With a sharp turn toward fiscal austerity, Europeans are in the process of committing recovery suicide. While a decline over there may not trigger a double-dip recession here, in this globalized world it surely will hamper the U.S. economy. Americans are likely to feel the results of Europe's experiment with neo-Hooverism in the form of sluggish growth and high unemployment.
The New York Times columnist Paul Krugman has sounded the alarm on this in several recent columns — just as he warned that the initial Obama stimulus, while historically high, was inadequate to fully reverse the downturn that was the legacy of the Bush administration. Then as now, Krugman was pointed, not polite, in his criticism. And while the administration probably couldn't have passed a larger stimulus in 2009, it is today hard to deny
that the Nobel laureate accurately diagnosed the situation.
This time around, his fellow Times columnist David Brooks has stepped forward to take the other side of the argument, penning a column this week — called, ironically enough, "A Little Economic Realism" — in defense of fiscal austerity, even in the face of high unemployment and uncertain growth. While Brooks' piece comes across as almost solicitous toward Obama, it is actually rooted in the logic of a reflexive right-wing ideology worthy of his former editor at the Weekly Standard, Bill Kristol.
Yes, Krugman can be prickly and Brooks is congenial, but their style of communicating has nothing to do with who's correct on the economic merits. Krugman clearly has that honor. Krugman clearly has that honor. Yet the Brooks position is on the verge of carrying the day, both across the Atlantic and in the midterms-wary policy debates in Congress. Last year's G-20 conference, led by Obama and then–British Prime Minister Gordon Brown, settled on a strategy of higher spending to spur demand and growth, to be followed by a fiscal tightening once the recovery was secure. This year's G-20, with a new Tory prime minister from Britain and German Chancellor Angela Merkel preaching Teutonic fiscal stringency, reversed field with a call to roll back spending.
Obama succeeded in modulating the document — its ambiguities were consistent with his view that this is not the time to don the green eyeshades of deficit obsession. Recently, White House economic advisor Larry Summers made a persuasive speech on continuing the stimulus until the job is done. But his words were hardly heard in the wider precincts of popular debate, and the administration itself has at times subverted the case for more stimulus. For instance, the president's pledges to cut the deficit — when the economy is back on firm footing, of course — have just added weight to the perception that austerity ought to begin now.
The anti-stimulus view derives from an expedient politics that denounces deficits even while running them to counter an economic slowdown or downturn (see: Ronald Reagan). The worm-eaten cliché that deficit spending is always morally and economically wrong has been repeated so often over the past couple of generations that it has taken root as conventional wisdom. But it's a delusion — a form of economic insanity. Still, there are plenty of asylum inmates in Congress — almost the entire GOP and most Blue Dog Democrats — who subscribe to it.
Of course, it can be difficult sometimes to disentangle tactics from ideology. Quack economics aside, Republicans are rooting for continued sluggishness as a route back to power in 2010 or 2012. Beyond that, their greater objective, as Daniel Patrick Moynihan said of the Reagan tax cuts, is to shear away the resources necessary to initiate or sustain progressive programs. Indiscreet GOP officials and candidates are even beginning to acknowledge items on the right-wing agenda that previously were kept from public view — for example, means-testing, slashing, or phasing out Social Security and Medicare.
A similar dynamic is underway in Britain. Under the pretext of creating sounder economic policy, the ConDem coalition of Tories and un-Liberal Democrats is ravaging education, income support, and the National Health Service — in the latter case, after a cynical promise to protect it. The Treasury predicts the loss of 1.1 million jobs, while another forecast has unemployment rising to 3 million, the high water mark of gloom during the Thatcher years.
Without reference to all of this, Brooks provides respectable cover to those on the right who propose — and would profit from — these policies of economic stagnation. He offers a measured but condescending instruction to the president to fall into line with the stimulus-denying, budget-cutting anti-strategy that has already taken hold in Europe and has a tightening grip on America's popular imagination. The column reads as thoughtful, yet it largely relies on assertion, not proof or analysis.
First, Brooks denigrates "Demand Siders" for having too much trust in their models, which could "risk national insolvency." Never mind that the markets — with historically low yields on U.S. bonds — are telling us that American debt remains the safest investment in the world.
For the medium and the longer term, as The Washington Post's Ezra Klein points out, simply letting the Bush tax cuts expire on schedule — instead of renewing them, as the supposed fiscal hawks in the GOP demand — would reduce the federal deficit by $4 trillion over 10 years. But the same voices that oppose spending now to restore the economy will oppose asking for any sacrifice from those at the top, even in good times.
Brooks' second assertion is that spending destroys confidence. This is, as he admits, "psychology" rather than economics — and he's off on the psychology, too. Herbert Hoover's pet rationalization was that FDR's election would shatter confidence. In 1932, he infamously warned, "Grass will grow in the streets of a hundred cities." It didn't, but Roosevelt himself later provided a brief and painful test of the efficacy of premature retrenchment — in 1937, he adopted his predecessor's nostrum, cut back spending, and recovery unraveled as demand fell, business investment dried up, and unemployment ballooned. What shattered confidence was not the spending, but the cutting. FDR swiftly and decisively returned to the expansionary course that had brought a record economic upturn during his first term.
But we have more than history here. As European nations have adopted fiscal constriction, markets there have fallen to their lowest levels in six weeks, while driving a 10 percent decline in the Dow.
Brooks insists that companies won't invest unless the deficit is reduced. But levels of investment were very high during the rolling deficits of the Reagan years. What's Brooks' proof that things are different now? Well, "talk to entrepreneurs in Racine and Yakima." Has he? And anyway, why would an anecdotal collection of predictable anti-government responses amount to anything other than folklore? He does cite a study claiming that government spending in "certain congressional districts dampened corporate investment." He doesn't bother to explain when this happened — or how the data apply to present circumstances. In fact, as another column in the same day's Times reports, "American corporate profits are nearly back to their [pre-crisis] peak." The problem, the piece argues, is that companies are retaining earnings in a depressed economy to pump up quarterly profits and executive compensation. The answer may be more government, not less — a tax on earnings retained for more than two years.
With consumers also spending less, we could easily fall into an un-virtuous cycle of dragging growth, with unemployment hovering near 10 percent through 2012. That would be good for the GOP, but not the GDP — or the country.
The only answer that's coherent and convincing is to stimulate demand long enough and vigorously enough to restore business and consumer confidence, and move the nation back to full employment. But that won't work, Brooks opines, citing a New York Times-CBS poll showing that only 6 percent of Americans believe that the stimulus succeeded in actually creating jobs. He grudgingly allows that "maybe" this is wrong. Maybe? According to the Congressional Budget Office, as of the first quarter of this year, there were 2.8 million people at work because of the stimulus, economic growth was 4.5 percent higher than it otherwise would have been, and unemployment was 1.5 percent lower. Without that package, the country would have faced a longer, deeper recession — and perhaps a depression.
In any event, the polling Brooks cites is no substitute for economics or science. A majority of Americans once believed that the Earth and the universe were only a few thousand years old. Despite the irrefutable quantity of modern evidence to the contrary, a sizable minority still does.
Brooks also writes, without proof, that it is "impossible" to spend enough money "quickly" enough. But Obama already did so, and just in time — it's only too bad Congress wouldn't let him do more. It also seems nearly indisputable that cutting swiftly and sharply at a moment like this will only serve the opposite purpose, sapping demand and raising unemployment. Soon enough, the British experiment with recessionary restraint will offer yet another case study.
To be sure, Brooks is a little more "compassionate" than the tea-drenched conservatives: He does recommend extending benefits for the long-term unemployed (currently being bogged down by a GOP filibuster in the Senate). At no point, however, does he bother to show how his prescription would offer what the jobless most need — jobs. Presumably they would just be left to endure the pain of someone else's premature fiscal rectitude.
Brooks concludes with another caveat: Washington should provide aid for embattled state governments on the condition that they move toward "long term" fiscal stability. That's exactly the strategy President Obama, perhaps imperfectly and insufficiently, has pursued: recovery first, then restraint when prosperity is strong once again. But Brooks elides that, too, as he condescends to assume that the president "can't read the models" economists rely on. I suspect Obama can read them, dissect them, and assess them.
Now, in the midst of a fraught midterm campaign, the president will have to tell voters why it's right to stay this course: The economy is still hurting and, yes, there's a lot more to do; but let's not allow the GOP — the party that caused the crash in the first place — to put the recovery at risk. Perhaps it's too late for him to venture an explicit case for his Keynesian approach. But he has to establish the logic in the public consciousness so he can fight back against a new Congress with more Republicans, more determined than ever to stymie him at every turn and force America back onto the Hoover path.
In place of a credible and convincing argument, the Right is trying to exploit the mythology of deficits in service of an ideological mission and a yearning for political power. As a result, America faces the same choice it did in the early 1930s. The Republicans lost that battle. But I guess that by their rekindled lights, the winner should have been Herbert Hoover.