Does Austerity Work? Senate Panel Discusses the Impact of Deficit-Reduction Policies

WASHINGTON – The debate over the impact of austerity on the economy continues to divide both lawmakers and economists as evidenced by a Senate hearing about the fiscal and economic effects of policies designed for deficit reduction.

Last week’s hearing was convened by Sen. Patty Murray (D-Wash.), the Senate Budget Committee chairwoman, as part of her ongoing campaign to persuade Congress to reduce some of the spending cuts and bolster the economy through a combination of tax increases and spending reduction.

The panel had on hand former Treasury secretary and Harvard economics professor Larry Summers, among other economic policy experts.

Many of the proposals included in Summers’ testimony aligned with President Obama’s latest budget, in which the president called for the replacement of the sequester with a combination of tax increases and other spending cuts.

Summers, a potential frontrunner for Federal Reserve chairman, said that the automatic budget cuts known as the sequester do not make macroeconomic sense for deficit reduction. He also called for corporate tax reform and said the U.S. must take advantage of low interest rates to maintain and upgrade the nation’s infrastructure.

“This is not the time for austerity or further cutbacks,” Summers said. “A balanced approach that focuses appropriately on supporting demand in the short run while containing long run budgetary pressures in a balanced way for the medium and long term will best promote growth, best increase confidence, and best offer us the prospect that…we can be in a position to start paying down the federal debt.”

The director of the nonpartisan Congressional Budget Office (CBO) told Congress in February that sequestration will cost 750,000 jobs this year. In its May report, the CBO estimated that for 2013, in the absence of further changes to tax and spending laws, the deficit will be $200 billion smaller than the $485 billion figure projected in February. According to the report, the deficit will fall from seven percent of the economy in 2012 to 2.1 percent of the economy by 2015.

The CBO’s latest projections, Murray said, show that the case for austerity in a time of economic weakness is wrong.

“Recent changes in deficit projections have made it clear that, despite the claims of some of my colleagues—there is no short-term debt or deficit crisis,” Murray said.

Salim Furth, a senior policy analyst at the Heritage Foundation, challenged Murray’s position, arguing that tax increases harm the economy and reduce future growth. In addition, he said that most of Europe is not experiencing austerity at all.

“Since 2007, few governments have pursued anything like a comprehensive austerity agenda. Most have spent more and some have taxed more. Only three of 28 OECD countries have policies that would lead to a budget surplus and a strong economy... and 18 countries have instead expanded their deficits,” Furth said.

He said that since taking effect in March, sequestration has had no impact on overall economic growth or employment numbers in the U.S.

“Lower government spending can bring debt under control and it can promote investment and subsequent growth,” said Furth, citing research from the Organization for Economic Cooperation and Development (OECD) and the International Monetary Fund.

“The 2013 budget sequestration was fully designed policy; however, its artlessness does not outweigh the fact that it is a step in the right direction on spending,” Furth said.

Murray and Summers said putting the nation’s 11.6 million jobless workers back to work should be the country’s primary concern. They supported government spending on infrastructure, saying it would boost demand and make the U.S. more competitive for years to come.

Murray authored the Senate’s most recent budget proposal, the first budget the Senate has passed in four years. Her plan for the 2014 budget, which passed in the Senate on a 50-49 vote, calls for a trillion dollars in tax increases and eliminates the automatic spending cuts required by sequestration. This proposal, along with the House version and the president’s, will likely be used as a basis for future negotiations between the parties.

“I have long believed that the case for austerity during times of economic weakness has been fundamentally flawed. When demand falls off in the private sector and millions of workers are losing their jobs, I think the last thing government should do is make things worse by slashing, spending, and causing aggregate demand to drop even further,” Murray said.

Murray also criticized House Republicans for trying to shift funds from non-defense programs to keep defense spending at pre-sequestration levels, which the senator believes is in violation of the bipartisan Budget Control Act – the law mandating the sequester.

Sen. Jeff Sessions (R-Ala.), the committee’s ranking Republican, accused Democrats of not being serious about reducing the deficit. Sessions said Democrats are using tax increases to fund new spending, instead of focusing on shrinking the deficit.

The hearing’s highlight came when Sen. Sheldon Whitehouse (D-R.I.) questioned Furth’s testimony, calling it “meretricious.”

Whitehouse said that Furth’s claims about OECD numbers are largely the opposite of the figures from the OECD itself. This, according to Whitehouse, is a distortion of the results and makes it seem as if tax hikes far exceeded budget cuts in some European countries.

“I am concerned that your testimony to this committee has been meretricious," Whitehouse told Furth. "I am contesting whether you have given us fair and accurate information."

Sessions offered Furth a chance to respond to the committee, but he declined by saying that the tenor there was not conducive to a productive discussion.

Furth responded to Whitehouse’s comments on Wednesday by clarifying that while his data is of past actions, the majority of Whitehouse’s information is for expected budgetary actions based on data projections.

“Of the spending cuts and tax increases Senator Whitehouse referred to as ‘what took place in Europe,’ the vast majority were only projections at the time his data were published. In the median country, 90 percent of the planned spending cuts were still just plans. Senator Whitehouse does not know whether those plans will be faithfully adopted, and either way, those data have little bearing on what occurred over an earlier—historical—time frame,” Furth wrote.

New York Times columnist Paul Krugman chimed in on Whitehouse’s tough remarks about Furth’s testimony.

“OK, this is really shocking: a Heritage Foundation economist has been accused of presenting false, deliberately misleading data and analysis to the Senate Budget Committee. What’s so shocking? Not the false, misleading data and analysis — that’s [standard operating procedure] at Heritage. ... What’s shocking is that they got called on it,” Krugman said.