Now that the academic and evidentiary support for austerity is shot full of holes, President Obama has an opportunity to perform a face-saving extrication from his position. Will he do it?
A recent study by a grad student at the University of Massachussets has pointed out critical errors in celebrated Harvard economists Carmen Reinhart and Ken Rogoff's study which has been the much-cited intellectual underpinning of the austerity movement. In short R-R's study showed a correlation between high levels of national debt (with a stated critical threshold point at 90% of GDP) and slow economic growth. The results of the study have been often stated as proof that debt at 90% GDP causes slow economic growth and that austerity measures must be employed to bring down debt.
Reinhart-Rogoff quickly achieved almost sacred status among self-proclaimed guardians of fiscal responsibility; their tipping-point claim was treated not as a disputed hypothesis but as unquestioned fact. For example, a Washington Post editorial earlier this year warned against any relaxation on the deficit front, because we are “dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth.” Notice the phrasing: “economists,” not “some economists,” let alone “some economists, vigorously disputed by other economists with equally good credentials,” which was the reality.Many prominent economists had previously pointed out another major error in the way that the study has been used by those who favor austerity:
There were good reasons for not accepting the Reinhart and Rogoff results even before this error was uncovered, as many of us had argued. Most importantly there is a serious issue of the direction causation. Countries tend to have high debt levels because their economies are doing poorly.Unfortunately, there was not much press notice of the causation problem in R-R's study, probably because it's the kind of story that the media find too difficult to explain. But when the grad student from the University of Massachussets discovered spreadsheet errors in their work, now there was an issue that our news media could latch onto with confidence that it was within their ability to explain it. Consequently it has gotten quite a bit of coverage and R-R's study has been discredited.
Austerity has been a failure where it has been employed
While Europe's leaders shy away from the word, the reality is that much of the EU is in depression.Anyone still advocating austerity, with all of the available evidence militating against it as a course of continued action is selling something very much other than a program to create broadly shared prosperity.
The loss of output in Italy since the beginning of the crisis is as great as it was in the 1930s. The youth unemployment rate in Greece now exceeds 60%, and the figure for Spain is above 50%.
With the destruction of human capital, Europe's social fabric is tearing, and its future is being thrown into jeopardy.
The economy's doctors say that the patient must stay the course. Political leaders who suggest otherwise are labelled populists. The reality, though, is that the cure is not working, and there is no hope that it will – that is, without being worse than the disease.
It will take 10 years or more to recover the losses incurred in this austerity process.
It's time for President Obama to step back from his austerity plans.
Obama's austerity plans are tied to Reinhart and Rogoff's work
In the Fall of 2009 President Obama supported an effort in Congress to form a fiscal responsibility commission. When Congress failed to form such a commission, President Obama formed one of his own. Obama's Catfood Commission was somewhat unusual as government commissions tasked to develop policy go in that it was partially funded by Pete Peterson, a man who has spent half a billion dollars so far to promote austerity and destroy entitlements (i.e., our earned benefits). President Obama's commission was clearly rigged to provide a particular result.
best laid plans careful preparations, the Catfood Commission ultimately failed to come to an agreement on a plan. This failure was largely ignored and the Commission chairs (Alan Simpson and Erskine Bowles) wrote their own plan which has been used by the administration as a basis for the imposition of austerity.
The Simpson-Bowles catfood plan has been fully embraced by the administration, and it is used as a yardstick for their "success" in implementing austerity:
These developments are poorly understood by those—most vocally, SB advocates—who continuously inveigh that we’re not “serious” about cutting spending. In fact, that’s the only thing we’ve been “serious” about so far, such that we’ve actually achieved 70% of the discretionary spending cuts called for in the SB budget plan.The Simpson-Bowles plan is based on the underpinnings of Reinhart and Rogoff's research and Erskine Bowles has repeatedly cited it:
Bowles has repeatedly cited the study by Carmen Reinhart and Kenneth Rogoff entitled “Growth in a Time of Debt” to support his calls for spending cuts.
Senate Republicans including Minority Leader Mitch McConnell (Ky.) and Jeff Sessions (Ala.) referenced it this week.
Many other leading austerity pushers have also cited it:
“It’s an excellent study, although in some ways what you’ve summarized understates the risks.”— Former US Treasury Secretary Tim Geithner.So, here's where you can see how far a half a billion dollars goes in purchasing public policy. Two Harvard academics write a paper which the media and highly-visible public intellectual economists all claim as purported evidence that austerity is sorely needed. The President of the United States creates a commission that is rigged to provide the result of support for the idea that austerity is sorely needed; the commission's findings rely on the underpinnings of the the Harvard academics' paper. In Congress major budget legislation is put forward with the claim that austerity is sorely needed; the author of the Congressional legislation and its supporters all cite the Harvard academics' work as justification.
“The debt hurts the economy already. The canonical work of Carmen Reinhart and Kenneth Rogoff and its successors carry a clear message: countries that have gross government debt in excess of 90% of Gross Domestic Product (GDP) are in the debt danger zone. Entering the zone means slower economic growth.”— Doug Holtz-Eakin, Chairman of the American Action Forum.
“Economists who have studied sovereign debt tell us that letting total debt rise above 90 percent of GDP creates a drag on economic growth and intensifies the risk of a debt-fueled economic crisis.” — House Budget Committee Chairman and former Republican vice-presidential candidate Paul Ryan.
Guess who the two Harvard economists who wrote the paper that all of the people who are calling for austerity cite?
I'll give you three guesses and the first two don't count...
Yes, that's right, "The Half-Billion Dollar Man," Pete Peterson:
When Washington Post writer Suzy Khimm pointed out to Peterson that the U.S. built significant deficits during the financial crisis but maintained very low interest rates, Peterson responded that America still needed to be on high alert: "you know [Kenneth] Rogoff and [Carmen] Reinhart -- I've talked to them, and they say [debt crises] are sudden, they're sharp, they're very substantial. The risk is simply too big. At some point, if we lurch from crisis to crisis, then confidence will decline on our economy in general." ...So, the circle of influence is complete. A web off deceit has been spun by wealthy. influential people who are able to apply massive amounts of money to academics, think tanks, the media and politicians and purchase public policy favorable to their interests.
Reinhart, described glowingly by the New York Times as "the most influential female economist in the world," was a Senior Fellow at the Peterson Institute for International Economics founded, chaired, and funded by Peterson. Reinhart is listed as participating in many Peterson Institute events, such as their 2012 fiscal summit along with Paul Ryan, Alan Simpson, and Tim Geithner, and numerous other Peterson lectures and events available on YouTube. She is married to economist and author Vincent Reinhart, who does similar work for the American Enterprise Institute, also funded by the Peterson Foundation.
Kenneth Rogoff is listed on the Advisory Board of the Peterson Institute. The Peterson Institute bankrolled and published a 2011 Rogoff-Reinhart book-length collaboration, "A Decade of Debt," where the authors apparently used the same flawed data to reach many of the same conclusions and warn ominously of a "debt burden" stretching into 2017 that "will weigh heavily on the public policy agenda of numerous advanced economies and global financial markets for some time to come." (Note that not everyone associated with the Institute touts the Peterson party line.)
Is President Obama the predator that weaves the web, or the prey that has been caught in it?
It's hard to know whether Mr. Obama is leading the charge for austerity or following the direction of others. He has worked assiduously to impose austerity during his administration. Early on, he chose to "go small" with economic stimulus as recommended by Larry Summers rather than the stimulus, larger by a trillion dollars, $1.6 - $1.8 Trillion stimulus recommended by the chair of his Council of Economic advisors, Christina Romer. Obama's stimulus program was criticized for it's small size by many more progressive economists outside the administration at the time.
President Obama's early commitment to austerity was also evident in his budgets. Despite his rhetoric about social investments and infrastructure rebuilding, President Obama's budgets since he took office have all been austerity budgets. Of course, Obama's support for "entitlement reform" a euphemism, like "strengthening" Social Security (by cutting the earned benefits of those that the program is supposed to be for. It has been reported that within the Obama administration, the political team and particularly David Plouffe, pushed for Obama to seek entitlement reform:
[Top Adviser David] Plouffe urged the president to give [entitlement reform] a shot. "I said he [Obama] should be big on entitlements," Plouffe told one former administration official, by which he meant reining in these budgetary elephants. Sure, this would enrage the party's base. But the political upside with the rest of the country would more than make up for it ... "Plouffe is pretty big on accomplishments trump normal politics," said one White House colleague. "Plouffe's view is that big trumps the little."So, now here we are, the rationale for austerity is in tatters, the web of deceit is unravelling. President Obama's actions now will show whether he is the predator who seeks to weave the web back together or the prey who, freed from the web, goes on to pursue a different path outside the web.