In testimony from earlier this week, Brown University Professor Mark Blyth told the Senate Budget Committee that austerity would gravely hurt the American economy
THOMAS HEDGES, TRNN PRODUCER: Earlier this week, the Senate previewed its approach towards the budget for 2016. In a hearing Wednesday, the Budget Committee made it clear that its main focus would be reducing the deficit through further cuts to the public sector. JEFF SESSIONS, U.S. SENATOR (R-AL): Under President Obama, we’ve already added $2.3 trillion in taxes over the decade–$1.7 trillion on Obamacare, another $600 billion at the fiscal cliff. And his budget he’s submitted now has got another $2.4 trillion that he wants to add. So I don’t think we’re going that way. HEDGES: The debate among Republicans has turned into one about whether or not to shield defense spending from sequestration cuts. But at the hearing on Wednesday, Brown University professor Mark Blyth outlined a different narrative that he says is largely ignored in Washington. DR. MARK BLYTH, WATSON INSTITUTE, BROWN UNIVERSITY: It’s a real honor for me to be here as an immigrant to the United States. So I just want to acknowledge that before I begin. I’m going to show some slides. I’m kind of a data-driven guy, so if I can have my slides–. Can we go to the next slide, please? You don’t really have a spending problem. You have a revenue problem. So I’m going to show you why. (Next slide.) You’ve been cutting taxes on top earners–on basically everyone, but really it’s the top end that matters–basically since the 1960s. If you have a look (next slide, please), what you’ll see there: the green line is the United States federal and state tax take as a percentage of GDP. That’s the average of all the other rich countries in the world. So, basically you’re massively under-revenuing, if you want to make that into a word. (Next slide, please.) That’s the United States on the blue line at the bottom. That’s everyone you compare yourself to and the OECD average. You’re just not raising revenue. (Next slide, please.) This is an old story. As you can see, taxes have outpaced–revenues have fallen short of taxes–all the way through the ’80s as well, actually. It was only briefly in the ’90s it was ever any different. And the reason you see this large, huge buildup in debt and spending is because we bailed the entire global financial system and had a huge recession. So of course taxes are going to go down as revenues dry up from an already low baseline, and spending’s going to go up–your debt’s become your deficit. It’s all quite normal why that should happen. And as you can see, they’re trending down again to being almost normal. (Next slide, please.) In fact, in comparison to the average of all other countries, the United States tax gap is actually smaller than many other countries. So you’re actually even in better shape comparatively, even though you actually spend very little through the government. Now (next slide, please), if the U.S. was overspending, it would show up in bond yields, because the people holding all of that debt would freak out and would want more interest payments. Well, here’s the funny thing. It’s been falling consistently since 2006, right through the financial crisis. You create giant tsunami of a financial crisis and people want to hold your debt. In fact, interest payments keep going down in terms of bond yields. If you have a problem in spending, it’s simply not showing up in the way that investors’ appetite shows up in bonds. The 30-year bond currently trades at 2.8 percent. That doesn’t even cover inflation over the period. No one can get enough of this debt. This is an entirely different story. (Next slide, please.) You can’t really see this, but basically what it shows is a regression between the degree of budget tightening, what you want to do, on the horizontal axis, and then what happens to your debt. And that dot at the top is Greece. And the ones in the middle are Spain and Ireland and Portugal. And guess what? The more that they tightened, the more debt they got, because the underlying GDP got smaller, and the same constant stock of debt got bigger rather than smaller. So the more you tighten, the more you shrink your economy, the more debt you end up with. It’s quite a paradox, but it’s a very robust finding. (Next slide, please.) This is the same thing seen the other way. This is basically the wonders of austerity part two. The stronger the budget tightening, the sharper the decline in GDP. Again, that’s Greece at the bottom. They have cut more than any country in modern history, and they have lost a third of their economy, and their debt has doubled despite the cuts–in fact, because of them. (Next slide, please.) This is hardly a surprise, because when you spend all that time shrinking your economy by obsessively balancing your budget, you build fragilities into the system going forward, such that when you get hit with an external shock, your economy craters because it’s much more fragile. And what we have here are years in which the budget was paid down, very long periods, and they’re all followed by recessions or depressions the minute you get hit with a shock because you’ve been artificially constricting your GDP growth for no good reason. (Next slide, please.) We wonder a lot about–we’ve heard a bit about interest payments on the debt. One of the other things I find fascinating is this idea that we’re all in hock to foreigners, right? So, you know, foreigners own our debt. If you look at this slide, you’ll find that most–in fact, 70 percent of U.S. debts debts domestically held. And that matters for your interest payments story, because although I pay taxes, which become payments on the debt, pension funds and banks use debt very productively. And when you pay them interest, that goes back into my pension. We’re all borrowers and lenders at the same time. The notion that debt interest is some deadweight loss is just simply not true. (Next slide, please.) So we have a lot of debt. And you can see here two lines. The blue line is the United States, and the other one is the European Union /eɪ/ Eurozone countries. And you can see the effects of the crisis going in. Basically, government spending’s pretty constant going in all the way across the decade. There’s no orgy of spending. It simply didn’t happen. Then there’s a huge blowup with the global financial crisis. You bail out the banks. And at the same time, without recapitalization and so on, you end up constricting the economy, you have a big recession, and that’s where your debt came from. Europe’s been tightening. Remember that. They’ve been doing the budget cuts that you want so much. They’re in exactly the same position. (Last slide, please.) However, the story’s much worse, because if you look at this another way, there’s your spend going in, there’s GDP growth, there’s the effect of the financial crisis going down. Look at the blue line. That’s America. We didn’t cut. We grew five times as fast as Europe did last year. Look at what happened to Europe. The more they cut–that dotted line going on at the end, that’s 20 percent unemployed in the periphery and 12 percent unemployment in the core. They’re in a miserable state because they’ve been balancing their budget. One last thing I wanted to end on. You don’t have a budget crisis now. You didn’t have it in the past. But you project it into the future. Everything I’ve heard is ten-year projections in the future. These straight-line linear projections ten years out. One thing you can bet on: no linear projection ever comes true. Imagine you did a ten-year linear projection in 2004. Do you think you would have picked up the financial crisis? Imagine the CBO did a ten-year projection in 1987. Do you think they would have picked up the cost savings of the end of the Cold War? Worlds are nonlinear generators. You have no idea what it will be like in ten years’ time. But one thing we do know is the American economy will be much bigger than it is now. In 2006, it was $13 trillion, $13.6 trillion. Today it’s $17 trillion. When we go out ten years, we’ll have a much bigger economy on which we will be paying back a smaller share of debt. If you start cutting now, you will end up in worse fiscal shape than you actually would if you’d just stay on the course you’re on now. Growth cures debt. Cuts cause debt.
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