FacebookTwitterGoogle+RedditEmail

What Deficit Reduction is Really About: Weakening Workers’ Bargaining Power

by DEAN BAKER

Few academic papers have ever received as much attention or had as much influence on public policy as “Growth in a Time of Debt,” a paper put out in 2010 by Harvard economists Carmen Reinhart and Ken Rogoff. While standard Keynesian economics indicates that most wealthy countries could benefit enormously from increased government spending, this paper argued against such actions.

Reinhart and Rogoff (R&R) purported to find a sharp cutoff with countries with debt-to-GDP ratios above 90 percent experiencing substantially slower growth than less-indebted countries. Their work has been cited by those arguing for smaller budget deficits in the eurozone, the United Kingdom, and the United States. The claim is that the higher deficits now could push nations into the danger zone; possibly leading to decades of slow growth.

There were many problems with the basic story in R&R. The most obvious problem was causality. Countries often accumulate large amounts of debt because their economies are doing poorly. Japan is the classic example. Its economy boomed in the 1980s driven by bubbles in both its land and stock market. During this decade it had near balanced budgets and very little debt.

Then its bubbles burst in 1990 and its economy went into a slump. The government boosted its deficits to help make up the demand lost from the private sector. In the R&R data set we have high debt causing Japan’s weak growth. In reality, the debt was due to the fact that its economy was weak.

There were also simple logical problems with the R&R story. Countries have both assets and liabilities. If there really is something horrible that happens when debt levels cross 90 percent of GDP then it would make sense to sell enough assets to get below this threshold. This could mean sales of government land, fishing rights, airwaves, even patent monopolies. While it may be foolish to privatize such assets in other circumstances, if there really is a potentially huge growth dividend from reducing debt-to-GDP ratios, then it would make sense to sell assets to get below the 90 percent threshold.

In spite of the obvious objections to the R&R paper it nonetheless carried enormous weight in policy circles. That is why it was hugely important when three economists at the University of Massachusetts put out a paper last week uncovering major errors in R&R. The three economists — Thomas Herndon, Michael Ash, and Robert Pollin — worked from R&R’s original spreadsheet. They found several important computational errors. When these errors were corrected, R&R’s result disappeared. There was no longer a sharp falloff in growth rates associated with debt levels above 90 percent of GDP.

The discrediting of the R&R paper raises important questions for economic policy. This work was central to the argument against measures designed to boost the economy. Now that it has been discredited, one of the major intellectual pillars of the drive for austerity has been removed. In principle this should lead to a rethinking of economic policy.

Unfortunately that does not seem likely to be an outcome. The policy of austerity has produced winners and losers, and the winners seem to have considerably more power. The high unemployment and weak labor markets of the last five years leaves workers with little bargaining power.

As a result, virtually all of the gains from productivity growth since the downturn have gone to employers. The after-tax profit share of national income is at the highest level since 1951. The rise in corporate profits had led to a booming stock market, which has recovered all the ground lost since the recession.

The list of losers in the current economic situation is much larger than the list of winners. There are a relatively small number of people who own substantial amounts of stock. The overwhelming majority of the non-retired population gets more income from their labor than stock ownership. These people are clear losers from the austerity being followed in the United States for the last three years.

Of course campaign contributions come disproportionately from the tiny segment of the population who do own large amounts of stock. As a result, the interests of the wealthy are likely to be the concerns of elected politicians even if they are opposed to the interests of the vast majority of the population. That is why we see efforts to cut programs such as Social Security and Medicare even when these cuts are opposed by large majorities of people across the political spectrum.

The news last week is that the new paper discrediting Reinhart and Rogoff made everything much clearer. The leadership of both major parties is not seeking ways to reduce the budget deficit because there is any reason to believe this will be good for the economy. They are looking for ways to reduce the budget deficit because the wealthy are happy to sustain a situation in which high unemployment weakens workers’ bargaining power. This does not paint a very positive picture of the state of democracy in the United States.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This article originally appeared on Caixin.

 

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

More articles by:

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

Weekend Edition
December 02, 2016
Friday - Sunday
John Pilger
The Coming War on China
Jeffrey St. Clair
Roaming Charges: The CIA’s Plots to Kill Castro
Paul Street
The Iron Heel at Home: Force Matters
Pam Martens - Russ Martens
Timberg’s Tale: Washington Post Reporter Spreads Blacklist of Independent Journalist Sites
Andrew Levine
Must We Now Rethink the Hillary Question? Absolutely, Not
Joshua Frank
CounterPunch as Russian Propagandists: the Washington Post’s Shallow Smear
David Rosen
The Return of HUAC?
Rob Urie
Race and Class in Trump’s America
Patrick Cockburn
Why Everything You’ve Read About Syria and Iraq Could be Wrong
Caroline Hurley
Anatomy of a Nationalist
Ayesha Khan
A Muslim Woman’s Reflections on Trump’s Misogyny
Michael Hudson – Steve Keen
Rebel Economists on the Historical Path to a Global Recovery
Russell Mokhiber
Sanders Single Payer and Death by Democrat
Roger Harris
The Triumph of Trump and the Specter of Fascism
Steve Horn
Donald Trump’s Swamp: Meet Ten Potential Energy and Climate Cabinet Picks and the Pickers
Louis Proyect
Deepening Contradictions: Identity Politics and Steelworkers
Ralph Nader
Trump and His Betraying Makeover
Stephen Kimber
The Media’s Abysmal Coverage of Castro’s Death
Dan Bacher
WSPA: The West’s Most Powerful Corporate Lobbying Group
Nile Bowie
Will Trump backpedal on the Trans-Pacific Partnership?
Ron Ridenour
Fidel’s Death Brings Forth Great and Sad Memories
Missy Comley Beattie
By Invitation Only
Fred Gardner
Sword of Damocles: Pot Partisans Fear Trump’s DOJ
Renee Parsons
Obama and Propornot
Dean Baker
Cash and Carrier: Trump and Pence Put on a Show
Jack Rasmus
Taming Trump: From Faux Left to Faux Right Populism
Ron Jacobs
Selling Racism—A Lesson From Pretoria
Julian Vigo
The Hijos of Buenos Aires:  When Identity is Political
Subcomandante Insurgente Galeano
By Way of Prologue: On How We Arrived at the Watchtower and What We Saw from There
Dave Lindorff
Is Trump’s Idea To Fix the ‘Rigged System’ by Appointing Crooks Who’ve Played It?
Aidan O'Brien
Fidel and Spain: A Tale of Right and Wrong
Carol Dansereau
Stop Groveling! How to Thwart Trump and Save the World
Kim Nicolini
Moonlight, The Movie
Evan Jones
Behind GE’s Takeover of Alstom Energy
James A Haught
White Evangelicals are Fading, Powerful, Baffling
Barbara Moroncini
Protests and Their Others
Joseph Natoli
The Winds at Their Backs
Cesar Chelala
Poverty is Not Only an Ignored Word
David Swanson
75 Years of Pearl Harbor Lies
Alex Jensen
The Great Deceleration
Nyla Ali Khan
When Faith is the Legacy of One’s Upbringing
Gilbert Mercier
Trump Win: Paradigm Shift or Status Quo?
Stephen Martin
From ‘Too Big to Fail’ to ‘Too Big to Lie’: the End Game of Corporatist Globalization.
Charles R. Larson
Review: Emma Jane Kirby’s “The Optician of Lampedusa”
David Yearsley
Haydn Seek With Hsu
FacebookTwitterGoogle+RedditEmail