the key point.
The tea party was more useful than Democratic leadership when it came to killing a grand bargain that would have cut Social Security benefits.
Similarly, as I have explained in many columns, the Obama administration’s refusal to prosecute the elite banksters that led the three great fraud epidemics that hyper-inflated the bubble and drove the financial crisis squandered the perfect opportunity. Prosecuting the elite frauds would have aided the Nation, reduced the risk of future epidemics of elite fraud, discredited the elite frauds and their supporters, and led to immense popularity for the administration. It would have put an enormous body of facts about elite frauds into the public record. Trump would have been defeated if the Obama administration had acted vigorously to restore the rule of law to Wall Street. It is remarkable that former Attorney General Holder is exploring a run for President given his massive failure of courage, integrity, and will.
In general, good government is good politics. The Democrats should focus on adopting and supporting superior policies that are humane and supported by good science. Let Trump embrace the economic ideology that just led the Trump administration to change regulations to lower automobile fuel efficiency because fuel-efficient cars kill people by causing them to drive more.