As should be obvious, a lot of the factors that divide progressives from conservatives these days are cultural and psychological. The former tend to view human history as in no small part a slow but steady march towards the liberation of our species from the dead weight of prejudice and privilege, often through collective action to create conditions of social justice, equal opportunity, and openness to innovation and creativity. The latter tend to defend prejudice and privilege as the product of priceless civilization, and fear social justice as contrary to nature, equal opportunity as leveling, and openness to innovation and creativity as a willful lurch towards barbarism. Beyond the “culture wars,” a host of psychological pressures attributable in part to a broken political system have steadily unraveled a rough consensus in favor of liberal or conservative variations on a general theme of regulated capitalism, a mixed economy, and a pluralistic society.
But sometimes the divide between progressives and conservatives comes down to assertion of mutually exclusive interpretations of empirical facts. And we sometimes fail to adequately grasp the extent to which that is true of the economic underpinnings of the current fiscal “crisis,” in which we are heading towards a confrontation in Congress that could produce a debt default and all sorts of terrifying consequences for the national and global economies.
There is no issue on which this Great Divide is more glaring that the explanation of why major corporations (and other investors) are sitting on unprecedented profits. Here’s the most widely accepted progressive interpretation, as presented (as he has done so often) by Paul Krugman:
The story, at this point, is fairly straightforward. The financial crisis led, through several channels, to a sharp fall in private spending: residential investment plunged as the housing bubble burst; consumers began saving more as the illusory wealth created by the bubble vanished, while the mortgage debt remained. And this fall in private spending led, inevitably, to a global recession.
For an economy is not like a household. A family can decide to spend less and try to earn more. But in the economy as a whole, spending and earning go together: my spending is your income; your spending is my income. If everyone tries to slash spending at the same time, incomes will fall — and unemployment will soar.
So what can be done? A smaller financial shock, like the dot-com bust at the end of the 1990s, can be met by cutting interest rates. But the crisis of 2008 was far bigger, and even cutting rates all the way to zero wasn’t nearly enough.
At that point governments needed to step in, spending to support their economies while the private sector regained its balance. And to some extent that did happen: revenue dropped sharply in the slump, but spending actually rose as programs like unemployment insurance expanded and temporary economic stimulus went into effect. Budget deficits rose, but this was actually a good thing, probably the most important reason we didn’t have a full replay of the Great Depression.
But it all went wrong in 2010. The crisis in Greece was taken, wrongly, as a sign that all governments had better slash spending and deficits right away. Austerity became the order of the day, and supposed experts who should have known better cheered the process on, while the warnings of some (but not enough) economists that austerity would derail recovery were ignored.
Corporations are sitting on their profits because aggregate demand has taken a dive, and austerity measures aimed at reducing public spending move in exactly the opposite direction from what we need, according to Krugman.
The standard conservative interpretation of exactly the same phenomenon has just been succinctly stated by none other that the Speaker of the U.S. House of Representatives:
The driving passion for Mr. Boehner in these fiscal debates is his conviction that trillion-dollar deficits are sapping the country of its energy and prosperity. When I ask him when the impact of this debt will start to be felt, he says: “It’s already here today. It’s killing our economy. It’s causing investors to sit on their cash. They’re afraid to invest. It’s a wet blanket on top of our economy.”
As an indication of how cultural and empirical factors interact, there’s this additional insight about Boehner’s point of view:
He sees debt as almost a moral failing, noting that when he grew up in a “little middle-class, blue-collar neighborhood” outside of Cincinnati, “nobody had debt. It was unheard of. I just don’t do debt.”
A fine, nineteenth-century attitude to maintain if you can afford it.
The one thing almost everyone agrees on is that continuing uncertainty over fiscal policies isn’t helping. Yet the conservatives supposedly most concerned with assuaging the fears of investors are now threatening a debt default, and in Boehner’s case, a long period of politically engineered crises designed to force big reductions in public spending and radical changes in the social safety net—or else.
That prospect, plus the strong possibility that any “Grand Bargain” on fiscal issues will include policies that pull in opposite directions when it comes to aggregate demand, is why so many of the “debates” on fiscal policy are no such thing. Pols holding diametrically opposed views on objective economic reality but possessing the power to block their adversaries’ preferred solutions are speaking different languages. And this is perhaps why we will never regain sustained, stable economic growth until one party or the other obtains the power to govern according to its own perspectives and then becomes clearly accountable for the results.
It’s hard to see exactly when that will happen, and thus, the fiscal confrontation just over the immediate horizon is not likely to produce anything better than mitigated misfortune and missed opportunities.
Feed the Political AnimalDonate
Washington Monthly depends on donations from readers like you.