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so-called cliff
Like many others, I’m not worried about the so-called fiscal “cliff,” and the ravages to the economy that are likely to occur if Congress doesn’t do something about it before the end of the year. That’s because a lot of the impact can be cushioned in the short run by Executive Branch manipulations while negotiations continue to go on. But if measures aren’t taken to reverse the contractionary effect of the sequestration-induced changes, we’re looking at deficit cuts of $487 Billion over 9 months of the fiscal year.
By comparison, the American Recovery and Reinvestment (ARRA) of 2009 produced only $350 B in stimulus during its first year. And, if the full sequestration were allowed to proceed unmodified, then it would result in a “claw-back” of about 60% of the total ARRA stimulus.
Fortunately, if we do go over the “cliff” heavy pressure will then be on both parties to reintroduce the middle class tax cuts, and make them retroactive, and to restore some of the other cuts as well, so it may be possible to mitigate much, if not most, of the damage, if the Democrats are aggressive enough in pushing the negotiation advantages they appear to have now. So, the real danger of the manufactured “fiscal cliff” is more long-term.
That danger is the constant bleating from both deficit hawks and “progressives” that we have to do something long-term about the deficit/debt problem. So, they put up these long-term plans to delay deficit cutting for a year or two and then want to cut even more down the road to ‘stabilize’ the debt-to-GDP ratio. This is a non-existent problem, and any plan providing for deliberate polices to force deficit reduction by constraining Government spending to some arbitrary level is bound to damage the economy seriously when the prescribed spending cuts and increased taxes for lowering deficits take effect.
People have to come to accept reality, which is: if we want to import more than we export; and also want the private sector as a whole to save money (i.e. bank savings, pensions, other savings) then there is no alternative to having the Government deficit spend. Further, how much the deficit ought to be, without incurring the penalty of demand-pull inflation is dictated by how much we want the private sector to save, and how much of a trade deficit we want to continue to run. If we want to have a trade deficit at 4% of GDP, and we want to save 7% of GDP, then we must allow the Government to run a deficit of approximately 11% of GDP. And we must do that year after year after year, for as long as we want to save that much and import that much.
Do I need to point out that our deficits are not now anywhere near 11%? And that as a result we not only have high unemployment, an output gap of more than $3 Trillion annually in GDP, but also less in both savings (financial wealth being accumulated) and imports (real wealth being accumulated) then we otherwise would have? What will happen if even the “liberal” Center On Budget and Policy Priorities (CBPP) hits the economy with its proposed total of $3.7 Trillion (the $1.7 Trillion already agreed to last year and the additional $2 Trillion it is proposing) in deficit reduction? That is an average of $370 Billion per year in enforced deficit reduction which will come right out of savings and imports. That, in the absence of credit bubbles creating unsustainable demand, will condemn us to a stagnant economy as far as the eye can see.
We don’t have to run those 11% of GDP deficits, and also have them drive 11% of GDP further debt accumulation. Deficits and debt accumulation are not the same things, and can be decoupled. We can have the deficits and use Proof Platinum Coin Seigniorage (PPCS) to underwrite the deficit spending; or we can change the rules preventing the Fed from monetizing deficit spending by just creating the necessary credits for spending Congressional deficit appropriations and placing them in the Treasury General Account (TGA) when needed. So having the increased debt along with the continuing deficits isn’t necessary. And if we don’t like the debt, then we can get rid of it.
But, again, if we want the imports and if we want the savings, then we must have the deficits, and we must never have deficit reduction unless we also have savings reduction and/or trade deficit reduction. So the bottom line here is: We need to have the “loser liberal” message we’re hearing from Bernie Sanders, Robert Reich, The Center On Budget and Policy Priorities, and various “progressive” pundits and organizations, just stop!
Keynes’s idea that a fiscally responsible nation incurs deficit/debt in bad times, and pays it back in good times with surpluses, is wrong in the context of fiat currency nations. The gold standard’s been gone since 1971. Nations have much more fiscal space. Some nations want to run trade surpluses all the time, and accumulate nominal financial wealth, and others want to accommodate them and accumulate the real wealth of their imports instead.
So, this makes it impossible for those others to have both aggregate private sector savings and full employment, without Government deficits compensating for the demand leakages. The accommodating nations need to run permanent deficits to serve their own populations. And, if other nations, object to that, then they need simply to stop having export-led economies.
We have no national debt, or debt-to-GDP ratio problem, because we are a nation with a non-convertible fiat currency, a floating exchange rate, and debts in currencies not our own. This means we can always generate new currency to pay our obligations using the methods I just mentioned. And it also means that 1) our levels of debt and debt-to-GDP ratio have no impact on the fiscal sustainability of our fiscal policy; and 2) fiscal responsibility can’t mean targeting fiscal policy at particular levels of the national debt, or the debt-to-GDP ratio.
Nor can the bond markets create rising interest rates on US public debt because “we,” that is the Fed and the Treasury together, control those rates and can keep them as low as they want to even if every ratings agencies downgrades US paper to its lowest rating. Put simply, our creditors have zero power over our interest rates. Reich’s talk about persuading our creditors that we’re serious about getting our fiscal house in order is just errant nonsense. What we really need to do about them is to use PPCS to fill the public purse, repay our debt instruments as they come due, and take their bond market in USD away from them entirely. It’s only a source of “welfare” payments to rich people and foreign nations anyway. What do we need it for, anyway?
(Cross-posted from New Economic Perspectives.)
Photo by tbennett under Creative Commons license.
20 Comments
I think before anyone writes an article about the fiscal cliff, they should realize that right now, 49 cents out of every dollar of profit that is generated in the USA ends up with the Biggest Financial Firms. And these financial firms aren’t required to lend out any of this money. So normal people can’t “grow” their companies. This one fact – 49 cents out of every dollar of profit – is an obscene fact.
Back in the 1970′s, for instance, only eight or nine cents out of every dollar of profit created in the nation went to a banker. And that bankers paid much more in taxes than they pay now!
Thanks elise, I know this is so. In fact, one of the overriding issues we face in the inequality that that this situation contributes to you may remember this recent piece I did on inequality in a comparative perspective.
The whole debt vs. GDP argument needs to be reframed. The debt has been rolling over since Prez Jackson. The debt needs to be compared to GDP since Jackson. People would see that clock in Times Square as the national investment clock.
Thanks ligid, the most succinct analysis of our options I have ever read, in a short piece, which is no small accomplishment for you. You deserve a wider audience.
While I consider MMT loony I’ll not argue that. Government debt is only about 30% of total systematic US debt and the focus on just that debt obscures or confuses the larger point which is that it is total debt, or credit in other words, growth which determines GDP growth. (let’s face it we are talking about GDP growth and in so doing are fighting on their turf with their weapons)
‘Growth’ in the economy has always been contingent on credit expansion. Currently there are two problems related to that. First is that total systematic credit growth is slow. Actually absent if you net out government borrowing the last 5 years. The second problem is that starting in the 80′s each dollar borrowed netted less growth.
For a century each $1.50 or so of credit netted $1 in GDP growth. By the mid 90s it took $3 of credit to produce $1 in growth and by the peak of 06 it took $6 of credit to get $1 in growth.
Let that sink it. No amount of government borrowing or money printing MMT style is going to bring back the so called ‘organic’ growth of the 20th century. Arguing so is shooting rubber bands at the stars.
I disagree with the article’s numbers. Much of the tax increases are going on the wealthy (personal income and capital gains). That tax increase is not a one-for-one equivalent to the stimulus.
The objective is “standard of living” rather than “GDP growth.” If the residents of the U.S. have the food, medical care, etc. that they need, we are successful society — growth or no growth. And, if we don’t have that we are a failure — growth or no growth.
Exactly! Deficit reduction is the opposite of stimulus. The trick is to reduce the deficit on things that have low multipliers, e.g., taxes on the rich, as opposed to things that have high multipliers, e.g., Medicaid.
If the objective is standard of living not GDP growth than monetary issues are the last place to look for a solution. In fact monetary policy or so called policy but really the monetary/financial system as it has evolved is one important source of all that progressives decry. There is no solution in monetary policy for what progressives want or think they want. Monetary policy is a political and cultural dead end for progressives.
Back to MMT. It is a mistake to imagine the financial powers don’t want money that is unhinged from any central bank balance sheet. For their goal and by “their” I mean all corporate powers goal, is to have the ultimate store of value measured by their assets. That probably flies right past most and I can’t make it clear in any short form. Operationally I posit that eventually corporate debt, bonds in other words, will be held more dear, at lower rates than Treasury debt and that most will come to think in terms not of how many dollars will buy XXXX shares of say GE but rather how many dollars will XXXX shares of GE buy. Then corporate power will determine on what and how much government can spend, period. MMT will bring us there sooner than the current consensus monetary system which is more MMT like every day anyway.
Let me try a plain English translation: The ONLY objective of capitalism is the accrual of more capital, and the quicker the better. Everything you described does just that for the corporate powers.
And none of it has one whit to do with maintaining, much less improving, the standard of living for at least 95% of the American population.
Even now, the majority of our money supply is issued by corporations, specifically, commercial banks whenever they make a loan or buy a security.
It has been compared to GDP in time series data. That hasn’t helped people see that debt instruments are like a bank savings account and that the debt is the primary record of whole world savings in dollars.
Thank you cb. I’m beginning to get one.
rapier, you’re lumping together the the debt of currency users with the debt of currency issuers. The two are very different things so your analysis involves category errors and isn’t worth a damn. You need to understand how and why the two categories of debt are entirely different things.
That’s true. Who said it was? And what numbers, specifically, do you disagree with?
I think there are multiple objectives all of which combine into the idea of public purpose. But growth is only one of them, and not the most important one in my view either!
The trick is not to reduce the deficit at all, If you don’t want to pay interest on the debt, then just pay it off using segniorage; but we need an increased, not a reduced deficit.
You don’t know what you’re talking about when you refer to MMT. It’s primarily about fiscal policy, not monetary policy. MMTers think monetary policy is a blunt instrument, and would just drive interest rates on bonds down to zero and use fiscal policy to drive full employment, price stability and other good things.
Ohio, what kind of capital are you talking about? And what kind of capitalism are you talking about? Adam Smith wouldn’t recognize it!
Right! The heavy majority!