The Siren Song of Austerity
Among the many lessons of the 2008 financial crisis and its aftermath in the United States is that there is no good reason to start worrying about debt when unemployment remains high and interest rates low. The hasty embrace of austerity derailed the last recovery, and it must not be allowed to do so again.
BERKELEY – Ten years and ten months ago, US President Barack Obama announced in his 2010 State of the Union address that it was time for austerity. “Families across the country are tightening their belts and making tough decisions,” he explained. “The federal government should do the same.” Signaling his willingness to freeze government spending for three years, Obama argued that, “Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t.” So great was the perceived need for austerity that he even vowed to “enforce this discipline by veto,” just in case congressional Democrats had something else in mind.
Immediately following these remarks, which appeared to fly in the face of economic common sense, some in the Obama administration tried to convince me that the president was merely engaging in Dingbat Kabuki Theater. The implication was that the administration would, of course, continue to use fiscal policy to reduce unemployment through tax cuts and spending on items that were exempt from the freeze: “national security, Medicare, Medicaid, and Social Security.”
But political theater can have a powerful effect on policy debates, determining which arguments can and cannot command broad assent in the public sphere. After the 2008 financial crisis, I and others had argued that in an environment of still-high unemployment and extremely low interest rates, the cost of continued government borrowing and spending would be trivial compared to the benefits. Yet Obama’s rhetoric lent austerity the bipartisan gloss that it needed to prevail.