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An Open Letter to Don Beyer, VA – 8th Candidate for Congress

8:08 am in Uncategorized by letsgetitdone

(Author’s note: My apologies: this one’s about 6 times longer than the ideal 1000 word post. I just didn’t feel right about breaking it up into parts, however, because that lose the continuity. So, please bear with it. I think a lot of candiates for Congress need to get these questions from angry constituents.)

My Congressman, Jim Moran, is retiring this year and his seat is up for grabs in the VA – 8th Congressional District. This is a solidly blue district made even more solid by the Republican gerrymander following their win in the disastrous elections (for poor people, for women, for the middle class, and for minorities) of 2010 in Virginia. So, the question is, which of the eleven candidates who are running in the primary will win it, and become the heavy favorite to win the Congressional election in November.

The heavy primary favorite is Don Beyer, a noted auto dealer in Northern Virginia, who has served as Lieutenant Governor twice, and also as Ambassador to Switzerland. My impression of Ambassador Beyer has been favorable. I have a friend who bought cars from him over many years and who had his Volvos serviced at his dealership all the while, and he had nothing but good things to say about the integrity of the service he received.

That said, however, and personal characteristics aside, I’d like Beyer to clarify his positions on the issues. So, I’m addressing this open letter to him. Read the rest of this entry →

What Happens Now?

7:12 pm in Uncategorized by letsgetitdone

In the aftermath of the great 2013 government shutdown/debt ceiling crisis, and the kicking of the can down the road while maintaining austerity once more, the subject on many minds is where do negotiations over fiscal policy go from here? Will the new “budget committee” produce more austerity and do a grand bargain including the “chained CPI”? Will Congress finally turn towards economic growth and job creation, or will we continue to have more shutdowns and debt ceiling crises in 2014?

Chained CPI and the “Grand Bargain”

Let’s begin with “chained CPI” and possible “Grand Bargains.” The President seems to still want one, but the question is, does anyone else? And, if they don’t, can he still get it through?

It’s dangerous for anyone running in 2014 to vote for chained CPI. Surveys show that overwhelming majorities of all Americans want no cuts to Social Security and Medicare, and also that 40% of tea party respondents are 55 or over, and are not likely to support such cuts, either. Nor do they appear to be anti- “their” Medicare. It’s the corporate Republicans who oppose these things. So, I don’t think the corporate Republicans would get much love from the tea baggers for supporting entitlement cuts, apart from Medicaid, which I think the tea party views as welfare. Certainly any credit the Congressional Republicans would get from their tea party base for voting for “chained CPI” would not outweigh their having given in on the CR and the rise in the debt ceiling just passed.

So what can the corporate Republicans in Congress gain from voting for chained CPI? Very little, I think, unless the Democrats get behind it, and then they can run against the Democrats as having sold out Social Security, as long as not many Republicans vote for it. In that case, however, the Democrats won’t have enough cover to vote for it, so they are unlikely to do so.

So, then we have to ask, what can induce the Democrats to vote for entitlement cuts knowing it will hurt them in the elections? Will the President be a big factor in the Congressional elections? He wasn’t in the elections of 2012, and, he was a negative in the 2010 wave election. Can he deliver votes by campaigning for other Democrats? Does he even want to? Does it matter to Congressional Democrats if he gets annoyed at most of them? I doubt all of these things.

Why will Patty Murray and Harry Reid (both of whom may want to run again in 2016) vote for chained CPI? To end the sequester? As Joan McCarter says, the coming second round of the sequester hurts the Republicans more than the Democrats. So, where’s the incentive for Democrats to go along with the President on chained CPI? I don’t think there is any.

If the President wants chained CPI this Spring, then he needs to assemble a corporate, Wall Street-supporting coalition from both parties, and that has to be large enough for a majority in the House. Since many Republicans would see passing the chained CPI as a victory for the President if he continues to support it, and the Democrats in Congress don’t, then we’re talking about a situation where the Tea Partiers and their allies would be called upon to pull the President’s chestnut out of the fire. How many votes do you suppose he’d get from the Tea Partiers and other Republicans for this? Keeping in mind that they just got 144 votes in the House to continue the ruinous shutdown/debt ceiling crisis, maybe 40, or 50? Or even that many, given that they’ll want to run against the Democrats on Social Security in 2014, if possible, and won’t see any political gain in holding hands with him as everyone jumps off the “I voted against SS” cliff?

And how many House Democrats would he get to play along? 150? 100? More? I think if he can’t get 200, an almost impossible outcome with at least 90 “progressives” very uncomfortable with the proposal, then this dog won’t hunt. The more he’s likely to fall short, the more likely it is that Democrats will see themselves as walking the plank for nothing, and will just run away from the proposal, and vote against it if need be.

Now you may see this scenario as far-fetched, because you may be thinking there would be some big omnibus deal with the Republicans that chained CPI would just get tucked into, and that would be irresistible for “progressive” Democrats. But what do the Republicans have to give? They certainly won’t offer any additional taxes on the wealthy. That’s poison to them. And they certainly won’t offer any increased deficit spending, say on infrastructure, because that would weaken the deficit/debt play they plan to run for all they’re worth in the election, and also because they know that infrastructure spending will reduce unemployment, and perhaps improve prospects for Congressional Democrats in the elections.

So what can they offer? Only concessions on the sequester. But here, if Pelosi, Murray and Reid play tough, as they certainly ought to do, then as Joan McCarter explains, the Republicans either have to shoot themselves in the foot again by keeping in place the sequester, or they would have to come to agreement. Then, if the Democrats know what’s good for them in 2014 (not a sure thing by any means, but still likely, in light of how well refusal to budge has served them over the past two weeks), then they won’t accept anything less than full lifting of the sequester. It’s harmed the economy for long enough, we need them to get rid of it, and they need that too.

The Republicans will then play games proposing lifting the parts of the sequester they don’t like, while giving the Dems nothing or only very little. At this point the Democrats need to take an all or nothing position on the sequester, rejecting the Republican’s salami tactics, and calling on the public for an end to the sequester nonsense, which has hurt the economy so grievously already.

The Rs will respond either by agreeing to lift it, or they will refuse. If they refuse, then the Democrats get to blame them for the down economy, we will surely see in the run up to the election, and the Democrats can run against that down economy which they would then claim was caused by the Republican shutdown, multiple debt ceiling crises, sequester, and blocking of any efforts to lower unemployment with jobs programs. (“They promised us “jobs,” “jobs,” “jobs,” and what did we get? Debt ceiling crises, sequesters, a government shutdown, more unemployment, and an economy in the ditch.)

Given that CBO projections will probably show the deficit going down to $400 Billion or less in FY 2014, which is about 2.5% of GDP, the Republican emphasis on “teh debt” and the deficit will not trump a Democratic campaign blaming Republicans for the lack of recovery and calling for jobs programs. Add to the above themes the Republican War on women, and suppression of voting rights of seniors, blacks, hispanics, and urbanites, and we have a Democratic victory in 2014 large enough to get back the House and keep the Senate.

Given all this, I don’t think there will be any Grand Bargain or chained CPI “compromise” in the near future and in the run-up to the election. It just makes no political sense for most Democrats and many Republicans. It may come up again in the lame duck and possibly in the next Congress, Republican or Democrat, if the President continues to push it. But I don’t think we’ll see it again this fiscal year.

Continued Austerity?

What we will see however, is continuing austerity from CRs or budget agreements, whether or not the sequester is lifted. Where a trade deficit exists, Government austerity is either running a surplus, or a deficit so low that it doesn’t make up for the leakage in demand due to the trade deficit. Let’s say one’s trade deficit is 3.5% of GDP, then the Sectoral Financial Balances (SFB) Model (whose terms refer to flows of financial assets among the three sectors of the economy in any defined period of time):

Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0

tells us that the domestic private sector, taken as a whole, can’t increase its net financial assets, unless the Government has a deficit greater than 3.5%. And, if we wanted to provide for the domestic private sector to save 6% while it was running that 3.5% trade deficit, anything less than a Government deficit of 9.5% of GDP would not meet that objective.

Of course, no budget proposed by anyone in Congress or the White House envisions a deficit this large. Patty Murray’s Senate Budget proposed in the Spring of 2013 envisioned a 4.2% of GDP deficit for FY 2014, just a bit more than the austerity boundary of 3.5%. Paul Ryan’s House Budget proposed a 3.2% deficit, which is an austerity budget, in the precise sense that given a 3.5% trade deficit, it would entail the private sector running a deficit and losing 0.3% in net financial assets.

Will either a compromise bill coming out of the budget committee, or a CR, after a failure to agree on a budget, be closer to Ryan’s or Murray’s deficit figure? I think it will be closer to Ryan’s; partly because the Congress just passed a CR for the first approximately three months of the fiscal year that is closer to Ryan’s view than to Murray’s and which maintains the sequester, and partly because I doubt that the Democrats will even propose a more expansive budget involving a deficit, but will just focus on getting the sequester removed in early 2014, and will then turn to other problems and to positioning themselves for the fall elections.

Growth and Jobs or Shutdowns and Debt Ceiling Crises?

I think the answer is neither. We may have shutdown and debt ceiling threats before the 2014 elections; but we will not have either of these types of crises, because the cost in public opinion, if it keeps trending the way it has been, will be too heavy for many Republican candidates, except for those in the reddest gerrymandered districts, to bear in 2014. I believe they know this, and that many of them are increasingly willing to chance getting primaried by tea party candidates in order to avoid probable defeat from Democrats, if they toe the tea party line and then try to run.

So, I think the shutdowns and debt ceiling scares are over until after the elections. That means there will have to be an agreement on a CR for the first part of FY 2015 by next October 1. That will happen because there’s no way the Republicans will chance another hostage-taking taking a month before the next elections.

That’s the good news. The bad news is that there will be very little growth and very few new jobs. If the sequester remains in place for the rest of FY 2014, unemployment is likely to increase, not decrease, because Government will continue to be a fiscal drag on the economy, and the private sector is likely to avoid expansion without increased demand. That demand could be manufactured by a credit bubble; but it doesn’t look like that is in the offing for 2014. So, the shortfall in demand produced by the Government will not be made up from private sector spending.

On the other hand, if the sequester is lifted, then this will make some difference. We will probably see declining unemployment if that happens, but since the deficit was much too small to sustain a vigorous expansion, even before the sequester, the decline in unemployment, increased job creation, and economic growth, will all happen only slowly, and by election time we will still see an unhappy public, but maybe one that is a little more hopeful about the future than we are now seeing.

I don’t know yet whether the falloff in economic activity due to Government austerity or near austerity, will be enough to produce another recession in the middle of this long stagnation period, Richard Eskow has aptly named “the long depression.” But there is some chance that this will happen before the fall elections. If it does, then we will see a messaging war on who bears the blame for the downturn, and the outcome of the elections will hang on the outcome of that war.

(Cross-posted from New Economic Perspectives.)

Let’s Defend Social Security and Other Entitlements With the Second Bill Of Rights

2:05 pm in Uncategorized by letsgetitdone

The favorite defense of Social Security by progressives harkens back to Franklin Roosevelt <a who famously said:

”I guess you’re right on the economics. They are politics all the way through. We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren’t a matter of economics, they’re straight politics.”

So, today progressives echo this even though the SS Tax is a regressive tax, and anything but progressive in its impact on the economy. With the development of the MMT approach to economics, and its emphasis on the government’s ability to spend without a solvency constraint on the Federal Budget, it’s now clear that SS doesn’t need to be funded by a regressive payroll tax; but can be funded out of general revenues and also guaranteed by a provision in law providing for automatic annual funding. Some government “trust funds” are funded this way, including parts of Social Security and Medicare, so there’s no economic reason why the primary funding for both programs couldn’t be provided for these programs.

But a friend, in an echo of FDR’s view, recently said to me in correspondence:

“It seems to me that it is a lot easier to make the case that people are entitled to a government benefit if they have been paying a dedicated tax for 45 years that is described as funding that benefit.”

And I replied in the following way.

It is easier; but it’s still not easy as we now see; and, on the downside, to defend it that way we have to:

1) support the view that people are entitled to government payments only when they pay for them;

2) then defend against the attack that the entitlement payout greatly exceeds the amount paid in, and has no relationship to what is paid in;

3) accept the idea that SS and Medicare must be self-funding like any business, while also ensuring that they are “solvent” as much as 50 years out unlike any business (that is people are upset now because questionable long term fiscal projections show that full coverage of SS spending can only be projected out for 21 years to 2033, so they are calling for fixes to extend that projected “full solvency” period out to 2075 or 2080);

4) always have a very hard time justifying any increases to entitlements for current recipients, because those oppose entitlements always cry out that the Government is running out of money, and would have to raise SS taxes to pay for it;

5) never bring into the argument the fact that things are very different now than they were when SS was first passed, because we now have a fiat money system which makes many things possible now that weren’t possible back then, because THERE IS NO SOLVENCY PROBLEM; and

6) ignore the great argument that our entitlements are the embodiment of an economic bill of rights that ought to apply to all Americans which, of course was outlined by the same FDR in 1944.

In my view, the protestant ethic defense that we’re entitled to SS, because we worked for it isn’t worth the candle. It makes things easier in the short-run, but it reinforces a skin-flintism which is wholly inappropriate to our modern economy, with its monetarily sovereign fiat currency system, and is largely responsible for the rapidly increasing inequality we’ve been experiencing over the years, which has now reached a ridiculous and anti-democratic pass.

We can’t look at SS and our other entitlements in isolation. We have to fight and win the battle for FDR’s economic bill of rights, and for an expansion of all the entitlements in the American social safety net; now the stingiest, most inadequate safety net among modern industrial nations!

FDR’s strategy for justifying SS was great for the 1930s, when we were still on the gold standard. But nearly 80 years later it’s time to move on to his economic bill of rights as our justification for entitlements, and stop reinforcing the idea that it’s only an entitlement if one pays for it. It’s time to stand on the over-riding moral argument! It’s time to say that when a nation like the United States can afford to implement these rights, as the United States has been able to do at least since 1971, they then are human rights that must be implemented as part of the public purpose. Let us have a Green New Deal with a much stronger social safety net including greatly increased payments for SS and Medicare for All, and a Federal Job Guarantee emphasizing Green Jobs!

Let’s fight for that and implement it economically using Modern Money Theory (MMT)-based fiscal policies!

(Cross-posted from New Economic Perspectives.)

Photo by Mr. T in DC under Creative Commons license.

No Plan B?

7:47 pm in Uncategorized by letsgetitdone

Woodward (photo: Bektour / wikimedia)

Bob Woodward’s releasing a new book, so we are now seeing articles based on it. A few days back, The Washington Post published the ”Inside story of Obama’s struggle to keep Congress from controlling outcome of debt ceiling crisis.” This account is a pretty downbeat one of how our political leaders and President Obama handled the debt ceiling crisis of the summer of 2011. I want to comment on what for me was the most salient point: that during the crisis, the President had no “Plan B” to get around the debt ceiling beyond negotiating a deal with Congress.

According to Woodward, the President asked his Senior staff to come up with a Plan B, because the compromise Congressional leaders first proposed to him would have required a two-step increase in the debt limit, with the second step coming near the time of the 2012 election, opening the possibility that the House Republicans would be able to hold the country and the financial world hostage in the run-up to the election. The President rejected the deal, and sent Harry Reid and his Chief of Staff David Krone back to get another that would not require the hostage taking two-step. Meanwhile, Obama’s staff tried to put together a Plan B.

But when Harry Reid couldn’t get a deal from John Boehner, and the House Republicans passed a two-step plan on July 29th, the President again called for more options. Woodward reports none except for accepting the Republican deal, which Geithner favored, and vetoing the House Bill if Harry Reid “folded” and the Senate passed it, which the President favored. The President, concerned about the likely continuance of Republican blackmail and hostage taking, and believing that he was out of options, indicated that he would veto a two-step deal even if the Democrats folded. However:

”Obama never had to confront the veto question. A few days later, House Republicans dropped their insistence on the two-step plan. The final plan accepted a debt limit increase that would take the country through the 2012 presidential contest. It also postponed $2.4 trillion in spending cuts until early 2013.”

So, the President, and according Geithner, the world financial markets, survived that confrontation because the Republicans folded. But, if Woodward is right, if the Republicans had stood firm, Obama would have vetoed the bill, because no other options had been developed by the White House staff.

Yet there were at least four other options that were offered in the blogosphere and the news media at the time, three of them at CNN, that a well-informed White House might have been expected to know about. So, the obvious question is why is there no indication in Woodward’s account that the White House was aware of other options except a veto or surrender to the House Republicans to handle the crisis?

The four options were: Read the rest of this entry →

No, Barack, It Just Ain’t Gonna Happen!

1:50 pm in Uncategorized by letsgetitdone

Who else thinks the President’s speech didn’t include any plans to create the 29 million full-time jobs for the dis-employed? Please raise your hand!

About jobs he said:

”We can help big factories and small businesses double their exports, and if we choose this path, we can create a million new manufacturing jobs in the next four years.”

”If you choose this path, we can cut our oil imports in half by 2020 and support more than 600,000 new jobs in natural gas alone.”

And, except to say he wants time to finish the job, that’s it! Over the next 4 years the economy will probably need another 4 million jobs just to employ new entrants into the job market, and not even to reduce that 29 million dis-employment figure. So he needs 33 million new full-time jobs to get to full employment, and he’s talking about 1.6 million in his acceptance speech. What planet is he living on?

Maybe, like Herbert Hoover, if he keeps saying prosperity is just around the corner, and does almost nothing to make it happen, then he thinks his beloved private sector will quit generating profits from financial manipulation and start creating jobs at a living wage. I think we’ve seen this movie; and it doesn’t end happily for working Americans.

The President had a lot more to say about deficits, then about jobs; showing that he lives in a fantasy world of faux problems:

”You can choose a future where we reduce our deficit without sticking it to the middle class. Independent experts say that my plan would cut our deficits by $4 trillion. And last summer, I worked with Republicans in Congress to cut billions in spending because those of us who believe government can be a force for good should work harder than anyone to reform it, so that it’s leaner, and more efficient, and more responsive to the American people.”

But why reduce our deficit at all? Have we got an inflation problem? Does either the level of our debt at $16 T, or our debt-to-GDP ratio of more than 100 percent either impair our ability to deficit spend in the future, or to pay off the debt without either taxing or borrowing? The answers to these questions are: There’s no reason to do it; No, and No! Here’s more from O:

“I want to reform the tax code so that it’s simple, fair, and asks the wealthiest households to pay higher taxes on incomes over $250,000, the same rate we had when Bill Clinton was president; the same rate we had when our economy created nearly 23 million new jobs, the biggest surplus in history, and a whole lot of millionaires to boot.

I love higher taxes on the wealthy, as much as the next person. I wouldn’t mind going back to the marginal tax rates of World War II and the inheritance tax rates of Harry Truman’s times. But does anyone really think that the same tax rates we had under Bill Clinton really caused the 23 million new jobs during his Administration; so that if we want to have that kind of job growth again, we really must have Clinton’s tax rates? Give me a break!

We know that the prosperity of the 1990s was primarily fueled by debt bubbles, and had little to do with Clinton’s higher tax rates. In fact, his surpluses, coupled with the Internet bust, produced the recession he bequeathed to Bush 43, a recession that was ameliorated, but never really ended for most working people by Bush’s deficit spending.

“Now, I’m still eager to reach an agreement based on the principles of my bipartisan debt commission. No party has a monopoly on wisdom. No democracy works without compromise. I want to get this done, and we can get it done. But when Governor Romney and his friends in Congress tell us we can somehow lower our deficits by spending trillions more on new tax breaks for the wealthy, well, what’d Bill Clinton call it? You do the arithmetic, you do the math.”

The problem, Mr. President, is that there’s more than arithmetic involved here, which is why the Bill Clinton/Jack Lew surpluses produced that recession at the end of their term, the one that played a part in Al Gore’s defeat. The economy is dynamic. If you try to cut deficit spending or run surpluses by raising taxes and cutting Government spending, then you had better estimate what impact that’s going to have on non-Government, including private, savings and investment, and the trade balance; because cutting deficit spending can lead to a net reduction or elimination in net savings and investment, as well as a reduction in the trade deficit.

Then the President told us what he wouldn’t do to cut the deficit:

“I refuse to go along with that. And as long as I’m President, I never will.

“I refuse to ask middle class families to give up their deductions for owning a home or raising their kids just to pay for another millionaire’s tax cut.

“I refuse to ask students to pay more for college; or kick children out of Head Start programs, to eliminate health insurance for millions of Americans who are poor, and elderly, or disabled, all so those with the most can pay less.

“I’m not going along with that.

“And I will — I will never turn Medicare into a voucher.

“No American should ever have to spend their golden years at the mercy of insurance companies. They should retire with the care and the dignity they have earned. Yes, we will reform and strengthen Medicare for the long haul, but we’ll do it by reducing the cost of health care, not by asking seniors to pay thousands of dollars more. And we will keep the promise of Social Security by taking the responsible steps to strengthen it, not by turning it over to Wall Street.”

I’m glad for all these refusals and lines in the sand. He’s told us what he won’t do to make things even easier for the wealthy; but as Digby says, that doesn’t mean he won’t trade some or all of these things, for tax hikes on the wealthy. Tax hikes on the rich will please people wanting greater fairness; but that will be cold comfort for people whose safety net benefits are traded away for a smidgeon of greater fairness.

There’s also another thing he hasn’t told us. Maybe someone will make him do it in the debates. And that is what he plans to do to solve that 29 million jobs problem. That question is a really interesting one considering that he plans for the US Government to average $400 Billion in deficit reduction over the next 10 years. That is really, really a bad idea, because in doing that he’s pretty much condemning the US to a stagnant economy with perpetually high unemployment for the next 10 years, giving us a 14 year period of high unemployment, Obama’s “new normal” legacy to future generations.

Why do I say that? Well let’s look at some basic macroeconomics from Bill Mitchell:

”The basic income-expenditure model in macroeconomics can be viewed in (at least) two ways: (a) from the perspective of the sources of spending; and (b) from the perspective of the uses of the income produced. Bringing these two perspectives (of the same thing) together generates the sectoral balances.

“From the sources perspective we write:

GDP = C + I + G + (X – M)

which says that total national income (GDP) is the sum of total final consumption spending (C), total private investment (I), total government spending (G) and net exports (X – M).”

That is, X is exports and M is imports. So, if X is greater than M, we have what is colloquially called a “trade surplus”; but if M is greater than X then we have a “trade deficit,” which is what the United States has enjoyed for many years. I say enjoyed, because people in other nations send us goods, real wealth, and we send them electronic bits of information called US Dollar electronic credits. Seems like we’d have the better of that kind of deal, if we had sense enough to employ the people put out of work by our persistent trade deficit on things that are valuable for people living here in the United States.

However, that aside, we should note that the US seems to be running a trade deficit of 4% of GDP right now. We’ll see shortly the importance of this number. Bill continues:

“From the uses perspective, national income (GDP) can be used for:

GDP = C + S + T

which says that GDP (income) ultimately comes back to households who consume (C), save (S) or pay taxes (T) with it once all the distributions are made.

Equating these two perspectives we get:

C + S + T = GDP = C + I + G + (X – M)

So after simplification (but obeying the equation) we get the sectoral balances view of the national accounts.

(I – S) + (G – T) + (X – M) = 0

That is, the three balances have to sum to zero.”

So, we have an investment/savings balance, a Government spending/tax balance, and a foreign trade (exports/imports) balance. The sum of these balances must equal zero, and this is true by definition alone. It is what economists call “an accounting identity.” Are accounting identities always “true”?

They are always “true” in the sense that they are logically valid. But reasoning from them can result in false conclusions, because 1) the wrong data is correlated to the one or more of the terms of the identity, or 2) further reasoning about the causal relations among the terms in an identity may give false conclusions, and/or 3) reasoning about the dynamics relating the terms in an identity over time may be in error.

If we want the private sector to collectively save, then S must be greater than I, and we must have an investment/savings balance deficit, or, in other words the private sector as a whole must be accumulating nominal financial wealth within some time period.

If we want to import more than we export, then M must be greater than X, and we must have a “trade deficit”, which means that US entities as a whole must be accumulating more goods and services from abroad and must be sending more dollars into accounts at the Federal Reserve owned by foreign entities than they are receiving from them in return for our own exports.

Notice here, that the USD provided to foreign nations when we run a trade deficit, go into their accounts at the Federal Reserve. They never do leave this country. So, don’t listen to people who constantly tell you that our trading dollars are going overseas. They’re not. They’re in our own central bank.

Lastly, according to the model, if we want the private sector to collectively save, and if we want it to collectively spend more on foreign goods and services than it receives in nominal financial wealth for our goods and services, then the Government sector will have to spend more than it taxes. That is, it will have to run a deficit in the Government balance to accommodate the savings and import desires of the private sector by replacing the leakage in aggregate demand that savings and more imports than export represent. But just how much of a deficit will the Government sector need to make sure that the balance called for in the model happens without decreasing savings or reducing the size of our trade deficit?

Well, I said earlier that we’re running roughly a 4% of GDP trade deficit in the US. We also know that the private sector needs to save to repair household balance sheets after the disaster of the financial crisis of 2008, coupled with the housing crash. Let’s say that US private savings desires are currently 6% of GDP, a reasonable estimate given behavior over the past few years.

Then, we’re saying that we want (I – S) to be – 6% of GDP and (X-M ) to be – 4% of GDP, which implies that we also want (G – T), the Government balance to be positive and equal to 10% of GDP. In other words, we’re saying that the Government ought to be running a budget deficit of $1.6 Trillion this fiscal year, which judging from how things are going is approximately $400 Billion more than we will actually be spending.

So, it should be clear that the Federal Government, far from running too large a deficit, is now running a deficit that is $400 Billion smaller than it should be to accommodate the desires of the private sector to import and save, and to replace the aggregate demand lost to savings and more imports than exports. Do you suppose this shortfall in the Government deficit spending we need could have anything to do with our stubbornly high unemployment rates?

Now, let’s say the Obama Administration compromises on a deficit reduction bill specifying $4 Trillion in Government deficit spending reductions over 10 years phased something like this: 8%; 8%, 6%, 6%, 6%, 4%, 4%, 3%, 3% and 2%, where the percents refer to the deficit spending levels as a percent of GDP. Then, there will be increasingly less space for private savings and imports.

No doubt the President would like to see a shrinking percentage of GDP spent on imports over the next decade because that means that the budget deficit can be smaller if private savings stay the same. But, it’s pretty clear that in the next two years, we won’t be able to shrink the trade deficit by even 1% of GDP or roughly $160 – $170 B annually.

So, that means that if we follow the plan for deficits I just stated, then the savings desires of the private sector can’t be accommodated at 6%, and household balance sheets won’t continue to build. As, deficits move down to 6% in 2015 – 17, imports will be squeezed further, as will savings. By the second half of the decade, both imports and savings will be subjected to very high downward pressure.

The result will be that our trading partners will resist efforts to re-balance trade. They will lower prices of their goods and services in an effort to maintain the balance. We, in turn, will also have to lower costs, and that probably means lower wages – a race to the bottom to continue to increase our levels of exports. That will feed back to domestic private savings, and also to aggregate demand here, which will both decrease; though maybe not by as much as demand will increase from the decrease in imports. Causality moves in conflicting directions and without rigorous modeling we can say what the overall increase in demand outcome will be.

In addition, the decreased space for savings will result in people seeking to save more and in increased economic conflict in the private sector with people and classes fighting over a shrinking pie. In the US currently, political power is arranged in such a way that an increasingly small group is able to direct nominal financial income its way by using the political system to its advantage.

So, austerity will mean that a very few wealthy people will grab the shrinking pie of savings, and more people will be faced with the choice of maintaining their consumption levels by going into debt, or maintaining their rate of savings by cutting back on consumption. This developing situation will be unsustainable; and the second half of the decade, after a period of a stagnating economy, will surely see a deepening depression, and a strengthened economic and political oligarchy.

That’s the scenario if things go smoothly with austerity policies being planned by the elite led by Peter G. Peterson and the President of the United States. However, it is likely that things will not go according to plan and that the politicians will not be able to maintain the deficit targets in any long-term deficit reduction plan. The reason is that if demand flags because people try to buck the program by imposing strict spending discipline on themselves, or if foreign demand for our exports flags so that export industries must cut employees, causing a weakening of demand here; then rising unemployment here will impact the automatic stabilizers like unemployment insurance food stamp benefits, and Medicaid, driving up deficits beyond the levels in the deficit reduction plan.

The experience of Europe tells us that ideological neo-liberal austerians will not then admit that they were wrong about austerity and the possibility of implementing a deficit reduction plan successfully. But that, instead, they will double-down on it, shrinking aggregate demand even more, and driving the economy down even further, as they have in every European nation where austerity is being tried.

What if the President, or Mr. Romney succeeds in making the “grand bargain” to raise a few taxes, and cut 3 times as much spending, including entitlements in the process of passing a long-term deficit reduction plan, and what happens if in the first three years the plan fails to meet its targets and also creates a new recession in our fragile economy?

Will the austerians then admit they were wrong and start paying attention to the sectoral balances and people’s needs? Or will political necessity prevent them from admitting error and force them to double- down on austerity because that is the only viable political choice? We know what they will do, because no politician ever admits they were wrong, until perhaps they’re thrown out of office, and not very frequently even then.

Look at Obama himself, it was apparent by the Fall of 2009, that his ARRA was too small to do the job of creating a full recovery. Did he and the Democrats admit it? Did they pull out all the stops to pass a jobs bills in the rest of 2009 and take care of their unfinished business? Or did they double-down on insisting that the stimulus worked, and move on increasingly to a health care bill that bailed out the insurance companies, and burned all their political capital, that coupled with the tepid recovery, lost them the election of 2010?

I think we know what will happen if President O wins on his “austerity grand bargain.” First, it will never succeed because it is inconsistent with what the sectoral balances tell us. And, second, when it doesn’t he will double-down and then plunge us into a worse recession than ever, and in 2016 an impoverished population will face at least four more years of looting by the 1%, and increasing poverty from the other corporatist party of the emerging plutocracy.

So, Mr. President, and Paul Krugman, don’t tell me we’re going to have both an economic recovery and a forced move towards a lower deficit over the next four years, because the sectoral financial balances model says, that without a new credit bubble, that will lead to an expansion of aggregate demand coming from rapidly increasing private debt, that will eventually burst and give us a new great financial crisis:

It just ain’t gonna happen.

(Cross-posted from New Economic Perspectives.)

The Fake Social Security Solvency Crisis Is Congress’s Fault!

6:18 am in Uncategorized by letsgetitdone

Ah…. my fellow Americans, be very, very, afraid of the terrible Social Security crisis that will sink us as a nation. According to Government projections, we won’t be able to pay full Social Security benefits, in 2037 and beyond, unless we cut benefits now, because the Social Security “Trust Fund” will be short of money.

So, say Paul Ryan, Peter Peterson and his minions, Mike Pence, Alice Rivlin, Erskine Bowles and Alan Simpson, and also many other deficit hawks. In reply, the most liberal of the deficit doves say that even though there will be a solvency crisis in 2037; it’s really nothing to worry about because all we have to do to end it is to lift “the cap” on FICA contributions entirely, so that wealthier income earners are paying the same rate on their total earnings, as workers whose wages or salaries are below $106,800 per year.

So, both the hawks and the doves agree that there is “a solvency crisis;” they only disagree about what to do about it. However, the SS solvency crisis is a big fake, like so many of the issues that arise in Washington. It is a fake because the crisis is not due to powerful economic forces that no one can do anything about, and that no one has control over; but rather is due to a choice Congress made when they wrote the original Social Security Act; namely that it would be paid for by raising revenues to fund it through FICA contributions and placing those in a “trust fund,” rather than by paying for it from general revenues. All that Congress has to do to end the crisis is to decide sometime between now and 2037, to pay for SS benefits automatically, out of general revenues, in the same way it pays for that part of the Social Security program called Supplementary Medical Insurance (SMI). End of problem. End of story.

Here’s a link to a post by selise featuring a youtube clip of Stephanie Kelton at last year’s Fiscal Sustainability Tech-In Counter-Conference explaining why this simple move by Congress solves the problem. Audios, Videos, presentations, and transcripts from the Conference which provides the definitive counter-narrative to the deficit hysteria currently rending our nation is here. Professor Kelton summarizes her argument here.

“Funding Social Security is always and everywhere a political choice. The strongest evidence of this comes directly from the 2009 Annual Report of the Trustees. In that report, they predict gloom and doom for Social Security because “there is no provision in current law that would enable full payment of benefits, once the Trust Funds are exhausted”.

In contrast, the Supplementary Medical Insurance (SMI) Trust Funds are “both projected to remain adequately financed into the indefinite future because current law automatically provides financing each year to meet next year’s expected costs.”

It is that simple. The former is in ‘trouble’ because the government isn’t committed to making the payments, and the latter gets a clean bill of health because the government will always make the payments.”

I think this really underlines how arbitrary the projections of financial doom from the Peterson crowd, CBO, and other Government agencies are. Apart from the silly and unreliable projections as far out as 25-65 years from now, the predictions of doom are really based on provisions in law that Congress can change at any time. Which means that just like the fake national debt crisis, the fake Social Security solvency crisis is Congress’s fault.

It is more Washington kabuki politics at its finest.

Selise has this to say in her post on why this is kabuki:

Q: Why is there even a debate about “fixing” Social Security when it’s not broken?

A: Because the focus of the debate is on problems that are unreal.

Focusing on unreal problems makes no sense. Unreal problems are NOT REAL!

Let me explain what I mean here by real as opposed to unreal problems with an example of each:

Unreal = “We can’t afford to Social Security because the Trustee’s report says that costs will exceed payroll tax receipts”

Real = “We can’t produce the goods and services needed by our nation’s seniors to keep them fed and housed.”

The unreal problem is about the availability of dollars. Our federal government is the monopoly issuer of the nation’s currency. We’ve been off the gold standard for almost 40 years and we have floating exchange rates. Therefore, the availability of dollars is a political issue. Tax revenue is not required, borrowing is not required — unless Congress chooses to impose those constraints.

A main reason why this particular instance of kabuki politics still exists is because so-called “progressives,” are unwilling to give up the idea that to keep Social Security safe it is essential that people “pay into it,” so that the opponents of Social Security won’t dare say that it’s a welfare program paying benefits to people that they are not entitled to. Guess what? The problem with this theory is that the opponents do dare say it, and have been saying it for many years through “propaganda” that has made “entitlement” a dirty word.

They don’t care whether people have made FICA contributions or not. For them the only issue is whether the Government “can afford” to pay for SS retirement benefits, not whether people have earned and paid for them, and so “deserve their benefits.” And they say the Government can’t afford it because they’re both busily cutting away at Government tax revenues and also falsely claiming that Government money is limited by a non-existent solvency risk.

Giving up the argument that people have paid into Social Security and so are entitled to it, is what progressives fear. But, nevertheless, since that argument is clearly not working, and also because that argument is bought only at the price of maintaining a very regressive tax on working people, they badly need to give it up in favor of an argument that all Americans, whatever their station, contribute something to the development of American society over time, often in ways that can’t easily by measured by the money they’ve made, or the visible things they’ve accomplished; and that because of these contributions and their American citizenship, each is owed a decent and dignified old age by the nation in the form of Social Security and affordable health insurance (now provided by Medicare).

This is especially true, since the money needed to pay them isn’t directly funded by taxes but only needs to be issued by the Government according to its constitutional authority. It is not money that is taken from anyone, or that is re-distributed. It is not some quantity from a limited supply of gold that is coming out of other people’s pockets. This money gets its value ultimately from the real wealth American society produces, which, in turn, comes from the past and present productive efforts of everyone, and the productive capacity that all of us together have created over the years and still create.

There is no right to share in this wealth equally, and there is no right for the elderly to cause younger people to go without, or to sacrifice opportunity. But American society is wealthy enough to make choices like these unnecessary. It is wealthy enough to provide an old age for its citizens that is free from want and fear.

Roosevelt knew that and it’s part of what he included in his second bill of rights. But Roosevelt’s old enemies, the Hooverians, have come back. They go by different names now. Sometimes, they’re called neo-liberals, sometimes austerians, sometimes Petersons, sometimes deficit hawks or doves. But whatever they’re called, the message is always the same, and that message is that money is limited, and that when it is given to some, it must be taken from others.

If the Government wants to spend money, it must be taxed away from some, or borrowed away from others. And finally, because money is limited, there are always hard choices to make, choices that sometimes put money ahead of people, and that make it necessary for “courageous people,” like the wealthy neo-liberals who talk and write this way, to choose who will prosper and who will suffer, who will be eating caviar, and who will subsisting on catfood or worse. That’s unfortunate, but it’s just the way of the world and we all must adjust to it.

The Austerity Doctrine is not, in the end, part of the American, or the progressive outlook. We are an optimistic people. We know that money isn’t really limited and that our constitution allows us to provide enough of it to make the economy we want. We also know that even though certain real resources are limited, resource limitations can be overcome using new human knowledge, by redefining the practical meaning and use of existing resources. We also know that real wealth, the stock of valuable goods and services, is increasing all the time as the mix of different kinds of capital, human knowledge, and human effort changes in accordance with the development of human society.

So, the truth is not Hooverian, it’s Rooseveltian, we know that Federal money isn’t limited, and we also know that real wealth can be increased through effort that in turn can be mobilized by nominal wealth (Federal money). We aren’t playing a zero-sum game in which some must win and some must lose. We are playing one in which everyone can win.

So, in the nature of things we don’t need to take anything away from retirees, because of some imaginary fiscal crisis. We can easily do what’s right and not only maintain Social Security and other entitlements, but even increase their benefits. All we need to do is to revise a few laws to say that all entitlements will be automatically paid for by the Government in perpetuity out of general funds, and that all entitlement trust funds are abolished. Let’s make Congress get off its high horse, show some real courage, and do it!

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

Loose Talk and Numbskull Notions At the Podesta/Holtz-Eakins Debate: Part Two

12:12 pm in Uncategorized by letsgetitdone

This is Part Two of a critical review of The National Journal’s Debate on "Our Fiscal Future" between John Podesta and Douglas Holtz-Eakin with Jim Tankersley moderating, at The George Washington University’s Jack Morton Auditorium. This part provides more observations and evaluation on some of the propositions offered by Holtz-Eakin and Podesta.

H-E: Eliminating tax cuts for the rich will cost 1.5% to 2% GDP annually.

Me: This one is really hard to believe. The tax cuts for the highest income people would average about $70 Billion per year. The multiplier associated with these cuts is only $0.29 on the dollar. So destroying these financial assets through taxation will cost the economy about $20 Billion annually. As a percent of current GDP that amounts to 0.14 percent, not 1.5 to 2 percent. So, I think we need to view this claim of Holtz-Eakin’s with a big dose of skepticism. The question is, why didn’t Podesta question it?

H-E: It’s not Obama’s money, it’s theirs! The Government is a redistributive engine!

Me: This is a conservative article of faith. But looking at it from a more objective point of view, currency creation is a monopoly of the Federal Government. All of it originates with the Federal Government. It is distributed to people, corporation, and other institutions according to a framework of laws that accords property rights to the recipients of currency.

These property rights aren’t absolute, they originate in due process of law, and they are limited by legal frameworks and processes. Without such a framework, property rights would not be operative at all, but possession of property would exist only because the holder of property had the physical power to continue to hold it. It is part of the legal framework of our society that the Federal Government has the right to tax and destroy financial assets, that is to take some financial property, in accordance with due process of law in order to fulfill public purposes. This taking of property is not arbitrary it is done according to law and in the context of a political democracy where citizens authorize the legislature to make rules that govern these "takings" by the Government.

So, no “owner” of currency or financial assets has absolute ownership. People and institutions “owning” currency have no absolute rights in that currency, and the Government can repossess currency (tax) to fulfill its legislatively approved purposes. No, the money doesn’t belong to Obama; but the idea that it may be subject to income or other kinds of taxation is firmly enshrined in law and custom. In fact, taxation is necessary to give a fiat currency its value in the first place.

As for the Government being a redistributive engine. You bet it is! But markets are redistributive engines too, and when they are non-competitive, and manipulated and governed by fraud and insider trading, they are an illegitimate, even criminal redistributive engine, as we have seen in the past few years.

Also, the legal framework we create to regulate commercial transactions to a greater or lesser degree itself results in redistribution. The framework put in place by The New Deal in the 1930s eventually produced both great prosperity, and a much greater degree of economic equality than we have today. Conversely, the legal framework that began to develop in the Carter Administration, and that was firmly set in place by Reagan/Bush41, strengthened by Clinton and Bush43, and so far maintained by Obama, has produced substantial destruction of wealth among the middle class in the past few years, and increasing inequality over the whole period of these presidencies. It has served us badly in the way it distributed wealth, and it now must change in the interests of justice.

So, yes, Government, in combination with market dynamics, is a distributive engine, and for the past 35 years it has been redistributing economic rewards in the wrong direction. It is time to right the balance. A silent “class war” has been fought for 35 years now, by the rich and the large corporations, against the poor and the middle class. It is time for the people who are victims of this one-sided war to begin fighting back; to acknowledge that "class war" is what is going on, to fight that war, to win it, and to adjust the legal framework, so that the balance is redressed toward greater equality. It is time to end the days of plutocracy and to bring back democracy to America.

H-E: Deepest unfairness is not keeping Government small!

Me: Holtz-Eakin is given to pronouncements of articles of faith from conservative ideology. The notion that Government should be kept small was outdated in Teddy Roosevelt’s time when he went to war against the giant trusts. It was outdated in FDR’s time when he tamed the interests controlling economic life in America. In these days of giant global businesses and international cartels it is absolutely ridiculous to think that small government could possibly produce fairness to individuals. Americans need big government to represent it against the great concentrations of economic and private political power we see all around us, because only big government can have the power and resources to make large corporations obey our laws, and treat individuals fairly and with respect.

It is either big government and heavy, careful regulation of the corporations, aand the markets, or breaking up the global corporations, scaling then down to a size that a small government can regulate, and making sure that they never grow beyond a certain point again. But we cannot have a small Government and huge global corporations and expect to have liberty and justice too. That is just dreamland.

Our problem is not big government. It is that the Big Government constructed by the New Deal and its successors was corrupted by neoliberal ideology, lack of enforcement of regulations, repeal of essential regulation, and control of our regulatory institutions by people who were appointed to gut them, and who refused to fulfill their legal responsibilities while in office.

Our big Government is broken. True enough. But the only reasonable way forward is to fix it; not to find refuge in small government, 19th century liberal, fairy tales. The deepest unfairness is not failing to keep government small; it is a weak and ineffectual government that doesn’t have the power or the willingness to see to it that corporations and the wealthy respect the rights of Americans and treat them fairly.

H-E: The top two tax brackets will have to go as high as marginal tax rates of 80% if we can’t borrow money as we are now!

Me: We don’t have to continue to borrow money in order to deficit spend. The Government has the constitutional authority to create all the money it needs by spending; i.e. by marking up private sector accounts. We are not running out of keystrokes to accomplish this spending. Debt issuance is a policy choice. Not a necessity. If the bond market doesn’t want to buy our securities at the price we’re offering them for, then we can have the Fed buy them at whatever interest rate we think is appropriate. The interest the Fed earns on these securities gets remitted to the Treasury minus the Fed’s cost of processing.

So, if we want to, we can issue no more debt, or alternatively only debt that will be bought by the Federal Reserve at an interest rate of our choice. There will be no high interest burden and there won’t be any debt that it is necessary to pay down or off. There will only be the permanent recycling of debt at very low or no interest. So there will be no need to raise marginal tax rates to 80% as Holtz-Eakin claims.

But even though there is no need to tax at 80% marginal tax rates to achieve fiscal responsibility or sustainability, we may still want to tax at those marginal rates, if that’s what is necessary to create a more equal society. In American history, there have been two central values: individual liberty and equality of opportunity. The loss of a measure of economic equality is now threatening both those great values. If we want to restore them we have to bring the great engine of big government under democratic control once again, and begin to level play fields, so that dangerous concentrations of bureaucratic power, either private or public, are neutralized, and every American has the opportunity to lead a fulfilling life.

P: Tax reform is very hard to do, has very low prospects!

Me: John Podesta is very much involved in practical everyday politics. He understands both Congress and the Executive branch very well, and the limitations of what those institutions could do in the last 20 years or what they can do today. But how good is he at predicting political change? For example, did he anticipate the rise of tea party candidates and their success in this primary season? Can he predict what the big political picture will look like in two or three years? I doubt it!

Clearly if the future political environment is like it is now. The prospects of tax reform will be small. But one thing we do know is that we live in a political economy that is being buffeted by the winds of change. There’s an appreciable danger of a double-dip recession, and there’s a widespread feeling in the country that the Congress, and especially the Senate, is dysfunctional, and that this institution must change. If it does change., if the filibuster goes, then the political context will change quickly, and tax reform will then be much easier.

But before, Podesta and Holtz-Eakin wish for tax reform, perhaps they ought to give a little more thought about what kind of reform it may be. Based on things said among the elites, many seem to feel that we should be adopting a Value-Added-Tax (VAT). This idea is very, very unpopular among the public, however, and if democratic control begins to come back, the reform we may see won’t be a VAT, but a much more progressive income tax system than perhaps they’d like to see.

H-E: If we go down the road we’re on, the best case is stagnation; the worst case is collapse and then stagnation!

Me: Well, the road we’re on is a bad one. But the road Holtz-Eakin favors is even worse. The austerity he recommends is the true path to collapse and then stagnation. It is the Hooverite path, and it is already bringing suffering and poor economic performance to the PIIGS in the Eurozone.

H-E Entitlements have to be on the table. It’s that vs. nothing!

Me: That assumes, of course, that we have a deficit or a debt problem. As I argued in Part One of this series and in other places. This idea is a myth, a fantasy, and it betrays ignorance of the workings of a fiat currency system. Most of what Holtz-Eakin says about the economy applies very well to economies on the gold standard, economies without control of their own currency, or economies with substantial debts owed in a foreign currency. But, very little of what he has to say applies to a Government sovereign in its own fiat currency, like the United States.

P: The new health care reform act changes the way we deliver health care.

In you dreams, John Podesta. The new health care reform is mostly about insurance coverage. It does have provisions that could lead to more effective and efficient health care delivery, if the providers cooperate and the act is well-administered, and if the claims of the Administration about how many additional people will be covered by insurance prove true.

However, the lack of insurance cost controls suggests that people will not be able to afford insurance once the program really goes into effect in 2014. Also, it’s doubtful that the vast expansion of Medicaid can be handled financially by our revenue-starved states even with Federal Aid specified in the act. In addition, CBO’s projections of money saved are unlikely to occur simply because CBO projections are unreliable more than a few years out.

All this means that we are unlikely to have much change in how we deliver health care, except, perhaps to have further deterioration in the way we deliver it across the board. The celebratory attitude of John Podesta about how the act is going to bend the cost curve looks to me like one of the many “happy dances” the current Administration and its supporters have done about its very limited, and highly compromised achievements. All of which have been carefully constructed with an eye toward compromise with every special interest that could possibly squawk about the legislation it passed.

Finally, a more general word about this whole debate on our fiscal future. In spite of their ostensible disagreement which framed the debate, both Holtz-Eakin and Podesta agreed that fiscal responsibility will, in the coming years, be viewed from the standpoint of our success in stabilizing the debt-to-GDP ratio. That is, fiscal responsibility for both is not about using the Government’s fiscal policy capabilities to create full employment, end poverty, create a first class educational system, rebuild our infrastructure, create a new energy foundation for our economy, or any of the other substantive public purposes that Government fiscal power can be used to facilitate, enable, and even achieve. No, from their point of view we will be fiscally responsible if we see to it that the debt-to-GDP ratio stabilizes at some unspecified level rather than continuing to grow.

From my point of view however, this is not fiscal responsibility or fiscal sustainability. I think, instead, that fiscal responsibility means using the Government’s fiscal power to help achieve public purposes Moreover, I don’t think the debt-to-GDP ratio level is very relevant to fiscal responsibility at all, simply because that ratio has nothing whatsoever to do with the Government’s capability or authority to spend.

A government like ours that is sovereign in its currency has no risk of solvency. It has the same power to spend at a debt-to-GDP ratio of 170% as it does at 30%. What it does risk is inflation, if its spending outruns the productive capacity of the economy in a given time period.

The US Government can spend quite a lot right now before it runs up against that limit since we are operating somewhere around 70% of our productive capacity right now. But, if we do really want to risk inflation, then all we have to do is to follow Holtz-Eakin’s advice, and drive our economy into a depression deep enough to destroy some of our productive capacity and real rather than just financial wealth. Then when our Government does finally turn around, and tries to mimic FDR rather than Hoover, it will find it much easier than it is now to outrun our diminished productive capacity with its spending, and to cause inflation.

In other words, apart from the unnecessary human suffering, there is another potential cost to listening to Holtz-Eakin’s austerity nostrums, rather than to those who want to create full employment within 6 months, and that is that an adventure in Austerianism might well leave us with much less pre-inflation room than we have now to life the economy with Government spending.

I’m not saying that we won’t be able to create full employment later on if we need to. We can always do that, but the room for injection of financial assets into the economy by the Government can be much less, so that the end result of Government spending is less savings for the private sector, and a longer recovery time than we would have had if we had acted in the right way from the beginning. In my view we have already wasted time with the Administration’s very poorly structured stimulus with its overabundance of tax cuts, and its relative avoidance of higher multiplier initiatives to create demand. At this point we ought to wholly ignore the Austerians, and go right to legislation that will create full employment in a matter of months.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

What Is Fiscal Sustainability?

12:36 pm in Uncategorized by letsgetitdone

When people introduce a new meme into politics, their standard operating procedure is often to just start talking about some label, say that it’s a problem, make various dire predictions, and then keep writing more and more screeds to try to get everyone else to think that it’s a problem. The meme or label used in campaigns like this is value loaded in some way, and the label often has little to do with what the writer is talking about, because the label is rarely explicitly defined and journalists, pundits, or commentators think it’s very pedantic and academic to start talking about definitions. Pretty soon after a process like this gets going, there’s very little connection between a label and what is being talked about under that label. So it is with fiscal sustainability.

In the past few months there’s been a lot of talk about “fiscal sustainability,” and also an assumption that we all know what this means. It refers, of course, to: the annual Federal Deficit (the gap between Federal Spending and Federal Tax Revenues), the public National Debt (the accumulated inflation adjusted sum of deficits and surpluses since the inception of the Republic), and the debt held by the public to GDP ratio. People who write about this then, see things this way: continuing and growing deficits are a sign that fiscal sustainability is going down; continuing and growing increases in the national debt are a sign that fiscal sustainability is going down; and an increasing debt-to -GDP ratio is a sign that fiscal sustainability is going down.

But what is Fiscal Sustainability? Is it really about deficits, national debts, and debt-to-GDP ratios? Well, that depends on what we mean, or at least ought to mean by that phrase. In another post, I pointed out that:

Fiscal situation” ought to be taken to refer to Government spending and its impact on the economy as a whole, including the private sector and the international environment. Why? Because isn’t our interest in the value, both positive and negative, produced by Government spending, and isn’t the public purpose of Government to do the best it can to produce positive value and to both minimize certain negative consequences and completely avoid those consequences that are entirely unacceptable?”

And then I defined “fiscal sustainability” this way:

”Fiscal sustainability” is the extent to which patterns of Government spending do not undermine the capability of the Government to continue to spend to achieve its public purposes.”

This definition can be consistent with worries about deficits, debts, and debt-to-GDP ratios; but only if the Government’s ability to spend is operationally limited by its ability to tax or to borrow. If it could not tax or could not borrow any additional money to use to increase spending to accomplish its public purposes, then it would be true that any short-term increase in spending that outran its ability to gather revenues over time would be "fiscally unsustainable."

On the other hand, however, if a Government’s ability to spend isn’t dependent on its ability to borrow or tax, then these debt-related indicators of fiscal sustainability aren’t valid any more, because they no longer measure it. We then need new measures. So, in the United States today, is the Government’s ability to spend dependent on its ability to tax or to borrow? If not, what is it dependent upon? If not, is the Peterson Foundation and the Administration making much ado about nothing? Are they focused on a non-problem, a distraction? Are they preparing legislation to cut Social Security and Medicare, entitlements, as they call them, out of a mere confusion, an error in their understanding about how the Government actually spends money? More generally, is their whole orientation to any new legislation that involves considerable Government spending based on a misunderstanding about the ability of the Government to spend?

These are some of the questions that will be addressed at the Fiscal Sustainability Teach-In Counter-Conference to be held on April 28th in Washington, DC at the George Washington University. Don’t miss the Teach-In Counter-Conference. Help us make it a success. Follow-up afterwards by watching the youtubes and the documentary will be making about the event, and by organizing fiscal sustainability teach-ins in your community.

Carry the anti-deficit hawk message of the event. We. Are. Not. Running. Out. Of. Money. The. Money. Was. There. All. Along. The. Money. Is. There. Now. The. Money. Will. Be. There. Tomorrow.

Let’s make this the start of a movement that sweeps Peterson and the deficit hawks aside, and that forces this Administration to end the recession and rebuild our nation. Here’s the event web site with all kinds of information about it, our speakers, the issues being addressed, press releases, schedules, location, associated blogs and so on.

(Cross-posted at All Life Is Problem Solving, Fiscal Sustainability and