June 08, 2012

Pray for Austerity to Work in 2013...

Patrick Marren
Partner

Another quick and filthy Friday Scenario Planning exercise.

Someone is holding a gun to your head and asking what the impact of the 2012 election will be on your organization.

Here's your answer: Austerity -- either moderate or less moderate. 

Damnable 2 x 2 consultant matrix for today: Obama vs. Romney on one axis; Keynes Is Right vs. The Austrians Are Right on the other.

The first axis is self-explanatory: Obama gets re-elected versus Romney gets elected. The second is as follows: "Keynes Is Right" means that John Maynard Keynes' analysis of the original Great Depression applies to our situation today, that we are caught in a liquidity trap with no way to stimulate the economy out of its long-term doldrums but massive government spending (and perhaps even a dose of inflation). "Austrians Are Right" means that what this economy really needs is a solid dose of austerity -- namely, paying down the national debt via lowered government spending.

Let's examine the first axis and ask ourselves what the election of either of these candidates might mean.

- If Obama is re-elected, it will almost certainly mean that he once again will face a Republican House, and possibly a Republican Senate. Therefore, there is no plausible scenario, short of a real cataclysm (e.g., real depression, alien invasion, Sean Hannity becoming a Young Spartacist League member, etc.) in which Obama will have any sort of free hand to try further federal government stimulus spending; even when he had a Democratic majority in both houses, he was not free to spend more than a third as much on stimulus as Keynesian economists recommended; aside from that, he has never given any public indication that he has ever been eager to spend more. In any case, even with severe contortions, it is difficult for even the most limber yogic scenario writer to concoct a future in which Obama is free to enact any further stimulus. In addition, we face the coming Armageddon of the Congressional suicide pact, in which harsh cuts to social programs will accompany harsh cuts to the military unless common ground is found suddenly and peace and love suddenly reign betwixt "socialist traitors" and "troglodyte wingnuts." Throw in the expiration of the Bush tax cuts, and you have one harsh dose of Austrian economics all at once. The prospect of this imminent tsunami of black ink should, of course, cause Congress and the Administration to reach some sort of compromise along the lines of less harsh cuts to social programs, less harsh cuts to the military, and extension of the Bush tax cuts to some extent at least. But the net effect will certainly be distinctly austerit-ous, not to say Austrian; and it is not entirely implausible to think that the re-election of a man so hated by the right could cause a complete breakdown in negotiations, bringing about the harshest belt-tightening this nation has ever seen.

- If Romney is elected, it will be on a platform of austerity, and he would likely face a Republican Congress even farther to the right than he, so you would think that austerity is even more likely than if Obama were president. But the Congress he would face also likes them some tax cuts. This is not Austrian orthodoxy; but it is 2012 Republican orthodoxy that tax cuts automatically pay for themselves, so don't worry about that side of the fiscal equation so much. Still, Democrats will wield some weak power to forestall the inevitable via the filibuster, unless a Republican Sente does away with that procedure (the temptation is always there for an aggrieved majority). So some negotiation will take place, but the likely outcome is harsh cuts to social programs (Obama himself had offered up significant cuts in 2011, privately, in negotiations with John Boehner); less harsh cuts to the military; continuation of the Bush-era tax cuts; and further tax cuts on top of those.

Bottom line: Either way, we are looking at some level of fiscal austerity come 2013. Paradoxically, it will probably be harsher if Obama is re-elected. Maybe not so odd, though: last time we balanced a budget, you might remember, it was under a second-term Democrat and a Republican Congress.

So we'd all better start whistling "Edelweiss" and praying hard. Because if the Austrian economists are wrong, and Keynes' analysis DOES apply to our current plight, we may soon instead be whistling "Brother Can You Spare a Dime."

Comments  | 

Let's look a little further downstream from the current Obama vs Romney scenarios. For whatever reasons (including the possible tanking of demand from EU and China), what if the US does not recover after 2012? What if it gets real bad? Would even a Romney presidency and a Republican congress refuse to consider the stimulus option? What if we're looking at double-digit unemployment...and thousands of jobless veterans of the Iraq and Afghanistan campaigns camped out on the Mall?

Thoughts?