What We Talk About When We Talk About Austerity

When conservatives make statements like “But the facts undermine the storyline,” you have to wonder: exactly whose “facts” are they referring to? Case in point is Michael Barone’s latest column in the right-wing Washington Examiner, which begins misleading even before the text begins, with the headline “Obama pursues higher tax rates, growth be damned.”

Barone’s thesis is that critics of European austerity are misguided not only in their condemnation of deep spending cuts on the continent – he cites claims by conservative gadfly Veronique de Rugy of the “free market” Mercatus Center that there really hasn’t been much austerity in Europe at all – but in their celebration of the supposedly contrasting policies of President Obama in the U.S. Austerity as practiced by Greece and Spain “is an attempt to reduce government budget deficits largely by increasing taxes and only to a small extent by reining in spending . . . Which, when you come to think about it, is the policy not of House Republicans — who actually passed a budget — but of Barack Obama.”

The problem is, the storyline undermined by the facts is not that of the supposedly liberal media but that of Barone himself. “Over the past three years, Obama has pursued the goal of higher tax rates as relentlessly as Captain Ahab pursued the great white whale,” he writes, eliding the inconvenient truth that Obama’s proposal to raise taxes on the richest one percent has little in common with the across-the-board, soak-the-poor tax increases common across the Eurozone. The president would in fact keep in place the bulk — $3 trillion of $3.7 trillion cost of a full extension — of the Bush tax cuts in place, raising rates only on families making more than $250,000 per year. Nine out of ten (98.3 percent, to be specific) Americans would see no tax increases at all, a fact which underscores the reality that Obama has actually lowered middle-class tax rates during his first term in office, to the tune of a $1,000-per-year drop for someone earning $50,000. It’s hard to compare this philosophy to the European tax hikes, which hit a broad cross-section of the population, from pensioners to shipping magnates. Greece imposed a 23% value-added tax (which, like all sales taxes, is highly regressive), and the government is cracking down on property-tax evaders by adding their tab to their utility bills. People who can’t pay would have their electricity cut off. Austerity-mandated pension reductions mean one woman’s $440 retirement stipend will no longer cover her $480 tax bill, according to the Times. A growing anti-tax movement in Ireland country is refusing to pay extra assessments on water and housing; at the same time, the Times reports, “salaries of nurses, professors and other public sector workers have been cut around 20 percent.”

All of this stands in marked contrast to the situation in the U.S., where President Obama has recommended nothing of the sort. It is ridiculous to conflate the tax increases that have hobbled Europe with the policies President Obama has advocated at home. Barone, no stranger to peddling half-truths, is only the latest to disseminate this lie. Veronique de Rugy, the most outspoken inhabitant of what Paul Krugman considers the alternate right-wing reality, writes at the National Review:

The most important point to keep in mind is that whenever cuts took place, they were always overwhelmed by large counterproductive tax increases. Unfortunately, that point is often overlooked. This  approach to austerity — some spending cuts with large tax increases — is what President Obama has called the “balanced approach.”

Regardless of what one thinks about Europe’s tax hikes, de Rugy deliberately and grossly distorts Obama’s “balanced approach,” a term which he has applied to plans similar to the Bowles-Simpson deficit reduction proposal. That plan contained a 2-to-1 ratio of spending cuts to revenue increases. On what planet is $5 trillion in spending cuts larger than $2.2 trillion in taxes? The proposal floated by the Democratic members of the “supercommittee” last November — and ultimately rejected by Republicans — was weighted even more heavily toward cuts, to the tune of a 6-to-1 ratio. So much for compromise. President Obama, in pushing for an extension of the 78 percent of the Bush tax cuts that affect people earning less than $250,000, is certainly aware that sharp tax hikes can take money out of the pockets of working Americans. Unlike many of Congress’ Tea Party freshmen, who opposed an extension of the payroll tax cut as a useless stimulus measure, Obama is not an anti-Keynesian who dismisses the possibility of a lack of demand in the economy. Only in the world of voodoo economics are businesses hampered more by government regulations than a dearth of actual customers. When Obama talks about raising taxes, he is referring to the 3.9 percent of Americans who make more than $200,000 (for one person) or $250,000 (for a couple). While across-the-board, regressive taxes that hit large segments of the population can indeed slow the economy, liberals would argue that taxing a sliver of the population in order to afford stimulus measures like unemployment benefits and safety net programs aimed at the masses can actually help economic growth. In fact, by opposing a payroll tax cut that would put more money in the pockets of everyday Americans, Republicans are closer than Democrats to the Greek position of sweeping, working-class tax increases.

The GOP resists not only taxes on the middle class but taxes on the wealthiest people in the country as well. The idea that growth is hobbled by higher rates for millionaires is, to put it mildly, controversial. The stimulus that Barone maligns saved millions of jobs and kept thousands of teachers and police officers spending money in the economy. Europe’s taxation is a much blunter instrument than Obama’s targeted policies, and actually bears a greater resemblance to flat tax or “fair tax” backed by many Republicans. Both Herman Cain’s notorious “9-9-9” plan, which was considered by some critics to be a 27 percent consumption tax in disguise, and the 23 percent sales tax Mike Huckabee believes should replace income and corporate taxes echo Greece’s 23 percent VAT.

Graphic via Factcheck.org

Recently, conservative standard-bearers like Eric Cantor and Paul Ryan have had the nerve to argue that too few people pay income taxes; in the conservative mindset, the wealthy shoulder an unfair amount of taxes, while the 47 percent of households that earn too little to pay an income tax (though they do contribute payroll, sales and state taxes) are dangerously inclined to vote for big government programs that they get for free. “Broadening the tax base” so that “lucky duckies” pay more is exactly what has pushed Greece and Spain into a recession. When you hit the very people most likely to spend their weekly paychecks, what do you expect? Obama is hardly calling for the punitive 75% rates of France’s Francois Hollande, despite research — controversial itself — that suggests the highest marginal rate could be 76% with little decrease in revenue. Though there is reason to think that Emanuel Saez and Peter Diamond overstate their case when they argue that a deduction-free tax code could boast such a high marginal rate without discouraging income (the inflection point of the so-called Laffer curve), a return to Clinton-era rates for high-income earners is hardly soaking the rich. Factcheck.org has some nice charts (at left) showing the federal surpluses in the Clinton years compared to the deficits under the supposedly favorable Bush tax rates, prompting Steve Kornacki of Salon to observe that the establishment of a 39.6% bracket in 1993 drew Republican outrage “identical to what we are hearing from today’s GOP.” Kornacki writes:

For months in the spring and summer of 1993, they loudly and relentlessly decried Clinton’s effort to enact “the largest tax increase in the history of the world” — a plan that, they warned, would smother what was then a tentative economic recovery, plunge the economy back into recession, throw millions of Americans out of work, and ultimately result in a far worse deficit problem.

Of course, that’s not exactly how things worked out. There was no recession, no fiscal doomsday — in fact, economic growth surged in the mid- and late-1990s and revenue increased enough to tip the budget into surpluses. While the Clinton rate increases were hardly single-handedly responsible for this prosperity, and the bubble-fueled boom of the ’90s certainly had drawbacks, it also “did not cause any of the economic turmoil that Republicans guaranteed Americans it would and it did not hinder — at all — the sustained growth that marked the rest of the decade.”

Michael Barone’s column also trots out the old conservative canard that “money spent propping up state and local public employee unions and funding supposedly shovel-ready projects — major features of his 2009 stimulus package — didn’t do much for the economy,” and goes on to misrepresent the work of economists Christina and David Romer, whose research puts them closer to Paul Krugman than Arthur Laffer. Conservatives like to cite a study by the Romers that “evidence on government spending . . . suggests that high spending means lower growth,” yet Romer — whom Krugman often name-checks as “Christy” — is also on record as saying, “The evidence is stronger than it has ever been that fiscal policy matters—that fiscal stimulus helps the economy add jobs, and that reducing the budget deficit lowers growth at least in the near term.” Barone’s compatriots at the conservative website Investor’s Business Daily condemn stimulus spending as “a path the U.S. and European Union have already followed, adding trillions of dollars of ruinous debt to the West’s economies, without any growth in jobs or the economy to show for it.” Unfortunately for the folks at IBD, the consensus among mainstream economists — from the folks at Goldman Sachs and the Congressional Budget Office to Mark Zandi of Moody’s Analytics — that the 2008 stimulus saved or created nearly 3 million jobs is as strong as the consensus among mainstream scientists that human activity causes global warming. In short, beyond a claque of ideologically-motivated hacks, there are few experts who completely dismiss Keynesian economics out of hand.

A hilarious Photoshop job posted in the comments thread of Krugman’s blog.

However, critics (most more nuanced than Barone) have a point when they argue that European austerity — tax increases paired with spending cuts — is not the same as the American version touted by Republicans as the “path to prosperity.” Where the fiscal policy implemented on the Continent fits the classic definition of austerity, the Paul Ryan vision for America comprises one part draconian spending cuts and one part sharp tax cuts. It’s traditional supply-side economics, a doctrine which hasn’t been updated since the Reagan years (and probably won’t be any kinder to average people than the Reagan years were either). Adding to the sense of time-warp is Arthur Laffer, who is is still banging around the WSJ editorial page and serving as an adviser to Kansas governor Sam Brownback, whose latest budget slashes the income tax by $3.7 billion over five years while raising taxes on the poor and cutting funds for education and social services. Free-market conservatives like Veronique de Rugy argue that Krugman and his fellow Keynesians disingenuously conflate American and European austerity when they paint Republicans as advocating the same policies that are failing across the pond. Krugman indeed has harsh words for Europe’s Austerians, as he calls them, and he does forcefully denounce those who would impose similar spending cuts on the U.S. Whether or not Europe has actually cut spending (Krugman says yes, de Rugy says no), the GOP is certainly calling for a massive reduction in domestic spending; it is this reduction that Krugman argues is unwise, above and beyond any comparison to the Eurozone. In reality, Krugman is making two separate arguments; his critique of Britain and Germany and his critique of Paul Ryan and company do not necessarily stem from the same reasoning, but de Rugy is correct that the two do tend to blend together.

Some of this is probably a deliberate move, as it makes for a neat narrative to accuse Republicans of pursuing the failed policies of Europe, but part of it likely results from Krugman’s own prodigious output: with two columns per week and an average of three blog posts per day, the Princeton professor is making a lot of arguments on a lot of topics. Other liberal pundits frustrate because of what seems to be economic ignorance; Steve Benen, who blogs for Rachel Maddow at MSNBC, makes a common error when he claims that Republicans should welcome “Taxmageddon,” the end-of year “fiscal cliff” that pairs the severe spending cuts mandated by the failure of the supercommittee with the expiration of the Bush tax cuts and the lower payroll tax. Benen thinks that, “if Republicans were sincere” about their anti-deficit rhetoric, “yesterday’s CBO report would be seen as great news — after all, the automatic cuts and higher tax rates would not only shrink the deficit immediately, it would prevent trillions of dollars in new debt over the next decade.” But just as it’s perfectly valid for Democrats to prefer balancing the budget with higher taxes on the rich rather than reduced spending on the poor, it’s equally valid for Republicans to view one method of reducing the deficit (tax increases) as disastrous, while seeing another method (spending cuts) as virtuous. One doesn’t have to agree with the conservative stance to admit that it is no more contradictory than its liberal counterparts.

Similarly, de Rugy has a point when she appeals to logic, writing that “I am not saying that there is no austerity in Europe. I am just saying that we need to stop talking about austerity as if all that Europe has done is cut spending. Instead, we should start acknowledging that austerity in Europe means some spending cuts and tax increases.” Though she’s lying through her teeth when she claims not to have said there is no austerity in Europe — how else would you interpret lines like “Spain, the United Kingdom, France, and Greece — countries widely cited for adopting austerity measures — haven’t significantly reduced spending since 2008”? — she is correct that Krugman could better define the type of austerity that he (accurately, even de Rugy admits) condemns in Europe.

It’s worth noting that there’s considerable debate over whether Europe has actually cut spending. The idea that “there hasn’t been austerity” may be true in that taxes have gone up, but despite conservative protestations, there is plenty of evidence of real spending cuts, whether it is to public pensions (even those greedy government workers inject money into the economy, you know) or wages. Krugman et. al. marshal some good arguments that spending has indeed been cut, including the chart at left, which shows the decrease in public investment as a percentage of GDP in Britain, and which Krugman cites as an example of “self-defeating austerity.” It’s hard to know who’s correct on the specifics, though, as neither de Rugy nor Krugman and his defenders directly address each other’s criticisms. Brad Plumer castigates de Rugy for her contention that countries in the Eurozone have not cut spending: “Yes, there’s been austerity in Europe,” he writes. Plumer offers a chart which seems to show that most of the “fiscal consolidation” occurring in developed countries can be attributed to spending cuts (the blue bars). De Rugy responds that most of the spending cuts are back-loaded and have not yet taken place; though this may be true, it doesn’t explain why Plumer’s chart is inaccurate. De Rugy simply repeats, ad infinitum, that, though “taxes usually do get raised, highly decried drastic spending cuts are often nowhere to be seen. Not surprisingly, the result has been quite disastrous. Not surprisingly either, everyone blames the spending cuts, rather the the tax increases, for the poor results, and austerity gets a bad name.” Perhaps both Plumer and de Rugy have valid points; there are many countries in Europe, and while Britain’s spending cuts may be back-loaded, Spain’s most certainly have not.

To some degree, the argument over the dictionary definition of austerity is a diversion. It eats up the oxygen in the room for the real debate over the merits of Germany’s prescription of budget cuts and tax increases, and it distracts from the Paul Ryan version being pushed in the U.S. And perhaps this is intentional; after all, it’s easier for partisans like de Rugy to bicker over particulars than defend the evisceration of the Medicare guarantee or the paring of WIC benefits. When she opines that “we need a new term to describe measures that actually cut spending and structurally reform the labor market or entitlement programs,” one gets the sense that she simply doesn’t like her precious supply-side economics being saddled with a term as freighted — and a policy so universally recognized as disastrous — as “austerity.” Also, de Rugy would have us believe that Krugman always equates European and American austerity, when quite often he is simply criticizing Europe without any mention of his own country. He does in fact acknowledge the conservative-approved definition of austerity; in what he calls his original 2010 “attack on the myths of austerity,” he wrote:

Well, there have been historical cases of spending cuts and tax increases followed by economic growth. But as far as I can tell, every one of those examples proves, on closer examination, to be a case in which the negative effects of austerity were offset by other factors, factors not likely to be relevant today. For example, Ireland’s era of austerity-with-growth in the 1980s depended on a drastic move from trade deficit to trade surplus, which isn’t a strategy everyone can pursue at the same time.

Brad Plumer addresses the conflict head-on when he takes issue with de Rugy’s charts purporting to show an absence of spending cuts in the Eurozone. He writes that she “seems to misunderstand what austerity is. It’s not all about spending cuts . . . . Countries in the euro zone have been pushing forward with austerity, through a combination of spending cuts and tax increases.” But it is what Plumer says next that is most crucial:

The standard Keynesian prescription for countries that are stuck in a deep economic slump — and this seems to describe much of Europe — is to actively increase deficits through more spending or tax cuts.

This gets at the heart of what is so wrong with de Rugy’s constant harping about “anti-austerity critics” who focus solely on spending cuts. In truth, her complaint really misses the point of Krugman’s critique altogether. De Rugy paints him as a fraud because she sees no spending cuts in Europe, but Krugman’s prescription is not merely for maintaining current levels of spending. If he misunderstands austerity, de Rugy misunderstands Keynesian economics, and the misunderstanding is equally as deliberate.

Krugman concentrates on budget cuts not only because those are the elements of austerity Republicans are most vocal about wanting to impose on America but because his prescription for recession is exactly the opposite. He doesn’t define austerity just as cutting spending but as keeping it flat during a recession. Krugman is a classic Keynesian, and Keynesian economics recommends fighting a recession with both massive stimulus and targeted tax cuts. For this reason, it’s attacking a straw man to criticize Krugman (and Obama) for wanting to raise taxes. Though he indeed thinks higher income Americans should pay more, that’s a long way from asking for the sort of increases Greece is experiencing. In fact, Krugman was a vocal advocate of keeping the payroll tax low, and like Obama, he would extend lower rates for low- and middle-income earners. More importantly, he thinks we need immense stimulus, which is obviously not happening in Europe, no matter how de Rugy slices her numbers. She’d like us to think that, simply because there haven’t been massive budget cuts, Krugman is wrong, when he’s really saying that flat spending is a disaster in itself. Ironically, though de Rugy appends to one of her screeds a comment from The Economist’s Will Wilkinson that accurately diagnoses the problem with her charts, she doesn’t seem to grasp the import of his critique:

I suspect the entire debate hinges on a difference in assumptions about the relevant spending baseline. If your theory prescribes significantly ramping up spending during recession, low or flat spending growth can look perversely “austere,” even if absolute spending as a % of GDP is very high.

In fact, keeping government spending flat when private spending plummets is really budget-cutting in disguise, because the entire GDP goes down — which also happens to make government spending account for a larger percentage of the economy. This keeps the graph line for level of spending conveniently (for de Rugy, at least) flat. Total spending is still dropping, even if government spending is unchanged. Republicans would have us cut government spending as well as cutting taxes, on the notion that households and businesses would spend that extra money in their wallets. But in a recession, by definition, businesses are not spending the money they already have. It’s the paradox of thrift — everyone can’t save all at once and not cause a depression. Businesses are already flush with cash; they hardly need lower taxes to be motivated to spend. In reality, cutting taxes won’t goose the economy; it will simply transfer more money from government (which would actually spend the money on goods and services, boosting GDP) to people who will let that money sit idle in a savings account. The familiar argument that money saved is available for investment doesn’t even hold, as businesses aren’t asking for loans. There is no demand, which I guess shocks Republicans, whose economics dictate that insufficient demand is somehow mathematically impossible. No one is using that money to open more plants because consumers aren’t buying the goods those plants produce. That’s where the much-maligned stimulus comes in. Government can step into the breach, either by directly buying those goods via infrastructure projects or by transferring the money to citizens (via paychecks or unemployment benefits) who will buy those goods and create demand. Alan Blinder, a former vice chairman of the Federal Reserve who recently ventured into the enemy territory of the Wall Street Journal op-ed page to advocate sparking demand via greater government spending, argues that we are missing out on a major opportunity to stimulate a lackluster economy via infrastructure improvements that will actually increase growth in the long run. As Blinder writes,

Suppose government borrowing is used to finance productive investments in public capital—such as highways, bridges, and tunnels. Right now, the U.S. government can borrow for 10 years at under 2% per annum. At these super-low interest rates, you don’t have to be a genius to find many public infrastructure projects with strongly positive net present values. Borrowing to make such investments will enhance long-run growth, not retard it.

Conservatives, despite all evidence to the contrary, deny that such investment can ever drive growth enough to actually boost government revenues. In fact, in the conservative reality, there is no such thing as public-sector investment; only the private sector can invest, while government can only engage in “wasteful spending.” Ironically, though Republicans reject the type of dynamic budget scoring that would attribute future revenues to current spending/investment, they accept as an article of faith (and insist the CBO should score as such) the controversial argument that cutting taxes leads to higher revenue. (While this may be true in some cases, Reagan economist Bruce Bartlett points out that it definitely did not happen with the Bush tax cuts, GOP politicians protestations notwithstanding. Tax cuts typically recoup only one-third of lost revenues.) Liberal economists, unlike conservatives, at least realize that running deficits during lean times, whether those deficits are driven by higher spending or lower taxes, can boost the economy: “It’s pretty simple,” Blinder says. “If the government spends more money without raising anyone’s taxes to pay the bills, that adds to total demand directly. That’s true, by the way, whether you like the specific expenditures or hate them. Similarly, cutting somebody’s taxes without also cutting spending raises spending indirectly—again, whether you like the tax cut or not.”

Of course, straw men aren’t the exclusive tools of the right. The left – or “centrists,” as pundits like Thomas Friedman of the Times and Matt Miller of the Post like to be called – are often just as guilty of false equivalence, peddling the temper-soothing pablum that both parties are to blame for economic illiteracy. Just as a columnist doesn’t risk rocking the boat by blaming both Democrats and Republicans for gridlock in Washington, supposedly sharp-witted economists like Peter Orzag not only sets up straw men but erects an entire field of scarecrows when describes the “ongoing jobs-versus-austerity debate” as “so frustrating.” Orzag, whose signature accomplishment as director of the Office of Management and Budget between 2007 and 2008, was to win neither a large enough stimulus package nor a credible deal on deficit reduction, deliberately mischaracterizes the position of those who, like Krugman and Joseph Stiglitz, prioritize short-term stimulus over efforts to pare the national debt. He writes that:

What we really need is to be bolder on both jobs and austerity, by pursuing a combination policy. Additional stimulus is required because the labor market remains extremely weak. Delayed deficit reduction is also needed to reduce uncertainty over how the federal government will navigate its perilous fiscal path — and to boost the chances of enacting more stimulus despite the looming debt limit.

For economists like Krugman and Alan Blinder, there is nothing controversial about this proposal. In fact, Blinder essentially takes a page out of Orzag’s book:

First, enact a modest stimulus, sharply targeted on job creation—and avoid falling off the fiscal cliff. Second, once the economy is ready, start on something that resembles the 10-year Simpson-Bowles deficit-reduction plan—which would pay for the stimulus 15-20 times over.

Those aren’t the words of an unbending, doctrinaire liberal who refuses to contemplate long-term deficit reduction. Yet centrists like Orzag lump Blinder’s breed of liberals together with the 97 percent of House Republicans who have pledged fealty to Grover Norquist’s no-exceptions ban on tax increases, or the 100 percent of Republican primary candidates who declared unacceptable any budget deal that offered a paltry $1 in taxes for every $10 in spending cuts. Which party is the more intractable here?

Though opponents of austerity and opponents of stimulus often talk past each other, it’s clear — to me, at least — that the level of mendacity on the conservative side dwarfs the mildly disingenuous claims of my personal favorite Princeton professor. As Thomas Man and Norman Ornstein famously put it in the Washington Post: “Let’s just admit it: The Republicans are the problem.” Yes, they most certainly are.