The Reckoning

The Fiscal Cliff and Austerity: Will Another Crisis Be Squandered?

Boehner and Obama

Speaker of the House John Boehner (R-OH) listens as U.S. President Barack Obama speaks with congressional leaders in the Roosevelt Room of the White House on Friday.

Photo by Olivier Douliery-Pool/Getty Images

With President Obama and House Speaker John Boehner now holding the most important negotiations either of their careers, the White House has done a predictably miserable job of preparing the ground. Even accounting for GOP denial, too much of the discredited economic dogma of the right has been allowed to survive. You can blame this on the strains of a close election for this oversight, of course, but that’s a cop out.

With talks now underway, too many Americans have not been exposed to the lessons that European fiscal policy has served up over the past several years when it comes to radical austerity. The lessons are clear, and they have direct relevance to the American dilemma.

They are very much in the news right now, too. Over the past two days, the eurozone (that part of the EU using the euro) officially fell into a double dip recession brought on by excessive austerity, and the UK’s central bank essentially predicted that the double dip its government precipitated with similar fiscal policies earlier this year is likely to turn into a triple dip sometime in 2013.

By now it should be blindingly obvious that the kind of budget cuts the right likes to champion will do just the same to the US economy. Indeed, it would also deepen the economic slowdown that is afflicting almost every major economy in the world.

So why has Obama failed to drive this lesson home?

I wish I knew. As I’ve been saying since 2010 - and more importantly, a slew of  notable economists have said it too – the best way to show what draconian budget cuts would do to the United States is to look at the results they’ve brought in other complex, developed economies: i.e., Europe.

You can make an argument – speciously, I think, but still an argument – that the experience of eurozone economies is not a valid analogy because a good deal of their dysfunction derives from the fact that they’ve created a deeply flawed currency union.

But Britain’s economy is a far better microcosm, and this week the Bank of England confirmed my argument: the stubborn refusal to stimulate economic growth in the face of a balance sheet recession will lead to yet another recession – a triple dip, almost unprecedented for a major economy

This week’s Bank of England inflation report for November confirms that the 1 percent growth in Q3 2012 that the government promised was the end of the double dip will be an anomaly. It appears all that growth – or nearly all – can be attributed to the stunning success of the London Olympics. With the torch out, the fire stoking the British economy diminished, too. The Bank now expects zero or negative growth in Q4 – or, put less delicately, a triple dip.

Chris Giles, the economics editor of the Financial Times, called the BOE forecasts “the gloomiest we’ve seen for a long time.” In effect, he says, the idea that tight fiscal policy and monetary expansion would drive demand has been completely destroyed by the British test case.

Why, then, is this almost never referred to in the enormously important American debate? It should by now be conventional wisdom – an unassailable fact – that replicating the road that the British government set out upon in when the Tory-led coalition government took power in May 2010 has been a disaster.

In spite of the fact that analysts warned of this back in 2010 (as I did in my book, The Reckoning: Debt, Democracy and the Future of American Power, which I finished writing in about August of that year), many people in the United States still accept the nonsensical idea that cutting government spending alone will fix what ails the US economy.

Here’s what I wrote at the time:

In effect, by strangling the British public sector with austerity at precisely the time when British consumers and corporations felt most distressed, [British Prime Minister] Cameron has guaranteed a deeper downturn, gambling that long-term economic balance is better served by a smaller public sector, with all the sacrifices that implies, than by policies that stimulate GDP growth.

Among critics of this approach, David Blanchflower, arguably the world’s leading labor economist, warned that deep austerity on the heels of a deep recession was a historic policy mistake that could permanently lower the “speed limit” of British GDP growth. He accused George Osborne, the top economic policymaker in Cameron’s government, of engaging in a short-term accounting trick to make Britain’s national accounts look better, all fueled by Thatcherite ideology rather than economic reason. By the middle of 2011, with his nightmare prediction unfolding as expected, Blanchflower chronicled the results in the New Statesman and Society, writing that “Osborne’s policies will be responsible for the worst recession in a century—and maybe it should be named the ‘Second Great Depression.’” Britain’s post-crisis recovery stalled to near-zero growth, effectively a double-dip recession, and by December 2011 was on course to become Britain’s worst-ever post-crisis recovery, supplanting the long, Depression-era slog of 1930 to 1934.

In the United States, the lesson has failed to take. Even before US growth began to flatten out once again in the autumn of 2011, the “recovery” that allegedly began in late 2009 had become the weakest of any since World War II. But the parallels are rejected on the right. With the silly season of primaries looming, when rational thought takes a back seat to appeasing the zealous base, the GOP appears unwilling to address the British debacle. Instead, an intellectually dishonest ditty from the Grand Old Hymnal, “What Would Reagan Do?” wafts up from the party’s rank and file.

Whether the 1980/2012 comparison is relevant or not (the case is dubious at best), contemporary Republicans seem unable to grasp what Reagan actually did in practice as opposed to the sepia-toned remembrances of party lore. So thick is the propaganda around the Gipper that no one recalls how, faced with a difficult economy and divided government himself in the 1980s, Reagan chose to mix tax cuts with stimulus spending and, yes, tax increases, too [emphasis added]. Bruce Bartlett, an economic advisor to Reagan and a Treasury official under George H. W. Bush, professes amazement at the twisting of the historical record by those who allegedly idolize his former boss. Bartlett reminds us: “The cumulative legislated tax increase during his administration came to $132.7 billion as of 1988 [$367 billion today]. This compared to a gross tax cut of $275.1 billion. Thus Reagan took back about half the 1981 tax cut with subsequent tax increases.”

Wouldn’t it be nice if enough Americans understood these facts to make their denial politically impossible? Imagine Obama going into the fiscal cliff negotiations with this nonsense already settled. Instead, this will be the central obstacle to progress toward a deal - the zombie philosphy of trickle down economics and supply side growth.

Given the week’s news in the UK and the rest of Europe, I hope Obama will deploy the argument in his negotiations with Boehner, hammering home the British example in particular. Too little, too late? Maybe. And true, he risks belng labeled some kind of Euro-Venusian Socialist every time he points to anything in Europe.

But the time to worry about that kind of thing ended on November 6. Today, the enemies on his right who would never have voted for him anyway really don’t matter much anymore. The heart of the problem now is economic discredited GOP economic dogma. Now’s the time to drive a stake right through it.