President Obama has the economic and moral high ground on the debt ceiling debate – but won’t take it. With an eye next year’s elections, the Republicans are putting Obama on the defensive by using the debate to paint Obama as a big spending Democrat.
Let’s get the facts straight on a few things: the Republicans are largely responsible for the debt problem because they spent too much and taxed too little during the Bush years; and austerity economics doesn’t bring economic growth.
Why don’t we hear that from the White House?
John Maynard Keynes taught us that the future is uncertain and so governments need to prepare for economic downturns, because private markets won’t. He said, “The boom, not the slump, is the right time for austerity.” That means reducing spending and increasing taxes during growth spurts, and lowering taxes and increasing spending during recessions.
Contrary to Republican rhetoric, it is the Republicans under George Bush who brought the nation into unsafe debt territory during one of the most significant economic booms of our lifetimes. George Bush entered the White House inheriting a budget surplus and a manageable debt burden. As economist Menzie Chinn has shown, when Bush took office he inherited a public debt to GDP ratio at just 34%. But Bush forced through tax cuts for the rich and increased spending on a war that no other country would pay for – and increased the debt ratio by 17 percentage points to a concerning 51%.
The Republicans handed the Obama administration an economic crisis and an empty hand in terms of the ability to pay for needed fiscal stimuli to recover from the crisis. Nevertheless, Obama did the right thing, albeittoo modestly, and put forth a $700bn stimulus package that at least kept us from the abyss. The stimulus package and other spending by Obama only increased the debt ratio by 13 percentage points (compared to the 17 points under Bush) and was more economically justified, given the crisis.
The bulk of evidence shows that austerity economics does not bring growth during a downturn. A new IMF study looks at the experience with austerity in industrialised countries from 1978 to 2009, and finds that for every 1% of GDP in budget cutting, GDP is reduced by close to two-thirds of a percentage point and the unemployment rate increases by one third of a percentage point.
The one study (pdf) that rightwing pundits like to cite as evidence that austerity brings growth turns out to be flawed. Arjun Jayadev and Mike Konczal unpacked the study by Alberto F Alesina and Silvia Ardagna that claims that slashing deficits is associated with economic expansion and reductions in overall debt levels. Jayadev’s and Konczal’s closer look at the data finds the reverse: “when countries cut in a slump, it often results in lower growth and/or higher debt-to-GDP ratios.”
Now that government spending has declined by the most since 1983, unemployment is increasing rather than decreasing in the United States. The Republicans had their chance for austerity but got greedy; now, the mess needs to be cleaned up. We need further stimulus and a long-term plan to narrow the deficit – which can only be narrowed by strong growth and increased revenue.
The Republicans were wrong to spend and tax cut during the Bush years. They are wrong now to say that budget-cutting – and perhaps even a default, as some in the Tea Party caucus are advocating – will put the US back on track.
And Obama and the Democrats are wrong to agree with them.