Ideas Lying Around
There’s this quote from the economist Milton Friedman that was doing the rounds a few months ago:
Only a crisis – actual or perceived – produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable.
It’s from the 1982 preface to one of his older books, and it’s easy to see where he got the idea. Friedman is probably the most controversial economist of the last 100 years. One part respected academic, one part libertarian polemicist, his ideas became unignorable during the economic tumult of the 1970s and early 80s. It was with Friedman as an advisor that Thatcher and Reagan crushed unions, slashed spending, and unleashed the financial sector. The long-term benefits of these policies are dubious in retrospect, but they are remembered for preceding a decades long era of economic growth and stability.
The specifics of the debate around these policies is less important than the lessons that economic policymakers took from them: the market must be allowed to operate freely, even if it means short term suffering for the people. This logic has since been framed by a hypermodern rhetoric of efficiency and globalization which disguises the primitive underlying belief system: The God of the Market will grant us prosperity, but only in return for the requisite human sacrifice.
These were the ideas lying around in 2008 when the financial crisis hit.
Debt Spirals and Credit Crunches
But 2008 was not like the 1970s and 80s. Back then, the problem was an overheating economy. Oil prices went up, making products more expensive to make and buy, while at the same time coal and manufacturing jobs were moving to China. Having drastically expanded the welfare state over the previous decades, Western governments were forced to do more with less. A certain obsession with efficiency and thrift made sense in this context.
The fear that motivates austerity is that lenders will think the government’s debt is so high that they’ll never be able to pay it all back. When that happens, the price of loans goes up (ie, lenders demand a higher interest rate) and social spending becomes more expensive. You can see how this can become a vicious cycle – high debt leads to sceptical investors, which leads to high interest rates, which in turn leads to more expensive borrowing, which leads to ever higher debt. That was the vicious cycle playing out in Western economies during the 1970s and 80s and that’s where we get the argument for borrowing less during a recession.
But the 2008 was a purely financial crisis – there was no scarcity of fuel or workers pushing up prices. Instead there was a scarcity of credit – a credit crunch – which involves its own vicious cycle: no one was lending, so no one could borrow, so no one could invest, so there were no jobs, so no one had any money, so no one was spending, so no one was making profits, so no one was lending, and down and down we go.
The prescription for halting this kind of spiral is stimulus, not austerity. During a credit crunch, it’s actually cheaper for the government to borrow, because as high as government debt might be, the government’s power to raise taxes and print money makes it a more reliable borrower than the economy’s struggling businesses. Thus, the government can now borrow to bail out credit-starved companies, who can now employ people, who can now pay taxes to the government, who can now pay back its lenders and hey presto! Your vicious cycle has become a virtuous cycle.
Thesis Statement
There are three things I want to convince you of here: 1) That austerity policies caused severe and lasting damage where they were implemented during the last recession, 2) That these policies were driven by popular economic misconceptions shared across the political spectrum and up and down the political hierarchy, 3) That it didn’t have to be this way, and we now have the power to stop the same mistakes from being made again. We could look to almost any major economy in Europe to tell this story – the same patterns emerge whether you look at Ireland or the UK; Germany or Greece. However, in Europe these stories are complicated by geopolitical considerations, be it the Eurozone crisis or Brexit negotiations. What we need here is a simpler illustration of how ideology distorts policy. For that, we need to look across the Atlantic…
Self-sabotage
By the time Barack Obama took office in January of 2009, it was clear that the economy was in dire need of stimulus. The collapsing housing bubble and subsequent credit crunch were already wreaking havoc on the lives of Americans. Having been plunged into mortgage arrears by a 30% drop in house prices, consumers cut back on spending, leading to the vicious cycle of business failures, unemployment, and more cutbacks. Christina Romer, then chair of Obama’s Council of Economic Advisors, recommended a stimulus of roughly $1.8 trillion to halt the crisis of credit.
But the ideology of austerity had already started to govern the crisis response. Months earlier, under the Bush Administration, the financial system had neared collapse following a bipartisan refusal to recapitalise Wall Street Investment banks. To simplify, Democrats didn’t like the idea of bailing out crooked banks and Republicans didn’t like the idea of socializing U.S. finance. Romer’s stimulus plan would have been of much more direct benefit to the American people than this previous intervention, so of course Republicans could be expected to vote against it unanimously. That meant the bill’s passage would depend on the support of centrist Democrats.
Seeking to pre-empt any opposition, Director of the National Economic Council Larry Summers intervened to revise down Romer’s $1.8 trillion figure by more than half so that Obama never saw just how much stimulus was needed. As if to confirm Summers’s fears, Democrats would whittle down the stimulus bill by a further $50 billion before they enacted it. When American activists wonder why the people got sold out while the banks got bailed out, it’s their own elected representatives – not economists – that they ought to look to.
Perhaps it shouldn’t be surprising that stingy penny-pinching would become a defining pathology of the Obama years. For six of his eight years in office, Obama was saddled with a Republican party empowered to veto any and all legislation sent their way – a power which they exercised with unprecedented zeal. High fiscal deficits offered Congressional Republicans the perfect pretext for the pro-poverty agenda which motivated them to get into politics in the first place.
More confounding is the mainstream liberal establishment’s blithe acceptance of the basic premise that government spending was too high. Even in 2010, with the stimulus act already proving effective despite its limitations, Obama himself was launching the Simpson-Bowles Commission – a bipartisan panel tasked with finding “policies to improve the fiscal situation in the medium term and… achieve fiscal sustainability over the long run”. That the commission’s ultimate $4 trillion dollar deficit reduction proposal never went anywhere was considered a lamentable failure of political will by all involved. Even ostensibly unbiased reporters would do things like ask whether America would ever do “the right thing” on entitlement spending. The relative merits of the commission’s strategy for reducing the deficit are debatable, but never addressed was the question of why deficit reduction was needed at all when so few economists advocated for it and borrowing was cheaper than ever.
How America Learned to Stop Worrying and Love the Deficit
I’m not sure if it was Bernie Sanders or Donald Trump who did more to change that narrative. Sanders never pretended that his ambitious policies would not need to be paid for, either through taxes or through cuts elsewhere in the economy. But his ambition did shift the budget question in the right direction – it’s not “How much must we cut?” but “How much can we spend?”
Still, I do think it was Trump and his Republican Congress who really exposed the pathological nature of Washington’s deficit phobia. You may remember the Republican tax “reform” pushed through Congress with lightning speed in 2017 as a massive tax cut for corporations which belied all of Trump’s populist rhetoric from his campaign. But the shape of the bill may be less interesting than its size. After years of harping on about the fiscal irresponsibility of Democrats, Republicans had pushed through a bill which, if made permanent, would grow the deficit by $4 trillion dollars over the course of 20 years – exactly as much as Simpson-Bowles was supposed to shrink it by.
These events were infuriating enough as a tale of plutocracy and hypocrisy. But what truly shocked Democrats about this bill is that it was… fine. There was no collapse in confidence that the world’s largest economy could pay its own debts; the cost of borrowing did not skyrocket. The economy may even have grown slightly in classic trickle-down fashion. The Republicans were hypocrites, but it was the hypocrisy of virtue paying tribute to vice. The bill was bad – a tax cut for the rich is a tax cut for the rich – but it meant Democrats could finally admit to themselves that they had been living a lie. The bogey man was not real. Politics could start being about making people’s lives better again.
This revelation came just in time for the two year race for the presidency which will conclude next month. That the Democratic Primary Race was so crowded – there were 20 candidates in the first round of debates – obscures how unified the candidates were in breaking from the rhetoric of fiscal prudence that had dominated in previous years. Sanders ran again on an even more comprehensive platform than in 2016. Kamala Harris’s LIFT Act would have spent $250 billion a year to lift 10 million people out of poverty. Joe Biden was correctly viewed as the most moderate of the major candidates, but even his policies, if implemented, would cut child poverty by 70% and commit $2 trillion to fighting climate change over four years. The left may lament how close Sanders came to winning the second time round, but his fiscal philosophy had emerged as victorious before a single vote was cast.
What’s Next?
These were the ideas lying around when the Coronavirus crisis hit. As in 2009, we are now faced with a recession of demand. It’s true that some businesses have been shut for health and safety reasons, but the much bigger problem is that no one’s going out and buying things from the shops. There are lots of approaches to addressing this problem, but they all basically amount to the government stepping in and spending to make sure there’s still an economy to come back to when this all blows over.
As in the last crisis, the Federal Reserve reacted first, injecting over a trillion dollars into the financial system to ensure that borrowing would remain cheap. Unlike in the last crisis, this ambition was matched in the U.S. legislature. In a rare fit of bipartisanship, the Senate unanimously passed the $2 trillion dollar CARES Act, granting a $1200 paycheck to every adult American and increasing unemployment insurance by $600 a month. To put that in perspective, the median recipient of this benefit earned 134% of what they were getting while they were employed. We’ve come a long way from Simpson-Bowles.
It may be small comfort to learn that it takes a crisis for ideas to matter. But by the same token, we too easily lose sight of the power we have in determining which ideas matter. How different would the decade have been if Larry Summers hadn’t suppressed Christina Romer’s report? The Republicans were always going to call for cuts, but was Obama? I don’t know, but in 2009 a $1.8 trillion dollar stimulus was unthinkable and in 2020 a $2 trillion dollar stimulus was inevitable. Something has happened to the D.C. policy consensus, and it happened because people changed their mind about economics.
As it is in America, so too is it in Europe. Everywhere austerity was imposed, the consequences were still being felt before the current recession. Here in Ireland, investment in social housing collapsed by 93% and didn’t begin to recover until about 2016, two years after the onset of the homelessness crisis. In the UK, a 2018 report by the UN special rapporteur on extreme poverty and human rights called the Conservative austerity agenda a deliberate attempt to overturn the welfare state, gut local authorities, and redefine the relationship between state and citizen. In Germany, the investment promised by its vaunted fiscal discipline has failed to materialise – the economy grew by a paltry 0.6% in 2019 after years of budget surpluses.
But the Trans-Atlantic similarities don’t end there. Europe, too, has massively expanded its fiscal ambitions during this crisis. The ECB, which a decade ago generated a years-long financial crisis by refusing to buy up the debts of struggling economies, immediately committed to a €750 billion debt purchasing scheme in March. The EU has gone so far as to invent a new kind of debt to finance European unemployment payments. In Ireland, “Prudent” Paschal Donohoe literally made his name by refusing to embrace deficit financing to address the housing crisis. But in this month’s budget he raised the deficit from below zero to €20 billion a year. That’s basically a decade’s worth of higher education funding in one year.
Today, Europe and America face the same dilemma: will we learn the lessons of the past and listen to the economic wisdom that has only become truer in the last decade? Or will we revert to our old anxieties, so obsessed with appearing fiscally responsible that we fail to invest responsibly in our own economies? Already, the German finance minister has committed to returning the deficit to “normal” by 2022, and the British Chancellor of the Exchequer has gone so far as to begin cutting spending while the recession is still getting worse. And of course, U.S. Republicans, who now expect to be in opposition in three months’ time, are gearing up to get back to their old tricks – in fact, they have already allowed the unemployment insurance expansion to expire in anticipation of a Biden presidency, plunging 8 million Americans into poverty in the process. I haven’t noticed any such rumblings in Ireland, but it’s early days yet and the government will have to hold its nerve for a long time before it needs to take its foot off the accelerator.
There may come a time in the next two decades when we have to raise taxes or cut spending to pay for the measures we took to survive this pandemic. When that day comes, our ability to foot the bill will depend on what we have done with the time our debt bought us. If we earn the confidence of our creditors by investing in our children and reforming the structures that govern society, then we will have no trouble raising the necessary revenue from growing and prosperous economies. But if in our complacency we allow the wounds and strains of the last recession to continue to fester and ache, then our problem won’t be that lenders will stop believing that developed economies can pay our debts, our problem will be that we are not developed economies at all.
FOOTNOTES
…one of his older books… Milton Friedman. 1982. Capitalism and Freedom. https://docs.google.com/file/d/0BxgMqtna1BWDdDlnTENYaHNBYnc/edit?pli=1I don’t recommend it, tbh
…most controversial economists… Milton Friedman. Wikipedia.https://en.wikipedia.org/wiki/Milton_Friedman#Criticism It is one of my main missions in life to normalise citations of wikipedia
…dubious in retrospect… Destroying unions is bad because they reduce economic inequality: John Alquist (2017). Labour Unions, Political Participation, and Economic Equality. Annual Review of Political Science. https://escholarship.org/content/qt2894m48p/qt2894m48p.pdf. Cutting spending is bad because it has long term effects that we’re learning about all the time: Dylan Matthews (2016). “If the goal was to get rid of poverty, we failed”: the legacy of the 1996 welfare reform. Vox.com. https://www.vox.com/2016/6/20/11789988/clintons-welfare-reform#reduceincomes. Unleashing the financial sector was bad because it basically caused the financial crisis. Financial Crisis Inquiry Commission (2011). The Financial Crisis Inquiry Report. Pp. 27-67. https://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_full.pdf.
Of course, none of that is to say that these policies didn’t have other benefits, and obviously at the time it seemed like these things were a good idea. For my money though, to the extent that there was recovery in the late 80s it is as attributable to falling oil prices (https://www.macrotrends.net/1369/crude-oil-price-history-chart) and the use of punishingly high interest rates (https://tradingeconomics.com/united-states/interest-rate#:~:text=Interest%20Rate%20in%20the%20United,percent%20in%20December%20of%202008) to curb inflation (https://tradingeconomics.com/united-states/inflation-cpi#:~:text=Inflation%20Rate%20in%20the%20United,percent%20in%20June%20of%201921) as anything else. Neither of these things can be attributed to Friedman-inspired Reaganomics. Oil prices are obviously a product of global forces which were out of Reagan’s hands and the policy setting high interest rates really began under Jimmy Carter when appointed Paul Volcker to the Fed in 1979.
Macroeconomic growth and stability… This period was referred to at the time as “The Great Moderation” (https://en.wikipedia.org/wiki/Great_Moderation) The label has taken on a slightly ironic valence in light of the massive Trans-Atlantic financial crisis and global recession which this era produced.
This logic… The cool kids call it “neoliberalism” https://www.justassociates.org/sites/justassociates.org/files/neo-liberalism-as-creative-destruction-david-harvey.pdf
…oil prices… manufacturing… Ford, Carter, and the Economic Malaise: Crash Course US History #42 https://www.youtube.com/watch?v=pyN5LPHEQ_0&list=PL8dPuuaLjXtMwmepBjTSG593eG7ObzO7s&index=44&t=602s
…obsession with efficiency and thrift. Here’s Jimmy Carter asking people to turn down their thermostat before bed. https://www.youtube.com/watch?v=MmlcLNA8Zhc. He also talks about investing in solar energy in that clip, which is… 
…The fear that motivates austerity… Adam Tooze (2018). Crashed: How A Decade of Financial Crises Changed the World. Chapter 1 does a great job of outlining how the Democratic obsession with deficits actually pre-dates the crisis and is somewhat tied up in opposition to the Iraq war and Bush Tax cuts, but also has precedent in 1990s Clinton administration. This book was a big inspiration for me in writing this blog.
…a credit crunch… – David McWilliams (2012) The Good Room: Why we ended up in debtors’ prison – and how we can break free. Chapter 3 has a good explication of this problem and an argument for why stimulus is the solution.
…geopolitical considerations… again, Crashed is the main way I learned about this stuff, but I think it’s a little technical if you don’t already have some basic understanding of economics and finance.
… 30% drop in house prices… Crashed. Chapter 6. Some of the statistics on this are really staggering. The median wealth of the Hispanic population fell by 86%!
…$1.8 trillion… The whole Romer/Summers/Obama saga is gone through in chapter 12 of Crashed.
To simplify… For the long version, check out Panic: The Untold Story of the Financial Crisis https://www.youtube.com/watch?v=QozGSS7QY_U
… unprecedented zeal. Michael Grunwald (2016). The Victory of ‘No’. Politico. https://www.politico.com/magazine/story/2016/12/republican-party-obstructionism-victory-trump-214498
…motivated them to get into politics in the first place. Obviously, this is a generalisation, but here’s former Speaker of the House Paul Ryan reminiscing about how he’s dreamed of cutting Medicaid since he was drinking out of kegs. https://www.vox.com/policy-and-politics/2017/3/17/14960358/paul-ryan-medicaid-keg More to the point, here’s the Rick Santelli monologue which arguably launched the Tea Party Movement. In it, he complains about how Obama’s stimulus plans require him to pay for “losers” who bet bad on the housing market during the boom. The Tea Party Movement would sweep to power in 2010 and push the Republican Party to the right on a lot of these issues. https://www.youtube.com/watch?v=zp-Jw-5Kx8k&t=115s
…effective despite its limitations… Crashed, p. 503.
…Simpson-Bowles Commission… National Commission on Fiscal Responsibility and Reform – Wikipedia – https://en.wikipedia.org/wiki/National_Commission_on_Fiscal_Responsibility_and_Reform
…ostensibly unbiased reporters… Ezra Klein (2013). The Problem with Alan Simpson. Washington Post. https://www.washingtonpost.com/news/wonk/wp/2013/02/20/the-problem-with-alan-simpson/
…debatable… Derek Thompson (2010). Paul Krugman’s Poor Critique of the Deficit. The Atlantic https://www.theatlantic.com/business/archive/2010/11/paul-krugmans-poor-critique-of-the-deficit-commission/66495/
…Sanders never pretended… Ok, hands up here. I don’t know if Sanders never pretended, but here’s Sanders not pretending. Nerdwriter1 (2020). How Bernie Sanders Answers A Question. https://www.youtube.com/watch?v=16S2lQn5xgs
…massive tax cut for corporations… Emily Stewart (2018). What the Republican tax cut did -and didn’t – do, one year later. Vox.com https://www.vox.com/policy-and-politics/2018/12/18/18146253/tax-cuts-and-jobs-act-stock-market-economy
…the cost of borrowing did not skyrocket. https://fred.stlouisfed.org/series/DGS10
The economy may even have grown… Emily Stewart (2019). The economic boost from the Republican tax cuts is probably about to run out. Vox.com https://www.vox.com/policy-and-politics/2018/12/3/18118225/republican-tax-cut-bill-economic-stimulus
…trickle-down fashion. For an explainer on trickle-down economics, also known as “voodoo economics”, see Stein (1986): https://www.youtube.com/watch?v=AyyAh2lQXF8
…even more comprehensive… Umair Irfan and Tara Golshan (2019). Bernie Sanders’s Green New Deal, Explained. Vox.com https://www.vox.com/2019/8/22/20827396/bernie-sanders-2020-climate-policy-green-new-deal
…tax large fortunes. Neil Irwin (2019). Elizabeth Warren Wants a Wealth Tax. New York Times. https://www.nytimes.com/2019/02/18/upshot/warren-wealth-tax.html
…10 million people out of poverty. Dylan Matthews (2019). 5 Anti-Poverty Plans from 2020 Democratic Contenders, Explained. Vox.com https://www.vox.com/platform/amp/future-perfect/2019/1/30/18183769/democrat-poverty-plans-2020-presidential-kamala-harris-booker-gillibrand?__twitter_impression=true
…correctly viewed as more moderate… Roge Karma and Ezra Klein (2019). In 2020, Joe Biden and the “Moderates” are well to Obama’s left. Vox.com https://www.vox.com/2019/12/20/21026212/2020-democratic-primary-joe-biden-bernie-sanders-elizabeth-warren-barack-obama
…cut child poverty by 70%… Dylan Matthews (2020). Joe Biden and Kamala Harris’s proposals could cut poverty in half. Vox.com https://www.vox.com/future-perfect/21456242/joe-biden-poverty-checks-kamala-harris
…$2 trillion to fighting climate change… Katie Glueck and Lisa Friedman (2020). Biden announces $2 trillion climate plan. New York Times. https://www.nytimes.com/2020/07/14/us/politics/biden-climate-plan.html
…demand recession… David Baqaee and Emmanuel Farhi (2020). Supply versus Demand: Unemployment and Inflation in the Covid-19 recession. CEPR https://voxeu.org/article/assessing-keynesian-spillovers-covid-19-recession
…injecting over a trillion dollars into the financial system… Jeanna Smialek, Kate Kelly, Peter Eavis (2020). Fed Unveils Emergency Lending Programs as Companies Struggle to Raise Cash. New York Times https://www.nytimes.com/2020/03/17/business/economy/federal-reserve-coronavirus.html
…CARES Act… Jason DeParle (2020). Vast Federal Aid Has Capped Rise in Poverty, Studies Find. New York Times https://www.nytimes.com/2020/06/21/us/politics/coronavirus-poverty.html
…134%… Peter Ganong, Pascal Noel, and Joseph Vavra (2020). U.S. Unemployment Insurance Replacement Rates During the Pandemic. BFI Working Paper. https://bfi.uchicago.edu/working-paper/2020-62/
…expired at the end of July… Emily Badger and Quoctrung Bui (2020). Unemployed Workers Built up Some Savings. Then the $600 Checks Stopped. New York Times. https://www.nytimes.com/2020/10/16/upshot/stimulus-checks-unemployment.html
…woefully insufficient. Hunter Blair (2020). The CARES Act to State and Local Governments Isn’t Enough to Shield Vital Public Services from the Coronavirus Shock. Economic Policy Institute https://www.epi.org/blog/the-cares-acts-aid-to-state-and-local-governments-isnt-enough-to-shield-vital-public-services-from-the-coronavirus-shock-lessons-from-the-great-recession-tell-us-why/
The HEROES Act… Emily Cochrane (2020). House Passes $3 Trillion Aid Bill Over Republican Opposition. New York Times. https://www.nytimes.com/2020/05/15/us/politics/house-simulus-vote.html
…Fallen by 74%… Emily Badger and Quoctrung Bui (2020). Unemployed Workers Built up Some Savings. Then the $600 Checks Stopped. New York Times. https://www.nytimes.com/2020/10/16/upshot/stimulus-checks-unemployment.html
12% of Black American Men… https://fred.stlouisfed.org/series/LNS14000031
…whose columns Congressional leaders are reading each day. Alexander Coppock, Emily Eakins, and David Kirby (2018). The Long-Lasting Effects of Newspaper Op-Eds on Public Opinion. Quarterly Journal of Political Sciencehttps://pdfs.semanticscholar.org/922f/2a0d8298be77253726efef2d42539de7638f.pdf
…collapsed by 93%… Aideen Hayden and Michelle Norris (2020). The Future of Council Housing. https://www.ucd.ie/socialpolicyworkjustice/t4media/The_Future_Of_Council_Housing_(Norris_Hayden).pdf
…two years after the onset of the homelessness crisis. https://www.focusireland.ie/resource-hub/latest-figures-homelessness-ireland/
…UN Special Rapporteur… UNHRC (2019). Visit to the United Kingdom of Great Britain and Northern Ireland.
…a paltry 0.6%… https://fred.stlouisfed.org/series/NAEXKP01DEA657S
…€750 billion debt purchasing scheme… https://www.ecb.europa.eu/press/pr/date/2020/html/ecb.pr200318_1~3949d6f266.en.html
…new kind of debt… Yohruk Bahceli. EU Makes Bond Market History with €275 billion demand for SURE issue – bankers. Reuters. https://uk.reuters.com/article/uk-eu-recovery-bond-issuance-idUKKBN2751Q9
…literally made his name… Padraic Halpin. Ireland’s ‘Prudent Paschal’ takes Eurogroup Chair. Reuters. https://www.reuters.com/article/us-eurozone-economy-eurogroup-chair/irelands-prudent-paschal-takes-eurogroup-chair-idUSKBN24A2YV
…From below zero… https://tradingeconomics.com/ireland/government-budget
…To above €20 billion… Shane Harrison. ‘Unprecedented’ Irish budget revealed. BBC News https://www.bbc.com/news/world-europe-54526382
…a decade’s worth of higher education funding… https://whereyourmoneygoes.gov.ie/en/
…returning the deficit to “normal”… Birgit Jennen, Nicholas Comfort. Germany’s Debt Spending May Become the New Normal, Official Says. Bloomberg. https://www.bloombergquint.com/politics/germany-s-debt-spending-may-become-the-new-normal-official-says
…while the recession is still getting worse. Chris Giles (2020). Crisis forces Sunak to walk a tightrope. Financial Times.https://www.ft.com/content/a7cbec08-2bd1-4e21-afa7-1104b64b50b1
…their old tricks. Bruce Bartlett (2019). The Republicans’ Familiar, Troubling Plan to Torpedo Biden’s Presidency. The New Republic. https://newrepublic.com/article/159932/budget-deficit-biden-agenda-mcconnell
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