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Let’s Celebrate the Failure of the July 2011 Great Betrayal
Posted By Bill Black On December 22, 2012 @ 8:30 am In Think Tank | Comments Disabled
In July 2011, President Obama and Speaker Boehner reached an agreement in principle on a deal crafted to inflict $4 trillion in austerity by raising taxes modestly, slashing social spending, and beginning to unravel the safety net. The deal would have been a disaster for America. Unemployment was 9.1%. The deal would have thrown us back into a recession and caused unemployment to surge. Recessions and increased unemployment cause tax revenues to fall and increase demand for social services (e.g., for unemployment compensation) – they produce large deficits. Austerity kills jobs and frequently increases deficits. The Eurozone is the latest demonstration of this fact.
We should, therefore, all be celebrating the failure of the July 2011 austerity deal. We almost committed an act of economic self-mutilation of tragic proportions. Instead, because of the failure to adopt austerity in July 2011 we followed an economic policy based on modest stimulus. As predicted by most economists (including my UMKC colleagues) that policy produced modest growth and modest reductions in unemployment. The recovery produced the sharpest reduction in budgetary deficits in modern U.S. history. The Eurozone’s leaders’ austerity policies forced many nations back into recession. Austerity was most draconian in the periphery where it produced Great Depression levels of unemployment, particularly for young adults. The dominant media meme about the “fiscal cliff” is that it is an insane austerity program that would force the U.S. back into a gratuitous recession and cause large increases in unemployment. Logically, that should cause the media to recognize that the far more severe austerity blows that Obama and Boehner sought to inflict on the U.S. in July 2011 at a time when our economic recovery was much weaker than it is today would have been disastrous and that we should be overjoyed that the deal fell apart.
The media, however, constantly warns us of the need not to repeat the “failure” to reach the July 2011 deal. They show no sign of recognizing the logical incoherence in simultaneously warning that the fiscal cliff’s austerity must be avoided lest it force the nation back into recession and that it is urgent that we adopt austerity. Media reports virtually never explain that if the July 2011 austerity deal had been finalized the results would have been catastrophic.
The media is similarly incoherent when discussing (more precisely, ignoring) another key aspect of the fiscal cliff – its origins. The “fiscal cliff” is not really a cliff, but it is definitely an economically illiterate and self-destructive austerity program. That is the first key analytical aspect of the origins of the fiscal cliff – it was known to be an economically illiterate and self-destructive austerity program when it was adopted. The obvious question, which the general media studiously ignores, is why the parties agreed to the “fiscal cliff” deal when it was obvious that it would cause catastrophic damage to our economy and people. The “fiscal cliff” (austerity) deal is the deal that did not fail – it was the bipartisan deal that became law in August 2011.
It is revealing that no one in the media even attempts anymore to defend the bipartisan fiscal cliff (austerity) deal. The media normally have a romantic crush on anything bipartisan, no matter how much it harms the nation. The fiscal cliff austerity deal is so obviously stupid that even the media almost universally criticize it. This should prompt three obvious questions.
The answers are:
Obama is the person in the world who benefitted most from the failure of the July 2011 austerity deal he reached in principle with Boehner. If the austerity deal had been finalized the nation would have be forced back into recession. Unemployment was 9.1% in July 2011. It would have risen sharply above 10% and it would have gone up every month in 2012 as the election approached. Obama would have been crushed by Governor Romney. The irony is that Obama tried five times in 2011 to inflict austerity on America. Had he succeeded, he would have caused grave damage to our nation. Had he succeeded in inflicting austerity he would have also destroyed his re-election chances, given the Republicans control of the U.S. Senate, slashed public services when they were most needed, and begun the process of destroying the safety net. He would have gone down in history as a grotesque failure.
Obama’s first major effort to inflict austerity on the nation in 2011 was his July austerity deal in principle with Boehner. Their shared goal was a $4 trillion austerity program with mild increases in tax revenues and fierce cuts to social programs and the safety net.
Obama’s second effort  to inflict austerity was the creation of the “fiscal cliff” austerity deal in August 2011. The premise of the August deal was that austerity needed to be inflicted on America.
“‘It’s an important first step to ensuring that as a nation we live within our means, yet it also allows us to keep making key investments in things like education and research that lead to new jobs and assures that we’re not cutting too abruptly while the economy’s still fragile,’ Obama said  in a statement from the White House Rose Garden before signing the bill.
‘I’ve said it before, I’ll say it again,’ Obama said. ‘We can’t balance the budget on the backs of the very people who have borne the brunt of this recession. Everyone has to chip in. It’s only fair. That’s the principle I’ll be fighting for in the next phase.’”
I know that these statements by Obama strike many Americans as sensible, but they betray a basic misunderstanding of economics and explain why he embraces austerity. We are a nation with a sovereign currency. Our national government is nothing like a household. “Balancing the budget” (“live within our means”) in response to the Great Recession is austerity. Austerity is a disastrous policy in such circumstances because it causes nations to fall back into recession or depression.
The issue is not “fair[ness]” through joint sacrifice. If “everyone” “chip[s] in” through austerity it still produces a gratuitous recession or depression. That is not “fair” – it is insane – there is no such thing as a “fair” recession. “Fighting” for “fair” austerity so that everyone suffers equally through a “fair” recession is impossible because recessions cause increased unemployment, which is inherently unfair. But the more essential point is that it is insane to cause recessions through austerity. That’s the principle for which we fight at UMKC. The economic crises we face are jobs and homes.
Similarly, you do not “cut” federal spending when the economy is operating well before full capacity because of a Great Recession. Obama’s stated policy was to cut federal spending in 2011, but not “too abruptly.” Cutting overall spending in response to a Great Recession causes gratuitous recessions, even if you make “key investments.”
Obama intended the prospect of the fiscal cliff’s dramatic mandatory cuts in social programs to extort progressive Congressional Democrats into agreeing to inflict severe austerity by voting in favor of what Obama hoped would be massive cuts in social programs and the safety net adopted by the Congressional “super committee” created by the same bipartisan austerity deal that created the “fiscal cliff.” Obama encouraged the “super committee” to inflict massive spending cuts and tax increases (super-sized austerity).
Obama’s fourth effort occurred during the super committee negotiations. Some members of Congress opposed the imposition of the “fiscal cliff” austerity provisions and sought to remove, delay, or reduce them. Obama intervened  to block any effort to avoid or reduce the austerity inflicted by the “fiscal cliff.”
“President Obama called the Democratic and Republican chairmen of Congress’s special deficit reduction supercommittee Friday and urged them to reach a deal….
But he also carried another message: Congress should not undo the painful consequences for failing to reach a deal that were agreed to when the supercommittee was created in the August debt deal .
But the so-called sequester could not be undone without a sign-off from Obama, and he made clear Friday that he would not agree.
‘The sequester was agreed to by both parties to ensure there was a meaningful enforcement mechanism to force a result from the Committee,’ the White House said in a statement. ‘Congress must not shirk its responsibilities. The American people deserve to have their leaders come together and make the tough choices necessary to live within our means, just as American families do every day in these tough economic times.’
He urged them to strike a deal that would cut both entitlements and raise revenues.”
Yes, President Obama “urged” the infliction of severe austerity through cuts in the safety net, massive cuts in social programs, and deliberately created and used the “fiscal cliff’s” self-destructive austerity threat to extort these betrayals of the American people. His surrogates (Erskine Bowles and Alan Simpson – the co-chairs of Obama’s austerity commission) pushed the “super committee” to “go big” and inflict $4 trillion in austerity . (Simpson predicted that the markets would “tank” absent such an austerity deal.)
Obama urged austerity under the “logic” that a national government with a sovereign currency is “just” like a household – the most basic and common economic error in this field. The President of the United States thinks that the U.S. government is “just” like a household and should try to balance the budget (“live within our means”) through austerity in response to the Great Recession. He also thinks we should seize the political opportunity, even if it had nothing to do with the budget deficit, to begin to unravel the safety net. It is this sad record that led me (and many others) to warn before the election  that Obama’s effort to secure a “Grand Bargain” constituted a “Great Betrayal” motivated by his desire to create his legacy. Obama’s self-portrait is that he was willing to agree to sacrifice his Party’s greatest accomplishments (the safety net) in order to secure a bipartisan agreement imposing austerity. The actual sacrifices, however, will be made by the elderly, the poor, and the working class, the victims of his betrayal. If Obama succeeds in producing another recession through austerity you can add the nation to the list of sacrificial victims.
When the super committee failed to reach  a bipartisan austerity deal in November 2011, members of Congress sought to pass legislation removing the fiscal cliff’s austerity provisions. Obama’s fifth effort to inflict austerity occurred when he threatened to veto any reduction in fiscal cliff austerity.
“President Obama said today he will veto any efforts to get rid of the automatic spending cuts that will be triggered by the supercommittee’s failure to reach a bipartisan solution to deficit reduction.
‘There will be no easy off-ramps on this one. We need to keep the pressure up to compromise, not turn off the pressure,’ the president said this evening. ‘The only way these spending cuts will not take place is if Congress gets back to work and agrees on a balanced plan to reduce the deficit by at least $1.2 trillion.’”
Fortunately for the nation (and Obama), fate conspired to cause four of Obama’s efforts to inflict austerity to fail while the fifth (the “fiscal cliff”) does not begin to kick in until 2013. For opposite reasons, the Tea Party and progressive Democrats have interacted in a manner that blocked Obama’s efforts to inflict austerity on the nation. (The Tea Party loves austerity, but hates even modest tax increases for the wealthy.)
Obama was not an outlier  in repeatedly seeking to inflict austerity on the nation in 2011: “about 100 members of Congress from both parties are urging the [super committee] to go big on the reductions, to the tune of $4 trillion.”
The general media did not warn about the insanity of inflicting the “fiscal cliff” austerity program on the nation. Instead, it fed the hysteria about the deficit and urged even greater austerity. The New York Times  exemplifies the general response. The title of their article about the August 2011 austerity deal that created the “fiscal cliff” set the pro-austerity tone.
The thrust of the article was that the proponents of the August 2011 bipartisan austerity deal had to defend it against charges that it imposed too little austerity. The article also claimed that while economists were divided on the issue, most economists favored austerity. Our national debt was about to cause interest rates to surge, causing a disastrous feedback loop.
“Proponents of the deal counter that it is an important first step, constrained by the political realities of divided government.
‘Is this the deal I would have preferred? No,’ Mr. Obama said Sunday in announcing the agreement. ‘But this compromise does make a serious down payment on the deficit reduction we need, and gives each party a strong incentive to get a balanced plan done before the end of the year.’”
The problem facing the nation has been clear for some time. The Congressional Budget Office estimates that the federal debt is likely to exceed 100 percent of the nation’s annual economic output by 2021, largely because of the rising cost of Medicare , Medicaid  and Social Security .
Americans will face higher taxes, particularly as investors begin to demand higher interest rates. Economists disagree about the amount of debt a nation can safely carry relative to the size of its economy, but there is widespread concern that 100 percent is too much, and that the weight of debt would begin to suppress economic activity.
All of this was economically illiterate. Interest rates fell, as my colleagues and economists like Paul Krugman predicted. Inflicting austerity in response to a Great Recession is a superb strategy for increasing unemployment, the deficit, inequality, and debt because it reduces already inadequate private and public sector demand and causes recessions and depressions. Even the modest stimulus policy the U.S. followed despite Obama’s and Boehner’s best efforts to inflict austerity, proved vastly superior to the Eurozone’s austerity policy that forced the Eurozone into recession and much of the periphery into Great Depression levels of unemployment. The U.S. budget deficit has fallen at the fastest rate in modern history due to the success of even the greatly inadequate stimulus program that Obama adopted before he turned against stimulus under Geithner and Daley’s influence. America’s problem is jobs, not the deficit.
Beware of anyone who uses phrases like “down payment” when it comes to the federal deficit for they have no meaning and are designed to mislead. Reducing social spending in response to the Great Recession is austerity – not a “down payment on … deficit reduction.” Indeed, it is likely to increase the deficit by causing a recession.
Geithner also spoke in favor of the August deal, and he completed the pro-austerity mantra by invoking what Paul Krugman has aptly dubbed  the “confidence fairy.”
“‘You’re going to see this basic underlying growth we’ve see in the United States improve over time because people will be more confident we can live within our means,’ [Geithner] said. ‘With more confidence we can get our arms around this long term. We will have more room to do the things we need to strengthen investment jobs now.’”
The confidence fairy stubbornly refuses to appear, but Geithner’s faith in fairies abides.
Note Obama’s explanation for why he approved the August 2011 austerity program. He was delighted that the “fiscal cliff” provision imposed “a strong incentive” on Democrats to agree to inflict severe cuts in social programs and the safety net. Obama issued a formal statement embracing (1) austerity, (2) the “fiscal cliff” as a device to force Congress to inflict austerity, and (3) the claim that the federal government is just like a household and should balance its budget (“live within our means”).
“‘The sequester was agreed to by both parties to ensure there was a meaningful enforcement mechanism to force a result from the Committee,’ the White House said in a statement. ‘Congress must not shirk its responsibilities. The American people deserve to have their leaders come together and make the tough choices necessary to live within our means, just as American families do every day in these tough economic times.’” – Washington Post 
Austerity is not a “tough choice.” It is a vicious, self-destructive policy that is the result of equal parts ignorance and inhuman indifference to the senseless suffering it causes. Obama and the nation have been saved from austerity by luck, the Tea Party’s extremism, and progressive Democrats’ refusal to be bullied or panicked by Obama’s and the general media’s hysterical and false claims about deficits and the safety net. Obama’s pitch for austerity and unraveling the safety net cannot withstand even cursory review. His “logic” is:
As our Senator, Claire McCaskill, said recently: “whiplash!”
I propose that we all celebrate the failure of the July 2011 Obama/Boehner deal to inflict austerity on the nation and the failure of Obama’s effort to use the “fiscal cliff” to extort progressive members of Congress into supporting austerity and the unraveling of the safety net. I also propose that we send Obama on an inspection tour of Ireland, Portugal, Spain, Italy, and Greece. This visit would not involve meeting heads of state. Obama should visit each of these nations and talk with the people. We would never have to defend the nation from another effort by him to engage in the self-mutilation of our economy and people. Absent such an awakening by Obama, progressives will need to step up and save Obama from Obama, America from austerity, and the safety net from Wall Street at least one more time.
Article printed from The Big Picture: http://www.ritholtz.com/blog
URL to article: http://www.ritholtz.com/blog/2012/12/lets-celebrate-the-failure-of-the-july-2011great-betrayal/
URLs in this post:
 William K. Black: http://neweconomicperspectives.org/p/about.html
 New Economic Perspectives: http://neweconomicperspectives.org
 second effort: http://abcnews.go.com/Politics/debt-ceiling-deal-president-obama-signs-bill-fight-looms/story?id=14213050
 Obama said: http://blogs.abcnews.com/politicalpunch/2011/08/with-default-averted-obama-looks-to-jobs.html
 Obama intervened: http://articles.washingtonpost.com/2011-11-11/politics/35284532_1_top-tax-rate-supercommittee-trillion-in-new-taxes
 August debt deal: http://www.washingtonpost.com/politics/cbo-confirms-debt-deal-would-save-at-least-21-trillion/2011/08/01/gIQAzmMVnI_story.html
 pushed the “super committee” to “go big” and inflict $4 trillion in austerity: http://www.foxnews.com/politics/2011/11/06/moderate-lawmakers-lead-insurrection-urge-super-committee-to-defy-leadership/
 to warn before the election: http://neweconomicperspectives.org/2012/11/wall-street-urges-obama-to-commit-the-great-betrayal.html
 failed to reach: http://abcnews.go.com/blogs/politics/2011/11/supercommittee-fails-to-reach-bipartisan-deal/
 not an outlier: http://www.foxnews.com/politics/2011/11/14/one-day-after-doubts-lawmakers-put-on-brave-face-for-super-committee-deal/
 New York Times: http://www.nytimes.com/2011/08/03/us/politics/03spend.html
 Medicare: http://topics.nytimes.com/top/news/health/diseasesconditionsandhealthtopics/medicare/index.html?inline=nyt-classifier
 Medicaid: http://topics.nytimes.com/top/news/health/diseasesconditionsandhealthtopics/medicaid/index.html?inline=nyt-classifier
 Social Security: http://topics.nytimes.com/top/reference/timestopics/subjects/s/social_security_us/index.html?inline=nyt-classifier
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