By William K. Black

The Office of Management and Budget (OMB) is every administration’s heavy artillery on budget issues. OMB’s staff is dominated by neo-liberal micro-economists under every administration, so it is institutionally conservative. OMB personnel obtain promotions by killing programs, cutting spending, and either blocking the adoption of regulations or weakening the regulations. OMB is institutionally predisposed to embrace austerity. OMB is also expected to be a zealous advocate for the President.

The combination of those dual roles can produce especially bad pro-austerity propaganda. President Obama’s OMB produced a classic example of that propaganda in 2012 that exemplifies the administration’s incoherence on austerity. Obama 2013 budget proposal contains OMB’s ode to austerity. It was prepared under Jacob Lew’s direction. Lew was OMB’s head until he became Obama’s chief of staff in January 2012. Lew is described as the leading candidate to succeed Treasury Secretary Geithner. Lew, Geithner, and William Daley (then Obama’s chief of staff) were Obama’s principal aides during his attempt in July 2011 to negotiate the Great Betrayal with Speaker Boehner. Each of them is a strong supporter of austerity and cuts to the safety net and a champion of Wall Street’s interests.

I have divided up the passage from the budget statement, which is a single paragraph in the original, into five paragraphs to ease the discussion.

CUTTING WASTE, REDUCING THE DEFICIT,

AND ASKING ALL TO PAY THEIR FAIR SHARE Reduce Discretionary Spending. In August 2011, the President signed into law the [Budget Control Act] BCA, which put in place a down payment toward deficit reduction and a structure to accomplish even more. The BCA included a cap on discretionary spending that would achieve approximately $1 trillion in deficit reduction over the next decade. In 2012, the Congress worked in a bipartisan way to meet the caps that were agreed to in the BCA. As we turn to 2013, the caps, in combination with the drawdown in overseas contingency operations proposed in this Budget, would bring discretionary spending to its lowest level as a share of the economy since Dwight D. Eisenhower sat in the Oval Office. These are very tight caps; indeed, it would not be possible to go further and still meet the needs of the Nation. That is why achieving these cuts in discretionary spending is not easy and will take tough choices. Many programs are cut or consolidated where possible, and in some cases, only because of the demands of the fiscal situation. The Budget makes these cuts in a way that asks all to shoulder their fair share. In areas critical to building a strong, growing economy that can create good jobs that pay well, programs are not cut, but rather frozen or given small increases. In light of the caps on discretionary spending, these increases are significant. Cut or Consolidate Programs. Allocating budgetary resources always involves a trade-off between what one wants to do and what one can afford to do. This is exacerbated when the imperative is to limit spending in order to reduce the drag of deficits and debt on our economic growth and competitiveness.

The quoted language comes from one of earliest paragraphs in the budget report. OMB chose these arguments to summarize its justification for the administration’s effort to inflict austerity. The report is an ode to austerity – the policy that threw the Eurozone back into a gratuitous recession (and Greece, Spain, and Italy into depressions). Austerity is also the policy that Obama just described as causing “self-inflicted wounds.” Obama warned that the “fiscal cliff’s” austerity would force the U.S. into a recession. This contradiction (simultaneously warning against and embracing austerity) demonstrates the administration’s fundamental incoherence about austerity.

The five paragraphs also demonstrate the incoherence of the rhetoric the administration advances to support austerity while simultaneously denouncing it. There can only be rhetoric, not logic, given the fundamental internal contradiction of simultaneously supporting and opposing austerity. Nor is there a dispute about which position is substantively correct. The austerity that Obama inflicted when he insisted on creating and maintaining (in late 2011) the “fiscal cliff” is, as Obama admits, a massive “self-inflicted wound.” It would (eventually) force the nation into recession, increase unemployment, increase human misery by cutting vital social programs and the safety net, and increase (not reduce) the budget deficit. It is a lose-lose-lose-lose proposition, except to the OMB.

OMB claims that the BCA’s two-barreled shotgun blast of austerity in response to the Great Recession would produce a string of benefits. First, it would produce “a down payment toward deficit reduction” by raising taxes and cutting spending. The OMB is claiming that pro-cyclical policies that make recessions more likely, severe and long-lasting (which increases budget deficits) are desirable. If that were true then OMB should be trying to force us over the “fiscal cliff” and cheering the Boehner’s failure. The phrase “down payment” is rhetoric devoid of meaning. We aren’t foolish enough to insist on a “down payment” of bleeding a patient (we’ll only take a pint – this time). It is equally foolish to adopt a moderate amount of austerity in response to the Great Recession (we’ll only throw the nation back into a moderate recession – this time).

The next sentence continues the myth that austerity in response to the Great Recession speeds economic recovery and reduces deficits.

“The BCA included a cap on discretionary spending that would achieve approximately $1 trillion in deficit reduction over the next decade.”

In the real world, nations that inflicted austerity on their people in response to the Great Recession were frequently forced back into recession. Italy, Spain, and Greece were forced back into Great Depression levels of unemployment. Recessions increase and extend budget deficits because they cause revenues to fall and expenses to rise. It is, therefore, impossible to predict that (austerity) will decrease budget deficits even in the short-term. It is more likely that austerity will increase the budget deficit. It is even more absurd to purport to project that austerity will produce savings over a lengthy time period like a decade. Over that long a period, austerity could cause and deepen multiple recessions. Cutting government spending on useful programs is more likely to cut growth and increased deficits even after full recovery from a recession. Any calculation of “budget savings” that is supposed to arise from austerity is an exercise in myth-making. OMB, however, embraces the myth and pretends that it knows that the BCA’s cuts to social programs will reduce the deficit by roughly $1 trillion over the next ten years.

The OMB report’s introduction and summary goes from myth-to-myth in each sentence.

“As we turn to 2013, the [BCA] caps … would bring discretionary spending to its lowest level as a share of the economy since Dwight D. Eisenhower sat in the Oval Office. These are very tight caps; indeed, it would not be possible to go further and still meet the needs of the Nation.”

The BCA caps were not created through a study of what social programs were required to meet the “needs of the nation.” No one can know what federal programs are required to meet “the needs of the Nation” over the next ten years because no one can predict the state of the world (e.g., national security needs) or the state of the economy over the next ten years. The inability to know these things is inherent and provides a compelling reason why ten year austerity deals are inherently irresponsible. OMB has no way to know the “needs of the Nation” over the next ten years. OMB claims a remarkable coincidence. OMB is claiming that the BCA “cap” number, chosen without any study of specific federal programs or the “Nation’s needs,” happened to be exactly the perfect number. Indeed, it’s the perfect number every year for the next ten years. OMB claims that any further cuts would prevent us from meeting the Nation’s needs – but that the trillion dollars in cuts had no such effect. This claim of achieving perfection through arbitrary political caps on spending is laughable on its face.

One hopes that OMB knows that it is lying and has not so deluded itself that it believes its own lies. The following passage offers some hope that OMB knows that the spending cuts forced by the arbitrary caps were not justified and have nothing to do with failing to meet the Nation’s needs.

“Many programs are cut or consolidated where possible, and in some cases, only because of the demands of the fiscal situation. The Budget makes these cuts in a way that asks all to shoulder their fair share.”

The first sentence admits that because the administration agreed to inflict the BCA’s austerity on the nation the administration has been forced to cut social programs not because they were not important to meeting “the needs of the Nation,” but because “of the demands of the fiscal situation.” The clause I have just cited makes no economic sense. We are trying to recover from the Great Recession. Unemployment is still far too high and capacity utilization is far too low. We have zero “fiscal … demands” that require us to adopt austerity and cut desirable programs. Cutting spending in such circumstances is certain to weaken the recovery and poses a high likelihood of causing a renewed recession and a larger budget deficit.

The next sentence in the OMB report is just as nonsensical, but more cynical in its propaganda.

“The Budget makes these cuts in a way that asks all to shoulder their fair share.”

This sentence is wrong on multiple dimensions. First, we wouldn’t want “all” to shoulder the burden of budget cuts even if overall cuts were essential. We don’t want to make cuts to the poor or to those to whom we’ve made promises, e.g., Social Security recipients and veterans. Those types of cuts are unfair. The Obama administration has demonstrated its willingness to make such unfair cuts in its negotiations in 2011 and 2012 with Speaker Boehner.

Second, the sentence repeats the austerity chorus with added propaganda about “fair[ness].” There are worse forms of austerity that add to inequality and impair the automatic stabilizers that have made recessions far less severe in the modern era. Fairness is important. The paramount issue when it comes to austerity is its self-destructive nature, not fairness. Austerity, as we have seen in the Eurozone, can cause gratuitous recessions and depressions, cause severe unemployment (which is terrible economically, socially, and psychologically), and cause greatly increased budget deficits and inequality. Austerity would a self-destructive, inhumane policy even if it could be made “fair.” Austerity, recessions, and unemployment can be made less unfair, but they are inherently unfair and it is deceptive propaganda for OMB to call its budget cuts to those in need “fair.”

Third, the sentence contains a more subtle and cruel form of propaganda through the use of the word “shoulder.” The word is supposed to make the victims of austerity believe that their sacrifice has made the Nation stronger and constitutes a “fair” call on them to make a personal sacrifice on behalf of their Nation. It would, logically, be “unfair” of them to oppose the budget cuts, e.g., in food stamps, that cause their children to go hungry. To oppose such cuts would make them “moochers” under OMB’s propaganda. The truth is that there is no reason to cut food stamps. It is not “fair” – it is inhumane. It does not make the Nation stronger. It harms our Nation’s children and economy. When doctors routinely “bled” their patients the result was not “fair” – the result was that all patients suffered unnecessarily and had their health harmed. Austerity is to economics as bleeding was to medicine – quackery.

Increased government spending can reduce the deficit not simply by adding public and private sector demand (the great bulk of public sector spending goes to private sector actors) but also by reducing losses. OMB, however, almost never studies whether social programs that don’t exist should be created. Consider how many trillions of dollars we could have saved if we had prohibited endemically fraudulent liar’s loans, prosecuted elite banksters, had a federal jobs guarantee program, or provided universal health care through a public health system. OMB ignores all those national needs and potential massive cost savings from programs that would also make our nation vastly fairer, more humane, and more democratic.

The savings and loan (S&L) debacle provides concrete examples of how OMB’s “cost saving” efforts would have vastly increased the federal deficit. OMB was one of the leading barriers to saving the Nation from catastrophic losses and bringing the elite banksters who drove the S&L debacle to justice. In 1984, the Federal Home Loan Bank Board (Bank Board) realized that it was massively understaffed to deal with the rapidly growing debacle. The Bank Board realized that it faced an emergency need to reregulate, resupervise, and prosecute. By doing so, it stopped a raging epidemic of “accounting control fraud” before it could cause massive bubbles in many regions and before it could cause a recession. The regulatory effort saved the Nation roughly a trillion dollars.

OMB took exceptional steps to attempt to block the Bank Board’s efforts. It opposed the reregulation that was so vital to breaking the fraud epidemic. Because we were an independent regulatory agency they could not block our rules, but they authored hostile comments on our proposed rules that the frauds’ attorneys could use in trying to convince courts to strike down the rules. Senior OMB officials sought to block our effort to double our staff of over 700 examiners, offering a pittance instead and telling Bank Board Chairman Gray that he failed to understand that deregulation meant that we should cut the number of regulators. Gray went ahead and doubled the number of examiners. With the enlarged, improved staff of examiners we developed the information necessary to close the worst S&L frauds and make the detailed criminal referrals that led to the surge of successful prosecutions of the frauds driving the debacle. This enraged OMB’s senior leadership to such a degree that they threatened to file a criminal referral – against Chairman Gray. The threatened “grounds” for the referral were that Gray was closing too many insolvent, fraudulent S&Ls. These incidents demonstrate how harmful OMB’s institutional incentives and neo-liberal dogmas have been to the Nation. In order to “save” money (by preventing us from hiring vitally needed examiners) OMB would have caused our Nation untold losses. OMB has vastly less relevant expertise than the regulatory agencies and departments about the Nation’s needs. Its second-guessing of agency decisions is more likely to cause harm to the Nation than save money. Regulation can prevent losses that injure and maim as well as cause immense economic losses.

The fourth paragraph of the OMB report implicitly admits the need to consider the value of individual programs but misses entirely the concept of saving by preventing or limiting losses through government programs and regulation. The paragraph makes several implicit admissions of the harm caused the Nation by austerity.

In areas critical to building a strong, growing economy that can create good jobs that pay well, programs are not cut, but rather frozen or given small increases. In light of the caps on discretionary spending, these increases are significant.

These two sentences are revealing about what is wrong with OMB and the administration. OMB reveals the administration’s budget priorities for employment and the crippling limits of what passes for such an employment priority. The first overall takeaway from the paragraph is the totality of OMB’s failure to understand why austerity failed as a response to the Great Recession. OMB claims that what is critical to restore employment is not restoring demand to levels that would sustain full employment. OMB claims that the key to recovery from the Great Recession is individual governmental programs that “create good jobs.” Macroeconomics and demand disappear as an explanation for unemployment or recessions, which is odd given that macroeconomics is supposed to focus on those topics. OMB’s report implies that we can inflict a recession on the Nation via austerity yet avoid employment problems through “small increases” in programs designed to create “good” jobs. Again, one must hope fervently that OMB does not believe its own propaganda.

It is understandable that the administration would make “good jobs that pay well” a priority, but OMB’s description of how the administration approaches that priority is a recipe for disaster. Here’s how badly a governmental program that is “critical” to the economy’s recovery and success fares under Obama: spending on such a program is “frozen or given small increases.” That is a significantly insane statement. Programs that are critical to the economy’s recovery and success should be greatly expanded, particularly in response to the Great Recession. OMB then makes this amazing claim: “In light of the caps on discretionary spending, these increases are significant.” This claim defies logic and destroys OMB’s earlier claim that austerity has not materially impaired programs necessary to “meet the needs of the Nation.” OMB admits that Obama has deliberately “frozen” programs that he believes are “critical” to success. Only someone deeply in thrall to the failed dogma of austerity could deliberately cripple the recovery in this fashion.

OMB then doubles down by trying to use the insanity of Obama’s decision to inflict the BCA’s austerity on the Nation in response to the Great Recession to defend its decision to starve programs it knows are “critical” to our recovery and success. It says that because the BCA’s caps mandate austerity the administration deserves great praise for allowing even “small increases” in critical programs that desperately need very large increases. But that claim should cause us to (1) reject OMB’s claim that the BCA’s austerity has not impaired our ability to “meet the needs of the Nation,” (2) cause us to demand to know what idiocy led the administration to inflict the BCA’s self-destructive austerity on our Nation, (3) and demand that the administration never repeat that mistake.

OMB’s report implicitly acknowledges that funding for programs that are useful to “meet the needs of the Nation” (as opposed to “critical”) are deliberately cut by OMB due to the its embrace of austerity. In particular, programs that do not produce “good jobs that pay well” are viewed as non-critical. The administration has written off vast amounts of potential jobs and the unemployed by cutting programs that would create jobs that do not “pay well.”

The fifth paragraph of the OMB report contains the ringing endorsement of austerity that explains the policy madness of providing only “small increases” or even freezing programs that are “critical” to the economy’s recovery and success.

“Allocating budgetary resources always involves a trade-off between what one wants to do and what one can afford to do. This is exacerbated when the imperative is to limit spending in order to reduce the drag of deficits and debt on our economic growth and competitiveness.”

My guess is that the first sentence strikes most readers (and almost everyone who has taken a few courses in economics) as obviously correct. It is, in fact, a myth that reveals that OMB does not understand the most fundamental economics of nations with a sovereign currency like the U.S. Nations with sovereign currencies do not face inherent budgetary trade-offs, particularly when they are in, or recovering from, a recession.

When a nation with a sovereign currency has high unemployment and its industries are operating below capacity it should follow a counter-cyclical fiscal policy. Severe recessions cause large budget deficits because tax revenues fall sharply and expenditures increase. This counter-cyclical combined effect occurs automatically and acts to begin to stabilize the economy.

We have known for at least 75 years (since the 1937 austerity program pushed by FDR’s neo-liberal economists crushed what had been a strong recovery from the Great Depression) that austerity is a disastrous, self-destructive, and cruel policy. It turns out, however, that OMB has found a time machine and brought back the long-falsified austerity dogma of 1937. OMB, the President’s preeminent agency, states openly this economically and morally illiterate dogma: “the imperative is to limit spending.” Obama’s OMB channels the Tea Party. Elections used to have consequences, now they produce the theatre of the absurd in which the winner adopts the loser’s idiocy after the voters rejected it.

The word OMB chose, “imperative,” explains why austerity would trump funding adequately even programs “critical” to the recovery and success of our economy. Growth and employment are imperatives, and the best way to increase them is to increase spending on useful programs. Even if reducing the deficit was a key goal the best way to do so during the recovery from the Great Recession would be to increase spending on useful programs, which would speed the recovery and reduce the deficit. Austerity does the opposite, but, OMB claims that it is “imperative” to cut spending “in order to reduce the drag of deficits and debt on our economic growth and competitiveness.” By February 2012, when Obama issued the budget statement Lew prepared and this column discusses, the Eurozone was already reported to be in recession due to the infliction of austerity. Austerity is the “drag” that slows growth and employment and increases deficits.

Obama, Geithner, Lew, Daley, and OMB remained committed to inflicting austerity on us and to betraying the safety net after seeing austerity force the Eurozone back into a gratuitous recession. Today, as the administration warns that the austerity of the “fiscal cliff” must be avoided before it causes a recession it pushes simultaneously to inflict the Great Betrayal’s austerity on our Nation. The context changes, but the administration’s incoherence on austerity is perpetual.