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.

 

More articles by:

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.

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

Weekend Edition
July 28, 2017
Friday - Sunday
Diana Johnstone
Collateral Damage: U.S. Sanctions Aimed at Russia Strike Western European Allies
Jim Kavanagh
Donald the Destroyer: Assessing the Trump Effect
Carl Boggs
The Other Side of War: Fury and Repression in St. Louis
Eva Golinger
There is Still Time to Prevent Civil War in Venezuela
Anthony DiMaggio
“A Better Deal”? Dissecting the Democrats’ “Populist” Turn in Rhetoric and Reality
Conn Hallinan
Middle East Chaos
Mumia Abu-Jamal
James Baldwin: Word Warrior
Gary Leupp
The Trump Revolution Devouring Its Own Children
Joshua Frank
The Fire Beneath: Los Angeles is Sitting on a Ticking Time Bomb
Myles Hoenig
It Wasn’t Russia, It was the Green Party!
Andrew Levine
Enter Scaramouche, Stage Right
Brian Cloughley
Time to Get Out of Afghanistan
Alan Jones
“Finland Station” and the Struggle for Socialism Today
Robert Hunziker
Plastic Chokes the Seas
Eric Draitser
Enough Nonsense! The Left Does Not Collaborate with Fascists
Vijay Prashad
The FBI vs. Comrade Charlie Chaplin
Jane LaTour
Danger! Men Working
Yoav Litvin
The Unbearable Lightness of Counterrevolution
Charles Derber
Universalizing Resistance: How to Trump Trump
Gregory Barrett
Two Johnstones and a Leftish Dilemma: Nationalism vs. Neoliberalism
Joseph Natoli
Choosing the ‘Arteries that Make Money’
CJ Hopkins
Intersectionalist Internet Blues
Pepe Escobar
China and India Torn Between Silk Roads and Cocked Guns
Ralph Nader
Can the World Defend Itself From Omnicide?
Howard Lisnoff
Agape While Waltzing at the Precipice
Musa Al-Gharbi
Want to Shake Up Status Quo? Account for the Default Effect
Angela Kim
North Korean Policy Must Focus on Engagement Not Coercion
Hiroyuki Hamada
Delivering Art in the Empire
David Macaray
Talking Union
Binoy Kampmark
Refugee Conundrums: Resettlement, the UN and the US-Australia Deal
Robert Koehler
Opening Gitmo to the World
David Jaffee
No Safe Space for Student X
Thomas Knapp
The State is at War — With the Future
David Swanson
What’s Missing from Dunkirk Film
Winslow Myers
There Is Still Time, Brother
Robert J. Burrowes
Biological Annihilation on Earth Accelerating
Frederick B. Hudson – Dr. Junis Warren
Robot Scientists Carry Heavy Human Hearts 
Randy Shields
Not My Brother’s Reefer
Sam Lichtman
Where are the Millennials?
Louis Proyect
Death Race: the Cruelties of the Iditarod
Charles R. Larson
Review: Norman Lock’s A Fugitive in Walden Woods
July 27, 2017
Edward Curtin
The Deep State, Now and Then
Melvin Goodman
The Myth of American Exceptionalism
Nozomi Hayase
From Watergate to Russiagate: the Hidden Scandal of American Power
Kenneth Surin
Come Fly the Unfriendly Skies
FacebookTwitterGoogle+RedditEmail