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Politics of Austerity Look Better Than the Economics Politics of Austerity Look Better Than the Economics

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BUDGET

Politics of Austerity Look Better Than the Economics

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President Obama meets with House Majority Leader Eric Cantor (left), House Minority Leader Nancy Pelosi (second from the left) and House Speaker John Boehner.(SAUL LOEB/AFP/Getty Images)

The Republican Party’s prevailing economic theory goes by a lot of names. Supporters call it “expansionary austerity” or “cut and grow”; critics call it “the Confidence Fairy.” It’s the idea that cutting government spending now, when yawning budget deficits loom on the horizon but federal borrowing remains dirt cheap, will spark increased growth and job creation right away.

It’s tough to say what exactly President Obama’s economic theory is, but until very recently, it wasn’t expansionary austerity. Then, on Monday, in his “eat our peas” press conference, the president embraced the idea, in a way that shouldn’t make many Republicans happy—or most economists, for that matter.

 

In a press conference spent extolling the merits of a potential “grand bargain” of multitrillion-dollar debt reduction tilted heavily toward spending cuts but including some tax increases, Obama said such a deal “will help with businesses feeling more confident about aggressively investing in this country.”

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A moment later came the hammer.

 

“I might add, it is the primary solution that the Republicans have offered when it comes to jobs,” Obama said. “They keep on going out there and saying, ‘Mr. President, what are you doing about jobs?’ And when you ask them, well, what would you do? ‘We’ve got to get government spending under control, and we’ve got to get our deficits under control.’

“So I say, OK, let’s go.”

As political moves go, Obama’s looks pretty deft. He has his response: “I tried. Your team said ‘No.’ ”

“He’s won the race to the reasonable middle,” said Ryan McConaghy, who directs the economic program at Third Way, a centrist Democratic think tank. Economically, though, it’s a questionable embrace. The most compelling evidence that deficits and uncertainty are holding back the recovery is anecdotal. For example, on Monday, the U.S. Chamber of Commerce released results of an online poll of business owners, more than half of whom cited “economic uncertainty” (broadly) as a top obstacle to hiring. Four in five respondents said the federal deficit posed a risk to the economy—but only one in five called it an “immediate threat.”

 

Empirically, there’s very little evidence of government deficits “crowding out” private borrowing by pushing up interest rates, as many supporters of expansionary austerity claim; on the contrary, borrowing rates remain near historic lows.

More broadly, new research from the International Monetary Fund debunks the idea that past deficit-reduction measures have led to increased growth. The research, by the IMF’s Jaime Guajardo, Daniel Leigh, and Andrea Pescatori, examined past attempts by countries to close budget gaps by cutting spending and/or raising taxes. It concludes that such efforts had “contractionary effects”: For every 1 percentage point of gross domestic product worth of fiscal consolidation, private consumption drops by 0.75 percent and GDP by 0.62 percent over the next two years.

But even as Obama was extolling the merits of such contraction, Republicans were falling back to an even simpler economic mantra: it would be irresponsible to raise taxes at a time of sluggish growth.

The IMF’s austerity paper supports that conclusion. That only underscores how neither the GOP nor the president can have the economics of debt reduction both ways: You either believe the full research—and reject any spending cuts or tax hikes until the economy is growing faster—or you’re cherry-picking. This, come to think of it, is the opposite of eating your peas.

This article appears in the July 12, 2011 edition of NJ Daily.

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