How Austerity Politics End

In early 2013, the influential U.S. think tank Third Way, an arm of the Committee for a Responsible Federal Budget (CRFB), released a report that called on then-President Barack Obama and congressional Democrats to immediately pass $1.9 trillion in deficit reduction. To achieve this enormous contraction of federal spending, the report’s authors proposed a raft of austerity measures to cut ​“entitlement programs,” slash Social Security benefits through ​“chained CPI” — a process to slow down cost-of-living adjustments in the program — and “[reform] the debt limit to grow with sustainable debt projections.”

Third Way failed to get its full plan passed, but its belief that debts and deficits demand urgent action even at a time of economic crisis for American workers became axiomatic within the Democratic Party. 

That same year, President Obama put out his own proposal to cut the deficit by $1.5 trillion over a decade in the hopes of brokering a ​“grand bargain” between Democrats and Republicans in Congress. While unsuccessful, those negotiations were overseen by then-Vice President Joe Biden, who submitted to Sen. Mitch McConnell’s (R-Ky.) demands to shrink entitlement programs and food stamps, warning that U.S. deficits ​“may become a national security issue.”

As the U.S. enters the second year of a global pandemic, however, the decades-long stranglehold that market fundamentalism has had on the Democratic establishment and U.S. politics more broadly may finally be loosening. Mainstream economists and politicians have roundly rejected the conventional wisdom that budgets must be managed like those of individual households, arguing instead that circumstances demand the government pay Americans directly and avoid the kinds of private partnerships that have long animated federal policy. 

If Donald Trump’s regressive tax code laid bare the bad faith of the Republican Party’s deficit hawks, Democrats now appear ready to use this kind of spending as a mechanism to subsidize working people. This stunning shift suggests Democrats have learned from their past failures and are now willing to exercise the full power of the U.S. government. 

The state to the rescue

President Biden stands poised to sign a $1.9 trillion rescue bill that throws the priorities of deficit scolds like those at Third Way and the CRFB straight out the window. And while the media class and some members of the political establishment may not be able to kick their addiction to ​“what the CFRB [is selling],” as Alex Yablon writes in The New Republic, the bill’s passage in Congress signals that Democrats are turning left on the issue of deficit financing.

The American Rescue Plan (ARP), which a Democratic Congress approved along party lines in early March, will directly aid U.S. workers and the poor in a matter of weeks. Key features of the bill include $1,400 direct payments, a $300 weekly boost to federal unemployment payouts, $350 billion in funds for states and local governments, aid for rental and mortgage relief, a massive expansion of earned income tax and child tax credit estimated to cut childhood poverty in half, funding for child care and to safe school reopenings, billions of dollars in relief for bars, restaurants and other small businesses, additional funding for the Paycheck Protection Program to keep workers on payrolls, as well as $20 billion toward a national vaccination program to crush the Covid-19 pandemic, with billions more for testing and contact tracing. 

The legislation also contains less-heralded provisions to make healthcare more affordable, reducing the number of uninsured Americans by 1.3 million over the next year, in addition to funding that would rescue the pensions of over one million workers and retirees.

Sen. Bernie Sanders’ (I-Vt.) push to increase the federal minimum wage to $15 an hour, which would have given a raise to nearly 30 million workers and lifted close to one million Americans out of poverty, failed due to arcane Senate budget rules and a group of recalcitrant centrist Democrats. Nonetheless, the rescue package represents a federal investment in the working class unseen in modern American history. According to the Tax Policy Center, the poorest 20% in the United States are estimated to see around a 20% boost in their income due to the plan. 

This package was funded not through cuts to welfare programs, contracts with for-profit private entities or increased taxes on the middle class, but by deficit spending. And it follows Congress’ passage of the $2.2 trillion CARES Act in March 2020 and another $900-billion stimulus that then President Donald Trump signed into law in late December 2020. Even before the ARP is taken into account, the deficit for the 2021 fiscal year was already projected to reach $2.3 trillion — far higher than the $680 billion that prompted the Obama administration to pursue an austerity program in 2013. 

Yes we can (implement an austerity agenda)

Prior to his proposed budget cuts, before he ever sought a ​“grand bargain” with Republicans, Obama oversaw the introduction of so-called ​“Pay-go” rules in the U.S. House to ensure that all federal spending be ​“paid for” by raising revenue or cutting public programs. ​“Contrary to the prevailing wisdom in Washington these past few years, we cannot simply spend as we please, and defer the consequences to the next budget, the next administration, or the next generation,” Obama observed at the 2009 White House Summit on Fiscal Responsibility. “[Voters] sent us here to usher in a new era of responsibility in Washington, to start living within our means again.”

Obama’s fear of deficits would prove politically perilous for the Democratic Party. The initial stimulus bill that his administration put forward in the wake of the 2008 financial crisis, the American Recovery and Reinvestment Act (ARRA), was seen by many progressive critics at the time as insufficient to the scale of the challenges facing the economy. Two years later, the Republican Party would gain 63 seats in the House and six seats in the Senate. As Senate Majority Leader Chuck Schumer (D-N.Y.) recently told the Washington Post’s Jeff Stein, ​“What happened in 2009 and 2010 is, we tried to work with the Republicans, the package ended up being much too small, and the recession lasted for five years. People got sour; we lost the election.”

Biden has echoed this view himself, telling reporters shortly after taking office that, ​“One thing we learned is, you know, we can’t do too much here. We can do too little. We can do too little and sputter.”

Indeed, Democrats didn’t just forfeit their House majority in the 2010 midterms but went on to lose over 1,000 seats in state and federal elections over the course of Obama’s presidency. NPR reports that from 2008 to 2016, Democrats ​“lost more House, Senate, state legislative and governors seats than under any other president.” And while the reasons for these losses are myriad, that voters recognized the government’s failure to improve the lives of working people is undeniable. 

In a 2012 Atlantic article titled ​“Barack Obama, Austerity President,” Derek Thompson noted that, ​“federal spending (which has grown every year since then 1960s) is increasing at its slowest pace in half a century, and federal employment is in true decline. Eighteen months removed from the start of the Census, it’s shrinking at its fastest rate since the mid-1950s.”

A new era of American politics

President Biden’s about-face on austerity economics hasn’t gone unnoticed by those who worked under the last Democratic president. On MSNBC’s Morning Joe earlier this week, former Obama official Steven Rattner called the ARP’s passage ​“the most dramatic shift in philosophy of government…going back 70 or 80 years.”

One element that sets the legislation apart from other recent stimulus bills is its lack of discreet corporate handouts. Progressives derided the CARES Act passed under President Trump for lavishing tax breaks on companies and wealthy business owners while the pandemic ravaged the American workforce. But even the Democrats’ ARRA of 2009 included massive subsidies to hugely profitable corporations, including General Motors and Lockheed Martin. 

The fact that Biden and Congressional Democrats eschewed this approach could presage a new era of American politics in which the state no longer treats private industry as its governing partner but as a sector to be governed — one whose profit motives often stand in direct conflict with providing Americans a decent standard of living. 

In his new book, Freedom from the Market: America’s Fight to Liberate Itself from the Grip of the Invisible Hand, the Roosevelt Institute’s Mike Konczal writes: ​“America’s market-oriented worldview is now breaking down. At a time of political upheaval, insecurity, and pandemics, people are hungry to reclaim a world outside the market.” 

How the Democrats proceed, particularly with their forthcoming infrastructure bill, will likely determine whether this breakdown in the neoliberal order of market fealty and deficit obsession is permanent, or only temporary. The CRFP likely hopes for the former, although even as it urged fiscal constraint during the ARP negotiations, it nonetheless conceded that the government ​“shouldn’t back away from borrowing more as needed.” 

If the proud ​“radical centrists” at Third Way can learn to stop worrying and embrace deficit spending, there should be nothing holding Democrats back from splurging on the working class.