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.

January 23, 2018
Carl Boggs
Doomsday Panic in Hawaii
Mark Ashwill
If I Were US Ambassador to Vietnam…
Nick Pemberton
The Inherent Whiteness of “Our Revolution”
Leeann Hall
Trump’s Gift for the Unemployed: Kicking Them Off Health Care
Dean Baker
Lessons in Economics For the NYT’s Bret Stephens: Apple and Donald Trump’s Big Tax Cut
Mitchell Zimmerman
Law, Order and the Dreamers
Ken Hannaford-Ricardi
The Kids the World Forgot
Dave Lindorff
South Korea Slips Off the US Leash
Ali Mohsin
Extrajudicial Murder of Pashtun Exposes State Brutality in Pakistan
Jessicah Pierre
Oprah is No Savior
John Carroll Md
Keeping Haiti in Perspective
Amir Khafagy
Marching Into the Arms of the Democrats
January 22, 2018
Patrick Cockburn
It’s Time to Call Economic Sanctions What They Are: War Crimes
Jim Kavanagh
Behind the Money Curtain: A Left Take on Taxes, Spending and Modern Monetary Theory
Sheldon Richman
Trump Versus the World
Mark Schuller
One Year On, Reflecting and Refining Tactics to Take Our Country Back
Winslow Wheeler
Just What Earmark “Moratorium” are They Talking About?
W. T. Whitney
José Martí, Soul of the Cuban Revolution
Uri Avnery
May Your Home Be Destroyed          
Wim Laven
Year One Report Card: Donald Trump Failing
Jill Richardson
There Are No Shithole Countries
Bob Fitrakis - Harvey Wasserman
Are the Supremes About to Give Trump a Second Term?
Laura Finley
After #MeToo and #TimesUp
Howard Lisnoff
Impressions From the Women’s March
Andy Thayer
HuffPost: “We Really LOVED Your Contributions, Now FUCK OFF!”
Weekend Edition
January 19, 2018
Friday - Sunday
Paul Street
Dr. King’s Long Assassination
David Roediger
A House is Not a Hole: (Not) Caring about What Trump Says
George Burchett
How the CIA Tried to Bribe Wilfred Burchett
Mike Whitney
Trump’s Plan B for Syria: Occupation and Intimidation
Michael Hudson – Charles Goodhart
Could/Should Jubilee Debt Cancellations be Reintroduced Today?
Marshall Auerback – Franklin C. Spinney
Boss Tweet’s Generals Already Run the Show
Andrew Levine
Remember, Democrats are Awful Too
James Bovard
Why Ruby Ridge Still Matters
Wilfred Burchett
The Bug Offensive
Brian Cloughley
Now Trump Menaces Pakistan
Ron Jacobs
Whiteness and Working Folks
Jeffrey St. Clair
The Keeper of Crazy Beats: Charlie Haden and Music as a Force of Liberation
Robert Fantina
Palestine and Israeli Recognition
Jan Oberg
The New US Syria “Strategy”, a Recipe For Continued Disaster
ADRIAN KUZMINSKI
The Return of the Repressed
Mel Gurtov
Dubious Partnership: The US and Saudi Arabia
Robert Fisk
The Next Kurdish War Looms on the Horizon
Lawrence Davidson
Contextualizing Sexual Harassment
Jeff Berg
Approaching Day Zero
Karl Grossman
Disaster Island
FacebookTwitterGoogle+RedditEmail