Tea Party’s austerity virus: How Washington lost its fiscal mind

Thanks to Congress, members of an otherworldly counterculture continue to strangle the American economy

Published January 30, 2014 3:44PM (EST)

Tea Party supporter William Temple of Brunswick, Ga.                   (AP/David Goldman)
Tea Party supporter William Temple of Brunswick, Ga. (AP/David Goldman)

According to the philosopher George Santayana, “Fanaticism consists in redoubling your effort when you have forgotten your aim.” But what do you call redoubling your effort to pursue the wrong aim?

Answer: Bipartisan budget compromise.

The budget deal recently brokered by Republican Representative Paul Ryan and Democratic Senator Patty Murray was an improvement over the sequester that it partially replaced. The deal prevented $63 billion in scheduled sequester cuts from taking place, beginning with $45 billion in the coming fiscal year. Already, according to the CBO, the sequester and other fiscal tightening might have shaved 1.5 percentage points off U.S. economic growth in 2013 and would depress growth in the years beyond.

So anything that reduces the sequester-mandated cuts is good for the economy. But here’s the catch: absent the recent budget deal, the sequester would have cut $180 billion from the federal budget in the next two fiscal years. That means that the Murray-Ryan deal only reduces the cuts imposed by the sequester by one-third.

Recall that the sequester itself was imposed on Congress by the Tea Party Right in the Republican House. The Tea Party is still the winner—as a result of its budgetary hostage-taking maneuvers, it still gets two-thirds of what it demanded. As Robert Borosage points out: “Adjusted for inflation, total funding in this budget is 10 percent lower than that in George W. Bush’s last budget in 2008.”

Imagine if police hostage negotiations with kidnappers functioned like political hostage negotiations in contemporary Washington, D.C. We might be reading news reports like this:

In a joint press conference today, the kidnapper and the police hostage negotiator announced agreement on a compromise: rather than saw off all five fingers on one hand of the kidnap victim, as threatened, the kidnapper will saw off only two.

“Obviously we would prefer that our negotiating partner not saw off any of the fingers of the hostage he is holding at gunpoint,” the lead police negotiator told the press. “In fact, we would prefer that our negotiating partner free the hostage. But the perfect is the enemy of the good. Let’s be realistic, freedom for the hostage is just not going to happen. And losing two fingers is better than losing a whole hand.”

While Democrats persuade Republicans to accept slightly less destructive austerity, there is a consensus among mainstream economists that the economy needs the opposite of austerity—namely, much more fiscal stimulus. On the Democratic side, former Treasury Secretary and former chief Obama economic adviser Larry Summers calls for more spending to avert possible “secular stagnation.” Among Republicans, the head of President Reagan’s Council of Economic Advisers, Martin Feldstein—nobody’s idea of a wild-eyed left-wing Keynesian--has also called for more federal spending now, to be offset in the future when the economy is stronger.

In an op-ed in the New York Times in December, Feldstein wrote:

A bipartisan House-Senate conference committee on the budget is closing in on a compromise, before the House adjourns for the year, on Friday, that would limit the across-the-board budget cuts known as the sequester and prevent another government shutdown. But even this modest deal would not produce the kind of long-term fiscal policy needed to achieve strong income and employment growth.

To get the economy back on track, President Obama should propose, and Congress should enact, a five-year fiscal package that would move the growth of gross domestic product to above 3 percent a year and focus on direct government spending on infrastructure. ….

The total price tag over five years would have to exceed $1 trillion to achieve the needed rise in the economic growth rate.

The gap between the scholarly consensus in economics and the economic policy being pursued by Congress could not be wider. While sensible conservatives as well as progressives call for fiscal stimulus, the Republicans on Capitol Hill continue to push extreme austerity. The Democrats respond by begging the Republicans to accept austerity lite. And the “centrist” media celebrate another triumph of bipartisan compromise. Over the body of their prostrate victim, the doctors congratulate one another for their success in killing the patient somewhat more gradually than before.

To a certain extent, this situation can be explained by the class interests of the rich, who dominate both national parties. The asset inflation produced by quantitative easing has boosted their wealth, insulating them from feeling the kind of pain suffered by millions of their fellow Americans as a result of mass unemployment and slow growth. The wealthy would personally suffer little or at all from the economic distress caused by cuts in Social Security, Medicare and other federal spending and worsened by the weak post-recession economy—while such cuts would help to avert the prospect of higher taxes on members of their tax bracket in the future.

But ideology as well as interest is at work in support of Washington’s counterproductive economic austerity policies. The collapse of a “governing right” has created a conservative movement with the characteristics of an anti-establishment counterculture. Like other counter-cultures, such as anti-Darwinian creationists, it tends to reject any scholarship that undermines its fundamental beliefs. The members of the subculture are exposed only to a highly-edited version of reality that reinforces their biases.

An example of bias-reinforcement can be found in a recent Heritage Foundation backgrounder by Romina Boccia, entitled “Cutting the U.S. Budget Would Help the Economy Grow.” Boccia, who received her economics degree from the right-wing, Koch-funded George Mason University and now works for the conservative Heritage Foundation, relies on disputed if not discredited scholarship to make the case for what has been called “expansionary austerity.”

Boccia cites a paper by Alberto Alesina and other scholars: “In a paper that analyzes the effects of fiscal policy on investment in 18 member countries for the Organisation for Economic Co-operation and Development, Alberto Alesina and other economists found that higher government spending is associated with less business investment. However, when governments cut spending, private investment surges.” And she cites another study: “Academic research by a number of economists finds that countries with high debt levels experience lower economic growth. Carmen M. Reinhart, Vincent R. Reinhart, and Kenenth S. Rogoff found that debt levels between 90 percent and 120 percent of GDP correlate with slower growth of 1.2 percentage points.”

Anyone who has been following the debate about economic policy knows that a 2010 paper by Alberto Alesina and Silvia Ardagna, along with the 90 percent debt-to-GDP figure first put forth in a paper by Carmen Reinhart and Kenneth Rogoff in 2010, have been subjected to devastating criticism.

Arjun Jayadev and Mike Konczal of the Roosevelt Institute wrote a critique of the 2010 Alesina-Ardagna study, in which they pointed out that historically countries tend to cut their deficits during booms, not slumps. Moreover, when countries foolishly cut their deficits during a slump, the result tends to be higher debt-to-GDP ratios and/or lower growth.

Equally discrediting criticism has been directed at the claim of the 2010 Reinhardt-Rogoff paper that all economies, in all conditions, are in danger if debt levels pass 90 percent of GDP. Three economists at the University of Massachusetts discovered that the authors of Reinhart-Rogoff had made a gross coding error that excluded countries with high debts and average growth. The authors concluded:

Our finding is that when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not 0:1 percent as published in Reinhart and Rogoff. That is, contrary to RR, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically di_erent than when debt/GDP ratios are lower.

The critique of Reinhart-Rogoff has raised doubts about the allegedly fatal 90 percent debt-to-GDP number among many economic experts. But not those at the Heritage Foundation.

The Jayadev-Konczal critique of the Alesina et al. paper was published in 2010 and the critique of Reinhart-Rogoff by the U. Mass authors was published in 2013. Boccia’s Heritage Foundation backgrounder calling for growth through budget cuts was published on November 20, 2013. And yet there is no mention, either in the text or the endnotes, of any of the critiques of Alesina and Reinhart-Rogoff.

Even more odd is the fact that Boccia does not cite the particular Alesina or Reinhart-Rogoff papers that generated the controversies. She does not mention Alesina-Ardagna; instead, she cites a much older July 1999 paper by Alesina and co-authors, “Fiscal Policy, Profits and Investment.”  And there is no mention of the original, botched Reinhart-Rogoff paper in the footnotes. Instead, she cites a 2012 defense of the original findings by Carmen and Vincent Reinhart and Kenneth Rogoff.

In the interest of intellectual honesty, the conservative champion of expansionary austerity might at least have indicated to readers that the positions she treats as supported by academic economic scholarship are, in fact, highly disputed.

It gets worse. The two Reinharts and Rogoff conclude their 2012 paper by warning against those who, like Boccia, would use it to justify misguided, premature austerity policies: “This paper should not be interpreted as a manifesto for rapid public debt deleveraging exclusively via fiscal austerity in an environment of high unemployment.” But that of course is exactly how Heritage’s Boccia and others on the right are using—or rather misusing—the research.

Today the Heritage Foundation’s model of ideological assertion backed by cherry-picked data has driven out more scholarly and empirical approaches on the right—including those of thinkers like Martin Feldstein, who once defined the conservative mainstream. The members of the right-wing counterculture are retreating further into a separate intellectual subculture that protects them from exposure to anything that might challenge what they want to believe about the world. That would not be a problem—except that members of this otherworldly counterculture, thanks to their control of the U.S. House of Representatives, are continuing to strangle the American economy.

By Michael Lind

Michael Lind is the author of more a dozen books of nonfiction, fiction and poetry. He is a frequent contributor to The New York Times, Politico, The Financial Times, The National Interest, Foreign Policy, Salon, and The International Economy. He has taught at Harvard and Johns Hopkins and has been an editor or staff writer for The New Yorker, Harper’s, The New Republic, and The National Interest.

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