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Magazine / ECONOMY

Obama's Mixed Message on Austerity

His Treasury secretary lectures Europe on the perils of thriftiness while his own budget agenda is driven by cuts.

Not as I do: Lew (left) in Europe.(AP Photo/Virginia Mayo)

What was Jacob Lew thinking? In his second major trip as Treasury secretary, he toured Europe this week, lecturing the troubled eurozoners about the dangers of “austerity.” For all the seriousness with which his words were taken, Lew might as well have been an itinerant clown vagabonding across the Continent to provide comic relief—the Germans and French do need that—and he was quite a soggy one at that.

Back home, at precisely the same time Lew was passing on his oh-so-stern message, his boss, President Obama, and congressional Republicans were making him look all wet. They were vying to out-austere each other with budget proposals that—whichever is adopted in the end—are likely to slow down the already chronically ailing U.S. economy. This latest bucket of frigid water on an economy that desperately needs to warm up was only further evidence, coming after the spectacle of across-the-board sequestration cuts, that Americans know as little about managing budgets as the Europeans do.

The Germans, who have expressed continued irritation at American presumptuousness, all but dismissed Lew’s advice publicly. “We trust in the American government to know what’s best for the country,” Finance Minister Wolfgang Schäuble said archly. “We in Europe have enough work to do … so we don’t need to give the United States advice.”

 

When will American officials learn that “Do as I say, not as I do” just doesn’t cut it abroad?

More and more, the U.S. economy seems to be going in one direction and Washington policymakers in another. And, as Lew’s trip suggests, the latter don’t even seem to realize how absurd they look when they talk one way and act the opposite. We already know that if the $85 billion in cuts in the budget sequester go through as planned, gross domestic product will slow 0.5 percent and about 750,000 jobs could be lost by the end of the year, according to the Congressional Budget Office. Now despite Obama’s efforts to replace the sequester with a budget deal that comes preloaded with concessions, the politicians are probably just going to make things worse. Obama’s fiscal 2014 budget, which calls for $1.8 trillion in deficit reduction, is an opening bid for that elusive “grand bargain” with Republicans that will seek to trade Social Security and Medicare cuts for GOP concessions on higher taxes for the wealthy.

Both things—the Republicans’ entitlement cuts and the Democrats’ additional tax hikes—will slow the economy further. And even if they don’t actually happen now, just the expectation will have a dampening effect.

Some Republicans pronounced themselves pleasantly surprised at Obama’s liberal apostasy on entitlement reductions, but they still drew the line at additional taxes. If the past is any guide, the negotiations will probably spiral downward toward more tit-for-tat talk of austerity, with the president offering up more cuts in exchange for a few tax increases.

Well into the second term of a Democratic president who once pledged to revive the middle class, Republican monomania about the deficit continues to dictate Washington’s agenda at a time when deficit spending—future investment in the economy—is needed more than ever. The latest round of talks comes as the prolonged nature of this “after-recession”—what else can we call it, since the official recession ended in 2009—is setting records for both slow job growth and inequality.

In this economy, the poorer and more middle-class you are, the worse you are feeling the effects. This is not only the slowest recovery of the postwar period, it’s also one of the most unequal. Both the slowness and the inequity will worsen under the sort of plans that Obama and the GOP are discussing, which amount to austere treatment of average Americans. It’s not just that 7.7 percent unemployment is something of a grim new “normal,” along with still-high long-term unemployment. It’s also that, while the economy has recovered most of the wealth lost in 2008, the bulk of it is coming from higher stock prices and therefore “has been flowing mainly to richer Americans,” the Associated Press reported.

The latest job numbers, out April 5, were one more reminder of this growing disparity. According to the Bureau of Labor Statistics, the unemployment rate edged down to 7.6 percent, but only because many more people dropped out of the workforce, bringing the labor participation rate to 63.3 percent, a new low since 1979. That means 469,000 Americans joined the record 90 million who are no longer even looking for work; most of them lack a college education, so government-funded training programs are desperately needed.

Although the sequester had little to with this particular jobs report, among the large government programs slated for cuts is the unemployment trust fund, to the score of about $2.39 billion. Regular unemployment benefits are exempt from sequestration, but payments intended for people who have been unemployed longer than 26 weeks are not. According to the Bipartisan Policy Center, most of these long-term jobless Americans will eventually see their benefits cut by a ruinous amount, more than 10 percent, for the remainder of fiscal 2013.

Both Democratic and Republican budget proposals will exacerbate these trends. According to Dean Baker of the Center for Economic and Policy Research, Obama’s budget proposal will hurt seniors far more than his tax hikes in December hurt the wealthy.

So, come home, Jacob Lew. The problems of austerity—American austerity—badly need your attention.

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