Chris Van Hollen says there's no excuse for putting the breaks on already slow growth. Democrats ask: What debt crisis?

Call them the debt crisis dissenters.

The two parties are miles apart on how to cut the deficit and national debt: Republicans want to slash spending even more. Democrats want to raise revenue.


And then there are the other Democrats — the ones who reject the entire premise of the current high-stakes fiscal fight. There’s no short-term deficit problem, they say, and there isn’t even an urgent debt crisis that requires immediate attention. This group could make it even harder for President Barack Obama to strike a grand bargain because they increasingly see no immediate need for either new spending cuts or significantly more revenue, both of which they say could further slow the economy.

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These Democrats and their intellectual allies once occupied the political fringes, pushed aside by more moderate members who supported both immediate spending cuts and long-term entitlement reforms along with higher taxes.

But aided by a pile of recent data suggesting the deficit is already shrinking significantly and current spending cuts are slowing the economy, more Democrats such as Virginia Sen. Tim Kaine and Maryland Rep. Chris Van Hollen are coming around to the point of view that fiscal austerity, in all its forms, is more the problem than the solution.

This group got a huge boost this month with the very public demolition of a sacred text of the austerity movement, the 2010 paper by a pair of Harvard professors arguing that once debt exceeds 90 percent of a country’s gross domestic product, it crushes economic growth.

Turns out that’s not what the research really showed. The original findings were skewed by a spreadsheet error, among other mistakes, and it’s helping shift the manner in which even middle-of-the-road Democrats talk about debt and deficits.

“Trying to just land on the debt too quickly would really harm the economy; I’m convinced of that,” Kaine, hardly a wild-eyed liberal, said in an interview. “Jobs and growth should be No. 1. Economic growth is the best anti-deficit strategy.”

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And the intellectual shift away from austerity is not just coming from the left.

The conservative American Enterprise Institute issued a paper last week saying Congress has already achieved enough deficit reduction for now. Other organizations not typically associated with free-spending liberalism, including the International Monetary Fund and Goldman Sachs, have cautioned that the austerity movement — which favors rapid reduction of national debt — may be worsening Europe’s economic problems and slowing down the U.S. recovery, as well.

“American fiscal austerity has been moderate and probably, at the current pace of deficit reduction of about $300 billion per year over the next half decade, has proceeded far enough for now,” AEI scholar John Makin wrote last week.

This intellectual shift away from the need for more immediate deficit reduction is likely to make this summer’s debt ceiling fight even tougher. Democrats are now increasingly likely to revolt against GOP demands, which could include a dollar of spending cuts for each dollar increase in the nation’s borrowing limit.

And it makes execution of a “grand bargain” on debt reduction — a pillar of Obama’s agenda and the subject of renewed talks between the White House and GOP senators — appear all but impossible. Because after all, if the deficit is already on the decline as a percentage of the economy and the debt is likely to remain stable for a decade, why would Democrats agree to fresh cuts to cherished social programs such as Social Security and Medicare, including the president’s proposal to reduce cost of living increases by using a different measure of inflation?

“The Democratic position is that we have already made significant progress in terms of long-term deficit reduction, and we are already seeing a drag on the economy from the sequester,” said Van Hollen, ranking member of the House Budget Committee. “There is no excuse for putting the brakes on already slow economic growth. The Republican plan is a prescription for more European-style austerity.”

Perhaps the biggest new weapon handed to intellectuals and Democrats who argue against more austerity-style budget cuts came in an obscure but critically important academic argument that has unfolded in wonk circles in recent days.

A trio of scholars at the University of Massachusetts Amherst poked major holes in one of the foundational documents of the austerity movement, the 2010 paper Growth in a Time of Debt by Harvard economists Carmen Reinhart and Kenneth Rogoff. Their study suggested countries with public debt over 90 percent of gross domestic product suffer much slower — even negative — economic growth.

The University of Massachusetts scholars, led by graduate student Thomas Herndon, found that Reinhart and Rogoff excluded instances of countries with high debt and normal growth and made a critical error in their Excel spreadsheet, which skewed results to make high debt seem more of a threat. The scholars found that growth in countries with debt over 90 percent of GDP was around 2.2 percent, not much different from lower debt countries.

Reinhart and Rogoff did not respond to a request for an interview. But in comments emailed to reporters and a New York Times op-ed, they admitted errors but said their larger point that higher debt is associated with slower growth still stands. And they made sure to note that they never really said high debt was a cause of slow growth or that 90 percent was a magical number at which point growth cratered.

The influence of Reinhart-Rogoff in conservative policy circles can hardly be overstated. House Budget Committee Chairman Paul Ryan cited the debt-to-GDP study as definitive proof that “confirms” the need for rapid deficit reduction in his “Path to Prosperity” budget, which passed the House earlier this year.

“The study found conclusive empirical evidence that gross debt … exceeding 90 percent of the economy has a significant negative effect on economic growth,” Ryan’s budget says.

Ryan spokesman William Allison said in an email: “The Rogoff-Reinhart study shows that gross debt in excess of 90 percent of GDP significantly weighs down economic growth. But Rogoff-Reinhart aren’t the only ones signaling this warning. [The Congressional Budget Office], the Federal Reserve and the [Organization for Economic Cooperation and Development] have all said high levels of government debt damages the economy.” He added: “The fact remains that excessive government debt is bad for jobs.”

Liberal scholars say the opposite is true, that cutting debt too fast is bad for jobs. And they argue that the University of Massachusetts paper leaves the academic case for austerity devastated.

“Reinhart-Rogoff was supposed to establish a universal rule that there was a speed limit where debt above 90 percent of GDP became dangerous. Now I think that’s out the door,” said Mike Konczal, a scholar at the progressive Roosevelt Institute. “You can still have a discussion about long-term entitlement reform, but it’s even less likely now that intellectually honest people will argue that it is even relevant to the current crisis” of slow growth and high unemployment.

Konczal added what a lot of Democrats are now advocating in the face of an economy that is once again showing signs of a spring slowdown driven by fiscal tightening: the reinstatement of the payroll tax cut and full cancellation of the $85 billion sequester spending cuts. “One intellectual reason we didn’t want to do that is people were worried about keeping debt so high as a percentage of GDP, and that’s significantly less relevant now,” he said.

Democrats are increasingly arguing that rapid deficit reduction is a cause of slowing growth, not a solution to it. And they note that the current CBO projections have the deficit dropping as low as 2.4 percent of GDP by 2014, under its 30-year average.

They also cite a Goldman Sachs report this week arguing that the drop in the deficit and relatively stable longer-term debt outlook should ease demand in Washington for more tightening. The Goldman analysts said even the current budget cuts would knock down growth by 2 percent, a number that would put the U.S. back close to economic contraction.

“We expect the pace of fiscal tightening to peak in mid-2013, weighing on growth by 2 percentage points, but to fade thereafter, opening the door to an acceleration of growth to 3 percent to 3.5 percent over the next few years,” the Goldman analysts wrote.

The debt-to-GDP ratio according to CBO now stabilizes around 73 percent in 2017, well below even the now questionable Reinhart-Rogoff danger zone, though still high by historical standards. It then rises again as health care costs increase because of baby-boomer retirements. But Democrats argue that a slight increase in debt-to-GDP in 10 years is no reason to enact more austerity budget cuts right now with unemployment at 7.6 percent.

“The focus right now should be solely on the unemployment rate. It’s very simple. If you get the unemployment rate down to 4.5 to 5 percent, you can cut these deficits by one-third,” said Rep. Richard Neal (D-Mass.). “I’m with the UMass professors. I pay attention to this stuff.”