The Deficit Hawks: When Did They Stop Being Wrong About the Economy?

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Dean Baker
The Guardian Unlimited, January 28, 2013

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The news that the United Kingdom is facing the prospect of a triple-dip recession with a negative growth figure in the fourth quarter of 2012 should be the final blow to the intellectual credibility of the deficit hawks. You just can’t get more wrong that this flat earth group of economic policymakers.

They are pretty much batting 1000. They missed the downturn caused by the collapse of housing bubbles in the United States and Europe. They grossly underestimated its severity after it hit. And their policy prescription of austerity has been shown to be wrong everywhere it was applied: in the United States, in the eurozone, and especially in the U.K.

By all rights, these folks should be laughed out of town. They should be retrained for a job more suited to their skill set: preferably something that doesn’t involve numbers, or people.

But that is not what is happening. The folks who got it all wrong are still calling the shots in the U.K., at the IMF, and the European Central Bank and in the positions of power in Washington. The idea that job security would have any relationship to job performance is completely alien to the world of economic policy. With few exceptions these people enjoy a level of job security that would make even the most powerful unions green with envy.

Of course the cynical among us might note that those at the top are doing just fine. The high unemployment rates are undermining workers’ bargaining power. This ensures that almost all the gains from economic growth go to those at the top. In the United States, the profit share of national income is near its post-World War II high.

Even if this upward redistribution is not a deliberate goal of policy, it certainly affects the urgency with which policymakers view the problems of badly depressed economies and excessive rates of unemployment. If the stock markets were tumbling, as was the case in the fall and winter of 2008-2009, there would likely be a lot more attention devoted to fixing the economy. (And, if you think a plunging stock market necessarily means that the economy is going down, then you need to study more economics.)

Instead of focusing on the fact that the economy is down more than 9 million jobs from its trend growth path, and that the real wage of the typical worker has risen by just 2 percent over the last decade, the policy people in Washington are debating the best way to reduce the deficit. This makes about as much sense as debating the right color to paint the White House kitchen.

Everyone who bothers to look at the data knows that we have large deficits because the economy collapsed. There are people who are paid to yell about out of control spending, but the numbers don’t cooperate with this story. There are also plenty of people who want to blame large deficits on the Bush tax cuts and wars in Iraq and Afghanistan, but that happens not to be true either.

We have large deficits because the economy collapsed, end of story. The folks who try to claim otherwise are either too lazy to look at the numbers or simply prefer to tell stories that are not true. 

One of my favorite quirks in the Washington policy debate is the fear that we will allow our public debt to exceed 90 percent of GDP and then bad things will happen to the economy. Remarkably, this sort of Twilight Zone fear – don’t cross the 90 percent line – is taken very seriously in Washington. 

The silliness of this figure was brought home by a blog post by the Institute for Energy Research last week that claim that the government owns more than $120 trillion in energy resources. There are plenty of grounds for questioning the accuracy of this industry funded outfit, but let’s assume that they are off by a factor of 10. This means that the government owns $12 trillion in energy resources.

Suppose we sell off half of these assets, netting the government $6 trillion. This would immediately lower our debt-to-GDP ratio by almost 40 percentage points. That would put us way below the 90 percent Twilight Zone threshold without any cuts to Social Security, Medicare, and other programs low and middle-class people depend upon. We don’t even have to raise taxes on the job creators.

Of course this is silliness. It is ridiculous to imagine that the government’s financial situation is in peril if we have a debt-to-GDP ratio of 90 percent, but everything is fine if we sell off oil and gas assets to reduce our debt to 50 percent of GDP. But that is what the Serious People in Washington believe or at least will claim to believe until they are become too embarrassed to spew such nonsense.

The unfortunate reality is that on both sides of the ocean we have people making economic policy who are largely sputtering nonsense about how to remedy the economy. And for the foreseeable future they will have the political power to keep their jobs no matter how disastrous the outcomes of their policy might be.


Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.