The Deficit Hawks: When Did They Stop Being Wrong About the Economy?
The UK's looming triple-dip recession should be austerity's death knell, but in the fevered brains of Washington analysts it lives on
The news that the UK, with negative growth in the fourth quarter of 2012, faces the prospect of a triple-dip recession, should be the final blow to the intellectual credibility of deficit hawks. You just can't get more wrong than this flat-earth bunch of economic policy-makers.
They're pretty much batting zero. They failed to foresee the collapse of housing bubbles in the US and Europe and its consequent downturn. They grossly underestimated its severity after it hit. And their policy prescription of austerity has been shown to be wrong everywhere that applied it: in the US, the eurozone and, especially, the UK.
By all rights, these folks should be laughed out of town. They should be retrained for a job more suited to their skill set – preferably, something that doesn't involve numbers, or people.
But that's not what is happening. The people who got it all wrong are still calling the shots in the UK, the IMF, the European Central Bank, and Washington. The idea that job security would have any relationship to performance is completely alien in the world of economic policy. With few exceptions, these people enjoy a level of job security that would make even the most powerful unions green with envy.
Of course, the cynical among us might note that the highest earners have done just fine. High unemployment rates undermine workers' bargaining power, which ensures that almost all gains from economic growth go to those at the top. In the US, the profit share of national income is near its post-second world war high.
Even if this upward redistribution was not a deliberate goal, it certainly affects the urgency with which policy-makers attend to depressed economies and high unemployment. If the stock markets were tumbling, as they were in 2008-09, there would likely be a lot more attention devoted to fixing the economy. (And if you think a plunging stock market has to mean that the economy is going down, you need to study more economics.)
Instead of focusing on glaring issues, like how the economy is down 9m jobs from its trend growth path, or how the typical worker's real wage has risen by just 2% over the last decade, the policy people in Washington are debating how to reduce the deficit. This makes about as much sense as debating the right color to paint the White House kitchen.
Anyone who bothers to look at the data knows that we have large deficits because the economy collapsed. There are people who are paid to yell about "out-of-control" spending, but the numbers don't cooperate with their story. There are also plenty of people who blame large deficits on the wars and Bush tax cuts, but those issues aren't the cause of these deficits, either.
We have large deficits because the economy collapsed, end of story. The folks who claim otherwise are either too lazy to look at the numbers or prefer to tell stories that aren't true.
One of my favorite quirks in the Washington debate is a fear that if we allow our public debt to exceed 90% of GDP, then terrible things will happen to the economy. Remarkably, this sort of Twilight Zone fear – don't cross the 90% line – is taken very seriously in Washington.
The silliness of the figure was made clear in a blogpost by the Institute for Energy Research last week, which claims the government owns more than $120tn in energy resources. There are plenty of reasons to question the numbers from this industry-funded outfit, but let's assume that they are off by a factor of ten. This means that the government owns $12tn in energy resources.
Suppose we sell off half of these assets, netting the government $6tn. This would immediately lower our debt-to-GDP ratio by almost 40%. That would put us way below the 90% twilight zone threshold, and without any cuts to social security, Medicare, or other programs that low- and middle-class people depend upon. We wouldn't even have to raise taxes on "job creators".
This is absurd, of course. It's ridiculous to imagine that the government's financial situation is in peril if we have a debt-to-GDP ratio of 90%, and that everything would be fine if we just sell off our energy assets to reduce our debt to 50% of GDP. But that is what Serious People in Washington believe (or, at least, what they'll claim to believe), until they finally get too embarrassed to spew such nonsense.
The unfortunate reality is that on both sides of the ocean we have policy-makers who are sputtering nonsense about how to remedy the economy. And for the foreseeable future, they will have the political power to keep their jobs – no matter how disastrous their policy might be.
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