Obama and his main economic advisers (Tim Geithner, Orszag, Larry Summers) were devotees of former Clinton Treasury Secretary and Goldman Sachs/Citigroup alum Rubin, who co-founded the pro–Wall Street Hamilton Project think tank at the Brookings Institution in 2006. The Hamiltonians had warned of "the adverse consequences of sustained large budget deficits" during the Bush administration and advocated "painful adjustments," namely cuts to social insurance programs like Social Security and Medicare in exchange for more liberal policies like tax increases and healthcare reform. Obama entered office with the Hamilton plan in his back pocket.
At the beginning of Obama's presidency, Richard Nixon's famous line "We are all Keynesians now" seemed more relevant than ever. But though Obama initially advanced a Keynesian-lite stimulus plan, which economists on the left and right agreed was imperative, the deficit was never far from the president's mind.
In February 2009, just weeks after the stimulus passed, Obama pivoted to the deficit, holding a Fiscal Responsibility Summit at the White House and assuring Blue Dog Democrats he supported a special deficit-reduction commission. "We feel like we've found a partner in the White House," said Blue Dog co-chair Charlie Melancon. The austerity class swiftly co-opted the new administration. The CRFB, the Peter G. Peterson Foundation and Pew Charitable Trusts launched a special commission in 2009 calling for mandatory spending caps and debt limits to put the United States in an "automatic, fiscal straitjacket." Its recommendations formed the basis for last year's Bowles-Simpson commission.
The austerity class's deep pockets can be traced back to Peterson, a GOP billionaire who served as Nixon's commerce secretary and founded the private equity Blackstone Group. Since 2008 his foundation has doled out $383 million of his promised $1 billion pledge to a seemingly endless number of think tanks, media organizations, advocacy groups and educational institutions to advance his debt obsession [see William Greider, "The Man Who Wants to Loot Social Security," March 2, 2009]. This includes six- and seven-figure donations to groups like the CRFB, the Concord Coalition, the Committee for Economic Development and the Peterson Institute for International Economics. It's largely because of Peterson that programs like Social Security and Medicare, favored by nearly 90 percent of the public, are savaged as bloated "entitlements" and are consistently on the chopping block.
Among the Petersonites, there was stiff opposition to a larger stimulus or additional recovery measures. "If we think about massive deficit spending as medicine for a sick economy, we also need to recognize that too much medicine can ultimately kill the patient," said Maya MacGuineas, president of the CRFB (which received $656,000 from Peterson's foundation last year), in January 2009. MacGuineas, a former stock analyst at Paine Webber and self-described "bond vigilante," did stints at the Brookings Institution, the Concord Coalition and the 2000 McCain campaign before moving to the CRFB in 2003. She's now one of the central organizers behind the austerity class.
Her minimalist take on the recession, though completely at odds with the views of top economists, quickly became conventional wisdom in elite Washington policy circles. "Concerns about the deficit limited the size of the stimulus act in 2009 and are a main reason that Congress has refused to take additional measures to cut our painfully high rate of unemployment," wrote Christina Romer, former chair of Obama's Council of Economic Advisers.
In his State of the Union address in 2010, the president announced a three-year freeze on nondefense discretionary spending (a position he'd criticized in all three presidential debates with John McCain as an "example of unfair burden sharing" and "using a hatchet when you need a scalpel"), along with the creation of Bowles-Simpson. "Families across the country are tightening their belts and making tough decisions," Obama said. "The federal government should do the same."
This line proved to be one of the most repeated talking points of the austerity class. "That's a very intuitive argument, but it's totally backward," says Jared Bernstein, former chief economist to Vice President Biden. "When families are tightening their belt in a recession, the government has to loosen its belt." The constant drumbeat against "excessive" government spending from the austerity class and opportunistic Republicans caused the administration to "pivot too soon," says Bernstein.
Tags: alive rivlin, ari berman, austerity class, bipartisan policy center, brad delong, committee for a responsible federal budget, committee for economic development, concord coalition, david brooks, david walker, douglas holtz-eakin, greg sargent, hamilton project, kent conrad, mark warner, new america foundation, niall ferguson, paul krugman, pete domenici, pete peterson, peter orszag, robert rubin, third way, tom friedman