Krugman and Obama’s Dangerous Austerity Myths

Krugman and Obama’s Dangerous Austerity Myths

Bill Black: Obama nominates a Wall St. loyalist to help negotiate the "Grand Betrayal" -   January 13, 2013
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Krugman and Obama’s Dangerous Austerity MythsPAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore. And welcome to this week's edition of The Black Financial and Fraud Report with Bill Black, who now joins us.

Bill is associate professor of economics and law at University of Missouri–Kansas City. He's a white-collar criminologist, a former financial regulator. And he's the author of The Best Way to Rob a Bank Is to Own One.

Thanks for joining us again, Bill.


JAY: What are you working on this week?

BLACK: Well, the odd convergence of Paul Krugman and President Obama. And so on the same day, they put out these odes to austerity that in the one case is ironic, because if Obama had gotten his way, he would have crushed his reelection opportunities, along with the U.S. economy, and the second, because Krugman has been fighting against austerity all these months.

So the first one is a Krugman column. And what he mostly wants to say is things like, you know, print the platinum $1 trillion and such. And he has a throwaway paragraph that says, you know, if you folks really want to deal with the budget deficit, if that's your issue, well, then there's a simple way to do that: you just raise taxes and cut spending. But elections have consequences and, you know, you don't always get that which you wish.

And then President Obama, in connection with Treasury Secretary Geithner leaving and nominating Jacob Lew to take that position, said something very similar. He said, hey, Geithner's the greatest Treasury secretary in modern times because he's produced 6 million new jobs, and now we're starting to reduce the deficit through a combination of taxes and government spending.

So let's go back to Krugman for a second. We're in a great recession and a weak recovery from it, in which unemployment is still twice as high as it should be, in which long-term unemployment is at record levels, in which poverty is at record levels, use of food stamps is at record levels. We have a jobs crisis and an inequality crisis.

But of course that's not what is good for the politics of all of these things. So President Obama wants to take credit for the creation of the jobs, which comes from the weak recovery. And then he wants to switch to his real love, which is the talking about deficit reduction. And that's the transition to Lew. And he says Lew is the guy that presided over three years of balanced budgets with Clinton, and he's going to be the guy to, you know, basically put austerity into force, full force, in the United States, and then all will be well.

Now, this is incredibly odd in the—start with Krugman, because Krugman has been writing for years about how austerity is not a simple matter, that in fact if what we did was raise taxes and cut spending, what we would do is cut private-sector demand by raising taxes, and then we would cut public sector demand by cutting spending [snip] would indirectly, since most government spending goes to the private sector, then also reduce private-sector demand. And the reason you have a recession is that demand is already inadequate. And this is not just any recession; this is the Great Recession, where demand was inadequate by trillions of dollars—and a trillion is a thousand billion, right?

So the stimulus program, everybody knew, was nowhere remotely big enough to replace the lost demand. But Krugman has been saying, don't do austerity, don't do austerity, that's the path that has pushed the Eurozone into recession into recession and put Spain, Italy, and Greece into Great Depression levels of unemployment, so don't go that route. It isn't simple. If you increase taxes, if you cut spending at this period, it will not cure the economy. It's just the opposite. It's more like medical malpractice in the old days of bleeding the patient. And then, because it doesn't, of course, help them recover, you bleed them more. And you do this until you cause an economic disaster.

So Krugman's completely off base if you quote Krugman on Krugman. And it's very strange.

Then you get to Obama. And what Obama doesn't realize is Geithner, of course, is the guy that pushed to kill stimulus. He is the guy that fought very hard not to create those 6 million jobs. If Geithner has gotten his way—and Geithner's famous quotation is that stimulus doesn't do anything for you, that it's like sugar: you just get a short-term high, and then, you know, you're cranky and rebellious and such and nothing gets done.

So had Obama listened to Geithner in the earliest months of the administration, Obama would have already been out of a job, because he would have thrown us back into a deep recession using austerity, and, of course, the Republicans would have control of the Senate.

Then Geithner tries to do it again in July 2011. This is what they refer to as the grand bargain—what I refer to as the grand betrayal—where they deliberately sought to cut the safety net—Social Security, Medicare, Medicaid, food stamps—where they sought to slash well over $1 trillion in public spending over the decade and raise taxes.

Had Geithner and Lew [incompr.] two, three principal aides pushing this—the third was a guy named Bill Daley, who was [incompr.] and Peterson is the guy that wants Social [Security privatized so that] Wall Street can make a fortune [snip] fees of our retirement accounts. These three aides—and they were the top aides for Obama on these negotiations back in July 2011—tried very hard to impose austerity. At the time, unemployment was 9.1 percent. This is, again, July 2011. Had they succeeded in getting austerity, the country would have gone back into recession within a few months, unemployment would have been well above 10 percent, quite possibly above 11 percent—European levels, in other words—and it would have been increasing every month during 2012, their election year. Hence Obama would have been destroyed politically and the Democrats would have lost the Senate. So that's the second time Geithner and Lew combined to try to create the grand betrayal and would have had the ironic effect of defeating Obama.

The third was after, despite himself, he gets reelected, Geithner tries the same thing, and with the support of Lew, where they go and they tell the president, we should, even though we don't have to, make deep concessions on spending cuts and on the safety net. And, fortunately, Senate Majority Leader Reed was so outraged, he took the proposal and threw it into his fireplace, into the fire, the raging fire in his fireplace, and burned it up. So we dodged the bullet again.

But now the president is signalling that's what Lew is going to try to do to the nation again. And so all the emphasis is now we need to start cutting spending even more, we need to raise taxes even more. And we can all look at what this has done to Europe and the devastation. But apparently the president and his principal advisers can't see that. And now it looks like even Krugman has become deeply clouded.

JAY: Thanks for joining us, Bill.

BLACK: Thank you.

JAY: And thank you for joining us on The Real News Network.


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