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Real Fiscal Responsibility: What Chris Hayes Said

7:18 am in Uncategorized by letsgetitdone

I’m interrupting my series on US Government Real Fiscal Responsibility since the Carter Administration to write about something Chris Hayes said relating to Real Fiscal Responsibility. Back in February of 2014, he tweeted:

Recently, that tweet along with an image has been making the rounds on Facebook as an Alternet photo. The sound bite in the tweet looks great, after the manner of a logical truism.

But, logically, it doesn’t follow, because one can easily say that as long as the Government implicit in the statement isn’t a currency issuer, but a currency user who must acquire its funds by taxing or borrowing alone, that Government can involuntarily run out of funds. And it is conceivable that funds might be raised to fund a war, while that same Government might not have the funds available to take care of the people who fought for the nation, without defaulting on its obligations.

So, assuming that the Government is one that can involuntarily run out of money, the rich are saying that they think fighting a war using deficit spending is worthwhile and one’s patriotic duty; but that there are more important priorities than taking care of the people who fought it for their country. So, what are those priorities and what are the moral judgments in back of them? That is really the issue in a situation of limited Government financial resources!

The rich often believe, that lowering the risk of inflation which, they think, would cost them money, or avoiding taxes, which would also cost them money, are more important priorities than taking care of the people who fought the wars for us and them. They don’t think they owe them a thing. Or alternatively, they think that what is owed to them should come out of other people’s pockets, so that it should be “paid for” by increased taxes on the poor and the middle class, or perhaps by cutting Government programs that serve them.

This view is morally reprehensible, of course, and it is also despicable when you consider that they and theirs also make sure that they don’t have to fight the wars, so that burden too falls on the poor and the middle class. So, Chris’s statement makes political sense because it sounds like an undeniable moral proposition, a moral truism.

On the other hand, a Government like the US’s with the authority and capability to create unlimited currency if it needs to, can always afford to both deficit spend on a war, and also deficit spend to take care of those who fought it. So, in that situation, the US’s current one, it is a truism that the Government can afford to deficit spend to fight a war and also to take care of the people who fought it for us. But, here, there are no “ifs” about it.

We can do both. And we can also expand Social Security benefits, and deficit spend on new energy foundations, and deficit spend on an enhanced Medicare for All program. We can do all these things and more without running out of money, because, as the currency issuer, the Government can do all sorts of things and never run out of money.

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Real Fiscal Responsibility 5; Carter: Environmental Degradation

5:59 am in Uncategorized by letsgetitdone

Love Canal Emergency Declaration Area Plaque at site of 93rd Street School, the school had been knowingly built on top of Hooker’s toxic landfill.

This, the fifth post in a series evaluating the fiscal responsibility/irresponsibility of the Governments of the United States (mostly the Congress, the Executive Branch, and the Federal Reserve) by Administration periods, beginning in 1977 to 1981 with the Jimmy Carter period, will cover the performance of the Government on the environment and climate change aspect of “public purpose.” Posts One, Two, Three, and Four discussed some basic definitions and assumptions of the series and evaluated Government performance relating to economic stagnation, living wage full employment, price stability/inflation, implementing universal health care, and educational reform.

I’ve explained why fiscal responsibility is closely connected to the idea of public purpose, in this post prior to beginning the series. You’ll want to read it, if you want to know what I mean by “public purpose,” and see what else that pregnant term includes, apart from enhancing the environment.

In the first post, I also claimed that the Government of the United States has been fiscally irresponsible in every Administration period since 1977, because its fiscal policies have largely worked against key aspects of public purpose. The first 4 posts supported that claim across 5 aspects of public purpose, as will this one. Future posts in this series will attempt to document it across additional aspects of public purpose. Read the rest of this entry →

Real Fiscal Responsibility 4; Carter: Education Reform

6:41 am in Uncategorized by letsgetitdone

If you’re reading this you’ve landed near but not at the beginning of my very lengthy series evaluating the fiscal responsibility/irresponsibility of the Governments of the United States (mostly the Congress, the Executive Branch, and the Federal Reserve) by Administration periods, beginning in 1977 – 1981 with the Jimmy Carter period. My first post explained why I chose to start my evaluation with the Carter period, and also laid out my related definitions of fiscal sustainability, and fiscal responsibility.

It explained why fiscal responsibility is closely connected to the idea of public purpose, which I laid out in this post prior to beginning the series. You may want to consult that post, if you want to know what I mean by “public purpose.” I also claimed that the Government of the United States has been fiscally irresponsible in every Administration period since 1977.

In my second post, I began by examining the problems of ending economic stagnation, and providing full employment at a living wage, and, I hope, by showing that the Government, during the Carter period, failed to solve either problem because of its commitment to deficit reduction, and budget balancing, in the service of hoped for inflation moderation. The third post in the series, examined how the US Government failed in its efforts to create and maintain price stability, and also failed to provide a solution to the problem of providing the right of receiving health care to every American in need. So, thus far in the first three posts in the series we’ve seen how the Government during the Carter period failed to 1) end economic stagnation; 2) failed to create and maintain full employment; 3) failed to maintain price stability; and 4) failed to maintain price stability. It did not fail however, to reduce the Federal deficit, which is not in itself an aspect of public purpose, but a presumed means of preserving government solvency, and avoiding inflation. So, I suppose congratulations are due the Government for solving a faux problem and failing to directly address the real ones.

So, from 1977 – 1981, the Government of the United States is thus far 0 for 4 when it comes to achieving real fiscal responsibility through fiscal policy in accordance with key aspects of public purpose. The remaining posts in this series will continue to document the claim that all the US Governments since 1977 have been fiscally irresponsible. In this, the fourth post in the series, I’ll evaluate the Government’s efforts at educational reform during the Carter period. Will the Government go 0 for 5? We’ll see! Read the rest of this entry →

Real Fiscal Responsibility 3; Carter: Inflation and Health Care

6:36 am in Uncategorized by letsgetitdone

Here’s the third post in my series evaluating the fiscal responsibility/irresponsibility of the Governments of the United States (mostly the Congress, the Executive Branch, and the Federal Reserve) by Administration periods beginning in 1977 with the Jimmy Carter period. My first post explained why I chose to start my evaluation with the Carter period, and also laid out my related definitions of fiscal sustainability, and fiscal responsibility.

It explained why fiscal responsibility is closely connected to the idea of public purpose, which I’ve laid out here. I also claimed that the Government of the United States has been fiscally irresponsible in every Administration period since 1977.

In my second post, I began by examining the problems of ending economic stagnation, and providing full employment at a living wage, and, I hope, by showing that the Government, during the Carter period, failed to solve either problem because of its commitment to deficit reduction, and budget balancing, in the service of hoped for inflation moderation. The remaining posts in this series will continue to document the claim that all the US Governments since 1977 have been fiscally irresponsible. This, one, the third in the series, will examine how the US Government failed in its efforts to create and maintain price stability, and also failed to provide a solution to the problem of providing the right of receiving health care to every American in need.

Creating and Maintaining Price stability

The Carter Administration sought price stability, and was convinced, mistakenly, that reducing the deficit and eventually balancing the budget would also bring the cost-push inflation in oil prices under control. In the pursuit of price stability, the President used his veto power (p. 40) on a heavily Democratic Congress of supposed allies when he vetoed a public works bill providing for $5 Billion in water projects in 1978, because be thought it was inflationary and full of pork. In addition, he vetoed or pocket vetoed a number of other bills passed by the Democratic Congress in pursuit of smaller Federal deficits and Government frugality.

Not that the Government ran very large deficits in those days in light of current ideas about large deficit spending. In fact, Congress, the President, and the Federal Reserve combined to reduce deficits very quickly after the Ford Administration. After 8 quarters when the Federal Government deficit ranged from 2.88%* of GDP to 6.50%, with 7 quarters exceeding 3% of GDP, the deficit was reduced during the Carter Administration to under 3% of GDP in the first quarter of 1977 and remained in the 0% to less than 3% range, with a low of 0.47%, for the rest of President Carter’s term.

These small Federal deficits were accompanied by small trade deficits by contemporary standards, ranging from a high of 1.21% of GDP to a low of 0.10%. In addition, there were five quarters of small trade surpluses during the Carter Administration, as well. In spite of this generally favorable context, the Government could not achieve price stability because its leaders in all branches were ideologically biased against using the right methods to control the cost-push oil inflation being caused by the spike in oil prices due to Saudi policy during these years. In fact, the Government mostly executed a textbook case of what not to do.

Cost-push inflation cannot be eliminated without killing the economy if one relies on increased taxes, reduced Government spending and high interest rates, which is the deficit hawk prescription. All that will and did do is to move toward macroeconomic and microeconomic austerity. The way cost-push inflation has to be fixed is through bringing alternative sources of supply, wage and price controls, and rationing online.

We know these last two measures are hard to take for Americans and hard to enforce. But they worked during WWII (pp. 95 – 120) even in a time of full employment, and would have worked again if the Congress and the Carter Administration would have employed them sufficiently vigorously. But even though the Administration and Congress did implement wage and price “guidelines” in 1978, and then moved on to tighter controls later, implemented by a Council of Wage and Price Stability, the prices affected were limited in scope, amounting to about half the prices in the economy, and the enforcement of standards wasn’t thoroughgoing, in part because the regulatory staff implementing the program was only 10% of the size of a comparable staff during the Nixon Administration.

As for bringing new supplies online, that is the best cure for cost-push inflation, but the problem with it is that it can take a good deal of time to work. Ironically, Jimmy Carter did initiate this cure for Saudi-induced oil inflation during his Administration, when he de-regulated natural gas production. The problem was that the new supplies did not begin to have an impact for some time. Eventually they did, but only after President Carter was defeated by Ronald Reagan, and only after the availability of more natural gas created an international oil glut, the primary reason for the fall of inflation in the Reagan Administration.

The secondary reason for the fall of inflation was Volcker backing off the Federal Funds rate. The Reagan recovery couldn’t have occurred without that; but, on the other hand, Volcker’s move wouldn’t have been effective if the oil price hadn’t already fallen.

So, the bottom line here, is that the Government did mostly fiscally irresponsible things in seeking price stability during the Carter Administration, while wrapping itself in the moral sanctimony of preaching the necessity for sacrifice. The one clearly good thing it did was to de-regulate natural gas. That eventually worked, and if Congress and the President had combined that with oil rationing and strict enforcement of price controls on domestic supplies, export controls on domestic oil, application of price controls on oil imports, and perhaps limited wage controls, then the economy could have survived without Paul Volcker’s Fed drying up the credit flow and producing a prolonged recession.

Implementing the right of health care for everyone

Carter promised passage of a national health insurance plan during his campaign, but when he was elected he backed off that idea as soon he was warned about the perceived likely inflationary impact of such legislation. This fear dogged his Administration and was a major factor in his inability to come to agreement with Teddy Kennedy and Russell Long on a bill that all three could support.

As his term passed, hesitation and delay resulted in his chance of passing a Medicare for All or other national health insurance bill slipping away, even though he had enormous Democratic majorities in both Houses during his first two years, and healthy majorities in his last two. His fear of inflation and concerns for fiscal responsibility as he defined it, prevented him from making a deal with Democrats supporting a single-payer system. He also insisted that any health reform bill had to safeguard a role for the private insurers.

At the time spending on health care amounted to 9% of GDP. Now that figure is at 18%. In retrospect, it is clear that the same beliefs about fiscal responsibility bothered him in this area as in the economic stagnation, full employment, and price stability issue areas. And also that his insistence on his mistaken fiscal responsibility notion, led to fiscally irresponsible policies, that, in turn, eventually led to the health care sector doubling the proportion of GDP it consumes on an annual basis, and also to many years of unnecessary fatalities, bankruptcies, foreclosures, and family breakups due to lack of universal health insurance.

In retrospect, this is one of areas of the Government’s biggest failures during the Carter Administration. The President was reluctant to make changes that excluded private interests, and to use the Government’s recently acquired greater policy space existing because the Government was now a sovereign fiat currency issuer to spend for the public purpose. His lack of faith in the ability of the Government to do things well, and his ideological faith in the superiority of the private sector to the Government as an agent of change, undermined his effectiveness in this as well as the other areas discussed thus far. It also has bestowed a very high cost on most Americans since 1981.

The Government, led by Carter during this period, could not even conceive of just letting the twin deficits (Trade and Budget) float, and accommodating the trade and import desires of the private sector. Had he been able to do so, he might have been been able to overcome stagflation, create prosperity, and produce low-cost universal health insurance for everyone.

Watch for my next post on the Government’s failure to legislate enduring educational reform during the period 1977 – 1981.

*My thanks are due to Professors Scott Fullwiler and Stephanie Kelton for kindly providing me with their quarterly time series data on Sectoral Financial Balances which I’ve drawn upon for the deficit, and GDP numbers I’ve used in this post.

(Cross-posted from New Economic Perspectives.)

Real Fiscal Responsibility 2: Carter, Stagnation and Unemployment

11:30 am in Uncategorized by letsgetitdone

The economy during the Carter period never operated at full capacity or near full capacity. Deficit and inflation reduction were emphasized above all other domestic concerns, and substantial output gaps were simply accepted as something that it was very difficult for Government to do anything about.

This post continues my series evaluating the fiscal responsibility/irresponsibility of the Governments of the United States (mostly the Congress, the Executive Branch, and the Federal Reserve) by Administration periods beginning in 1977 with the Jimmy Carter period. My first post explained why I chose to start my evaluation with the Carter period, and also laid out my related definitions of fiscal sustainability, and fiscal responsibility.

It explained why fiscal responsibility is closely connected to the idea of public purpose, which I’ve laid out here. I also claimed that the Government of the United States has been fiscally irresponsible in every Administration period since 1977. The remaining posts in this series, and they will be many, will document that claim with analysis.

In this second post, I begin my evaluation of the extent of fiscal responsibility or irresponsibility of the Federal Government during the Carter Administration by covering two of the primary problems reflecting public purpose, and what the Federal Government did or did not do about them with its fiscal and monetary policies. The two are: ending economic stagnation, and creating full employment at a living wage.

Replacing a stagnating economy with one operating at its full potential; closing the current output gap

The economy during the Carter period never operated at full capacity or near full capacity. Deficit and inflation reduction were emphasized above all other domestic concerns, and substantial output gaps were simply accepted as something that it was very difficult for Government to do anything about. This was true during a period in which the presidency and the Congress were both in Democratic hands with substantial majorities.

In addition, the President was able to appoint his choice to head the Federal Reserve on two occasions. During the early part of his Administration he was dealing with a Republican appointee, Arthur F. Burns, who was far from a fiscal hawk on inflation. When Burns resigned, Carter appointed G. William Miller to head the Federal Reserve. Miller was, if anything, more dovish on interest rates than Burns. But later when he moved Miller to Treasury, he appointed the fiscal hawk Paul Volcker as Federal Reserve Chairman, and in doing this shot both himself and the United States economy in the foot; condemning himself to defeat in 1980; and the economy to a multi-year recession with high levels of unemployment from 1980 – 1986.

In spite of his favorable political situation (at least until he appointed Volcker) for active deficit spending-based fiscal policy, President Carter and leaders in the other branches of Government chose to emphasize inflation moderation, rather than facilitating an economy that used its full productive capacity for the public purpose. The outcome of this orientation was characterized as “stagflation” in the popular press, and the term came to stigmatize the Carter period in Government and his Administration, in particular.

Why did the leaders of the Congress, the Executive and the Federal Reserve choose inflation moderation above other goals during the period 1977-1981? Partly because President Carter was very serious about attempting to reduce the Government’s deficit, and eventually balance the Federal budget by 1981, and he implemented a variety of Executive Branch cost-cutting measures across the Federal Government to try to reach his goal, while using the power and bully pulpit of the presidency to bring others along the path of “sacrificing for the public good.”.

Congress both collaborated with and sometimes opposed Carter’s cost-cutting proposals, when they related to infrastructure spending. But generally, they supported him in his broad-based deficit cutting activities, because they bought into the fiscal responsibility as deficit cutting and budget balancing notion, and also accepted that as political virtue in a time of uncertainty and stagflation.

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Real Fiscal Responsibility I: Preliminaries

6:25 am in Uncategorized by letsgetitdone

In 1976, Carter ran, in part, on a platform of “fiscal responsibility,” a virtuous “adult” behavior, while also promising to restore full employment. He did not, either during the campaign or afterward, state his policy using today’s neoliberal fiscal responsibility/austerity doctrine.

This is the first in a lengthy blog series that will evaluate the US Government’s record on RealFiscal Responsibility, Administration period by Administration period, since the Administration of Jimmy Carter in 1977. In evaluating the US Government’s record, it’s important to state clearly that I will be evaluating more than just each Administration and its activities.

The record of fiscal responsibility is not the product of the Executive Branch alone. It is the outcome of the interaction of the Executive with the two Houses of Congress and the Federal Reserve System, even on occasion the interaction of one or more of these with the Supreme Court. All bear joint, though not equal responsibility for the record of Government fiscal responsibility or fiscal irresponsibility, as the case may be, during each Administration period.

Why start this series with Jimmy Carter; since, after all, other Presidents before him have been concerned about balancing the budget and deficit reduction? Well, first, such concerns had justification before President Nixon closed the gold window in 1971, and left the United States with a non-convertible currency, with a floating exchange rate, and no debts payable in other currencies. But after that, and with the passage of enough time to give people a chance to understand and digest the significance of that change for increased policy space in the fiscal and monetary areas, it is reasonable to expect that orientations toward deficit spending and balanced budgets among the parts of the US Government should have changed with the change in the realities of the Government financing system.

How much time is enough time for this to happen? That is debatable, of course. But I will assume that given the pressures on them, it is probably too much to expect that the Nixon/Ford Administration could have come to a changed understanding of the newly existing space for fiscal policy. Also, neither of these Presidents appear to have established deficit reduction as a goal, essential in itself for good government, so much as an expedient concern to meet the dual challenges of high unemployment and OPEC-induced inflation. But with Jimmy Carter, we get something new in the post-WWII period.

In 1976, Carter ran, in part, on a platform of “fiscal responsibility,” a virtuous “adult” behavior, while also promising to restore full employment. He did not, either during the campaign or afterward, state his policy using today’s neoliberal fiscal responsibility/austerity doctrine, nor did he trouble to define what he meant by “fiscal responsibility”, and to provide a rationale for his definition, but he appeared to believe, in common with today’s austerians, that 1) achieving small deficits, or, even better, balanced budgets, would create full employment, and also 2) that the public debt-to-GDP ratio needed to be decreased over time to moderate inflation. So, because of this change in orientation and also the fact that he took office nearly 6 years after Nixon dispensed entirely with the gold standard, it seems to me right to view him as the first modern president who could reasonably have been expected to figure out that Real Fiscal Responsibility isn’t a matter of reducing deficits or balancing budgets, but rather of spending or taxing for the public purpose, and to have acted accordingly.

The same goes for the heavily Democratic post-Watergate Congress that served along with him, and the Board of Governors of the Federal Reserve. All had enough time to figure the new reality out, all were responsible for not taking advantage of the new fiscal reality in which they live. But they didn’t take advantage of it; instead they acted with fiscal irresponsibility; as year after year, up to the present, has every succeeding President, Congress, and Federal Reserve. And in so doing, they have made themselves, every government of the United States since 1977, responsible for the decline of economic, social and political equality, and repeated episodes of economic stagnation the United States has had since that time.

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 purpose, and

fiscal responsibility is fiscal policy intended to achieve public purpose while also maintaining or increasing fiscal sustainability.

Proceeding from these definitions, and also a specification of public purpose you will find here, it may be fiscally responsible, in theory, to both implement fiscal policy based on its expected economic impact while also targeting managing the size of the deficit, the public debt, and the debt to GDP ratio; but, only in cases where an economic system is using a currency that it cannot issue in unlimited amounts to maintain its solvency. That includes all economic systems using currencies that are convertible to a commodity, or systems whose political authorities peg the value of its currency to the currency of another economic system, or systems whose political authorities have adopted a foreign currency. But it doesn’t include those systems whose political authorities (including central banks) can issue their own currency and reserves at will; more formally, systems with convertible fiat currencies, floating exchange rates, and no debts in currencies they do not have the authority to issue.

These last economic systems, fiat currency sovereigns such as the United States, the United Kingdom, Japan, Canada, and Australia, to name several, have no need to target the levels of public debt or the debt to GDP ratio to maintain fiscal sustainability, and only need to be concerned about the deficit if it grows large enough in a single time period to impact an important component of public purpose such as the inflation rate. For these nations, in fact, it is irresponsible to target levels of public debt, and the debt-to-GDP ratio, and in any way to prioritize or trade-off changes in these levels over fiscal policy impacts on full employment, price stability, health and well-being, environmental sustainability, climate sustainability, energy foundations, educational attainment, public facilities, or any of the other components of public purpose, since no fiscal sustainability goal would be served by doing so.

Indeed, the opposite is the case, since the sustainability of the capability to freely issue fiat sovereign currency and reserves without undesirable effects such as hyperinflation, depends on the continuing productive capacity of the economic system whose political authorities are issuing such a currency. It is only when such systems have or can easily generate the goods and services needed to meet demand generated by Government deficit spending that the full freedom of such systems to spend in order to respond to economic cycles and to adapt to other problems can be realized. So, one of the most fiscally irresponsible things a Government can do is to target deficit reduction and budget balancing at the expense of maintaining and expanding productive capacity, including both the constructed capital providing that capacity and the competencies, skill, and knowledge, of the human beings who can use it to generate goods and services.

And yet, in pursuing Government austerity through policies targeting deficit reduction and budget balancing, that is what most Governments having fiat currency systems have done since shortly after the world followed the United States and went entirely off the gold standard in the 1970s. In particular, by almost never achieving full employment and by, instead, using an unemployed buffer stock as a hedge against inflation, they have frequently damaged and wasted skills, competencies, and knowledge of their own citizens who want to work, and have decreased real national wealth compared to what might have been created.

In this series, I’ll analyze and evaluate in detail each Administration period since 1977, from the viewpoint of fiscal responsibility I’ve defined above, and relative to the specification of public purpose I’ve outlined here, and will use in each blog. Readers may not agree with my specification of public purpose and so may disagree with my evaluation. But I think there is less room to disagree with the idea that Government taxing and spending in a democracy ought to align with some specification of public purpose, rather than aligning with mere private purposes of elites. So, it remains for those who will disagree to offer their own ideas of public purpose and then explain why these require the kinds of deficit reduction, budget balancing and austerity policies that each US Government, to lesser or greater degree, has pursued since 1977.

(Cross-posted from New Economic Perspectives.)

Still Not Over: CPC Update

8:11 am in Uncategorized by letsgetitdone

The Congressional Progressive Caucus (CPC) recently issued its “Better Off Budget” document as an alternative to the White House/OMB document, and the coming House budget document, a Republican/conservative alternative. The “Better Off Budget” has received enthusiastic evaluations from writers affiliated with the DC progressive community. Richard Eskow’s recent treatment is typical and provides other reviews that are laudatory. These “progressives” clearly see the CPC budget as anything but an austerity budget. But is it, or is it not? Read the rest of this entry →

How to Restore the Good Name of Government

2:28 pm in Uncategorized by letsgetitdone

There are four very important things the president can do before the elections of 2014 that would help to restore some faith in Government and, as a by-product, at least tentative trust in the possibility that renewed Government deficit spending may help people.

Why is it that Washington village “progressives,” and their associates in other parts of the country who are nevertheless part of the Washington village culture, often ask useful questions, but, almost always deliver, underwhelming answers? Here’s an example from Richard Eskow, probably the best writer at Campaign for the American Future.

How do we restore the good name of government spending, which is especially important during periods of high unemployment and slow growth like these? First, by supporting those politicians who are unafraid to make the case. Second, by demanding that the reluctant ones take a bolder stand – without mixing their messages between spending and premature austerity. Third, by rejecting the insanity that today’s Republican Party represents. Some in the GOP are even opposing infrastructure spending – as America’s bridges, schools, highways and dams decay around us.

Underwhelming, right? Why? First, because there aren’t too many politicians who are unafraid to make the case. Second, because people who are reluctant aren’t likely to respond to only “demands” from people who fiercely desire more government spending. Third, because merely rejecting Republican insanity is very unlikely to cut it, since that is what Democrats have been doing and it seems to be having little or no effect. And fourth, because the only way to restore faith in Government spending is to take actions that have consequences that are highly visible and unambiguously good for the vast majority of people. In other words, those who want to restore faith in Government spending have to get the Government to take actions delivering things for people that they see as important. So, how can this be done?

At this juncture, little can be done that involves the Congress because Republicans and Democratic corporatists won’t let it happen. They won’t legislate anything useful before the election.

Nor will they legislate anything useful after it unless 1) Democrats get a majority in both Houses and 2) Democrats who constitute those majorities are willing to move away from corporatism and legislate in the interests of people. So, if something can be done in this area, it must be done by the President. There are four very important things he can do before the elections of 2014 that would help to restore some faith in Government and, as a by-product, at least tentative trust in the possibility that renewed Government deficit spending may help people.

1. The President can re-institute the rule of law in the area of national security and secrecy by ending mass surveillance of the US population immediately, ceasing all investigations and attempts at prosecutions of journalists who have been trying to tell the public about the overreach of our intelligence agencies, beginning investigations and prosecutions of intelligence operatives who have broken existing laws in gathering intelligence, ending current prosecutions of whistle blowers, and issuing pardons for those who already have been tried, convicted, and jailed.

2. The President can re-institute the rule of law in the area of FIRE sector control and mortgage frauds by beginning investigations and prosecutions of high level executives at too big to fail FIRE sector organizations who have committed fraud including those that caused the financial collapse of 2008, which, in turn, led to the Great Recession and the destruction of so much middle class wealth.

These first two initiatives are supremely important because they will deliver a very visible presidential message that the Government is re-instituting honest government and a single system of law, which, in turn, will give people some reason to believe that renewed spending by the Government will be carried out honestly for the benefit of people, and not for the benefit of FIRE, health care, energy and other elite corporations. Giving people this is an essential step in restoring faith in additional spending, since from their point of view, it looks like the financial power of Government has been used to save big corporations and Wall Street and see to it that they prosper, while leaving working people and home owners to twist slowly in the economic winds of “the long depression” (Eskow’s memorable phrase). How can they believe that renewed spending will help them if they believe that the Government promising good results from new spending is a corrupt government, in the pocket of the 1% or perhaps even the 0.001%?

3. The President can next do something that is very essential to developing widespread support for renewing spending, because it will make plain that the US Government has and always will have whatever amount of funds it will take to create full employment and to finally end the long depression. The President has to remove the perceived problem of the national debt from the consciousness of the public by paying off a large proportion of it WITHOUT running economy-destroying surpluses. There’s only one way that can be done by the President acting alone right now, in time to affect the campaign environment in the 2014 election by eliminating the debt as an issue backing continued austerity propaganda.

That way is to cause the US Mint to create and deposit a platinum coin with a face value high enough to repay the debt subject to the limit entirely as it falls due, and to cover deficit spending for a long period of time thereafter. If the President does that, and sees to it (as he has the power to do) that the Mint’s account, and ultimately the Treasury’s spending account are credited with reserves equal to the value of the seigniorage resulting from the Mint’s deposit at the Fed; and also, if he follows that up by immediately paying off a large percentage of the debt, then everyone will know that the seigniorage is being used to get rid of the debt quickly.

When people know this they will know two other things. One, that the Treasury is easily paying off the debt, and two, that it has and always can easily create whatever funds it needs to follow through on its promises to end the long depression without either cutting spending or raising taxes. This will be a revelation to people which the President and the Democratic Party must drive home.

4. The White House and the Democratic Party must then run a campaign advocating a list of programs people will immediately view as likely to solve their economic problems. These must promise full employment recovery within a year using full payroll tax cuts and a Job Guarantee program at a living wage with good fringe benefits, strengthening social security and other trust fund programs by guaranteeing their annual spending regardless of the size of their trust fund balances, and by greatly increasing the size of safety net benefits and the protections they afford in case of inflation, truly universal and comprehensive health care using enhanced Medicare for All, revenue sharing for states on a proportional basis by population, fixing US infrastructure over 5 years, fixing the Housing crisis with various specific measures redressing the injustices done to homeowners by the big banks since 2007, fixing the student loan crisis with a “debt jubilee” and a grant program covering post-secondary education, and, lastly, dealing with environmental, climate change, and sustainability issues with a massive 5 year transition away from fossils fuels and nuclear and to renewable energy.

Democrats must then meet the cynicism and ridicule greeting these campaign promises by guaranteeing that if people give them a victory, then they will get rid of the Senate filibuster and other impediments to rapid action, and will legislate their program within the two year period of the next Congress without fail. These guarantees must be backed with a further promise not to run for re-election if they break any of their promises. Only then will some of the cynicism greeting their promises be dispelled.

Finally, these Democratic promises will surely be met with a campaign emphasizing the bogeyman of hyperinflation. Democratic promises will be estimated in a primitive way totaling up what will they cost over the two year period. The assumption will be made that they won’t be countered by automatic stabilizers producing increasing fiscal drag as the US approaches full recovery.

Democrats will have to respond with their own projections estimating that drag. It will come from gradual and automatic re-imposition of payroll tax cuts calibrated to kick in gradually as unemployment decreases, and gradual shrinking in Government spending on the Job Guarantee (JG) program as the private sector responds to increased demand by hiring people from the JG rolls.

In addition, it will come from increasing private sector savings and increasing trade deficits as recovery moves forward. It will also come from the White House working with Congress to phase in some of the programs I’ve mentioned gradually and in response to increasing fiscal drag.

The bottom line is that if the Democrats are successful in winning the Congress in 2014, and in legislating these programs, then faith in Government will be restored. But, there will be a fly in the ointment, as there is always is in life. The debates over fiscal policy will shift to debates about the likelihood of inflation, and managing the economy to avoid inflation at full employment will become a prime concern. We will have traded increasing government illegitimacy, chronic unemployment, stagnation, and “long depression” problems for renewed faith in government, full employment, prosperity, and inflation concerns.

That’s a great trade-off for all of us, I think. And I will take it anytime over the current neoliberal evolution toward a feudal/fascistic order.

(Cross-posted from New Economic Perspectives.)

Photo by l’ennui d’ennui, used under Creative Commons license

The New Populism Needs to Get This Straight

11:12 am in Uncategorized by letsgetitdone

Let’s look again at the new populism through the lens provided by Robert Borosage in his recent attempt to tell us what it is about. He says:

The apostles of the new inequality have unrelenting sought to starve the public sector. President Reagan opened the offensive against domestic investments. Perhaps the hinge moment was in the final years of the Clinton administration when the budget went into surplus, and Clinton, the finest public educator of his time, pushed for paying down the national debt rather than making the case for public investment. He left the field open for George W. Bush to give the projected surpluses away in tax cuts skewed to the top end.

Pop!Tech 2008 - Juan Enriquez
The hinge moment wasn’t then. It was when he decided, either early in his first term, or even before he took office, to rely on deficit reduction coupled with low interest rates from Alan Greenspan, on the advice of Robert Rubin and Larry Summers, rather than on deficit spending on human capital investments as advocated by Robert Eisner and Robert Reich. Rubin’s victory in the internal debates within the Administration was well-known at the time (1993), and set the deficit reduction course that played along with the Fed’s bubbles to create the private sector debt-fueled “goldilocks” prosperity, and surpluses of his second term. By the time Clinton faced the choice Borosage refers to, the die had already been cast. It was very unlikely that Clinton would turn away from further Government austerity policy, and turn instead toward investments in infrastructure, public facilities and “human capital.” Read the rest of this entry →

Who Needs a Balanced Trade Policy?

3:12 am in Uncategorized by letsgetitdone

Do we need balanced trade?

It’s easy to recognize that after many years of trade deficits accompanying implementation of trade agreements beginning with NAFTA the US needs to change what it’s doing. Many, including Robert Borosage of the Campaign for the American Future (CAF), advocate for balanced trade and they contrast that with the so-called “free trade” policies we have now. The case for balance trade policy is summarized by Borosage this way during his discussion of the policies favored by the New Populism:

Our global trade policies have been defined by and for multinational banks and companies. They have shipped good jobs abroad and driven wages down at home, while racking up unprecedented and unsustainable trade deficits. Those imbalances, as the International Monetary Fund and former Federal Reserve Chair Ben Bernanke have noted, contributed directly to blowing up the global economy.

The new populists demand balanced trade policies. . . .

So, we need “a balanced trade policy” meaning one that reduces trade deficits because it will support lower unemployment by keeping “good jobs” here, drive wages up rather than down, be more sustainable, and won’t contribute to a collapse of the global economy. But, is that the only or the best way to get these outcomes?

I raise that question because there is an important truth of macroeconomics to take account of. That truth is that: “Exports are real costs; and Imports are real benefits.”

This notion is based on the distinction between real wealth measured in accumulated products and services and nominal wealth measured in accumulated financial credits. Exports add to real wealth being sent to other nations; in return for nominal wealth received from them (financial credits). Imports add to real wealth being received from other nations; in return for nominal wealth we send to them.

So, would we rather send fiat money to other nations and add to real wealth in return, or would we rather add to their real wealth to and get their fiat money or our old fiat money back in return? My answer is that other things being equal, we’d prefer the first alternative rather than the second, meaning that trade deficits are better than trade surpluses, at least in the short run.

The problem with this answer is that other things are not equal, in the sense that if the Government does nothing to compensate for their shorter and longer-term effects, then the problems highlighted above do result from continuous “free trade” policy supporting continuous trade deficits. On the other hand, these effects of trade deficits can be avoided without implementing balanced trade as a continuous policy. How?

First, trade deficits cause aggregate demand leakages, which is what causes higher unemployment and lower wages. But, we don’t have to accept that outcome. We can implement a Job Guarantee program, along with other Government spending such as State Revenue Sharing, infrastructure spending, and Social Security payroll tax holidays to replace the demand lost to trade deficits.

Of course, we’d have to pass those measures. But what’s better, from a progressive point of view, doing these things or preventing Americans from buying goods and services (acquiring real wealth) from other nations that they would like to buy?

What about the lost jobs themselves? If they were “good jobs” would the new jobs produced by Government spending and SS payroll tax cuts be “good jobs” too? That depends on how the Government implements its Job Guarantee (JG) program. If the JG pays a living wage and provides Medicare access and good fringe benefits to those in the JG, then private sector people will have to better what the JG offers to get employees, and the wage floor will be raised radically over current levels and that will raise wages all along the line.

So, from the standpoint of adequacy of pay, there will be many more “good jobs” then there are today. The quality of the jobs will also improve if the JG is implemented to allow local non-profits to define jobs that will produce socially valuable outcomes for people. The role of the Federal Government would be the funder of the JG program; but local non-profits, communities, and the JG participants themselves would define the jobs in the program, exerting pressure on the private sector to increase the quality of the jobs offered in that sector.

One way to look at the situation is that trade deficits and the demand leakage they create, also provide an opportunity for the Government to employ people on social entrepreneurial projects producing public good and commons improvements of significant value; filling needs that cannot be filled by the private profit-motivated market. The purpose of the JG jobs provided is to provide a transition for displaced former employees of dying industries.

This opportunity is a good thing provided the Government takes advantage of it, because it provides not only transition jobs for individuals, but also a transition period for the private sector to develop new industries and new jobs based on new technologies while the potential labor force continues working at other jobs having social value.

Of course, the US Government hasn’t been doing that, preferring instead to leave people in an unemployed buffer stock that depresses wages and increases inequality. But the truly progressive remedy for that is to implement the Job Guarantee and other Government deficit spending and middle class tax cut programs, not to pursue a policy of balanced trade.

Second, it’s very popular today to say that x, or y, or z is “unsustainable” without saying what they mean by that term. From my point of view, policy unsustainability means that a policy cannot be followed forever without undermining the capacity to follow that policy sooner or later. The important thing here is to notice that the Government’s policy isn’t to run trade deficits forever. But just to allow trade to flow freely and let the trade deficit float. So, the issue here is whether that policy is sustainable. With exceptions to be noted below, I think it is.

The reason why it is sustainable, is that it is, in the end, self-correcting. Eventually, other nations will tire of selling the real wealth they produce in return for our nominal wealth, the electronic bits of information that eventually end up in their accounts at our Federal Reserve Banks and they will sell them instead to their own consumers. At that time, the Government’s policy of letting the trade balance float will produce smaller trade deficits or even surpluses, if the US Dollar becomes sufficiently unattractive. Until that time however, having trade deficits resulting from a trade policy that allows the trade balance to float is perfectly sustainable with some exceptions I’ll now consider.

Third, Robert Borosage refers to the view of the IMF and Ben Bernanke that continuous trade deficits of the United States contributed to the Great Crash. The chain of causation, according to Bernanke, is that the accumulation of US Dollar credits by Asian nations led to their investing in US and mortgage-based securities, causing a bubble in MBSs which then, in the crash of 2008 spread the US financial crisis around the world contributing a potent feedback loop to the crash. The general idea is that continuing trade deficits would, over time, concentrate the dollar assets of foreign nations in risky securities vulnerable to financial downward spirals.

This mechanism may or may not be a factor whose importance is great enough to render running continuous deficits unsustainable. But, if it is, then the remedy is easy. Pass legislation banning speculation in financial instruments that carry any systemic risk by entities with large dollar holdings. End of story and of this possible factor in promoting unsustainability.

Fourth, the remaining problem with letting trade happen and allowing the trade balance to float is that there may be industries or areas of endeavor that are vital to the defense of the United States, and/or its further economic development. Free trade in these areas cannot be allowed, since it risks destroying vital US skills and capabilities or potential for innovations. We need a US industrial policy to identify these areas, to decide how to subsidize them, and to ensure that they are maintained or developed. Once we have that, along with the other policies mentioned earlier, a policy of letting the trade balance float, even if it results in continuous trade deficits will be sustainable without causing unemployment, reduced wages, financial crashes, or making the United States dangerously dependent on other nations for political and economic sustainability.

Finally, let’s review the bidding again. The new populists and writers like Borosage think that progressive trade policy is balanced trade. In contrast, I think that a policy of unrestricted trade, taking advantage of the willingness of other nations to send their real wealth to the US is better for us and also seems be what our trading partners want right now.

However, to make that work for the US, we need full employment policies including a Job Guarantee program at a living wage with full fringe benefits, as well as other policies designed to compensate for demand leakages from trade deficits and private sector savings. In addition, we need to prevent investment of dollar savings in risky financial instruments such as Mortgage-Backed Securities (MBSs) and derivatives, and lastly, we need an industrial policy.

So, which is more “progressive” and also “populist”: balanced trade policy, or unrestricted trade, modified by full employment at a living wage, strict regulation of investments in financial instruments, and industrial, policies? I think it’s the second alternative and that progressives and populists ought to forget balanced trade and embrace it.

(Cross-posted from New Economic Perspectives.)

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