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The Five Worst Reasons Why the National Debt Should Matter To You: Part Three, The Other Four Worst Reasons

3:06 pm in Uncategorized by letsgetitdone

In Part One of this series, I considered “Fix the Debt’s” claim that high levels of debt cause high unemployment and gave a few reasons why this is a false claim. In Part Two, I followed with a review of the historical record from 1930 to the present and showed that it refutes this claim throughout this period, and that there is not even one Administration where the evidence doesn’t contradict “Fix the Debts” theory. In this part I’ll continue my examination of the other four “top reasons” why “Fix the Debt” insists that the National Debt should matter to you.

2. Debt means more expensive consumer credit: home, auto, student loans, as well as credit cards.

Growing federal debt can drive up interest rates throughout the American economy. That means higher interest rates for people across the country who may be taking out loans for a home, a new car or truck, to pay down credit card cards or for education costs. Higher interest costs mean they will all be more expensive, resulting in higher monthly payments.

Response: This is a proverbial red herring. Interest rates in the United States aren’t determined by private markets, they’re determined primarily by the Federal Reserve, or by the Fed in collaboration with the Treasury. That is not to say that markets can’t drive up interest rates if the Fed does nothing about it. But if the Fed chooses to take counteraction, then it can determine the term structure of interest rates across the Board.

3. Delaying action on the national debt means it will be much more difficult to protect Medicare and Social Security from abrupt, severe, and widespread cuts in the future on all beneficiaries.

Social Security’s disability program will exhaust its assets in 2016, the overall Social Security trust funds will be exhausted in 2033, and the Medicare Trust Fund will run out in 2026. Some of those dates may seem like a long time away, but if we want to protect beneficiaries who rely on these programs from severe and abrupt cuts – especially the elderly who have used up all their savings and other vulnerable groups – we need to start taking gradual steps now.

Response: All of this is false. It assumes that we will fund safety net programs in the way we do today, by continuing to issue debt, and it also assumes that continuing to issue debt and having higher levels of debt are problems for a fiat sovereign. They’re not! Fiat sovereigns can continue to deficit spend regardless of their debt or debt-to-GDP ratio levels. And if we want to get rid of or reduce debt for political reasons, then Congress needs to guarantee annual funding for these programs in perpetuity and for the Executive to ensure that funds are there by using Platinum Coin Seigniorage (PCS), to supply the reserves to cover appropriated deficit spending.

Even if these alternatives aren’t available right now, however, it still makes no sense to cut safety net programs now, based on some long-range projections that may never come to pass. If people really will have to suffer later, because Congress and the Executive are refusing to use their power to remove the need for any suffering at all, then why should we, the people just accept that?

Much better to get ourselves a new Congress and a new President who will do what’s needed to remove any need for suffering at all. We certainly should not let today’s politicians rob us now, so we can plan ahead for poverty, when we have as much as 25 years to replace this crew of reprobates with people who will vote in the interests of most of the people, most of the time, and who will take back the gains of the 1% extracted from the economy and the Government through political influence and outright fraud.

4. If we do not address the debt now, federal investments in education, infrastructure, and research will decline.

We currently spend nearly $225 billion each year in interest payments alone on the national debt. And that number will only continue to rise. These payments – which have to be made – reduce our ability to fund critical investments in areas such as education, infrastructure, and research that are vital parts of a strong economy. In addition, the mindless sequester continued to cut spending throughout many of these programs, without making any decisions on where to target the savings and without focusing on the most unsustainable areas of the budget: increasingly-costly entitlement spending and an outdated, inefficient tax code.

Response: Yet another fairy tale for the gullible. Yes, interest payments are at $225 Billion per year. That’s about 1.5% of GDP. During the 1980s that figure was more than 5% of GDP. Why did it go down?

Not because our national debt got smaller; but because the Federal Reserve drove interest rates down, allowing the Treasury to sell securities at lower interest rates. Again, the Fed can drive down interest rates to virtually zero if it wishes to, and can keep the interest bill of the United States as low as it wishes, ensuring that interest on the national debt will never be a threat to the rest of the budget. So, forget about this. Interest payments on Treasuries can never be a threat to the solvency of the United States as long we maintain the present fiat currency system we’ve had since 1971.

But, of course, apart from such action by the Fed, the option of PCS is always open to the Treasury. It can pay back whatever portion of the debt it likes and refrain from issuing any more debt. So, over time, the Treasury can lower its interest costs as low as it wishes if it believes interest payments are becoming either a financial or a political problem.

5. Taking steps to address our deficit now would mean a more robust economy and significant job growth over the next 10 years.

A Congressional Budget Office analysis indicates that $2 trillion in deficit reduction over ten years could grow our economy by nearly an additional 1 percent by 2023. A healthy, growing economy means more good jobs and higher wages for hardworking Americans.

Response: The CBO projections about deficit reduction growing our economy are wrong. First, because CBO projections are mostly wrong. They’re even wrong four months out. For example, compare CBO projections on the anticipated 2013 deficit published in January and May of 2013. CBO failed to project the four years of Clinton Administration surpluses. It failed to project the recession at the end of the Clinton Administration at the beginning of the year 2000. It failed to project the crash of 2008 in early 2008, and even a few months before the crash.

Then it failed to project the seriousness of the recession in January of 2009. It failed to project the Clinton recovery in 1993, or the boom in Clinton’s second term. All these were relatively short-term errors. But, forecasting errors due to false models accumulate drastically over time. So, CBO has nil capacity to project over a period of ten or more years. All one can really count on is that CBO (and all the other well-known projectionistas will be wrong.

CBO’s projections do not take into account the macroeconomic sectoral financial balances. So, it doesn’t even recognize that long-term proactive deficit reduction means reducing Government additions of Net Financial Assets (NFAs) into the private economy. Of course, lower NFA additions over a decade, due to deficit reduction, do not guarantee a contracting economy and high unemployment in 2023. But, in the absence of a private credit bubble, which will bring another crash sooner or later, they make it much more likely that CBO’s projection will prove false.

In short, the idea that $2 Trillion in deficit reduction now will produce a healthier, more robust economy is false. We might have a more rapidly growing economy in 2023, even with deficit reduction, if the private sector, supported by the Fed, blows that big credit bubble. But that growth will not mean a healthy, robust economy. It will mean a sick one on the point of a huge deflationary collapse produced by another debt crisis. And while the new class of Peterson plutocrats might greatly desire such a result so that they can extract most of the rest of the financial resources of the 99%, I think the rest of us would prefer to base our future expansions on the actual additions to private NFAs produced by Government spending that is not offset by tax revenue.

So, we’ve now seen that “Fix the Debt’s” five top reasons why the national debt should matter to you, are actually the five worst reasons why it should matter. However, there are at least three REAL reasons why the national debt should matter, and why we should fix it without breaking America, or causing people to suffer. In the concluding, Part Four of this series, I’ll give these reasons.

(Cross-posted from New Economic Perspectives.)

The Five Worst Reasons Why the National Debt Should Matter To You: Part Two, the Record Since 1930

1:25 pm in Uncategorized by letsgetitdone

In Part One, of a critique of the most important of “Fix the Debt’s” reasons for “Why the National Debt Should Matter To You,” I asserted that high debt levels haven’t caused high unemployment in the United States, and that, if anything causation was in the other direction. I didn’t want to disturb the flow of the argument there with a relatively lengthy survey of some of the numbers in the historical record since the 1930s. But let’s test the idea that High debt causes fewer jobs and lower wages in the United States by looking at that record now.

Hoover, FDR, and Truman

During the early 1930s, in the presidency of Herbert Hoover, unemployment spiked up first; then the deficits, funded by debt issuance, followed. In fiscal 1933, which began in July 1932, unemployment peaked at 24.9%, while the debt-to-GDP ratio reached 39.1%, up from a low of 14.9% in 1929.

During FDR’s first two terms, the increases in the debt-to-GDP ratio level off. But, unemployment declines steadily to 9.9% in 1941, with an exception coming in 1938, the year following his misguided attempt to cut the debt. During WW II, the public debt skyrockets, but unemployment declines to a historically low level of 1.2%, another contradiction to the idea that high debt levels cause fewer jobs and lower wages.

Nor are the Truman Administrations any kinder to this first “fix the debt” myth. During these eight years the debt-to-GDP ratio declines steadily from 112.7% to 60.2% with one exception in fiscal 1949. Meanwhile, unemployment rises until driven down by Korean War spending beginning in Fiscal 1951.

Eisenhower and Kennedy-Johnson

How about the Eisenhower and Kennedy-Johnson Administrations? Again, all the evidence contradicts the “Fix the Debt” myth. Levels of the debt-to-GDP ratio continue to fall while unemployment rates vary cyclically, but generally average a full point higher than in the Truman Administration, and more than three points higher than at the height of wartime full employment. In short, decreasing levels of the debt-to-GDP ratio do not appear to cause more jobs and higher wages than the higher debt-to-GDP ratio levels during WWII and the Truman period.

In 1969, the debt-to-GDP ratio falls to 28.5%, a drop of nearly 3 points from the year before. The budget surplus is 0.3% up from a deficit of -2.9 in 1968. Unemployment is down to 3.5%, a low water mark for the Kennedy-Johnson period. But in FY 1970, unemployment spikes up to 4.9% and continues “high” for the rest of the Nixon-Ford Administration, reaching 8.5% in FY 1975, even as the level of the debt-to-GDP ratio declines to 24.6% in 1974, and then goes up to 28.1% in 1976 before resuming its downward track for a few years.

Nixon – Ford and Carter

The Nixon-Ford Administration, marks a break in the currency system, since in August of 1971 Nixon withdrew from the Bretton-Woods agreement and both ended the convertibility of dollars to gold on the international exchange, and allowed the value of the dollar to float freely on the international exchanges. Since then, the US has had a fiat currency system, rather than a commodity-based system. However, the US has continued to act domestically as if it was still on the gold standard, continuing to issue public debt even though the rationale for borrowing back money created under its authority, and which can be created in unlimited amounts, at will, is based on the idea of a Government Budgetary Constraint (GBC) that no longer exists; and also on the need to “sterilize” excess reserves produced by deficit spending, because these are falsely assumed to be more inflationary than new securities would be.

In spite of the change in the currency system, and the change in political party control of the White House, the Carter Administration was not able to break the pattern of economic stagnation that characterized the Nixon-Ford Administrations, probably because it received bad advice from economists, who did not understand the significance of the shift to a fiat currency system. The general levels of unemployment remained similar over the two administrations.

The mean annual employment rate during the Nixon – Ford period is 6.3%. During the Carter Administration, it increases to 6.65%. We’ve already seen that the decline in the debt-to-GDP ratio reached 24.6% and then increased slightly. The Carter Administration began to reduce it again, but never reached the Nixon low point, and ended at 26.3%.

There’s no noticeable relation here between high debt levels and unemployment. The debt-to-GDP ratio hit a low level and was varying slightly higher than that level after 1974 through 1981. Unemployment, on the other hand, varied cyclically, but was trending upward, with apparently no direct relationship to high debt levels.

Reagan-Bush

The Reagan-Bush years are remembered as prosperous years. But the mean unemployment rate was 7.1%, a half point higher than under Carter and 0.8% higher than in the Nixon-Ford years, and the period ended at 6.9%. So, many people weren’t prospering.

On the other hand, the Reagan-Bush years saw a substantial rise in the debt-to-GDP ratio which increased from 26.3% at the end of Carter’s Administration’s to 49.5% at the end of Bush 41′s. A level that high had last occurred 35 years before in 1958, during a period when unemployment had averaged 4.9%. Comparing the two, note 1) the level is nowhere near the historic high of 112.7% and 2) the level of the ratio is apparently compatible with both relatively low and relatively high unemployment levels, again refuting the idea that “high debt levels = fewer jobs and lower wages.”

Clinton and Goldilocks

The period of the Clinton Administration has been characterized as the period of “the Goldilocks Economy,” and is also considered by many as a time of “fiscal responsibility.” The economy grew at the most rapid rate since the 1960s, but did so in the presence of trade deficits, and decreasing budget deficits, finally ending in Government surpluses.

With GDP growing rapidly and public debt growing slowly, and actually shrinking through four consecutive years, of surpluses, the debt-to-GDP ratio fell throughout the period FY 1994 – 2001, declining from 49.5% to 32.5% in 2001. This happened simultaneously with steadily declining unemployment rates, reaching 4.0% in 2000, before increasing again to 4.7% in 2001, when a new recession, in reaction to the surpluses and the credit bubble of the 1990s began to bite. The unemployment rate over the whole goldilocks period averages 4.93%, the lowest average since the Kennedy-Johnson and Eisenhower Administrations.

Why isn’t the Clinton Administration a confirmation of the claim that high debt causes fewer jobs and lower wages? Well first, the data show the debt-to-GDP ratio falling, along with unemployment, not the ratio rising while unemployment increases. But even if one wants to claim that a falling debt-to-GDP ratio increases employment and wage levels, the data show unemployment falling much faster than the debt-to-GDP ratio, which doesn’t begin declining appreciably until the unemployment rate has declined from 6.9% in 1993 to 4.9% in 1997.

Also, when unemployment rises again in 2001 to 4.7% from 4.0%, the fall in the debt-to-GDP ratio continues, suggesting a lag relationship between unemployment and a falling debt-to-GDP ratio. What would explain this? The answer is the automatic stabilizers. When people go back to work, they cease to draw as much, or at all on the safety net, and they also pay taxes. So, tax revenues increase, government deficits decrease, and GDP increases, meaning that the debt-to-GDP ratio falls.

But a mystery remains, why did the goldilocks economy appear? Why did it create an apparently strong recovery with decreasing unemployment and higher wages, without the assistance of large government deficits, and with the disadvantage of increasingly substantial trade deficits. The answer is that the goldilocks economy was driven by the Fed’s decision to maintain low interest rates, and easy bank credit, and by the increasing willingness of the private sector to run a deficit, and run down its net financial assets, accommodating the Government’s desire to run a surplus.

The private sector balance went into deficit in 1997 when the Government’s deficit declined to -0.3%. Then the four years of Government surplus: 1998, 1999, 2000, and 2001, were all years of aggregate private sector deficit in which the private sector, looked at as an aggregate, lost net financial assets. While this was going on, the “dot com” bubble was bursting and the economy fell into recession, accompanied by the increase in the unemployment rate in 2001, followed by the increase in the debt-to-GDP ratio, as the automatic stabilizers, along with the beginning of post 9/11 homeland security deficit spending, kicked in with a return to deficits in 2002.

So, it turns out that the primary causal factor in the Goldilocks economy and its increasingly low unemployment rate wasn’t deficit reduction, as claimed by many Clinton partisans, and debt hawks, but the credit bubble blown by the Federal Reserve, the banks, Wall Street, and an increasingly optimistic private sector. The economy boomed in spite of deficit reduction, and was itself the primary cause of deficit reduction, and not vice versa. This is another refutation of the narrative behind the theory that high debt levels cause high unemployment and low wages, because the boom was due to a credit bubble that drained net financial assets from the private sector and then burst at the end of the period.

Later, the blowing of another bubble under Bush 43, restored a modicum of prosperity, but only increased the chances for a more serious crash in 2008. Had the expansion of the 1990s been based on much larger government deficits, the recession at the end of the Clinton-Gore period would have been avoided, because the expansion would have been based on a permanent transfer of new net financial assets to the private sector, and not on bubble-generated paper assets that are gone with the wind when the inevitable collapse of a credit bubble occurs.

Bush 43

That brings us to the Bush 43 Administration. In 2002, the Government went back to deficit spending. But the Government deficit was small enough that, given the size of the demand leakage due to the trade deficit, it kept the private sector in deficit. Deficit spending increased in 2003, along with war spending, but since the trade deficit was rising to 5% it wasn’t large enough at – 3.4% to compensate for the trade deficit. Over the next two years, the private sector balance varied around zero, sometimes in deficit, sometimes showing a small surplus.

But beginning in 2005, as the trade deficit rose eventually to 6%, and the Government deficit again was lowered first to -2.6, and then to -1.9 and -1.2% in 2007, the private sector was again in substantial deficit for three consecutive years. Altogether, beginning in 1997 under Clinton and ending in 2007 under Bush, the private sector went through 11 years without ever having a substantial private sector surplus, and for 6 of those years the private sector lost more than 2 – 4 % of GDP in net financial assets, because private sector activity was funded by private sector credit bubbles rather than by government deficits that were high enough to compensate for the Trade deficit.

In other words Government deficit spending wasn’t too high under the Bush 43 Administration, as we hear in conventional economic and political analysis. But rather, it was far too low to sustain a decent level of economic activity without relying on the credit bubble-fueled housing bubble that burst in 2007, and led to the crash of 2008.

No wonder the Bush 43 period had the highest average unemployment rate (5.83%) since the Bush 41 Administration (6.7%). Neither Government deficit spending, nor the private credit bubble were large enough to drive unemployment down to the levels seen in the Clinton period, and unemployment was mostly over 5% hitting 5.8% in 2008, and then in the transition 2009 fiscal year, between the Bush 43 and Obama Administrations, rising to 9.3%. Meanwhile, the debt-to-GDP ratio slowly rose nearly 4% from 32.5% between 2001 and 2007, and then jumped sharply to 40.5% in 2008 and to 54.0% in 2009, as unemployment was rising and safety net spending accelerated.

So, during Bush 43, we see a sharp rise in the debt-to-GDP ratio in 2008 and 2009. But, it’s not this rise in debt levels that causes unemployment, because the sharp increases in unemployment were a result of the financial crash caused by the lengthy attempt over two administrations to fuel economic expansion through increasing private sector debt facilitated by the Fed, the banks, and Wall Street. That attempt led us back to the boom-bust cycles that were prevalent prior to the New Deal and the reform of the banking system — reforms that were largely repealed in the Clinton and Bush Administrations.

The sudden growth in debt in 2008 and 2009 appeared because the rise in unemployment caused by the Great Crash, led to increases in Federal deficit spending resulting from the automatic stabilizers, and the beginning of the economic stimulus provided by the American Recovery and Re-investment Act of 2009. So, once again, job loss came first, and was then followed by higher debt levels, rather than vice versa, another contradiction with the theory that high debt levels cause higher unemployment and lower wages.

The Obama Administration

From 2009 until the present, the results of the sharp spike in the unemployment rate on the debt-to-GDP ratio are apparent. The ratio has increased by nearly 20 points in 2010, 2011, and 2012 to 72.6%, while the unemployment rate has declined from 9.3% to the present 7.4%. So, increases in the debt-to-GDP ratio are inversely correlated with the unemployment rate, yet another contradiction of the austerian theory. Meanwhile, the reduction in unemployment and the increase in both GDP and tax revenues is driving the 2013 deficit toward 4% of GDP, down from 10.1% in 2009.

This result, while touted as good news by the Obama Administration, and nearly everyone else in sight, resulting in a veritable Versailles happy dance, is bad for the economy. While the trade deficit is down to close to 2.5% now, a projected Government deficit of 4% for 2013 is too small to provide for more than a 1.5% of GDP surplus in private sector net financial assets. Most of this is likely to go to continue to repair private sector balance sheets that were damaged so much during the 11 year debt binge over the Clinton and Bush Administrations.

That means there won’t be new private sector financial assets sufficient to support increasing aggregate demand. And this, in turn means that the economy will continue to stagnate or heal only very slowly, or perhaps even turn back to recession, provided there’s no substantial private sector credit expansion to fuel demand. But, so far at least, one can’t see such an expansion getting under way, and without it there’s no substitute for the Government deficit spending that the Administration and Congress are so intent on reducing.

Where’s the Evidence?

It’s astonishing how people just make up stories to support policies they favor. Even though I have the background to use rigorous modeling or statistical analysis methods, and have used them many times in past years, my look at the record hasn’t involved them, because, this is, after all, a blog post meant to be read more widely than a statistical study, and I think the raw numbers since 1930 continuously and conclusively refute the causal theory advanced by the “Fix the Debt” group that high debt or debt-to-GDP levels increase unemployment rates.

Falsification of any theory can never be certain, but the evidence in this case never contradicts the idea that high unemployment comes first, and high debt levels come afterward as an effect of high unemployment, assuming, of course, that deficit spending is accompanied by debt issuance. Given the data, I think one has to reasonably conclude that High debt levels ≠ fewer jobs and lower wages, as the “Fix the Debt” group claims.

If the “Fix the Debt” group disagrees, and thinks that I’ve interpreted the data incorrectly, or that more rigorous analysis expanding the set of variables and using more sophisticated techniques shows that the evidence doesn’t refute their theory, then I challenge them or others in the Peter G. Peterson Foundation-funded network of organizations to produce such an analysis. Until they do, I think we have to continue to ask “Where’s the evidence”?

And we also have to ask whether a theory amounting to no more than a plausible narrative about what causes unemployment, contradicted by many other plausible causal narratives can serve as the basis for a Federal fiscal policy of deficit reduction that will hurt many millions of American citizens for generations? I think not! I think the very idea is ludicrous, and that it’s time to laugh the “Fix the Debt” campaign off the public stage.

In Part Three, I’ll cover the other four “worst reasons” why the national debt should matter.

Data Sources:

Budget deficits/surpluses, 1940 – 2018.

Unemployment rates, annual averages, 1923 -1942.

Unemployment rates, annual averages, 1940 – 2008.

Unemployment Rates, annual averages, 1947 – 2012.

Sectoral Financial Balances.

(Cross-posted from New Economic Perspectives.)

The Five Worst Reasons Why the National Debt Should Matter To You: Part One, High Debt Levels and Jobs

10:34 am in Uncategorized by letsgetitdone

Your Social Security, My Pocket

I came across a post from the “Fix the Debt” campaign last month called “The Top Five Worst Reasons Why the National Debt Should Matter to You.” It’s a post full of debt/deficit lies that cry out for correction. That’s what I’ll provide in this series.

1. High debt levels = fewer jobs and lower wages

In times of fiscal and economic uncertainty, consumers and businesses reduce investment and delay projects because investment is costly to reverse. Higher government borrowing can also drive up interest rates once the economy recovers, reducing the access and affordability of funds for consumers and businesses to borrow and invest in new ventures and ideas. This can hold back the economy, resulting in fewer jobs and lower wages down the road.

Response: What’s with the colloquial use of the ‘equals sign’ in this statement? Is the “Fix the Debt” campaign trying to say that there’s an identity between high debt levels and fewer jobs/lower wages? Is it trying to say that fewer jobs/lower wages cause high debt? Are they trying to say that there’s mutual causation between the two over time? Or are they trying to say something more complex than these things?

The summary statement after the headline indicates that the “equals” is an ambiguous way of making the straightforward claim that high debt levels trigger a causal chain ending with fewer jobs and lower wages. Here are two ways of addressing this claim: is it true, or even likely, given the data; and even if it is true, then so what?

Addressing “truth” first, it’s not! There’s plenty of evidence (See Part Two) refuting the idea that high public debt levels cause fewer jobs and lower wages in nations like the United States that use a non-convertible fiat currency, a floating exchange rate, and have no debts in currencies they do not issue.

In fact, even before 1971, when the United States closed the gold window allowing convertibility to gold on international exchanges and arrived at our current fiat currency system, the data still refute this claimed identity and suggest, that, if anything, the causation is reversed. In Part Two I’ve added a historical addendum dating from 1930 to the present showing that the evidence refutes this theory about the causes of higher unemployment.

Read it and see what’s happened for yourself; but the upshot is that this theory is pure fiction. Its narrative hasn’t happened once in the United States since 1930.

Now, on to “so what.” Let’s, for the sake of argument, say that high debt or debt-to-GDP levels did cause high unemployment, and that Government debt is a problem. The “Fix the Debt” campaign wants to respond to this by cutting Government deficit spending, raising taxes and following a long-term deficit reduction program featuring cuts to social safety net programs.

But why follow that unnecessarily painful economy-contracting, middle-class depriving strategy? The United States is a fiat currency sovereign. It doesn’t have to borrow back its own currency and reserves from people who are holding those.

It doesn’t have to sell any more debt instruments, providing unearned profits primarily to wealthy individuals and foreign nations. Congress can either provide the Treasury Department with the authority to create whatever money it needs to repay the debt as it falls due and to perform whatever deficit spending chooses to appropriate; or the Executive branch can use existing Platinum Coin Seigniorage (PCS) authority to fill the public purse with all the dollar reserves needed to do both of these things.

I’ve outlined how this works in numerous posts at this site and others, also in my kindle e-book. The process is very straightforward, will not cause inflation, and is legal under current law. So, if the “Fix the Debt” campaign is really worried about high unemployment and fixing the debt, then I challenge “Fix the Debt” to support my petition for the President to order the Secretary to mint a $60 T platinum coin immediately to accomplish this without in any way compromising the safety net or hurting the economy.

I don’t think “Fix the Debt” will support this proposal however. The reason why is that “Fix the Debt” is a front group for a very long-term effort by Peter G. Peterson to gut the social safety net and privatize Social Security. Peterson and the various front groups he funds through the Peter G. Peterson Foundation aren’t really interested in fixing the debt. They understand that the public debt is no danger to a fiat sovereign like the US, and doesn’t cause high unemployment.

What they are really interested in is persuading the public that patriotism demands crippling the safety net in the name of fiscal responsibility. If they were not, and they really think that “teh debt” is a cause of high unemployment, then they would join me in supporting one of the two proposals I advanced earlier for “Fixing the Debt.” Read the rest of this entry →

It’s Not About the Food Stamps; It’s About a Job At a Living Wage

6:09 pm in Uncategorized by letsgetitdone

Some old food stamps

Image: chrstphre ㋛ campbell / Flickr

Got this in an e-mail yesterday from my brother, Hal:

“June food stamp Recipients Hit All Time High As Three Times As Many Americans Enter Poverty As Find Jobs, bringing the total to a new all time high of 46.670 million and once again rising fast.”

This headline, circulating via e-mail, seems to be picked up from Zero Hedge by merging the title of one its posts with a phrase from the body of the blog post. The way it’s constructed can easily be misinterpreted as suggesting that 46.670 million are now receiving Food Stamp assistance. But actually that’s the BLS number for the number of people in poverty. The Food Stamp number is 22.4 million households.

Apart from wondering about the accuracy of the headline being circulated, and noting the sky is falling tone of the whole thing, I had the following brief reaction.

Those Republican bastards want to cut food stamps as part of their continuing program to make the middle class poor and get the poor people to die quickly (h/t Alan Grayson of course).

But, the Government safety net including Food Stamps is the bread and butter of people who have fallen on hard times; and there’s only one primary reason for unemployment: there aren’t enough jobs.

You want to get rid of unemployment? Then, quit yer complaining about the Food Stamps and make the jobs!

Doesn’t matter if they’re public or private: who gives a shit besides neo-liberal, Ayn Randian ideologists?

The only thing that matters is that people who want them get jobs at a LIVING wage, which means: Make sure those new jobs aren’t at Walmart or McDonald’s!

And, yeah, we can afford it!

Cross-posted from Correntewire.com.

Things Will Get Worse Before They’ll Get Better

8:29 pm in Uncategorized by letsgetitdone

House leaders have agreed on a compromise continuing spending resolution at the same level as before from October 2012 through March 2013. It’s likely now that the President(s?) will probably try to make the money available for deficit spending, as of today, last through the time period of the continuing resolution so that one deal including both the budget and raising the debt limit can be made by March of 2013. According to the August 2, Daily Treasury Statement, there’s $528,508,000,000 of deficit spending left until the debt ceiling is reached. In addition, there’s an additional 58,993,000,000 available in reserves, for a grand total of $584,501,000,000 available until the debt ceiling is reached. That’s an average of $73,062,625,000 deficit spending per month for the next 8 months, ending March 31, 2013.

For the past 10 months, average deficit spending was at $114,802,300,000 Billion per month, and that amount was not enough stimulus for a full recovery. So, the likely 36% reduction in average deficit spending over the next 8 months is unlikely to be any more effective in pulling us out of the extended employment recession we are experiencing, than the deficits in the preceding 10 months were. On the contrary, deficit spending over the next 8 months is unlikely even to allow us to maintain the unemployment levels we have now, provided private sector net spending doesn’t increase to compensate for less Government spending. What would have to happen for private sector spending to increase?

That’s an easy one to answer. The government deficit for the past 12 months, in rough terms, has been about 8% of GDP. The planned spending would be about 5.5% of expected GDP. If the Government sticks to its deficit spending targets, then the private sector will have to save less and import less, to avoid demand leakage which would place greater fiscal drag on the economy. If imports come in at 3% of GDP, then private sector savings will have to decrease to 2.5% or less of GDP if the economy is to expand faster than it is now, and to create lower unemployment.

This conclusion isn’t set in stone because there are distributional effects to consider, but it’s also true that private sector attempts to continue to save say 6% of GDP and to import 4% of GDP will cause slower GDP growth, higher unemployment, and more rapid government spending than planned in the shorter run, bringing on the debt ceiling problem sooner than expected, and, in the absence of Congressional, or Executive, action allowing more deficit spending, forcing the Government into surplus, and the economy into even more rapid decline prior to March 31, 2013 due to fiscal drag.

In short, the recent jobs report notwithstanding, looking at the economy from the viewpoint of the sectoral financial balances model, and taking into account the likely spending plans for the next 8 months, the economy looks bleak even if we assume that the Eurozone will hang in there, and avoid a financial crash, forcing us to face, once again, the question of whether the big banks should be bailed out again, or whether this time, they should just be taken into resolution and the TBTF ended.

I don’t believe it makes much difference to this prediction of how the economy will go whether President Obama or Romney is elected, as long is there isn’t a big change in the Congress, or a big change in the stated views and behavior of whichever candidate is elected; both of which are very unlikely as far as we can see at this point. It’s as if we have entered the 1930s with only different versions of Herbert Hoover, without half the integrity and good will old Herbert had, to lead us.

We are nearly four years into the crash now, and real unemployment rates are approaching depression levels. Working Americans could well lose a decade, as Paul Krugman has been warning, before this is over. And if Americans don’t rouse themselves to either take over or destroy both these sorry excuses for political parties over the next four years or so, we could be looking at a longer period of blight than that.

(Cross-posted from Correntewire.com.

Myths, Scares, Lies, and Deadly Innocent Frauds, Updated: Part Three

8:06 am in Uncategorized by letsgetitdone

(Author’s Note: This post updates Part Three of a series reviewing Warren Mosler’s book: The 7 Deadly Innocent Frauds of Economic Policy. The updating is prompted by a post by Hannah at DailyKos offering a “. . . a Review Sort of” of Warren’s book.

Hannah’s post begins by stating Warren’s “7 deadly innocent frauds” (DIFs), and then goes on to point out that they are not innocent and to make a number of claims about Warren’s beliefs which clearly indicate that she neither read his book, nor researched his actual positions stated frequently on his web site, nor bothered to note Warren’s economic truths that his book counterposes to his DIFs. So, in this series, and because of the importance of his easily accessible book, I’m presenting a more detailed discussion of the frauds and the corresponding truths.)

In the previous two posts in this series I’ve examined four ideas that Warren Mosler has called “deadly innocent frauds,” (difs) and that others have variously referred to as myths, scares, and lies. Three of the difs — that Government deficits create a debt burden for future generations, take away non-governmental sector saving, and that social security is broken are all “deadly innocent frauds,” supporting the idea that deficits must be avoided, even if we have to suffer through extreme economic downturns to avoid them. These frauds, like the fourth dif that Government spending is operationally limited by the need to tax and borrow, all serve to reinforce the idea that Government can’t do anything about a bad economy without doing more harm than good.

The contrapuntal truths that: Government can create money, and is not operationally limited by the need to tax and borrow; there is no debt burden on future generations that limits production or consumption; deficits don’t subtract from, but add to non-governmental savings; and Government checks including Social Security checks don’t bounce; all reinforce the idea that Government deficit spending is not to be avoided, but, on the contrary is something we can and need to do to avoid the economic and human waste of unnecessary economic recessions and depressions. In this final part of the series, I’ll review the remaining three of Warren Mosler’s difs and discuss their political implications.

Beware the Trade Deficit?

Mosler’s fifth dif is:

“The Trade Deficit is an unsustainable imbalance that takes away jobs and output.”

The normal arguments for this dif, in my view, are that if other countries give us more in goods and services than we give them, then we 1) build up unsustainable monetary debts and 2) lose jobs and outputs because we are not producing those goods and services here in this country. As trade imbalances accumulate over time, our monetary debt grows larger and we, as a nation, lose industries that have been producing the goods and services we get from abroad, and therefore continue to lose jobs and output until, eventually, we may become de-industrialized and our workers, in increasing numbers find themselves out of jobs, careers, and all that depends upon them.

Warren Mosler opposes this line of argument by noting that “the real wealth of a nation is all it produces, plus all its imports, minus all its exports.” This is basic economics. But it’s important to stop for a moment and reflect on why it makes sense.

Real wealth is the sum total of valued goods and services possessed by an entity. It is not money, which is only the medium of exchange. We produce goods and services, i.e. real wealth. We also import goods and services, also real wealth, from abroad. But when we export real goods and services, what we are doing is sending real wealth abroad. So we are subtracting from our net real wealth when we export.

So why export, one might ask? For some nations, it’s because they need the foreign currency they would gain from exporting in order to import. But what happens when other nations want to export to a specific nation so badly that they let that nation import even though it doesn’t have their currency to pay for it, and they allow it to owe them for what it buys in their own currency? This, of course, is the enviable situation of the United States and other nations that are sovereign in their own currencies.

So, specifically for the United States, the answer is that they are giving us real wealth on credit, and agreeing that we can pay them for that wealth using our own currency at some future time. Which means, in other words, that they are sending us their wealth, and are agreeing that we can pay for it with a medium of exchange that our Government can create at will, and that is not real wealth, but only a warrant, backed only by the value of the current and future economic output of the United States of America.

As Mosler says: “. . . a trade deficit increases our real standard of living. How can it be any other way? And the higher the trade deficit the better!” Or to put this in terms of his counterpoint to the fifth dif:

”Imports are real benefits and exports are real costs. Trade deficits directly improve our standard of living.”

So, the greater our trade deficits, the more wealth other nations are shipping us, without us having to ship them real wealth in return. Well, what about the monetary debts that are accumulating say, obligations to China, and others? Those debts are all in US currency. And we, or our children, can make as much of that as we want without producing anything to send to China in return. So where is the debt burden, and the unsustainability in these accumulating debts?

The answer is that there is none. Well, what about the problem that by our importing goods and services from China in such a profligate way, we are hollowing out our own industries and productive capacity, and destroying jobs and the lives of our workers over here? Isn’t this an unsustainable burden on us? I think there are two points to be made about this. One made by Warren Mosler and one of my own.

Warren’s is that we can always use fiscal policy to develop new industries and to keep our people working so that we are using our full productive capacity to create wealth, while also importing whatever China or other nations are willing to export to us on credit. So, to amplify his view, the fact that we accept imports that drive us out of certain industries doesn’t have to mean de-industrialization or unemployment here. It’s all up to us.

We can take foreign imports at the expense of domestic productive activity, or we can take them, and ramp up our own economic activity in areas where there are no imports that are less expensive than what we can make ourselves. In particular, in our current situation there is all kinds of work to be done in re-building our infrastructure, re-inventing our industries along green lines, fighting climate change, cleaning up the environment, and educating our ourselves.

If other nations can free our labor force to do this kind of work, while they export to us various goods and services on credit, then we only get richer and suffer not at all. To have things work this way however, we have to have a fiscal/economic policy that will keep our people working and moving forward, we cannot afford to have periods in which people are unemployed when there is important work to be done.

My own point about the possibility of long-term unsustainable burdens, or at least negative consequences from a trade imbalance is that imports of certain kinds can, indeed, be harmful to the United States. But the harm, in this case, doesn’t come from the short-term economic effects of those imports on productive activity, which remain beneficial, but rather from their effects on certain other values, such as our ability to provide for our national security, or our ability to produce certain components such as computer chips that are important to industry and manufacturing across the board, or our ability to keep our environment clean, or our energy foundations strong, regardless of the choices made by external parties to continue or refrain from trading with us, or their choices about what they want us to pay fpr products we cannot provide for ourselves.

To the extent that, because of imports, we lose the capability to manufacture certain materials and products, and need to rely on other nations for these, that may not be friendly to us in times of conflict. We allow these imports to hurt our military self-sufficiency and also, our industrial and economic self-sufficiency. While I haven’t studied this link between imports acquired on credit, and a declining industrial foundation for supporting military capability, closely, I have the impression that the trends since the 1980 have been toward increased external contracting of military production, and the weakening of our industrial base in national security-related areas of manufacturing. In addition, the more the industrial capacity to make computer chips and other products is shifted overseas, the more reliant we are on continued favorable trading relationships with other nations who may not always be friendly, to maintain our own economy.

The significance of this point is that while the general economic principle that “Trade deficits directly improve our standard of living”, is correct, nevertheless with respect to certain products and industries we may not want to follow this principle because of political, security, moral, or long-run economic considerations, even though we know that not doing so will cost us economically in the near term, at least.

Do We Need to Save First to Accumulate the Funds for Investment?

Mosler’s sixth dif is

“We need savings to provide the funds for investment.”

To see what’s wrong with this dif, we have to pay attention to the difference between macro and micro levels of the economy. At the individual level, saving is one way for someone to accumulate enough money to make a capital investment. It’s not the only way since individuals can also seek and get grants and loans for investment, but, nevertheless saving money and later using it for investment is a very common pattern and clearly underlies this dif.

At the macro level, however, savings get us into the Keynesian paradox of thrift. Since if spending doesn’t equal all income, some of what is produced in the economy will remain unsold. Thus, at the macro level savings detract from consumption and create a slackening of demand, which, turn, can lead to less profits and investment and future production of wealth, and greater unemployment, unless there are compensating factors.

One possible compensating factor is using credit. When someone saves, someone else can absorb the slack demand created by savings, by borrowing money in order to consume existing products. If that happens to the same extent as savings, then economic output is fully consumed. Another possible compensating factor for savings in lifting demand is Government deficit spending which immediately adds to private sector savings, that, in turn, can be consumed, and so lift demand. Regardless of these compensating factors, however, we can see that, whatever the situation at the micro or individual level, at the macro or societal level, savings has a depressive effect on economic activity and investment, which is why we have ourselves a dif here.

The counterpoint to this dif is that far from savings being necessary for investment,

“investment adds to savings.”

To see why this is true, we have to reflect on what nominal capital investment really is. Namely, it is the use of money to produce instruments or tools, that play a part in producing valued goods and services (i.e. real wealth). Since this is the case, the investment in the capital goods comes first, and these goods are then used along with paid labor to produce output. But it takes time to produce output. So before there is output, there is labor, and pay for the labor, which can’t be used to consume the output because it is not yet there. So, the pay given to labor leads to savings, until those savings can be consumed by spending them on the future output.

This reasoning may seem a little convoluted because workers receiving pay can consume any number of other things even though the immediate products of their labor are not yet available. But viewed from the macro perspective, somewhere in the system, the time lag between production and consumption has an effect resulting in those earning money saving for goods and services that they want which are not yet available. So, the counterpoint that

“investment adds to savings”

holds.

Warren Mosler points out that belief in the dif that “we need savings to provide the funds for investment”, is very damaging because it has led modern economies to divert real resources away from productive sectors of the economy to the financial sector. And he says that this dif:

” . . . drains over 20% annually from useful output and employment- a staggering statistic unmatched in human history.”

In fact, government deficits are much less inflationary in the US than they would otherwise be, because they are compensating for the slack demand created by increasing diversion of resources to the financial sector. Pension funds, IRAs, and other tax advantaged savings institutions, are harmful to the macroeconomy because their net effect is to remove a substantial part of the aggregate demand we need to fully consume our industrial output and our imports. Then we need greater private sector credit expansion and Government deficit spending to fill the gap created in aggregate demand by our misplaced emphasis on savings because we think it is necessary for investment.

Nor, is this all the damage done to our economy. In addition, the existence of “massive pools of savings,” has led to the creation of a sub-industry of thousands of pension fund managers and more thousands of brokers, bankers, and financial managers to service them. In itself this is a great diversion of people and human resources away from the productive portion of our economy, to the segment devoted to financial manipulation.

Public Sector Deficits and Taxes

Mosler’s final dif is yet another one directed at the harm caused by Government deficit spending. It is:

“higher deficits today, mean higher taxes tomorrow.”

While there is a good chance that this is often literally true, it is not true because, as deficit hawks would have it, we need to have the higher taxes to pay borrowed money back to reduce the national debt. Instead, we may well have higher taxes because we need them to moderate a booming economy that, in part, resulted from greater Government deficit spending.

In other words, if Government increases spending to create greater demand in the private sector, and to create the conditions where our output and imports can be consumed, and we have full employment, then we may reach the point where we begin to see demand-pull price inflation in the economy. At that point, higher taxes ought to be imposed by the Government to prevent over-heating of the economy. In other words, Mosler’s counterpoint is:

”Higher deficits today when unemployment is high will cause unemployment to go down to the point we need to raise taxes to cool down a booming economy.”

So, while the dif suggests that the burden of debt repayment resulting from deficits, is a bad thing; the counterpoint suggests that there will be higher taxation only after our economic woes are over, and everyone is experiencing prosperity, a good thing, and a price we may all be willing to pay, except those among the 1% whose greed and lust for control and extreme inequality knows no bounds.

Conclusion: Why The 7 Deadly Innocent Frauds of Economic Policy is So Important

The common thread in the three difs I’ve discussed in this part, is that they’re all beliefs that counsel false economy and that, to the extent we follow them, lead to less national prosperity and wealth than we would otherwise enjoy. The sixth and seventh difs both lead to less economic activity and higher unemployment; and the fifth dif, in effect, counsels us to forgo opportunities to increase our national wealth through trading. The seventh dif, also, is like the first four in that it is another support for deficit hawkism, and a counsel against deficit spending, that is sorely needed in a time of slack demand and high unemployment.

Taking all 7 of Warren’s difs together, we see the outline of an ideology whose effect is to cripple American potential in both the immediate and the longer term. The 7 difs together constitute a 19th century economic ideology appropriate for a nation with a commodity monetary system, rather than a 21st century economic ideology appropriate for a nation with a fiat monetary system. Partisans of this ideology often call it neoliberalism. But there is nothing “liberal” or progressive about it. Instead, it is an instrument of elite control, emerging oligarchy, and impoverishment of the 99%.

On the other hand, Warren’s 7 truths counterposed to the 7 deadly innocent frauds, together lead us to an economic ideology that fully supports progressive actions to solve existing problems and to collaborate through the Government to realize the equality of opportunity and the right to a decent life that is very American’s birthright. His 7 truths tell us that we can have full employment, provide for our children and grandchildren making life better for them, strengthen out entitlement safety net protecting the old and the sick, enjoy real wealth other nations are prepared to send us, enjoy savings at the micro-level while we have investment at the macro-level, pay more in taxes only when the economy is operating at full capacity and we can afford it, and do all of this without worrying about our government becoming insolvent.

All we have to do to make these things happen is to cast aside the false beliefs of neoliberalism and embrace the economic wisdom of the MMT deficit owls, and Franklin Delano Roosevelt’s economic bill of rights. As someone once said “the truth will make us free,” if only we have the courage to put aside our fears of some new thinking and embrace it. What do we have to lose? The neoliberal things we’re doing aren’t working. We may as well try MMT-based economic and fiscal policies and reach, once again, for human progress.

It’s About Bailing Out Working People, Stupid

5:27 pm in Uncategorized by letsgetitdone

Nobel prize winner Joe Stieglitz recently called for a second stimulus to reduce unemployment and get the economy working well again. But the Administration seems uninterested in pushing the idea or making it an issue in the election, because it has been unsuccessful in setting the necessary frame for persuading the public that its first inadequate stimulus was only a political compromise that has done some good, but left much more yet to do. Yet we badly need that second stimulus, and if the Democrats could get their act together, get people back to work this month, and were willing to get rid of the filibuster in the Senate, we could have it quickly, and they probably could even avoid catastrophic losses in November.

I don’t expect the Democrats to do that however. It seems like they’d rather berate their base, play guilt and fear cards, and make generalized promises than show working people they represent them by actually performing and producing good results. A second stimulus would be the centerpiece in a bailout program for working people. I think that stimulus program should incorporate the three elements in Warren Mosler’s plan for ending the recession: a payroll tax holiday for employers and employees; a $500 per person revenue sharing program to prevent job cuts at the State level; and finally the most important element in it, a Federal Job Guarantee (FJG) for all who want to work.

The FJG would be a permanent automatic stabilizer added to the safety net. In good times its rolls would be very thin and its expenditures low; during recessions they would both grow and provide a floor of aggregate demand, as well as a way for people to remain in the work force and add to their work experience and their skills. FJG jobs would have full fringe benefits including two weeks of vacation annually, and Medicare insurance coverage.

I’d add a number of elements to Warren Mosler’s program. First, I’d reduce the standard work week to 35 hours, while raising the minimum wage, to $10 per hour, a rate that would also apply to the FJG. Second, I’d freeze all mortgage foreclosures in the United States, until the current problems with proper documentation and right to foreclose can be resolved. This would put a lot of money into the pockets of people who haven’t been able to make their payments. For some it would result in their eventually getting legal title to their homes. For the big banks it would result initially in further devaluing of their real estate holdings and might cause them to seek another Federal bailout. I would not provide it. But, instead, would take them into resolution, and not spin them off to private capital again until the toxic assets were cleaned off their books, and the loan funds were flowing to consumers and small businesses.

Third, the Democrats should immediately pass legislation to limit credit card interest rates to a maximum of 6% above the prime rate. In giving the credit card companies nine months before the law was implemented to prepare for it, their credit card reform bill invited the companies to raise interest rates on consumer credit cards by 50% or more before the law went into effect. That is, the bill bailed out the banks and increased the burden on consumers. Placing a limit on interest rates, accompanied by a non-usurious profit margin for the companies, would immediately change the narrative about bailouts, and also make credit much more affordable for consumers. More importantly, it would drive sales of consumer goods and also create jobs.

So that’s my program. The whiny and feckless Democrats won’t implement it or anything like it, but if they did before the election, they could minimize their House losses, and be sure of retaining the Senate. A political party that has lost the courage to grasp its own historic identity is a political party that doesn’t deserve to exist. That’s the case with the Democrats today, and if things keep going as they have been, they may just split down the middle by 2012.

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

Why Should We ACT Based on CBO’s Projections?

8:01 pm in Uncategorized by letsgetitdone

Today, Dean Baker questioned the sanity of The Washington Post, after its editorial staff once again came out for cuts in Social Security to avert a crisis which will not be manifest until 2037. In reply to the Post’s observation that this year is the first in which the Social Security program will pay out more than it takes in, and that this is a warning sign, Dean points out that it:

. . . certainly is a warning sign. The falloff in Social Security tax revenue is a warning that the economy is seriously depressed due to the collapse of the housing bubble. Double digit unemployment leads to all sorts of problems, including the strains that it places on pension funds like Social Security.

He then goes on to criticize the Post for not advocating the urgency of the need to get back to full employment to solve any pending shortfall in Social Security, and for advocating instead for possible Fiscal Commission–recommended "balanced" measures, including Social Security spending cuts to be implemented gradually to avert the projected 2037 crisis.

Dean then advocates that we reject this recommendation and wait to act. He says:

A Greenspan Commission size fix put in place in 2030 would leave the program fully solvent for most of the rest of the century.

There is also a very good reason for delay. The opponents of Social Security have been spending huge amounts of money deliberately promoting misinformation. Peter Peterson, the richest and most prominent opponent, has repeatedly asserted that the Social Security trust fund does not exist. This flat earth view of the program has been given respectful treatment at the highest levels of government. When Peterson put on a daylong program on the deficit in the spring both of the co-chairs of President Obama’s deficit commission took part in the program as did former President Clinton.

This massive effort to undermine confidence in the program has been largely successful. Polls show that substantial majorities of younger workers do not expect to receive their Social Security benefits.

That is not a good environment in which to debate substantial changes to the country’s most important social program. Since there are several decades until the program faces any real problems, it is entirely reasonable for those who support the program to focus on educating the public about the program’s financial health and to seek to delay any major changes until the Peterson-type misinformation campaigns have been defeated.

I think this is a very good argument, and I’m glad that Dean has made it. But why have he and other economists chosen not to go directly at the CBO projections that are currently driving much of the WaPo/Peterson/Fiscal Commission/deficit hawk propaganda, not only against Social Security, but also against every form of Government spending that is not deficit neutral, regardless of the vital need for that spending to allow us to meet our increasingly severe national problems?

Both WaPo and CBO are suggesting that the CBO projections, which admittedly are not predictions, and in CBO’s own view are extremely unlikely to come true, should be taken as the basis for actions this Fall that will put in place a framework for spending cuts that will hurt very real and very vulnerable people, if not this year or next, then certainly in the next few years, when the current economic crisis ends. But this contention is insanity. It is the height of true fiscal irresponsibility.

It is one thing to ask people to sacrifice to fight a war for survival, or to respond to dangers that they have a clear expectation will come true at some time in the future. But, it is entirely another to ask people to sacrifice for some projected state of affairs that by CBO’s own admission is “not likely” in the sense that scientific predictions are likely, and that is “unlikely” in the sense that CBO itself doesn’t think they will occur.

CBO’s scenarios are not as likely as an assertion that a Katrina-like hurricane will hit New Orleans again sometime in the next decade. They are not as likely as the scenario that we have a double-dip recession during the next year. Its projections are not predictions that will come true. They are projections based on a policy environment and on policy choices that “we” can change at any time.

And, as I have pointed out elsewhere, the so-called projected fiscal crisis is not based primarily on the structure of our current expenditures, or even on the projected growth of our health care and Social Security entitlements. Rather, if it is real at all, which I very much doubt because the absolute level of the public debt-to-GDP ratio has no significance in the abstract, it is because we are refusing to stop issuing Governmental debt, and even more importantly, because we are refusing to provide full employment, out of an exaggerated fear of inflation. If we stopped issuing debt, and also provided a Federal Job Guarantee program ensuring full employment at all times, we could cut out the huge projected interest expense and also, restore economic growth rates to historical norms and even beyond, and then the automatic stabilizers would give us a surplus problem rather than a deficit problem soon enough.

So, because WaPo and CBO are unwilling to consider, or to envision such initiatives, or any other changes that would make a real difference in their projections, except myriad little cuts in spending or tax increases that would cause most Americans to suffer; they tell everyone who will listen that austerity, sacrifice, and suffering are the only way out. And, of course, they expect us to believe this. But what we ought to believe instead is that these institutions have no interest in solving real problems, but are only interested in offering painful solutions to problems they’ve conjured up to maintain their own sense of authority and relevance.

Fiscal responsibility in Government is using the Government’s fiscal power to fulfill the public purpose, including full employment and price stability, enough economic economic growth that improves the lot in life of all Americans, environmental sustainability, educational excellence, a new energy foundation for the American economy, universal health care, and other public purposes. It has nothing to do with maintaining particular levels of deficits, the national debt, or the debt-to-GDP ratio considered in the abstract. It’s time for The Washington Post and the CBO to begin advocating for real fiscal responsibility and to give up Peter G. Peterson’s wet dream of shredding the Social Safety net

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

So, How much lower would our deficit be, if . . . ?

8:07 pm in Uncategorized by letsgetitdone

Heather Boushey, Chief Economist at the Center for American Progress Action Fund, writes about the economy failing to go over the cliff and the deficit. She says:

In their report, How We Ended the Great Recession, Economists Alan Blinder and Mark Zandi estimates the effects of the financial and fiscal policies enacted since the crisis began in 2008 on the economy. Their conclusion is that had the combined financial and fiscal policies not been enacted, “GDP in 2010 would be about 6.5 percent lower, payroll employment would be less by some 8.5 million jobs, and the nation would be experiencing deflation.”

and also:

However, one tidbit in the report that has received little notice is that by acting, Congress actually reduced our potential deficit problem. Given the policy steps taken, Blinder and Zandi estimate that by the end of the 2010 fiscal year, the federal budget deficit will be $1.4 trillion and it will fall to $1.15 trillion in fiscal year 2011 and $900 billion in fiscal year 2012.

However, had Congress done nothing, the deficit would have ballooned even higher, hitting over $2 trillion by the end of the 2010 fiscal year, $2.6 trillion in fiscal year 2011, and $2.25 trillion in fiscal year 2012. That’s right, doing nothing would have meant that the 2012 federal budget deficit would likely be over 2.5 times as large as taking the steps we took.

And she finishes:

By taking actions to avert greater unemployment, we averted a bigger deficit. It seems there’s a win-win here that everyone should get on board with: the steps taken to shore up our economy have ended up being a better investment for jobs and for the deficit than doing nothing at all.

No doubt this is all close to the mark, and that as she and her colleague Michael Linden also say: ". . . The reason for the deficit is the recession itself." But, why stop there, why not ask: What if the stimulus had been $1.6 Trillion as some economists like Jamie Galbraith, though not Blinder and Zandi, were calling for, then what would have been the impact on unemployment and the deficit then?

Isn’t it likely that the same model Blinder and Zandi are using to estimate the impact of the actual stimulus could also be used to estimate the impact of those early proposals that the Obama Administration, in its infinite wisdom, and concern for bipartisanship, took off the table?

And, if so, just how many jobs did those early machinations of Rahm Emanuel, Larry Summers, Timothy Geithner, the Blue Dogs in the Senate, and the Republicans, including the moderates who eventually voted with the Democrats on that final emasculated stimulus compromise, cost the American people?

And if that larger stimulus had passed, then what would be the deficit prospects right now? Would we even be looking at a deficit in 2012 at all? Would we be wasting our time talking about the Catfood Commission now?

As the saying goes, inquiring minds want to know the answer to these questions? So, what do you think the answers are Heather Boushey?

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

Bob Herbert: Maybe Next Time You’ll Know What To Do About It

10:03 pm in Uncategorized by letsgetitdone

Bob Herbert, in his column on June 7th said:

There is no plan that I can see to get us out of this fix. Drastic cuts in government spending would only compound the crisis. State and local governments, for example, are shedding workers as we speak.

And by July 26th he still hadn’t come up with a solution and began his column with:

The pain coursing through American families is all too real and no one seems to know what to do about it.

Bob continued with a discussion of a study by the Rockefeller Foundation using an economic security index to measure economic insecurity. the study headed by Jacob Hacker found:

. . . that more than 20 percent of Americans experienced a 25 percent or greater loss of household income (without a financial cushion) over the prior year — the highest in at least a quarter of a century.

After discussing this finding at some length and quoting Hacker, Bob concludes with:

Policy makers have dropped the ball completely in terms of dealing with this devastating long-term trend of ever-increasing economic insecurity for American families. Long-term solutions that have to do with extensive job creation and a strengthening of the safety net are required. But that doesn’t seem to be on anyone’s agenda.

Meaning, it seems that Bob Herbert may be someone who does know what to do how about it, who is playing the game of: "I’m no gonna say." So, my question is: Why don’t you propose something Bob?

In my reply to Bob’s June 7th post, I pointed to Warren Mosler’s three-part solution to the problem of unemployment including: a FICA Tax holiday; revenue sharing of $500 per person for the States; and a Federal Job Guarantee (FJG).

More recently, L. Randall Wray discusses the Federal Job Guarantee in a post explaining MMT to the Libertarian/Austrian School of thought and making it clear that an FJG doesn’t have to be an enormous Government program.

Also, Bill Mitchell has a recent post on a Job Guarantee proposal in the Australian context discussing in part how a program like this can be regionalized to benefit areas that need it most. And here’s a multi-part program from Marshall Auerback with a number of elements expanding Warren Mosler’s three-part program.

In short, there’s a lot of good work out there, Bob. If you read it, you’ll be able to write columns proposing solutions, and not just grieving over our problems. And you won’t have to say things like:

The pain coursing through American families is all too real and no one seems to know what to do about it . . .

anymore. Because, you’ll know what to do about it.