It’s the austerity, stupid

Kevin Drum:

THE OBVIOUS QUESTION AT THIS POINT is: Why? It’s not as if we needed the skills of Nostradamus to predict the consequences of austerity. It’s pretty much textbook economics. Surely Reinhart and Rogoff aren’t entirely to blame for Washington’s perplexing decision to ignore Econ 101 and instead commit America to a self-defeating war on the deficit?

Of course not. Their paper was, after all, just another paper. It could only have the impact it did if it told people something they wanted to hear in the first place. But again: Why?

This transports us from the realm of academic economics into the realm of political speculation. But we can certainly speculate. Among Republicans, one obvious explanation is that austerity provides a handy excuse for cutting social spending that they’ve never approved of in the first place. (And—though no one will admit this in polite company—they probably found it pretty easy to talk themselves into opposing anything that might have given President Obama a growing economy to campaign on in 2012.)

What else? John Maynard Keynes thought of the economy as a simple machine: When a car has trouble starting, we don’t lecture it, we just fix the car. Likewise for the economy. But plenty of people find this unsatisfying. They think of economics as a morality tale: We’ve been on a binge, and now we need to pay the piper.

Other people rely on folk wisdom: Households have to tighten their belts when times are bad, so the government should too. Even Obama fell into that trap during his pivot to the deficit in 2010. But this is one of the most destructive bits of economic folklore ever to enter common circulation. The truth is exactly the opposite; the proper role of the federal government is to be countercyclical. When households and businesses are all cutting back at once, Congress needs to be the spender of last resort to keep the economy from falling even further into recession.

Adding even more momentum to these misconceptions is simple self-interest, since plenty of people have something to gain from austerity. Chief among them are creditors like banks and pension funds, which tend to be single-mindedly hostile to the risk of deficit-fueled inflation eating away at the value of their earnings, even if it means tolerating an extended recession. The finance industry also tends to like the political focus on austerity because it diverts attention from the market excesses that caused the banking crisis in the first place.

In other words, Reinhart and Rogoff were pushing on an open door. There were lots of powerful actors—Pete Peterson, Grover Norquist, the Washington Post editorial page—ready to leap at the chance to pretend that their pursuit of austerity was motivated not by politics or self-interest, but merely by a virtuous desire for economic growth. The 90 percent paper provided them that cover.

So have we learned our lesson from all this? Of course not. No further stimulus is even remotely on the table, either in the United States or in Europe, and Republicans are already promising another debt ceiling crisis unless Obama agrees to yet more spending cuts. The inmates took over the asylum three years ago, and they show no sign of leaving.

Austerity is working out fine for the 1 percent: Their jobs are safe, their investments are growing, and their taxes are low. But the rest of us are paying a high price in the form of slow growth, high unemployment, and stagnant wages for years to come. All things considered, we’ve been remarkably tolerant of our fate. The folks who run the world might do well to ponder how long that’s going to last.