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Progressive Economists Warn Obama Against Austerity Path

Americans don't want a "Grand Bargain"--they want sound and fair economic policies

Jon Queally, staff writer

As the public dialogue leaves the 2012 election behind and the domestic policy conversation in the US converges towards a singular focus on the so-called "fiscal cliff," New York Times columnist and Princeton economist Paul Krugman says that those proposing tax cuts for the wealthiest and steep cuts to key social programs like Medicare, Social Security and Medicaid shouldn't just be ignored, they shouldn't even be allowed a seat at the table.

Robert Kuttner, economist and senior fellow at Demos, echoes Krugman by calling Obama's willingness to consider massive cuts with only minor revenue gains, a failed approach both policy-wise and as a negotiating strategy. "If anything," Kuttner said of the present US federal budget, "it needs spending increases."

As Krugman writes:

Contrary to the way it’s often portrayed, the looming prospect of spending cuts and tax increases isn’t a fiscal crisis. It is, instead, a political crisis brought on by the G.O.P.’s attempt to take the economy hostage. And just to be clear, the danger for next year is not that the deficit will be too large but that it will be too small, and hence plunge America back into recession.

"The deficit scare mongers are not interested in numbers and economics," says Dean Baker, co-director of the Center for Economic and Policy Research. "They want to gut key government programs, most importantly Social Security and Medicare. That is why they are pushing the fear stories about the debt and deficit. This is the rationale for the Campaign to “Fix” the Debt, a collection of 80 CEOs ostensibly focused on getting the budget in order."

But, in an extensive piece that examines the details of the "fiscal cliff" debate, The Huffington Post's Ryan Grim and Sarah Bufkin posit that conventional wisdom in Washington is in direct conflict with what the American people—again and again—have said they would like to see.

"Washington's establishment considers a grand bargain to be as necessary as it is prudent and responsible," write Grim and Bufkin. "Regular people, however, don't see it as a bargain at all." They write:

[...] More than anything, lawmakers will likely target Social Security, Medicare, Medicaid and a host of other social programs that help those with the fewest advocates in Washington, including people on food stamps, veterans, retiring federal workers, home health care workers and the elderly.

Seventy percent of voters, however, prefer a more balanced approach to deficit reduction than the deep, across-the-board cuts that the GOP has advocated, according to a new survey conducted by two progressive groups, Democracy Corps and the Campaign for America's Future. They support eliminating waste and tax breaks for special interests while also investing in critical areas like education and worker training programs to spur long-term growth.

In other words, Americans rejected the GOP approach to the crisis at the polls last week in clear terms, but Washington—Republicans, many Democrats, and a chorus of elite media pundits and influential center-right think tanks—refuse to listen. Not a week after his re-election, President Obama is dangerously close to falling back into the same trap he faced in previous budget battles.

"While Obama's supposed new toughness on tax policy has gotten most of the attention," warns Kuttner, "he seems poised to give away the store on spending cuts." And continues:

Recently, Bob Woodward was given a leaked copy of the Administration's offer in the proposed budget deal of 2011 that fell apart because House Speaker John Boehner was unable to deliver his Republican caucus to support any revenue increases.

In that aborted deal, Obama was prepared to cut Social Security and increase the Medicare eligibility age. White House leaks have suggested that both items will be on the table this time. That's bad policy, and worse politics. The clearest principled differences that distinguish Democrats from Republicans is that Democrats are staunch defenders of Social Security and Medicare, while Republicans are eager to cut, privatize, and voucherize.

So the good news is that the Democrats won the election and President Obama's spine has been stiffened on the subject of taxes. The bad news is that the skids are greased for a budget deal that cuts more than necessary, risks putting the economy back into recession, and blurs differences between the parties on critical issues like Social Security and Medicare.

Few are arguing that what's been called the "fiscal cliff" won't have a serious impact on the US economy if it is not seriously addressed by leaders in Washington. Krugman, for his part, puts the emphasis on the word serious.

"Look, we should be having a serious discussion about America’s fiscal future," Krugman concludes. "But a serious discussion is exactly what we haven’t been having these past couple years — because the discourse was hijacked by the wrong people, with the wrong agenda. Let’s show them the door."

Writing for Dollars and Sense magazine Heidi Garrett-Peltier, assistant research professor at the Political Economy Research Institute, offers three key alternative policy proposals that will avoid the pitfalls of the fiscal cliff, but also respond to calls from US voters to save social programs and add jobs.

First, delay the repayment of debt until the US emerges from the recession.  This is a common sense approach that Krugman and others keep repeating and aligns perfectly with Kenseyian economics that says stimulative spending in a recession is necessary.

Second, let tax cuts for the nation's wealthiest 2 percent expire. Garret-Peltier cites the non-partisan center OMB Watch, whose analysis showed that allowing rates to go up for those making over $250,000 a year "would generate almost a trillion dollars over the next ten years."

And last, she says, invest in public spending in healthcare, education, and other social services and let the budget cuts needed come out of ineffective and wasteful military budgets. She writes:

Dollar for dollar, non-military domestic programs create many more jobs than military spending. One billion dollars spent on the military (and related industries) supports about 11,200 jobs in the United States. That same amount spent on healthcare supports 17,200 U.S. jobs; spent on education, 26,700 U.S. jobs. Why do these programs create more jobs, dollar for dollar, than defense? Because they are more labor-intensive than defense: more of the dollars go to pay salaries rather than to buy materials and equipment. And more of non-defense spending stays in the United States. As teachers and healthcare workers spend their income in their towns and cities, they create more demand for food services, healthcare, and other local industries.

Whether or not the advice of economists like Krugman, Kuttner, Garrett-Peltier, and Baker trickles up to those at the negotiating tables, is anyone's guess.

However, as Kuttner specifically warns, unless Democrats, progressives, and others keep the pressure on Obama to do the right thing, there will be a dangerous desire on the President's part to practice bad economics in the name of bipartisanship.

"Despite his recent victory, if he is too eager to make a deal," says Kuttner, "he—and we—will get rolled."

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