False Politics of Austerity Hurt Democrats: Thomas B. Edsall

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Jan. 6 (Bloomberg) -- The U.S. faces daunting economic and budgetary challenges, and a variety of factors make the current situation more serious than other periods of crisis, including the Great Depression.

First and foremost, in the past, the general expectation -- and expectations are a powerful force in economics -- was that the economy would recover, the war would end, and the nation would get back on an even keel. Today, the expectation is for only a short-term return to economic growth and declining deficits.

Recently, people’s anxiety about the economy has centered on the issue of the national debt. But the real concerns lie in the distant outlook. According to some scenarios, long-term budget shortfalls could trigger a political or market reaction that brings a sudden change in interest rates, exchange rates, capital outflows, etc. Avoiding these outcomes will require significant and sustained changes to federal spending and revenue policies.

This means substantial cuts in widely popular programs, as well as tax hikes, the bete noire of American politics. Ever since 1984, when Democratic presidential nominee Walter F. Mondale famously proposed raising taxes, only to lose every state except his native Minnesota to Ronald Reagan, proposals to raise revenues have been shunned by both parties.

No New Taxes

For Republicans, this stance is deeply ingrained orthodoxy. For Democrats, it is a matter of survival on Election Day. The reality, however, is that if long-range deficit reduction is the goal, a failure to raise taxes means disproportionately penalizing Democratic constituencies. So for Democrats seeking to represent the interests of core constituencies, a substantial tax hike would seem to be an essential policy tool.

Given that the deficit and the debt will be part of the 2012 election debate, it will be difficult for Democrats to evade the subject of raising taxes. For the Republicans, on the other hand, the focus of attention on the debt is a win-win situation. Republicans experienced striking success in early skirmishes over the budget for fiscal year 2011, giving additional momentum to the austerity movement. On April 8, 2011, they triumphed in pressing President Barack Obama and Senate Democrats to agree to a record-setting $38 billion in spending cuts, some $5 billion more than House Speaker John Boehner had originally called for.

At the same time, House passage of Budget Committee Chairman Paul Ryan’s version of the budget -- which proposed dismantling much of the modern welfare state -- forced the Obama administration to radically alter its budget proposal for fiscal year 2012 and to produce a plan calling for major surgery on federal spending, including reductions in entitlement programs.

Early polling showed widespread opposition to some of the Ryan committee proposals, especially the conversion of Medicare from an entitlement into a voucher program that would not cover the full cost of medical treatment. Even Republican Newt Gingrich, recognizing its political liabilities, described the plan as “right-wing social engineering.”

Victory for Conservatism

Despite these concerns, the public, according to an April 2011 Gallup poll, was evenly split when asked to choose between the Ryan committee budget (43 percent) and the Obama budget (44 percent). Yet the very fighting between the Republican House and the Obama administration over competing plans to slash federal spending was a huge victory for conservatism. The movement’s starve-the-beast strategy had finally forced Democrats and Republicans to consider austerity measures.

Many, if not most, economists argue that substantial revenue increases are a necessary part of long-term deficit reduction and that new levies should be more substantial than Obama’s proposal to impose a tax hike only on the rich.

In addition, while there is general consensus that the growing debt is unsustainable, some credible economists dissent from this view. James K. Galbraith of the University of Texas, for example, contends that everything depends on interest rates. People assume rates will rise. But if you suppose, more realistically, that they’ll stay close to what they are now, says Galbraith, “then the current primary deficits are not unsustainable, and all the attacks on Social Security and Medicare and Medicaid are revealed for what they are: the same old crowd going after their habitual target.”

The economist Michael Spence, a 2001 Nobel Prize winner, argues that obsessive concern with deficits and debt oversimplifies, and perhaps masks, a more complex problem: the increasing role of emerging markets in shaping the U.S. economy, especially the job market.

It would be difficult to overestimate the detrimental consequences of these developments for American confidence. Globalization, according to Spence and other observers, has put America in an uncomfortably passive position, subject to external forces it cannot control but only, at best, moderate or fine-tune. Employment exported from the U.S. started with low-skilled jobs and, over time, moved up the ladder to higher-skilled, better-paying work.

Exporting Jobs

Spence and his co-author Sandile Hlatshwayo, a researcher at New York University’s Stern School of Business, use the shifting pattern of exports from China to illustrate the point. In 1992, exports from China were dominated by textiles, apparel and footwear. By 2005, Spence and Hlatshwayo wrote, export production in China had shifted to telecommunications, office machines and electronic machinery. In other words, China was taking many more skilled and well-paying jobs from developed countries in 2005 than it had 13 years earlier.

Until the start of the Great Recession, the U.S. was able to absorb this loss of jobs because of strong employment growth in work that can be done only within the U.S., especially in government and health care. Now, however, American governments at every level are shedding jobs, while simultaneously searching for ways to reduce health-care costs. The U.S. is caught in a tightening free-market vise.

The global economy has an abundance of human resources, and as emerging economies develop, the supply only increases. The sectors of the supply chain in which these economies have the potential to be competitive are enlarging. And, as a result, first low-skill, then mid-skill and increasingly high-skill workers in the U.S. are seeing their job options narrow and their incomes stagnate.

This is not because of liberal policies, market failure or a calculated effort on the part of foreign powers to undermine the U.S. It is just a natural outcome of market competition.

A policy of strict austerity will not change the situation, because the problem is not debt but rather a lack of demand -- and, therefore, of consumption and investment. Extreme belt-tightening only curtails demand. Conservatives and others who think a balanced budget will produce a balanced economy are mistaken.

(Thomas B. Edsall, a former political reporter for the Washington Post, is a professor of journalism at Columbia University, an online columnist for the New York Times and the author of “The New Politics of Inequality,” “Chain Reaction” and other books. This is an excerpt from his book, “The Age of Austerity: How Scarcity Will Remake American Politics,” to be published this month by Doubleday. The opinions expressed are his own.)

To contact the writer of this article: Thomas Edsall at t.edsall@verizon.net.

To contact the editor responsible for this article: Mary Duenwald at mduenwald@bloomberg.net.