Jim Devine
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Subject:Let William Black help you celebrate this holiday!
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Let’s Celebrate the Failure of the July 2011 Great Betrayal
Posted By Guest Author On December 22, 2012 @ 8:30 am In Think Tank | 1 Comment
Let’s Celebrate the Failure of the July 2011Great Betrayal
William K. Black [1]
New Economic Perspectives [2], December 20, 2012
In July 2011, President Obama and Speaker Boehner reached an agreement in
principle on a deal crafted to inflict $4 trillion in austerity by raising
taxes modestly, slashing social spending, and beginning to unravel the safety
net. The deal would have been a disaster for America. Unemployment was 9.1%.
The deal would have thrown us back into a recession and caused unemployment to
surge. Recessions and increased unemployment cause tax revenues to fall and
increase demand for social services (e.g., for unemployment compensation) –
they produce large deficits. Austerity kills jobs and frequently increases
deficits. The Eurozone is the latest demonstration of this fact.
We should, therefore, all be celebrating the failure of the July 2011 austerity
deal. We almost committed an act of economic self-mutilation of tragic
proportions. Instead, because of the failure to adopt austerity in July 2011
we followed an economic policy based on modest stimulus. As predicted by most
economists (including my UMKC colleagues) that policy produced modest growth
and modest reductions in unemployment. The recovery produced the sharpest
reduction in budgetary deficits in modern U.S. history. The Eurozone’s
leaders’ austerity policies forced many nations back into recession. Austerity
was most draconian in the periphery where it produced Great Depression levels
of unemployment, particularly for young adults. The dominant media meme about
the “fiscal cliff” is that it is an insane austerity program that would force
the U.S. back into a gratuitous recession and cause large increases in
unemployment. Logically, that should cause the media to recognize that the far
more severe austerity blows that Obama and Boehner sought to inflict on the
U.S. in July 2011 at a time when our economic recovery was much weaker than it
is today would have been disastrous and that we should be overjoyed that the
deal fell apart.
The media, however, constantly warns us of the need not to repeat the “failure”
to reach the July 2011 deal. They show no sign of recognizing the logical
incoherence in simultaneously warning that the fiscal cliff’s austerity must be
avoided lest it force the nation back into recession and that it is urgent that
we adopt austerity. Media reports virtually never explain that if the July
2011 austerity deal had been finalized the results would have been catastrophic.
The media is similarly incoherent when discussing (more precisely, ignoring)
another key aspect of the fiscal cliff – its origins. The “fiscal cliff” is
not really a cliff, but it is definitely an economically illiterate and
self-destructive austerity program. That is the first key analytical aspect of
the origins of the fiscal cliff – it was known to be an economically illiterate
and self-destructive austerity program when it was adopted. The obvious
question, which the general media studiously ignores, is why the parties agreed
to the “fiscal cliff” deal when it was obvious that it would cause catastrophic
damage to our economy and people. The “fiscal cliff” (austerity) deal is the
deal that did not fail – it was the bipartisan deal that became law in August
2011.
It is revealing that no one in the media even attempts anymore to defend the
bipartisan fiscal cliff (austerity) deal. The media normally have a romantic
crush on anything bipartisan, no matter how much it harms the nation. The
fiscal cliff austerity deal is so obviously stupid that even the media almost
universally criticize it. This should prompt three obvious questions.
What idiot designed the fiscal cliff (austerity) deal?
Why did both parties support it?
Why did the media not denounce the deal before it was adopted?
The answers are:
President Obama took the lead in crafting the “fiscal cliff.” He did so with
terrible counsel provided by Treasury Secretary Geithner and William Daley,
Obama’s chief of staff (Wall Street’s leading representative within the
administration and, like Geithner, a strong opponent of stimulus and a strong
proponent of austerity).
Both parties “knew” that austerity was essential.
The media “knew” that austerity was essential.
Obama is the person in the world who benefitted most from the failure of the
July 2011 austerity deal he reached in principle with Boehner. If the
austerity deal had been finalized the nation would have be forced back into
recession. Unemployment was 9.1% in July 2011. It would have risen sharply
above 10% and it would have gone up every month in 2012 as the election
approached. Obama would have been crushed by Governor Romney. The irony is
that Obama tried five times in 2011 to inflict austerity on America. Had he
succeeded, he would have caused grave damage to our nation. Had he succeeded
in inflicting austerity he would have also destroyed his re-election chances,
given the Republicans control of the U.S. Senate, slashed public services when
they were most needed, and begun the process of destroying the safety net. He
would have gone down in history as a grotesque failure.
Obama’s first major effort to inflict austerity on the nation in 2011 was his
July austerity deal in principle with Boehner. Their shared goal was a $4
trillion austerity program with mild increases in tax revenues and fierce cuts
to social programs and the safety net.
Obama’s second effort [3] to inflict austerity was the creation of the “fiscal
cliff” austerity deal in August 2011. The premise of the August deal was that
austerity needed to be inflicted on America.
Debt-Ceiling Deal: President Obama Signs Bill as Next Fight Looms
By DEVIN DWYER and SUNLEN MILLER
Aug. 2, 2011—
U.S. Averts First-Ever Default but Economic Impact Still Uncertain
“‘It’s an important first step to ensuring that as a nation we live within our
means, yet it also allows us to keep making key investments in things like
education and research that lead to new jobs and assures that we’re not cutting
too abruptly while the economy’s still fragile,’ Obama said [4] in a statement
from the White House Rose Garden before signing the bill.
‘I’ve said it before, I’ll say it again,’ Obama said. ‘We can’t balance the
budget on the backs of the very people who have borne the brunt of this
recession. Everyone has to chip in. It’s only fair. That’s the principle I’ll
be fighting for in the next phase.’”
I know that these statements by Obama strike many Americans as sensible, but
they betray a basic misunderstanding of economics and explain why he embraces
austerity. We are a nation with a sovereign currency. Our national government
is nothing like a household. “Balancing the budget” (“live within our means”)
in response to the Great Recession is austerity. Austerity is a disastrous
policy in such circumstances because it causes nations to fall back into
recession or depression.
The issue is not “fair[ness]” through joint sacrifice. If “everyone” “chip[s]
in” through austerity it still produces a gratuitous recession or depression.
That is not “fair” – it is insane – there is no such thing as a “fair”
recession. “Fighting” for “fair” austerity so that everyone suffers equally
through a “fair” recession is impossible because recessions cause increased
unemployment, which is inherently unfair. But the more essential point is
that it is insane to cause recessions through austerity. That’s the principle
for which we fight at UMKC. The economic crises we face are jobs and homes.
Similarly, you do not “cut” federal spending when the economy is operating well
before full capacity because of a Great Recession. Obama’s stated policy was
to cut federal spending in 2011, but not “too abruptly.” Cutting overall
spending in response to a Great Recession causes gratuitous recessions, even if
you make “key investments.”
Obama intended the prospect of the fiscal cliff’s dramatic mandatory cuts in
social programs to extort progressive Congressional Democrats into agreeing to
inflict severe austerity by voting in favor of what Obama hoped would be
massive cuts in social programs and the safety net adopted by the Congressional
“super committee” created by the same bipartisan austerity deal that created
the “fiscal cliff.” Obama encouraged the “super committee” to inflict massive
spending cuts and tax increases (super-sized austerity).
Obama’s fourth effort occurred during the super committee negotiations. Some
members of Congress opposed the imposition of the “fiscal cliff” austerity
provisions and sought to remove, delay, or reduce them. Obama intervened [5]
to block any effort to avoid or reduce the austerity inflicted by the “fiscal
cliff.”
“President Obama called the Democratic and Republican chairmen of Congress’s
special deficit reduction supercommittee Friday and urged them to reach a deal….
But he also carried another message: Congress should not undo the painful
consequences for failing to reach a deal that were agreed to when the
supercommittee was created in the August debt deal [6].
But the so-called sequester could not be undone without a sign-off from Obama,
and he made clear Friday that he would not agree.
‘The sequester was agreed to by both parties to ensure there was a meaningful
enforcement mechanism to force a result from the Committee,’ the White House
said in a statement. ‘Congress must not shirk its responsibilities. The
American people deserve to have their leaders come together and make the tough
choices necessary to live within our means, just as American families do every
day in these tough economic times.’
He urged them to strike a deal that would cut both entitlements and raise
revenues.”
Yes, President Obama “urged” the infliction of severe austerity through cuts in
the safety net, massive cuts in social programs, and deliberately created and
used the “fiscal cliff’s” self-destructive austerity threat to extort these
betrayals of the American people. His surrogates (Erskine Bowles and Alan
Simpson – the co-chairs of Obama’s austerity commission) pushed the “super
committee” to “go big” and inflict $4 trillion in austerity [7]. (Simpson
predicted that the markets would “tank” absent such an austerity deal.)
Obama urged austerity under the “logic” that a national government with a
sovereign currency is “just” like a household – the most basic and common
economic error in this field. The President of the United States thinks that
the U.S. government is “just” like a household and should try to balance the
budget (“live within our means”) through austerity in response to the Great
Recession. He also thinks we should seize the political opportunity, even if
it had nothing to do with the budget deficit, to begin to unravel the safety
net. It is this sad record that led me (and many others) to warn before the
election [8] that Obama’s effort to secure a “Grand Bargain” constituted a
“Great Betrayal” motivated by his desire to create his legacy. Obama’s
self-portrait is that he was willing to agree to sacrifice his Party’s greatest
accomplishments (the safety net) in order to secure a bipartisan agreement
imposing austerity. The actual sacrifices, however, will be made by the
elderly, the poor, and the working class, the victims of his betrayal. If
Obama succeeds in producing another recession through austerity you can add the
nation to the list of sacrificial victims.
When the super committee failed to reach [9] a bipartisan austerity deal in
November 2011, members of Congress sought to pass legislation removing the
fiscal cliff’s austerity provisions. Obama’s fifth effort to inflict austerity
occurred when he threatened to veto any reduction in fiscal cliff austerity.
Nov 21, 2011 4:52pm
Obama Threatens Veto on Bid to Avoid Automatic Cuts as Supercommittee Fails
“President Obama said today he will veto any efforts to get rid of the
automatic spending cuts that will be triggered by the supercommittee’s failure
to reach a bipartisan solution to deficit reduction.
‘There will be no easy off-ramps on this one. We need to keep the pressure up
to compromise, not turn off the pressure,’ the president said this evening.
‘The only way these spending cuts will not take place is if Congress gets back
to work and agrees on a balanced plan to reduce the deficit by at least $1.2
trillion.’”
Fortunately for the nation (and Obama), fate conspired to cause four of Obama’s
efforts to inflict austerity to fail while the fifth (the “fiscal cliff”) does
not begin to kick in until 2013. For opposite reasons, the Tea Party and
progressive Democrats have interacted in a manner that blocked Obama’s efforts
to inflict austerity on the nation. (The Tea Party loves austerity, but hates
even modest tax increases for the wealthy.)
Obama was not an outlier [10] in repeatedly seeking to inflict austerity on the
nation in 2011: “about 100 members of Congress from both parties are urging
the [super committee] to go big on the reductions, to the tune of $4 trillion.”
The general media did not warn about the insanity of inflicting the “fiscal
cliff” austerity program on the nation. Instead, it fed the hysteria about the
deficit and urged even greater austerity. The New York Times [11] exemplifies
the general response. The title of their article about the August 2011
austerity deal that created the “fiscal cliff” set the pro-austerity tone.
August 2, 2011
Spending Cuts Seen as Step, Not as Cure
The thrust of the article was that the proponents of the August 2011 bipartisan
austerity deal had to defend it against charges that it imposed too little
austerity. The article also claimed that while economists were divided on the
issue, most economists favored austerity. Our national debt was about to cause
interest rates to surge, causing a disastrous feedback loop.
“Proponents of the deal counter that it is an important first step, constrained
by the political realities of divided government.
‘Is this the deal I would have preferred? No,’ Mr. Obama said Sunday in
announcing the agreement. ‘But this compromise does make a serious down
payment on the deficit reduction we need, and gives each party a strong
incentive to get a balanced plan done before the end of the year.’”
The problem facing the nation has been clear for some time. The Congressional
Budget Office estimates that the federal debt is likely to exceed 100 percent
of the nation’s annual economic output by 2021, largely because of the rising
cost of Medicare [12], Medicaid [13] and Social Security [14].
Americans will face higher taxes, particularly as investors begin to demand
higher interest rates. Economists disagree about the amount of debt a nation
can safely carry relative to the size of its economy, but there is widespread
concern that 100 percent is too much, and that the weight of debt would begin
to suppress economic activity.
All of this was economically illiterate. Interest rates fell, as my colleagues
and economists like Paul Krugman predicted. Inflicting austerity in response
to a Great Recession is a superb strategy for increasing unemployment, the
deficit, inequality, and debt because it reduces already inadequate private and
public sector demand and causes recessions and depressions. Even the modest
stimulus policy the U.S. followed despite Obama’s and Boehner’s best efforts to
inflict austerity, proved vastly superior to the Eurozone’s austerity policy
that forced the Eurozone into recession and much of the periphery into Great
Depression levels of unemployment. The U.S. budget deficit has fallen at the
fastest rate in modern history due to the success of even the greatly
inadequate stimulus program that Obama adopted before he turned against
stimulus under Geithner and Daley’s influence. America’s problem is jobs, not
the deficit.
Beware of anyone who uses phrases like “down payment” when it comes to the
federal deficit for they have no meaning and are designed to mislead. Reducing
social spending in response to the Great Recession is austerity – not a “down
payment on … deficit reduction.” Indeed, it is likely to increase the deficit
by causing a recession.
Geithner also spoke in favor of the August deal, and he completed the
pro-austerity mantra by invoking what Paul Krugman has aptly dubbed [3] the
“confidence fairy.”
“‘You’re going to see this basic underlying growth we’ve see in the United
States improve over time because people will be more confident we can live
within our means,’ [Geithner] said. ‘With more confidence we can get our arms
around this long term. We will have more room to do the things we need to
strengthen investment jobs now.’”
The confidence fairy stubbornly refuses to a
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