Who are the austerians anyway?

[H]ow much of our depressed economy can be explained by the bad fiscal policy?

To a first approximation, all of it. By that I mean that to have something that would arguably look like full employment, at this point we wouldn’t need a continuation of actual stimulus; all we’d need is for government spending to have grown normally, instead of shrinking.

Here’s a comparison of two series. One is actual government purchases of goods and services since the Great Recession began (this is at all levels; most of the fall has been state and local, but the Federal government could have prevented that with revenue sharing). The other is what would have happened if those purchases had grown as fast as they did starting in the first quarter of 2001, i.e., in the Bush years.

As you can see, the gap is large and has been growing rapidly; it’s currently at about 400 billion 2009 dollars, or more than 2 1/2 percent of GDP. Given reasonable multipliers, this suggests that real GDP is somewhere between 3 and 3.75 percent lower than it would have been without the austerity. And given the usual Okun’s Law rule of half a point of unemployment per point of GDP, this in turn says that without the austerity we’d have an unemployment rate well under 6 percent, maybe even under 5.5 percent.

I don’t want to pretend to spurious precision here. Instead, I just want to make the point that given what we know and have learned about macro these past five years — and given the modest recovery that has taken place — we’re now at a point where, to repeat, to a first approximation the depressed state of the economy is entirely due to destructive fiscal policy.

People keep telling me that President Obama "pivoted" to deficit reduction only after the 2010 "shellacking" as a way of making the case for re-election.  But that's not how I remember it.  And in the course of doing some research today, I was reminded of this:

At bottom, entitlement reform means one of two things: less spending on things voters like, such as medical treatment or retirement checks, or unpopular higher taxes to pay for those things — and quite possibly it means both. Blocking each of those routes are powerful lobbies ready to whip supple members of Congress: antitax ideologues, liberal New Deal defenders, retiree groups, patient advocates, pharmaceutical companies and medical providers, to name a few. To make matters worse, while the financial crisis is both real and terrifying, it is not always apparent. Even as our fiscal position deteriorates, the world continues to buy U.S. government debt, allowing for magically low interest rates in spite of enormous deficit spending.

It is on this inhospitable terrain that President Barack Obama now plans to accomplish the impossible: reverse the trajectory of the political universe and make real progress on reforming Medicare, Medicaid and Social Security. [...] 

The effort to reform Social Security, which is generally seen as a less complex problem, is likely to take a backseat over the coming months to health-care efforts. This is partly because of resistance by many House liberals to the idea of reducing Social Security benefits. This group includes House Speaker Nancy Pelosi, who was able to take over the reins in Congress in part because of the resentment caused by Bush's failed reform effort. Although Administration officials don't like discussing the problem on the record, the White House has not yet ruled out the idea of establishing an independent commission (outside the congressional committee structure) to look at creating a specific reform plan, an approach supported by many experts as the best way to break the political deadlock. 

Perhaps the biggest advantage that Obama has as he prepares to tackle entitlement is the financial crisis, which has forced everyone in Washington to focus on the nation's long-term fiscal problems. The recent explosion of government spending to handle the banking collapse and housing crisis has concerned nations like China, which buy government debt. A drop in international interest in U.S. debt could lead to a spike in interest rates, which would have a damaging impact on the U.S. economy. On Sunday, Secretary of State Hillary Clinton urged Chinese leaders to continue their investments in U.S. debt. "We are truly going to rise and fall together," she warned. 

None of this, however, means that Obama's task will be much easier than the one that has bedeviled his predecessors. "This is not walking and chewing gum," joked Robert Reischauer, a former director of the Congressional Budget Office. "It's doing open-heart surgery and particle physics at the same time." But the difficulty has not dissuaded Obama. As he pivots to confront the nation's fiscal problems, his aides say he knows exactly what he is getting into.

The date of that Time magazine article?  That was written on February 23, 2009, a month after the president was inaugurated the first time. It was on the heels of these reports the week before:

With a $787 billion stimulus package in hand, President Barack Obama will pivot quickly to address a budget deficit that could now approach $2 trillion this year.

He has scheduled a "fiscal-responsibility summit" on Feb. 23 and will unveil a budget blueprint three days later, crafted to put pressure on politicians to address the country's surging long-term debt crisis.

Speaking Friday to business leaders at the White House, the president defended the surge of spending in the stimulus plan, but he made sure to add: "It's important for us to think in the midterm and long term. And over that midterm and long term, we're going to have to have fiscal discipline. We are not going to be able to perpetually finance the levels of debt that the federal government is currently carrying."

Along those lines, White House budget director Peter R. Orszag has committed to instituting tougher budget-discipline rules -- once the economy turns around. Those include a mandate that any "nonemergency" spending increases be offset by equal spending cuts or tax increases[...]

The president met with 44 fiscally conservative "Blue Dog" Democrats this week and gave a nod to legislation that would set up commissions to deal with long-term deficit strains. The commissions would then present plans to Congress for an up-or-down vote.

"We feel like we've found a partner in the White House," said Rep. Charlie Melancon (D., La.), a Blue Dog co-chairman.

I can understand why it's important for some people to believe that the president was "forced" to pivot by the results of a major electoral setback.  But this pivot happened in the midst of a delirious honeymoon, long before the Republicans had regrouped from their shellacking. It was the purpose of the "Fiscal Summit" (in which the White House very nearly had Pete Peterson himself as the keynote speaker.)

I was reminded of all this when I read this interesting piece by Josh Marshall today on whether or not Obama is a bad manager (in response to today's op-ed on the subject in the NY Times.  Josh wrote this:

[N]ot that I don’t think Obama’s management or approach to the presidency was flawless. My critique is simply different. I think the biggest single flaw in Obama’s approach to the presidency in his first term was the focus on the inside game, both in policy and legislative terms — an inherent peril of technocrats. For much of his first term, Obama simply did not focus on the public and political dimensions of the work he was trying to get done. To give but one example, the health care edifice was getting built up largely in private while public support for it cratered in the midst of catastrophic levels of unemployment. Yes, it was always going to be hard and there was the biggest economic crisis in 70 years. But there was a failure to grasp a dimension of the job.

I don't disagree with this. I think it's been a problem. But I think that on the greatest challenge of his administration --- the economy --- he's been wrong on a political and a policy level from the beginning. 

Obviously, I think  deficit reduction is and was completely daft at a time like this. But I would suggest that by "pivoting" to talking about deficit reduction in the middle of the crisis, as he did, made it so that even the stimulus and all the other government actions to try to spur the economy sputtered as people anticipated more austerity.

And when you read those articles, it sure sounds as though they were using the bad economy an excuse to "fix" the "entitlements." Michael Sherer talked about the motivation in the first article I excerpted above:

As sure as the sun rises, the sitting President of the United States will promise to save our fiscal future by reforming entitlement spending. And as sure as the sun sets, each attempt at delivering on that pledge will end in failure.
[...]
At bottom, entitlement reform means one of two things: less spending on things voters like, such as medical treatment or retirement checks, or unpopular higher taxes to pay for those things — and quite possibly it means both. Blocking each of those routes are powerful lobbies ready to whip supple members of Congress: antitax ideologues, liberal New Deal defenders, retiree groups, patient advocates, pharmaceutical companies and medical providers, to name a few. To make matters worse, while the financial crisis is both real and terrifying, it is not always apparent. Even as our fiscal position deteriorates, the world continues to buy U.S. government debt, allowing for magically low interest rates in spite of enormous deficit spending. (See 25 people to blame for the financial crisis.)

It is on this inhospitable terrain that President Barack Obama now plans to accomplish the impossible: reverse the trajectory of the political universe and make real progress on reforming Medicare, Medicaid and Social Security.

Why in the world were they thinking this way in the midst of what they themselves called the worst economic crisis since the Great Depression?   

This was the hubristic attitude of the Obama administration in the beginning --- the belief that they alone would be able to solve all the problems that had eluded their predecessors, despite the fact that the world economy was melting down. (Or was it because the world economy was melting down?) They were just that special (aka Best and Brightest Syndrome, which does relate to Josh Marshall's point.)  And on health care, they even have made some progress.  

Unfortunately, by flogging the deficit boogeyman from the very beginning they perpetuated a whole bunch of economic myths that have hamstrung the recovery (and may wind up hurting the chances for the health care reforms to work by giving the deficit fetishists the weapon they need to cut it before it gets the chance.)

This was, in my opinion, the major error of the first term. And it's why I have trouble trusting that the administration isn't going to use whatever "cliff" or crisis to accomplish it in the second term. I hope they have seen the error of their ways, but these trial balloons about raising the Medicare age or the Chained CPI, don't bode well. After all, the history shows that this does not come from being cornered or in "hostage" negotiations --- it comes from a desire to actually do it. There were no hostages in February of 2009.