Avoiding the Austerity Trap

July 4, 2010

by Thomas Frank
Thursday, July 1, 2010

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Deficit reduction is an unhealthy obsession.

Recent increases in the federal deficit have made the pundit class tremble, but they aren’t really mysterious. They are, for the most part, a product of the recession, which has reduced tax revenue, justified the bailouts and last year’s stimulus package, and brought unemployment insurance and other “automatic stabilizers” into effect.

Solve the recession and we’ll eventually bring the deficit back down, too. The real danger is that instead we will decide to regard the deficit as a problem entirely unto itself—a quasi-moral issue that needs to be addressed independently of the larger economy—and that we will proceed to budget—balance ourselves right back into the economic ditch. For a glimpse of how this works, take a look at once-booming Ireland, where a starvation diet designed to control the deficit has made the recession more or less permanent.

Austerity would be a dreadful choice at the moment, but the urge to blunder burns hotly among the policy priesthood these days. One reason for this is that deficit reduction is often a proxy for something else, some object of political desire that must remain obscure because it is too distasteful to discuss openly.

Usually that object is “entitlement reform,” a euphemism for cutting or reconfiguring Social Security and Medicare, programs that cause offense to certain parties for reasons entirely apart from their effects on the federal balance sheet.

Consider, in this connection, the endless war on “entitlements” waged by the legendary deficit hawk Pete Peterson, a former commerce secretary, former investment banker, and current billionaire. Mr. Peterson has attacked these entitlements for decades now, often describing them as a betrayal of our capitalist moral fiber.

Once upon a time Mr. Peterson preached his gospel of thrift through books and essays; since the early 1990s, however, he has built up two foundations to help fight his war on entitlements, the Concord Coalition and the Peter G. Peterson Foundation, both of them dedicated to his obsessive vision of fiscal austerity.

Their work goes forward in a confusing welter of partnerings, commissions, studies and public events involving deficit hawks from both parties. Back in April, for example, the Peterson Foundation’s “Fiscal Summit” brought together the ever-so different perspectives of the Republican Alan Greenspan and the Democrat Robert Rubin.

To you this may seem like a transparent trick, but here in Washington such bipartisan rituals are always thought to be highly convincing stuff.

Something similar was no doubt the goal last December when another Peterson project, a news organization called the Fiscal Times, started “partnering” with the Washington Post, furnishing that august institution with a story on—of course—the prospects for a special commission on the deficit. The story referenced an officer from a different Peterson project and a study done by yet a third Peterson project, but somehow never managed to disclose its own Peterson provenance, causing a short-lived stir in blogdom.

Memories of that incident resurfaced when it was announced that the Peterson Foundation, along with two other foundations and an outfit called America Speaks, was going to conduct a high-tech “national town meeting” on—of course—the burning issue of the federal deficit.

For liberals of the more skeptical variety, this combination of electronic populism with the agenda of the Peterson Foundation was an obvious warning flag, a signal that propaganda was in the offing. Several members of the president’s own fiscal commission were to be in attendance at the get-together, and the results of the proceedings were to be presented to the full commission later on. Clearly the fix was in!

The event took place as scheduled last Saturday, with thousands of citizens meeting in different cities. They duly absorbed a booklet alerting them to the danger of deficits. They deliberated. And then something funny happened on the way to the consensus.

According to a preliminary compilation of results, participants supported “an extra 5% tax” on incomes of greater than $1 million per year (by 68%) and an increase in the corporate income tax rate (59%). They thought a “carbon tax” was a good idea (64%) as well as a “securities transactions tax” (61%). On Social Security, austerity was nowhere in sight as 85% backed raising the limit on taxable income, and only a miserable 27% thought that we should “create personal savings accounts.” Majorities favored cutting defense spending and expressed support for further recovery measures even if they increase the deficit.

These liberal results have been brought to you in part by a distinctly conservative foundation—bipartisanship at its best. Will Washington listen? Probably not. One reason we are rushing to austerity these days is because that’s what the comfortable people who chat so amiably in the green room are utterly certain we ought to be doing. The deficit numbers, they think, are just too big, too frightening. And deep in their hearts, they also know that the costs of austerity will always be borne by others.

Write to thomas@wsj.com

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