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Kudos to Ezra Klein for interviewing University of Texas economist Jamie Galbraith on the deficit hawks’ incoherence in warning of the supposed dangers of current US budget deficits. Galbraith, along with Dean Baker and friends, are to the deficit hawks and their cynical scare mongering what the skeptical and ultimately correct McClatchy reporters were to Dick Cheney’s fabrications about Saddam’s weapons of mass destruction and links to al Qaeda. The scaremongering was all a cynical lie that led to a Three Trillion Dollar War.
EK: You think the danger posed by the long-term deficit is overstated by most economists and economic commentators.
JG: No, I think the danger is zero. It’s not overstated. It’s completely misstated.
EK: Why?
JG: What is the nature of the danger? The only possible answer is that this larger deficit would cause a rise in the interest rate. Well, if the markets thought that was a serious risk, the rate on 20-year treasury bonds wouldn’t be 4 percent and change now. If the markets thought that the interest rate would be forced up by funding difficulties 10 year from now, it would show up in the 20-year rate. That rate has actually been coming down in the wake of the European crisis.
So there are two possibilities here. One is the theory is wrong. The other is that the market isn’t rational. And if the market isn’t rational, there’s no point in designing policy to accommodate the markets because you can’t accommodate an irrational entity.
EK: What are the policy implications of this view? . . .
JG: It says that we should be focusing on real problems and not fake ones. We have serious problems. Unemployment is at 10 percent. if we got busy and worked out things for the unemployed to do, we’d be much better off. And we can certainly afford it. We have an impending energy crisis and a climate crisis. We could spend a generation fixing those problems in a way that would rebuild our country, too. On the tax side, what you want to do is reverse the burden on working people. Since the beginning of the crisis, I’ve supported a payroll tax holiday so everyone gets an increase in their after-tax earnings so they can pay down their mortgages, which would be a good thing. You also want to encourage rich people to recycle their money, which is why I support the estate tax, which has accounted for an enormous number of our great universities and nonprofits and philanthropic organizations. That’s one difference between us and Europe. . . .
JG: I have one more answer, though! Since the 1790s, how often has the federal government not run a deficit? Six short periods, all leading to recession. Why? Because the government needs to run a deficit, it’s the only way to inject financial resources into the economy. If you’re not running a deficit, it’s draining the pockets of the private sector. I was at a meeting in Cambridge last month where the managing director of the IMF said he was against deficits but in favor of saving, but they’re exactly the same thing! A government deficit means more money in private pockets.
The way people suggest they can cut spending without cutting activity is completely fallacious. This is appalling in Europe right now.
If Galbraith is correct, and as I read them, our best known economists are saying he’s right on the essentials, then what are we to think of the anti-deficit, anti-employment policies now sweeping Europe, partly at the urging of the US government? The logic tells us Europe and Obama’s economic advisers think the way to fix their respective economies is reduce spending and put more people out of work. Huh?
The news is full of stories not just about the efforts to forestall a Greek default — a uniquely extreme problem — but promises by Spain, Portugal and Great Britain to implement severe budget contractions immediately.
When the Obama stimulus plan was being debated last year, our best macro economists taught us that deficit spending was not only okay, it was essential to make up for depressed private demand when monetary policy — lower interest rates — was exhausted. We needed deficit spending to increase demand, to put money into the economy via the public sector to increase spending and create both public and private jobs. These experts had a plausible story: you have to do this to staunch unemployment and rebuild the economy, and if you don’t do enough — "we need a bigger stimulus" — you risked a "jobless" recovery and/or extended period of unacceptably high unemployment, along with increased deficit spending to deal with that. They’ve been proven right.
And the economists also told us that if government curtailed deficit spending too early or too fast, it would push the economy back into a second recession. That would repeat FDR’s strategic blunder in trying to balance the budget in 1937, which reignited massive unemployment and another downturn. So it was a mistake to listen to the anti-Keynesian deficit hawks, who convinced FDR that US deficits had to be reduced or else.
Okay, isn’t that where we and Europe are? I understand there’s another serious complication with the Euro currency disconnected from national budgets and a central bank disconnected from fiscal policy and coherent theory. That makes this harder to solve.
But the lessons of 1937 still seem a coherent, credible story. So someone needs to explain why it makes sense for the UK, Spain and Portugal to be making what appears to be the same mistake FDR made in 1937, and why the Obama Administration is pushing this mistake not only on Europe but on ourselves.
And if, as the Administration has repeatedly told us, we’re counting on increasing exports to help produce our way out of the current recession, why does it make sense for Europe, one of our largest trading partners, to reduce spending, increase unemployment and shrink their economies?
It seems the incoherent story coming from the Peterson/Washington Post/Administration deficit hawks that Jamie Galbraith worries about is sweeping not just Washington but the capitals of Europe. These people seem like the real weapons of mass economic destruction. If that’s not true, we need a coherent story why. Hello?
More:
NYT: Deficit cuts promised in Britain
NYT: Portugal follows Spain on austerity cuts
Dean Baker, The deficit problem is not "we the people," it’s you the incompetent elite, and many other posts there.
Paul Krugman, Are we Greece?, and Shock and Uh?
Brad DeLong, via Matthew Yglesias, A complacent capital [about unemployment]; also Spending cuts for the UK
Baseline Scenario/Simon Johnson: Restructuring the Eurozone; and see The kitchen sink . . .
MSNBC, For lawmakers, easing joblessness isn’t Job #1
Naked Capitalism/Edward Harrison, MMT: The accounting of budget deficits
51 Comments
Thanks for your coherent story Scarecrow. Recd
Well, the problem is, this may just be my inability to follow an increasingly complicated story. That would be good news.
This is really a plea to our best economists to find a way either to explain this better or to tell us we’re making a mistake. And they need to explain it so that even people with straw for brains can follow it. If they’ve lost the strawman, . . .
These people
seemarelikethe real weapons of mass economic destruction.Heh, that was my first instinct, but I’m open to having people smarter than I educate me.
Concur. But here’s the thing; if it was truly a systemic thing, generating this misery, we would turn that part of the system/function OFF in the firm OFF position of that switch.
But it’s clearly not systemic. It’s people/incentive based and those people with the incentive are keeping the switches firmly in the ON position.
If “Malomar Man” Obama were the least bit interested in guiding this country back to economic health, he’d shitcan Rahm, Geithner, Summers, Rubin, Orszag, Shapiro, Bernanke, Gensler and the rest of Rahm’s hand-picked corporate stooges and put Jamie Galbraith in charge.
What Jamie had to say about putting us back to work building the economy of the future brought tears to my eyes.
Hi Scarecrow, I’ve been writing about Jamie’s views too and also about whether or not there’s any solvency risk as a result of increasing deficits. Some links are here, here, here, here, and here.
Many of the views Jamie Galbraith expressed in his interview with Ezra are held in common with other Modern Money Theorists. For example:
And this:
And:
It’s important that people who like Jamie’s views know that they arise, in part, out of the approach to economics called MMT. The recent Fiscal Sustainability Teach-In Counter-Conference on April 28th focused entirely on the coherent MMT view toward Fiscal Sustainability and related issues. Jamie supported the Teach-In with a Press Release. First products of the Conference include ppts and audios, which are posted at selise’s site. Videos will be ready soon. Blogs about the Teach-In have begun to appear and are linked to from node66.
MMT views on fiscal solvency and sustainability are of tremendous importance because, if they are correct, they remove the “How Are We Going to Pay For It?” excuse used by politicians to avoid solving problems with solutions that require Government spending. It would a lot harder to say no to Medicare for All. federal Job Guarantees, Education reconstruction, infrastructure modernization, environmental and many other things progressives value if the question “How Are We Going to Pay For It?” can just be swept off the table. According to MMT, it should be, because applied to our Government and its spending it makes no sense.
Heh, lets: Assume you saw this over at Naked Capitalism. –seems relevant to the question I’m asking.
http://www.nakedcapitalism.com/2010/05/mmt-the-accounting-of-government-budget-deficits.html
And yes, I knew this connected to the MMT. What I’m hoping to prod is an response from those not explicitly there. There are all kinds of other issues in the European situation; each country is different, some (Greece) more “profligate” than others (Spain), some more affected by housing bubbles than others, and the Euro nations don’t control their own currency so individually they can’t print money, as our Fed can. I’m trying to understand whether/why this would make the traditional view the non-MMT economists hold inapplicable. One step at a time.
Not entirely correct Scarecrow. You wrongly write:
Sorry, that’s wrong. The Greek problem (see my diary running now here at FDL “GREECE: Big Spender on Military Budget”) is NOT unique and just about all observers of the EU economic scene say the problem will spread to Portugal, Spain and Britain. ALL of these countries have been overspending not so much on social programs, but on military hardware and in the U.K.’s case, the Afghanistan war. Many of these countries (the U.K. for instance) have also thrown boatloads of money (as has the U.S.) to financial institution “bailouts”. Recall Northern Rock? So yes they have economic problems but they were created by bailouts to huge banks and by reckless military expenditures.
This is not to say I disagree with your overall thesis and with Galbraith’s position. Yes, the deficit hawk movement is coming from Washington and mostly from the Obama Administration. Remember that it is Obama who formed his debt reduction commission (and stacked it with people like Alice Rivlin and Anne Fudge connected with the Hamilton Project-Brookings) who want cuts in entitlements. See a recent excellent article titled something like “Obama Packs Commission with Social Security Looters”.
Recall too that in April, 2006, Obama spoke at the launch of the Hamilton Project. He lauded “my friend Bob [Rubin, ex head of Goldman Sachs and Citigroup] and called for cuts in entitlements! That is the Hamilton Project’s (funded and created by Rubin and Goldman Sachs) reason for existence. These people, including Obama, have been pushing this false notion for at least four years!
This appears like the Naomi Klein’s Shock Doctrine all over again.
I am dubious about Jamie Galbraith’s penultimate paragraph. I think the government surpluses are an effect not a cause. But for the rest I am in agreement.
That is a nice statement of the kind of re-industrialization of the country I advocate. The deficit hawks represent the thinking that got us into our current mess. It shows how in our media and government there is no such thing as ever being truly discredited. They can be wrong about everything but these are the same people that are sought out for their views and to run the responses to the disasters they created. The real question is why this is so. I think ideology here is just a screen to facilitate the ongoing looting by our elites. Deficit hawkism, jobless recoveries, these are so much verbiage to confuse the rubes.
Folks interested in following this topic further might also want to read through the last link by Edward Harrison at Naked Capitalism, and the comment thread there.
Oh Galbraith’s right. Galbraith’s only problem is that he’s polite enough to pretend that Summers, Geithner, Bernanke, Peterson, Rubin… that they just don’t understand. But the thing is, those folks do understand. And what does that say about these “people”?
The last time the world had rot this bad at the top of the food chain we held Nuremberg trials.
*sigh* Not one mention of Japan, Ya’ll…? Ya’ll are too euro-centric…! ;-)
Risk of Japan going bankrupt is real, say analysts
I don’t have a view one way or another, but not everyone is panicked about the level of Japan’s debt. See, eg., http://risingpowers.foreignpolicyblogs.com/2010/04/27/japanese-debt-bad-but-not-that-bad/
Yeesh, the comments on the original article are typically dumbfounding. It would be nice if Klein would release the full interview.
My very puny contribution to this amazing thread is to observe that the entire marketing/advertising complex exists to ensure that markets are not rational.
I maintain, until incentives change, ain’t nothing gonna change.
I always thought the marketing was designed to make you think comparable products are very different, or that non-comparable products are the same, so that you couldn’t possibly want anyone else’s product, and thus to make the markets less competitive/efficient.
They’ve always topped the list, they’re the most frugal folk I’ve met…! I merely wanted to point out that the Doomsayers aren’t confined to just the Western Hemisphere, as I straddle the border between the spheres…! ;-)
Several untruths from Galbraith:
1) Looking at the market’s current valuation of something (in this case interest rates) and concluding that is its true or future value is how we got into this mess. The market can be (and usually is) dead wrong.
2) The ugly economic numbers parallel the environmental / fossil fuel problems, they are two ways of looking at the same thing. Present consumption and future expectations of consumption can not be materially sustained. Remember back to the “recession”, oil, copper, food, etc skyrocketed driving folks out of the market. As a consequence aggregate demand collapsed and prices fell, only to be rebouyed by a massive infusion of fiat debt.
3) One can achieve budgetary balance and build up industry of the future: it’s not an either or as Galbraith states. We can do both by cutting elsewhere, preferably in luxury consumption and warfare.
Galbraith doesn’t get it: two wrongs don’t make a right.
Which, I would argue, is fundamentally irrational. The language of advertising is truly perverse genius: “best” means “the same as”, while “better” means “best”. Metaphors and similes do not exist; thus, the vast majority of advertising language, imo, is semantically null suggestive imagery, designed to produce an irrational result.
Halving our current 2010 $880 Billion Dept. of Defense Budget would be a great start, and, We’d still be spending more than the entire world’s combined defense budget…! 8-(
FWIW:
Kan Repeats Plea for Bank of Japan to Fight Deflation
And to add to the Galbraith discussion, I would again mention government accounting and the idea of a ‘capital budget’ (which the CBO doesn’t want to have happen)
“Proponents of capital budgeting assert that the current budgetary treatment of capital investment creates a bias against capital spending and that additional spending would benefit the economy by boosting productivity. They note that capital budgeting could better match budgetary costs with benefit flows and eliminate some of the spikes in programs’ budgets from new investments. The existence and extent of any such bias, however, depends on how differently policymakers would behave with a capital budget instead of the existing budgetary treatment of capital investments. Furthermore, although evidence suggests that additional capital spending could have larger economic benefits than costs, the economic benefits of increasing capital spending by the federal government would partly depend on how well the additional funds were targeted to high-value projects and on the extent to which they would displace spending that would otherwise be undertaken by the private sector or other levels of government.
This is one of the ways I define velocity. It is not either quantitative easing or a Keynesian increase in aggregate demand per se. It is how money is directed to increase aggregate demand that counts. Velocity is not just how fast you’re going but where you are headed.
on this issue, galbraith is our best well known economist. i don’t think either version of the neoliberal orthodoxy is the place to look, let alone start finding, answers. and that includes both the salt water and fresh water economists.
have you read galbraith’s reply to krugman’s opus? i’ve posted it previously, so i’ll just give a link this time. devastating. and true.
galbraith has really turned the heat up since last fall.
ed attended the teach-in.
The whole concept of ‘velocity’ in terms of monetary policy is seldom, if ever, mentioned either by pundits or government reps.
What also seldom discussed is not only the need to change policies but the institutions of government,e.g.CBO.
I keep having the bbc series ‘yes, prime minister’ float through my thoughts.
they’ve had 40 years.
we have less than 8 months before the president’s “let them eat cat food!” commission issues its report. if you want one step at a time, could you double time it please?
i think you’d be one of the very best people to help make this material accessible (there is a reason i tried to encourage you to go to the teach in). but i’ll have the day’s videos up soon. i hope you will take a look. and there is a group of volunteers transcribing the whole fracking day to go with the audio, video and slideshows.
i also have a ton of references i could give you (recommendation #2 after watching the teach-in is to read billy blog every day and do the weekend quizes!) i’ve been reading this stuff for almost a year now (although it has taken time for me to wrap my head around the paradigm changes and i still have a long way to go) and it’s the only thing i’ve found that makes any sense at all (i went on a semi-serious looking campaign for a macro that is not stupid at at the beginning of 2009).
Soft Currency Economics by Warren Mosler
also: Warren Mosler’s Proposals for the Treasury, the Federal Reserve, the FDIC, and the Banking System
“Nominal aggregate demand is money times velocity.” – tom hickey
Thanks and tell me if I’m mistaken (because obviously I haven’t read the links) but I don’t think Warren addresses all the ‘little’ institutions that actually run government,like the CBO or MMS or …..
Hugh, you’re an excellent researcher, and Im in need of some of that. I’ve got an application scaffolded that needs research/data to get going, and it’s too big a hurdle to tackle by myself.
The concept is “Citizen’s Most Wanted”
Would you be willing to assist in pulling up statutes and gathering an evidentiary record?
just the biggies in the link and as far as i know. but that’s the major hurdle.
you know economists who self-identify as “institutionalists?” they may be right up your ally.
It is. But haven’t you already answered that question? They’re fixing to make FDR’s mistake again. In fact they’re fixing to commit Herbert Hoover’s errors again. They’ve forgotten all the lessons of the ’30s.
It makes it inapplicable for at least two reasons. First, the fact that the Eurozone countries aren’t sovereign in their own currencies, doesn’t mean that austerity programs in those countries won’t exacerbate short-term deficits. They most probably will, and probably a good deal of real wealth and productive capacity will be destroyed, before the Eurozone recovers. And second, the whole thing is needless, since all the Greeks have to do is kiss the Euro goodbye, get back the drachma, and spend to fulfill public purposes.
Remember also that Alice Rivlin goes back all the way to the 1970s when she was the first Director of the CBO and during which time she had a great effect on Jimmy Carter’s own very persistent, though unsuccessful efforts to balance the budget and contain inflation at the expense of full employment, Alice was one of the original neo-liberal deficit hawks whose influence was strong on Congressional Democrats at that time and on Carter’s OMB. And here she is today still throwing poor people under the bus.
he did, and asked some of the best questions too.
Ed had an earlier post here. It also has a very good discussion thread.
very sad news.
Japan has no solvency risk, and the comparison of Japan to Greece without indicating that Japan has a fiat currency system and owes no debt in foreign currency, while Greece uses Euros over which it has no control shows the ignorance of the analyst cited by CTuttle. The Japanese case is discussed at length here.
That’s why MMT is about spending on the public purpose; not just spending.
One problem I see with respect to the deficit and the Catfood Commission’s predictable call for SS and Medicare cuts is that people in general will have a problem with the idea that governement can just keep spending more than it takes in forever.
Most people operate on a basic eduction and relatively simple life experiences. Even someone with a college degree, if its not from the financial, economic, or poli sci field, probably has no real knowledge of M1, M2, M3, the velocity of money, etc. Doctors, lawyers, and other professionals regularly lose money in bad investments or to dishonest investment advisors because they don’t know enough to handle their own investments.
We have a massive job ahead of us in the next 6-7 months in finding a way to educate the average voter about how the deficit should really be brought under control, and doing so using simple terms and examples that they can understand and relate to on a personal basis. Unfortunately, it’s going to take people more versed in the field than I am to figure out how.
i can point you (and others) to links and information, but i generally suck at writing.
re the fed budget and deficit not being analogous to household budgets and deficits is this short policy brief by randy wray. scott fullwiler says it is the best thing that helps his students start to “get it.”
Teaching the Fallacy of Composition: The Federal Budget Deficit, by L. Randall Wray
i think one way to get people interested is to claim that we’ve been lied to by both parties for 40 years and if only we knew the truth, which is not complicate to grasp except that it turns all our previous notions about money upside down.
I just posting this so you people can hear the other side of the argument by REAL opposition.
http://www.youtube.com/watch?v=fZrWoZiB9HY&feature=player_embedded
Enjoy.
Btw long time reader and 1st time posting. I was been very reluctant to post something but reading this broke the spell, men like James Galbraith resisted for spew such claims
I don’t see where JKG talks about the cause of the government surpluses so I’m not sure what you are dubious about. JGK simply states that when these government surpluses have occured, recession has followed soon after.
Or are you saying that recession’s cause government surpluses? I can’t say that I’d agree with that.
It’s pretty obvious that the our public is largely broke, in debt and uncreditworthy. Banks would be stupid to increase thier issue of loans at this time. Without the banks increasing thier issuing of loans, how will enough money be created to service our existing debts?
Without increased government spending we are looking at a death spiral of debt defaults. Defaults which will be bailed out in favor of the rich.
So Peter Schiff states that government should not have control of it’s own currency. How interesting…. and unconstitutional. Schiff sounds like a Plutocrat.
i think you got it all wrong, whats i think hes trying to say is that the US having the ability to just print new money to pay off its debt is not exactly in our best interest and if u did any research on him, you would find out that he is a supporter of the gold standard(silver) and an end to the fed.
Whats unconstitutional is the status quo, with the Federal Reserve being in control of our money supply and essentially operating with no checks(and no the Sanders Audit the fed is no check at all)
Hiya boggey, Galbraith certainly writes better than he debates. What he didn’t say is that the markets don’t determine the interest rates the US offers on its debt instruments. The Treasury does.
That is, it can spend money without issuing debt instruments at all. If it does that, it will flood the banks with reserves which will drive the overnight interest rates down to zero, thus pretty much eliminating the interest costs on short-term loans. Schiff and Burnett don’t understand this dynamic. Galbraith does, but evidently didn’t think he could explain it in the context of the debate. Warren Mosler or Bill Mitchell would have wiped the floor with Schiff, because they’re not as polite with Galbraith. Anyway, the point is that the scenario on interest costs projected by Schiff will never happen. If you doubt this look at Japan where the Government has driven the short term interest rates down to near zero.
boggey, I’m with you on ending the Fed. The Central should be part of Treasury and ultimately responsible to an elected offocial, the President.
However, we part company on the gold standard. Going back to it is ridiculous. It was a big factor in causing the great depression and in the periodic business cycles that made life tough for ordinary people throughout the history of the US. The worst thing we could do is to return to that “Cross of Gold.”
Greece borrows money from Germany; both have high social spending and governmental deficits.
What is the difference between the two – one has a trade deficit, the other a trade surplus!!!
Spain and Portugal, the next two in danger, also have massive trade deficits.
trade deficits matter.
They do. If one has a trade deficit then, other things being equal, one will need a bigger Government deficit to balance things out. And if one has a trade surplus then one will need a smaller Government deficit. See here for an explanation in terms of sectoral balances.