Reprinted from neweconomicperspectives.org
I know the Republicans are complete hypocrites about federal deficits and debt. I know their dishonesty and faux deficit and debt hysteria, when a Democrat is president, harms the Nation and the world through the infliction of self-destructive austerity. Austerity's primary victims are the working class and government social programs for the poor and working class. That means that the Democrats should never mimic the Republicans' dishonesty, hysteria, and willingness to inflict austerity on the people of America and the world.
Unfortunately, the New Democrats embraced the economic malpractice of austerity with the passion of a convert. Michael Meeropol, an economist whose work I respect greatly, has rightly chastised me for failing to explain that fiscal austerity produces enormous winners, not just losers, and that this fact helps explain why the economic malpractice of austerity is so common. Austerity is a policy that aids the wealthy and harms the non-wealthy. One of the greatest triumphs of the wealthy is to get vast numbers of the non-wealthy to fail to understand this point. The New Democrats' passionate support for austerity reflects the interests of its primary donors -- Wall Street elites.
Austerity produces higher unemployment rates. It can cause deflation. It leads to cuts in public employment and funding for social programs. High unemployment allows CEOs to force lower wages and creates a political climate in which CEOs are able to get legislation and rule changes embracing "labor flexibility." That phrase is a euphemism for making it easier for firms to fire workers without. CEOs use high unemployment to induce an international race to the bottom on worker protections and wages under the pretext that doing so is essential for U.S. firms to maintain "global competitiveness."
Deflation is a superb situation for (net) creditors. They get repaid in a currency that is gaining value. Deflation reduces interest rates, so the market value of existing long-term fixed rate debt instruments (bonds) can increase substantially.
Federal fiscal austerity could be implemented through tax increases, including tax increases on the wealthy and corporations. But this would harm rather than aid the wealthy so it increasingly rare to see it done because it would harm legislators' wealthy patrons (donors).
President Obama Embraced the New Democrats' Desire to Inflict Austerity
President Obama famously told Congressional New Democrats that they represented his views. Obama reluctantly agreed to a stimulus program that was considerably less than half of what economists knew was needed. Even that inadequate stimulus spurred our (inadequate) recovery from the Great Recession and, unlike the eurozone's austerity policies that through many nations into Great Depression levels of unemployment, the U.S. growth rate soon surged and unemployment rates fell.
Obama's reaction to the meaningful success of (inadequate) stimulus was to abandon it and join the Republicans' condemnation of stimulus. In his January 27, 2010 State of the Union address he complained that when he took office he inherited "a government deeply in debt." The implication, which is false, is that the U.S. would be better off if there were no federal debt or at least dramatically less federal debt. The U.S. would be worse off in either circumstance, for the alternatives -- not winning World War II or having longer, deeper recessions -- were very bad and the U.S. national debt causes no serious problems for our people or the people of the world.
Obama knew that was true. In the same address he explained.
Because of the steps we took, there are about two million Americans working right now who would otherwise be unemployed. (Applause.) Two hundred thousand work in construction and clean energy; 300,000 are teachers and other education workers. Tens of thousands are cops, firefighters, correctional officers, first responders. (Applause.) And we're on track to add another one and a half million jobs to this total by the end of the year.
The plan that has made all of this possible, from the tax cuts to the jobs, is the Recovery Act. (Applause.) That's right --- the Recovery Act, also known as the stimulus bill. (Applause.) Economists on the left and the right say this bill has helped save jobs and avert disaster.
Obama then admitted that recent U.S. expansions had been based on bubbles and scams.
We can't afford another so-called economic "expansion" like the one from the last decade --- what some call the "lost decade" --- where jobs grew more slowly than during any prior expansion; where the income of the average American household declined while the cost of health care and tuition reached record highs; where prosperity was built on a housing bubble and financial speculation.