fiscal responsibility

Spare Me the “Middle Ground” Please!

Joseph M. Firestone — Fri, 10 Jun 2011 20:06:24 -0400

In a debate at FiredogLake about Modern Monetary Theory (MMT) perspectives on the so-called deficit/debt crisis and the idea that there is no long-run deficit problem, powwow, a perspicacious commenter and occasional blogger at MyFDL, suggests that while MMT offers useful perspectives on how the monetary system works, and he also agrees that more deficit spending in the present employment crisis will not lead to forced, as opposed to political default, he still believes in a “middle ground” position about the advisability of extensive deficit spending and the MMT claim that deficit spending cannot force us into eventual insolvency, saying:

However, unlike, apparently, the MMT academy, I am not so sanguine about what the future holds in that department, and think that discretion is the better part of valor here, such that we should not be living, as a nation, as though money really does grow on trees, and will do so indefinitely.

In a later comment and in reply to my pointing out that the claim that insolvency caused by economic rather than political factors isn't possible for Governments sovereign in their own currencies, according to the MMT paradigm, powwow stated a number of considerations which I'll reply to here n dialog form

Working off admittedly-limited research, and focusing in particular on this ‘painless or necessary deficits’ question (while recognizing that the operational facts are that all the government does to “create money” these days is to push a button on a computer keyboard), here’s a tentative impression I’m receiving about the MMT federal money debate:

I perceive some MMT proponents to be trying to reframe an extraordinary period in American history – a time of historically-high government deficits and debt, but historically-low interest rates for government borrowing – as the “new normal,” in a way that’s beginning to remind me of the sense I had during the peak of the housing boom. I didn’t know the major contributing factors that created the housing boom (the Wall Street pressure for ever more loans to repackage and ‘collateralize’, etc.), but I was positive that the situation was simply not sustainable. Meanwhile, a cottage industry of players was describing what has turned out to be an abnormal, short-lived period of great excess as the “new normal” for the American housing market and economy.

I agree with you about the housing boom, I, too, had the feeling that it was unsustainable. However, the reason why I thought that was because the boom was based on a private debt bubble, and those building debt had only a limited capacity to continue or spiral it upward. Sooner or later, their credit worthiness would be questioned by lenders, and when that happened the whole house of cards would collapse.

However, the deficits MMT is talking about are accompanied by public debt instruments and the Government issuing them has an unlimited capacity to create/spend the money it needs to meet whatever debt obligations it has. So, however, large the public debt gets, the capacity of the Government to issue more debt is unimpaired, unless political factors intervene. When viewing private debt vs. public debt, it's important to recognize that these are very different, as argued here, here, here, and here.

Also, it needs to be emphasized that running deficits isn't the same thing as issuing debt. Congress, again, now requires that Government first issue debt when it wants to deficit spend. But Congress can change that rule at any time, so that deficit spending could continue, but now without debt. In addition, The Executive Branch now has the capability to issue jumbo platinum coins of arbitrary face value. If it chose to issue such coins and deposit them at the Fed, the profits from coin seigniorage could close the gap between tax revenues and government spending, technically erasing all future deficits, while allowing the Government to completely pay down the national debt over time. If this method were used, net financial assets would still be added to the non-Government economy when the Government spends, because, unlike taxation, coin seigniorage produces revenue and erases deficits without destroying cash reserves.

The housing boom was proven to be primarily a confidence game, with little real justification for its years of existence (which, upon collapse, generated a lot of pain for those at the bottom, but little for those at the top who drove it, and finally ended it). Can’t the same be true of the present ‘seemingly-painless-government-debt’ era of the wider American economy? As with the housing boom, there are heavily-invested players with enormous incentives to keep the game going, who are working overtime to prevent a change in the status quo.

I'm not entirely sure what's meant here, but I think that Government deficit spending won't generate demand bubbles and eventual collapses as long the Government doesn't deficit spend beyond the productive capacity of the economy to absorb the aggregate demand deficit spending has created. So, I think this is the demand-pull inflation issue. MMT opposes deficit spending beyond full employment, and proposes that excessive aggregate demand be contained through taxation.

But just as suddenly transformative and unpredicted as the Lehman bankruptcy was for the Wall Street home mortgage game, probably few can know or predict with precision what factor might suddenly change present circumstances enough to make us wish we’d stopped unnecessary deficit spending by our government long before now.

I already wish we hadn't done much of our deficit spending because of bad effects of the spending itself. For example, I'm against corporate welfare programs and spending on the wars in Afghanistan and Iraq. But, I think you're suggesting that there is something about Government deficit spending itself that has bad effects, apart from the content of this spending, and that under certain unknown and relatively unpredictable circumstances these “Black Swan” bad effects can become highly visible and dominant.

I won't say that there's nothing to the idea of falling victim to a Black Swan, but surely to refuse to take action by spending what we need to to solve our major national problems for fear of encountering a “Black Swan” that might collapse our system, isn't a good enough reason to accept the status quo on our myriad problems, on grounds that we'll spend so much that we'll expose ourselves to those novel conditions we can't even imagine.

Don't get me wrong, I'm all for being careful and watchful for any emerging “Black Swan,” and by “looking for trouble” constantly with any MMT-inspired policies. But I'm not for inaction while: our labor force degrades from unemployment, our educational system continues to deteriorate, our health insurance system causes close to 60,000 unnecessary fatalities per year, our infrastructure continues to decay, our safety net is continuously weakened, and other very serious problems go untreated.

In the end, even if ‘money growing on trees’ were to become the accepted definition of the spending power of the federal government, I’d probably be in the camp of those insisting that we need more than the free will of our representatives, plus endless “free” money at their disposal (or at the Federal Reserve), to keep our federal government in check, even if the bills Congress ran up, or the spending they ordered, was done with money manufactured out of thin air, that never needed to be accounted for in any way.

I don't like the “money grows on trees” metaphor here as well as I like Warren Mosler's “scorekeeper” analogy. Like the scorekeeper, the Government never can run out of points to give to the players in the economic game, unless, of course, Congress constrains the scorekeeper.

As it is with the scorekeeper, the Federal Government neither has nor doesn't have any points (or USD). What it has instead is the authority to create points (dollars) in the non-Government sector through spending, and also, in the Government's case, to destroy them (through taxing or selling debt instruments). These days when the Government creates dollars, it typically costs it virtually nothing, because it's done electronically; and that also holds true when it destroys dollars.

So, finally, I agree with you that we need more than “free money” and Congressional free will to “keep the Government in check.” But I also think that this is beside the point of whether the MMT paradigm is correct in its analysis of fiscal sustainability and fiscal responsibility. Keeping the Government in check is a matter of getting greater accountability from our representative system of Government, whatever economic ideas we are subscribing to. Right now that system isn't working well to represent working and middle class people, and I think we need to develop new institutions that will help us to keep the old ones in check. But that doesn't mean that we should acknowledge artificial bounds on Government spending when people are suffering, economic lives are being destroyed, and sick people are dying and dying quickly for want of health insurance. If this Hooverian austerity period goes on much longer, we are looking at wasting the lives of a generation of young Americans, at unknown cost to the viability of our democracy. We need that wasting to stop. We need to use the full power of Government spending to create sustainable economic growth.

Middle grounds often sound like a good idea theoretically. But in reality they can be incredibly costly because the cautious,compromising approach they require often means accepting the very outcomes one is trying to avoid. So, for example, we see those who fear Social Security insolvency and a severe cutback in benefits in 2037 advocating cuts to Social Security that will bring the reality of reduced benefits right now. Similarly this Administration's cautious, moderate, middle ground, “bipartisan” approach to economic stimulus, along with its willingness to accommodate Republican and Blue Dog stimulus measures and its insistence that the Recovery Act be kept under $900 Billion in deficit spending over two years, pretty much guaranteed the inadequacy of the Recovery Act as a means of ending the job crisis. The middle ground position failed to solve the jobs problem, and along with other foolish “middle ground” measures has left us on the brink of a double-dip recession now.

We've seen an even more foolish “middle ground” approach, in the health care reform area. The bill that emerged certainly was “middle ground” all the way. No deficit spending. No public option. Medicare savings from waste. Mandates following RomneyCare in Massachusetts. Plenty of Republican giveaways to the private insurance companies included in Amendments. Complete avoidance of the idea of Medicare for All.

The result is a big failure, which thus far had failed to stem the tide of fatalities, foreclosures, and bankruptcies due to health costs and lack of insurance, and which is vulnerable to complete repeal before it even becomes operative. In this Administration, the cost of middle ground approaches to problems has been horrific. I'm afraid the term “middle ground” has a negative connotation for me. It doesn't mean reasonable. It doesn't mean useful. It doesn't mean solutions. It means incoherent. It means failure to accomplish what could have been accomplished because people assumed that doing something, anything, is better than waiting until one can do something that might actually solve a problem. “The perfect is the enemy of the good.” Well, the bad, the incoherent, and the unworkable is the enemy of the good too. So, let's have no more of that!

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

Why Do “They” Want To Limit Our Sovereignty In Our Own Currency?

Joseph M. Firestone — Tue, 12 Apr 2011 15:20:27 -0400

One of the most emotional issues in American politics is the sovereignty of the United States itself, and its independence from foreign powers, interests, other nations and their ruling elites, and emerging globalizing elites who place their own interests against the nation interest of America and its people. The issues of fiscal sustainability and fiscal responsibility should be discussed from the viewpoint of our national interest, not from the viewpoint of abstract financial ratios, or supposedly critical indicators that generate a lot of sound and fury signifying nothing.

When we look at fiscal policy in the United States from the viewpoint of our national interest, among the first things we must consider is maintaining the national sovereignty of the United States. Most Americans want the United States to remain autonomous and independent, and to not be subject to the economic control of any foreign power, whether another nation, an international organization, or an international political grouping of a more informal character.

This desire is a constant throughout our history and it is the basis for the relative unpopularity of the United Nations here. A very important dimension of our national sovereignty is sovereignty in our own currency. The Constitution gives Congress authority: “To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.” That authority, through interpretation by the Supreme Court over the years, has come to mean that it is constitutional for Congress to cause the issuance of fiat money, whose value may be regulated by the government, at will in order to serve the public purpose.

Today the Federal Reserve Bank interprets the power to “print money,” as the power to “mark up” accounts in the banking system by computer, in the process of augmenting the money supply or in implementing spending by the Treasury. There is no limit on the power of the Government to create money this way, provided that Congress doesn't set such limits itself.

In addition, to its unlimited power to create fiat money, the United States also has a constitutional obligation that is worth mentioning when talking about economic sovereignty, since the classical notion of sovereignty is also related to obligation. Section 4 of the 14th Amendment states:

". . . .the validity of the public debt of the United States, authorized by law... shall not be questioned."

Of course, constitutionally, the Government can only spend what Congress has appropriated; but, beyond that, there are other constraints that Congress has set for the Government which are not mandated by the Constitution, and which limit the degree of economic sovereignty of the Government. Here are three:

-- the Treasury is not allowed to run a negative balance at the Federal Reserve,
-- the Treasury must issue debt when it expects to deficit spend, and
-- the Treasury cannot issue debt beyond the statutory debt limit,

The first two constrain the Government by forcing it to remove money from the non-Government sector before it can deficit spend; even when Congress has already appropriated the deficit spending. The last constraint is intended to impose an arbitrary limit on deficit spending by bringing it to a halt, even after it has been appropriated. Its purpose right now seems to be to provide periodic and very public opportunities for political kabuki theater during which the two parties can express their core political values as they apply to fiscal policy, while they dismantle the heritage of the New Deal.

The kabuki opportunities carry a very high cost, however, since the constraints making them possible:

-- cause Government shutdown crises,

-- sometimes create doubt that the Government will voluntarily become insolvent and fail to meet its obligations, and most important of all,

-- are responsible for the existence of the National Debt of $14 Trillion, and for the “welfare” for the rich and foreign nations paid to them every year in the form of interest on Treasury securities, which, except for the Congressional requirement to issue debt, the Government would never have to pay.

Why does the Congress limit the fiscal flexibility of the Government, including its own flexibility, with constraints like the three above?

Why are some in Congress trying to get a balanced budget amendment passed to further limit flexibility in Government spending and fiscal policy?

Why do many in all three branches want to limit the monetary power of the Federal Government and its potential for helping America achieve in public purposes?

Why, in short, are so many politicians so much in favor of limiting the currency and fiscal sovereignty of the United States?

Why are we letting them do it?

Why aren't we as protective about our currency/fiscal sovereignty, as we are about other aspects of sovereignty, such as our territorial integrity, and our political independence?

Before I try to answer these questions, I'll review what fiscal/monetary sovereignty is.

What It means To be Sovereign In Your Own Currency

Deficit hawks in the United States envision a day when the United States Government will go broke, unless we curb government spending on entitlements. Well, governments can go broke in the sense that they can run out of money they need to pay their debts. But not all governments. Only Governments:

-- whose monetary systems are commodity-based, such as those on the gold standard; or

-- those using fiat money,

whose official fiat currency is issued by supra-ordinate authorities, or

-- those who owe debts in a fiat currency issued by another governmental authority,

can all “go broke,” involuntarily.

Governments issuing their own fiat currency, subordinate to no higher authority, and owing no debt to anyone else in a currency other than their own, can never “go broke,” or put another way, become insolvent, due to events in financial markets, or decisions made by other nations. This is true, because all they need to do to spend money is to issue credits to non-government sector accounts in banks, and all they need to do to pay back other Governments who have lent them their own currency, is to credit the accounts of the lender Governments in that currency, an action which they have full authority to do, absent any political constraint they may have placed on themselves preventing them from exercising their full monetary sovereignty.

We call such Governments “sovereign” in their own currency. And because they have this kind of sovereignty, they also have flexibility to facilitate economic activity to accomplish public purposes that Governments without that kind of sovereignty don't have. But with that fiscal flexibility also comes fiscal responsibility – the responsibility to use the operationally unlimited spending power of an economically sovereign government to use that spending power for public purpose and not for private gain.

One of the Governments that fit these criteria and so can never go broke is the US Federal Government. Other common examples are Japan, Australia, New Zealand, and Canada, and the UK. Governments that don't fit these criteria and that can go broke include the nations of the EU, such as Greece, Portugal, Spain, and Italy. Even France and Germany can go broke, since they no longer issue their own currency. Other examples include all those developing nations with loans from the IMF, the World Bank, and other international authorities that must be paid back in US Dollars, or any other currencies they cannot issue; as well as state, local, provincial, and other governments subordinate to a super-ordinate currency-issuing authority such as California.

Most governments that are sovereign in their own currency haven't been fiscally responsible in a very long time.

While some have performed better than others in seeking and achieving public purposes, most have continued to act as if they are constrained by the gold standard, and have attempted to either reduce spending at the expense of the less well off, or to fail to pursue programs for full employment, or to fail to make enough investments that will fulfill other pubic purposes. In most of these cases, deficit hawkism and specifically the desire to either reduce deficits, or to balance budgets, has trumped the desire to fulfill public purposes.

In short, governments sovereign in their own currencies have been acting like governments on the gold standard, or those who owe debts in currencies they don't issue. They have been acting in a fiscally irresponsible way given their fiat monetary systems, while at the same time claiming to be fiscally responsible.

They can get away with this, because very few people make the distinction between governments sovereign in their own currency and governments that are not. And even fewer go on to recognize that what may be fiscally responsible for gold standard governments, or governments that are not economically sovereign, is most certainly fiscally irresponsible for economically sovereign Governments.

In systems where governments are economically sovereign like the United States, it is a big mistake to measure how well the nation is doing fiscally by using deficit, the national debt, or debt-to-GDP ratios. That mistake is one the United States and most other nations with monetary sovereignty are making right now.

Those measures, in fact, are the wrong things to measure. The government is a scorekeeper that can always credit accounts when it needs to spend or pay what it owes, or even set interest rates by flooding the market with reserves and driving short-term interest rates down to near zero. In such systems, the money is always there for the non-governmental sector, not in the sense that the government has accumulated some physical stock of it, but in the sense that the Government can always spend or pay back by crediting accounts, regardless of any physical stock it may have.

In such systems, fiscal responsibility is not about what the Government has accumulated either in debt or in surpluses, since given its unlimited ability to create new currency, these neither constrain nor support its further ability to spend What it is about, however, is the Government's success in spending on worthwhile things that produce actual value, rather than spending on worthless outcomes.

Why Are We Self-limiting Our Currency Sovereignty?

There are a few contributing reasons. First, most Americans don't understand that the power of Government to help the economy to recover from recessions and to achieve full employment, is dependent on the ability of the Government to deficit spend and to add net financial resources to the private sector. To the extent that the ability to deficit spend is limited by fiscal rules, the fiscal sovereignty of Government is impaired, diluted, or, in the case of balanced budget amendments like the one gathering steam in Congress, largely destroyed.

Second, most Americans don't understand that deficit spending and the resulting deficits and debts, carry no solvency risk. They view the US Government as an analogue to a household, and they think that, like a household, the Government cannot spend more than the revenue it raises through taxing or borrowing without risking insolvency, and that the more it borrows, the more it will need to borrow and the less its ability to borrow will be. Of course, the Government is different from a household in many ways, but most importantly, in that: all money in the United States ultimately derives from Government-issued money, and the Government, of course, can always add more money to the private sector if it chooses to do so.

Third, most Americans don't understand that every dollar of Federal deficit spending adds a dollar of net financial assets to the non-Government sector of the economy.

The asset can be base money, if the Treasury is allowed to spend without issuing debt, as it sometimes has been, or it can be in Treasury securities if it is required to continue debt issuance. Many think that when Government deficit spends it impoverishes the private sector, because it competes with it for resources. But this is clearly not the case, when there is an output gap and much of our productive capacity is unused.

Fourth, most Americans don't understand that global elites and corporations don't want the United States to retain its currency/fiscal sovereignty, because they make more risk—free money if the Government's currency power is constrained, and if we must buy/”borrow” our previously created USD, rather than make more. So, long as we issue debt instruments rather than just issue currency, they have a risk--free place to put the money they've previously acquired, and get an interest return besides. Over the next 15 years, the interest paid on the debt will be roughly $12 Trillion. If the Government can and does use its full currency sovereignty, and deficit spends, without issuing further debt, then the global elites can say goodbye to that money.

Fifth, global elites recognize that if Governments use their power to create currency to benefit any other groups other than the global elites themselves, then that potentially harms the elites and makes their USD holdings worth less. Perhaps not immediately, because demand is slack and businesses will try to increase production rather than raise prices for their valued goods. But, eventually when full employment is reached, they fully expect that either the need to regulate inflation will subject them to increased taxes, or, alternatively, the occurrence of inflation will cause the de-evaluation of their own money and Treasury Securities.

Conclusion

Issues about governments sovereign in their own currencies, as well as others having to do with fiscal sustainability and fiscal responsibility have been addressed at the Fiscal Sustainability Teach-In Counter-Conference last April 28th. It provides the answers to the continuing attempts of the deficit hawks and austerity mongers to orchestrate and implement a political process that will result in transferring more wealth from the middle class and the poor to the very well-off and the corporations, and that has already resulted in the failure of many nations, including our own, to end the sufferings of the unemployed and others victimized by the wholly avoidable crash of 2008.

The primary anti-deficit hawk message of the Teach-In was this: Since the United States Government is sovereign in its own currency: We. Are. Not. Running. Out. Of. Money. The. Money. Was. There. All. Along. The. Money. Is. There. Now. The. Money. Will. Be. There. Tomorrow. And. It. Will. Be. There. For. Our. Children. And. Our. Grandchildren. Too.

This is a message that needs to be sent to Congress, to the President, and to Republican budget-cutters like Paul Ryan, Jon Kyl, Mike Pence, and all the tea party folk, whose “pay off the national debt by cutting spending and taxing to get a surplus,” austerity nonsense, will ruin the United States, and create the second great depression, if we go along with it. We must not forget that every dollar less of deficit spending translates to at least a dollar subtracted from the dollars available to the non-Government sector, and the amount may well be more than a dollar if the dollar less is in a high fiscal multiplier segment of the economy. The attempts by budget-cutters to cut high-multiplier deficit spending will accelerate the downward spiral of the macro-economy, especially as compared with the impact that increased taxes on the wealthy may have had.

Finally, I have to wonder why the very legislators who are always so quick to wrap themselves in The American Flag, are also the ones who are quickest to put forward and implement fiscal rules that will constrain American currency sovereignty and subject the best interests of the American people and the public purposes of the United States to the interests of globalizing elites, foreign Governments like China, Japan, Middle east oil exporting nations, the Eurozone, Wall Street, the bond markets, and the wealthy like themselves. The fiscal rules Congresspersons have implemented and new ones they are seeking to implement to force the nation to pay off the national debt through economic surpluses, have the effect of subordinating the national interest, which they are elected to uphold, to the interests of multi-national corporations, global elites, and foreign nations.

We must recognize this problem for what it is. It isn't just a technical issue of economics. It's an issue of patriotism. It's an issue of whether our economy will be run for we, the people, or interests both domestic and foreign who place their own needs for more wealth above the interests of most Americans to be able to influence our own economic futures and opportunities.

If you're really worried about your children and your grandchildren, not to mention yourself, then you need to stop the deficit hawks and the deficit doves from destroying the economic sovereignty of the United States with their fiscal rules. You need to insist instead on the freedom and economic independence of the Government from the bond markets and all other elite interests. You need to insist that we act in our own national interest and not in the interest of the global elites. You need to insist that the Government keep its spending/currency creation power intact and use it for the public purpose. You need, in other words, to insist that we remain a Government sovereign in its currency, and to begin to act like one, taking responsibility for the miserable state of the economy within our national borders.

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

Neo-Liberalism Can't Beat the Tea Party: But MMT Can

Joseph M. Firestone — Fri, 01 Apr 2011 01:32:59 -0400

In the big budget fight going on right now in Congress, the Tea Party conservatives rightly point out that $61 Billion in spending cuts is just a drop in the bucket compared to the $1.6 Trillion predicted deficit, and they react with a great deal of moral fervor to the suggestion that they ought to compromise on $33 Billion in cuts in order to avoid shutting down the Government. That moral fervor sounds perfectly reasonable to me as long as one agrees that Government spending causes inflation, that we now have a huge deficit, debt problem in the United States that we must solve, or face national insolvency in the not too distant future, and also if the people afire with moral fervor would also apply that to the issue of the wealthy paying their fair share of taxes.

Neo-liberal believers in the power of the bond markets, the idea that Government money must come from taxing or borrowing, and the need for Government to avoid exploding interest rates on the national debt, can try to oppose tea-partiers by saying that it's better economics not to cut public spending while unemployment is as high as it is right now; but when you agree with the tea party that we have a long-term deficit/debt problem that can destroy the credit of the United States and its access to the bond markets, you're then on very thin ice, when you oppose this “small down payment” on coping with a very serious problem that both you and the tea party agree we have.

So, when you're very committed to austerity to solve the long-term problem, are the neo-liberal deficit doves, all you can do in opposition to the goal of drastically cutting Government sending over a period of years, is to argue about the details of discretionary spending cuts, and to find a place to compromise, rather than simply saying that the current tea party campaign to cut deficit spending is just silly, because there is no deficit/debt problem, and so there is no economic need to cut any Government program whose outcomes are accomplishing public purposes.

A big, big advantage of adopting the MMT approach to economics, is that it provides a political basis for going straight at the tea partiers, Hooverites, Peterson cohorts, and deficit hawks. Michelle Bachmann and Mike Pence may stand up in front of a pitiful tea party rally of 100 people in Washington, DC and thunder about how the United States is about to fall off a fiscal cliff and ruin the lives of our children and grandchildren by imposing an intolerable of burden of debt of $45,000 on each of them; and that to forestall that catastrophe, the Government has to stop spending money we don't have. But an MMT-informed politician can just come right back and say:

I hate to have to tell you this, but you folks don't have the slightest idea of what you're talking about. Where do you think money comes from? It comes from the Federal Government. The Federal Government has the constitutional authority to supply as much money to the private sector as is necessary to see to it that our economy is performing well. The Federal Government cannot run out of money unless silly Congressmen become powerful enough to prevent the Government from spending. Then and only then will we see the financial collapse you tea partiers are afraid of.

If the American public listens to your insanity, and the Government does what you want it to do to avoid a financial crisis, that very thing will cause what you fear most – a collapse in the value of the American currency to happen.

So, I, as someone who does understand that the Government is the source of all American Dollars, and always has the capability to create more simply by spending, hereby pledge that I will not vote for one $1 Dollar in spending cuts to programs on grounds that there is a Government deficit, or that the national debt is something we cannot afford. Since the Government can always add money to the private sector by spending, if it chooses to do so, these are nonsense reasons to vote for cuts, and I was not elected to compromise with, or vote for, nonsense. And I will not allow you to continue to hold the voters I represent hostage to your idiocy and inability to understand our fiat currency system and our national monetary sovereignty.

On the other hand, I will be happy to vote for eliminating programs that worsen the condition of the American people, or that kill people for no reason, or that loot the Treasury for the benefit of a few wealthy people. So, if you tea partiers want to cut out some of those programs, I'll vote with you.

But otherwise, I'll vote no on your proposals, and if you and your Republican colleagues continue to try to cut programs that I think a majority of the American public want, and this results in the shutdown of our American Government, then f__k the Republican Party, because it will be on you. You will suffer the wrath of the American people in 2012, and no amount of money or propaganda will protect you from it. You'll be lucky to escape the fate of the Whigs. Oops! I'll guess you'll have to explain who the Whigs were to Bachmann, Palin, and the other tea partiers.

Yes, Modern Monetary Theory (MMT) can be a powerful political weapon against tea partiers, Republicans and deficit hawks in both parties, and also deficit dove Democrats who think the Government can become insolvent. This isn't a reason to believe in MMT. The only reason to believe in it is if you think it's the best approach to economics available today.

But, conversely, it is a reason to question other economic approaches. It is a reason to question neo-liberalism. It is a reason to refuse to accept it without thoroughly testing it against the evidence and alternative approaches to neo-liberal economics like MMT. And, if you are a progressive, it also is a reason to take the trouble to learn MMT, and to decide for yourself how it compares to other approaches to economics.

In some of the replies to recent posts criticizing Paul Krugman's remarks on MMT, some have asked what all the fuss is about. They've pointed to the areas of agreement between MMT and Krugman's brand of deficit dove economics, and have noted that both sides seem to agree that more economic stimulus is necessary now and that measures to contain inflation may be needed later.

This is true, but as I've pointed out in previous posts and comments I've made on this subject, the fuss is about the difference in the world views of deficit hawks and deficit owls, their analyses of whether a risk of insolvency exists, and whether there's a long-term deficit/debt problem; what this difference means in terms of how fiscal policy should be managed by the Federal Government, what fiscal sustainability means, what fiscal responsibility means, and also, as I've emphasized here the content of political communications and appeals that can be used to advocate for progressive economic policies.

Deficit dovism is all about defense against the modern know-nothings and Hooverites. Deficit owlism or MMT is all about a political offense against them relating to what we ought to about the economy and America's future.

As a real progressive, I'll take a good offense, anytime! How about you?

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

Bill Mitchell on the Austerity War

Joseph M. Firestone — Fri, 18 Mar 2011 20:07:17 -0400

A number of people including myself have been furiously blogging for many months now on the world-wide austerity war that most Governments are fighting against the well-being of their citizens. The position we're blogging is that there is no deficit problem requiring fiscal austerity for those Governments including the United States that issue their own non-convertible currencies with floating exchange rates, and have no external debt in currencies not their own; and also that there is no fiscal sustainability problem for these Governments because they cannot run out of money, and therefore the level of their deficits, national debts, and debt-to-GDP ratios are just irrelevant from a real fiscal sustainability viewpoint. I've offered a number of posts supporting this argument including here, here, here, and here. Others, including Bill Mitchell, Warren Mosler, Randy Wray, Stephanie Kelton, Pavlina Tcherneva, Jamie Galbraith, Marshall Auerback, Mike Norman, Matt Franko, Tom Hickey, and Scott Fullwiler have filed numerous posts and articles on the subject.

It's been very hard to get our “deficit owl” views aired beyond the blogosphere, and into the publications of the progressive establishment. These publications publish pieces that reflect a “deficit dove” point of view, advocating spending now during the recession, but a long-term fiscally responsible” plan to solve “the deficit problem” and reach “fiscal sustainability,” by making the tax system much more progressive than it is today, and cutting corporate welfare. Implicit in the deficit dove view, in agreement with “the deficit hawk” view that is at the heart of the austerity propaganda machine, is the idea that the United States must raise money by taxing or borrowing to fund its spending, and also that surpluses, in the abstract, are a good thing, and that deficits are undesirable, and unsustainable, in the long term.

Today was a good day in the fight against austerity. One of the leading “deficit owls,” and a leading figure in the Modern Monetary Theory (MMT) School of Economics, Professor Bill Mitchell of the University of Newcastle, Australia published an article in The Nation entitled “Beyond Austerity.” Jamie Galbraith publishes there occasionally, but has pulled his punches in expressing the MMT point of view. This article, on the other hand, is an admirable summary of many of the main points of MMT as they apply to the issues of austerity and fiscal sustainability. It touches every base in the MMT argument, at least in outline.

Read it if you care about what progressives can do to bring back a prosperous America, where everyone can work, get the health care they need, and where the level of inequality is reduced enough to remove the threat to democracy from the rich that we're experiencing today.

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

Trouble Is When We Take the Truth Off the Table

Joseph M. Firestone — Sun, 27 Feb 2011 01:03:11 -0500

Arianna Huffington is calling attention to “the great budget battle of 2011,” between the President and the Republicans. She correctly points out that whichever of the two sides win, we, the people, lose. She's right, of course, and says further:

Just look at this so-called "debate" we're having. The problem ostensibly on the table is the deficit. But, without any context, the raw deficit number is meaningless. If the country's debt were, say, $50 million, that wouldn't be a big deal. If some average American suddenly found himself $50 million in debt, well, that would be a big deal. And that's because the country's GDP is a lot bigger than the average person's income. So what we're talking about is really the debt-to-GDP ratio.

Yet the debate is concentrated almost entirely on the debt side of the equation and barely at all on ways to increase the GDP side. . . .

Arianna's right about the pure deficit number being meaningless and needing context. But it's also true that it needs the right context. The right context for deficits isn't simply GDP or comparing the size of a deficit to the annual volume of economic activity, and the right measure of whether we have a deficit problem or not, or how serious it is, is not the debt-to-GDP ratio. Implicitly here, Arianna is accepting the view that the debt-to-GDP ratio is an indicator of something that causes grave economic problems. But there is no empirical evidence that there is any relationship between that measure and negative economic effects when a nation has a fiat, non-convertible currency, a floating exchange rate, and no external debt in a currency not its own.

So, she's claiming that the current debate is constrained because only the debt side and not the GDP side of the deficit/debt issue is being debated, but I think it's constrained because nearly everyone in the mainstream, including Arianna, refuses to debate whether there are any deficits, debts, or debt-to-GDP ratio levels that make it necessary to either increase taxes or cut spending, or, alternatively to avoid further tax cuts or spending increases. Please don't misunderstand. I'm not suggesting that we shouldn't cut spending and/or taxes in certain areas, or increase spending and taxes in others. What I'm saying, instead, is that any fiscal proposals at all need to be evaluated according to whether their consequences are likely to be in accord with public purposes, and not according to whether they either raise or lower deficits, the national debt, or the debt-to-GDP ratio.

In short, I'm suggesting that there is no deficit/debt problem for the United States at all. And I'm asking why the debate that Arianna refers to doesn't start with the bedrock question of whether there is a deficit/debt problem, and only when that question is settled, and only if necessary, move to the subsidiary question of whether the present focus on spending cuts ought to be broadened to the GDP context, or for that matter to the question of tax increases on the wealthy?

Arianna continues:

. . . How has the playing field of what is acceptable in this debate been so shrunken that the only two competing proposals still allowed on the field are the president's cuts and the House GOP's draconian cuts?

Well, it was no accident. And, as it turns out, there's an entire field of study based on the dynamic being played out: Agnotology. Coined by Robert Proctor, a historian of science at Stanford University, the word means the study of ignorance that is deliberately manufactured or politically or culturally generated. "People always assume that if someone doesn't know something, it's because they haven't paid attention or haven't yet figured it out," Proctor says. "But ignorance also comes from people literally suppressing truth -- or drowning it out -- or trying to make it so confusing that people stop caring about what's true and what's not."

Sadly, this is quite to the point. But it doesn't apply only to the present debate in the sense that the wider context of how the debt-to-GDP ratio might be reduced through alternative tax and spending policies designed to increase GDP is being “drowned out” or suppressed. It also applies to it in the sense that most media outlets including blogs with wide audiences are “drowning out” or suppressing post-keynesian and other heterodox economic viewpoints on the deficit/debt debate.

Ignorance of these positions is being manufactured and maintained by all of the mainstream media and by much of the alternative media, too. The way it is maintained is partly by ignoring the existence of alternative views about whether there is a deficit problem; partly by distorting and misrepresenting these views when they are, infrequently, able to find expression in popular outlets, and finally, by not supporting and fostering open debates between different fiscal sustainability/responsibility approaches. Using these methods, the media have made it difficult for any views to gain currency except deficit hawk and deficit dove views on the deficit. It's as if the media, including much of the blogosphere is frozen in the deficit hawk/dove neo-liberal polarization, just as politics in Washington is frozen into its narrow left-right polarization. However, there is a deficit owl position in the fiscal sustainability/responsibility debate, and it needs to be considered seriously by everyone debating these issues because 1) it may be right; and 2) the deficit hawk/dove polarization has worked out very poorly for the doves.

Why? Because the deficit dove position, in its most enlightened form represented by Paul Krugman, Joe Stieglitz, Robert Kuttner, Simon Johnson, and much of the Washington, DC progressive establishment starts by granting the premise of the deficit hawk position, namely that the debt-to-GDP ratio is important, and that we must monitor Government spending with reference to its impact on this ratio. Now, these folks, as the old saying goes, “haggle over price.” The hawks think that the ratio has to go down now and that we can't expect the increase in the GDP half of the ratio to outpace the increase in the debt half. The doves believe that we have time to bring the ratio down and that if we do things right, then we can lower it by growing faster than we borrow, raising taxes on the wealthy, and by cutting things like Defense spending, and the rate of growth of health care costs.

But when the two sides debate, the compromise that comes out of that debate always means agreement on the need to manage fiscal policy with the goal of decreasing the debt-to-GDP ratio, and on some plan to reduce that ratio by spending less, taxing more, and just accepting CBO's future GDP growth projections, which are both very conservative and extremely unreliable, as all long-term projections have always been. This leads inevitably to a shared pain and sacrifice scenario for various plans for decreasing the debt-to-GDP ratio over the long term. And this mantra of shared pain and sacrifice then inevitably devolves into a debate about how that sacrifice should be shared. In today's political system, the wealthy and powerful, in the end make no sacrifices, and in fact gain new advantages after these debates. But working people somehow always get called on to make any financial sacrifices that are implicit in the deficit hawk/dove position. Hence the 99ers, the long-term unemployed, Medicare recipients, public employees in Wisconsin, Ohio, New Jersey, Indiana, and the like.

The deficit doves fight back when spending cut proposals threaten programs like Social Security, Medicare, and various “discretionary” programs that are very important to many people. But the pushback from the doves while fact-based and logical, is designed to avoid specific cuts, like preventing Social Security cuts. It is not pushback against the very idea of deficit cuts and managing Federal fiscal policy with reference to the deficit/debt “problem.” So, for example, a year after the President appointed his Catfood Commission, and a large coalition of progressive organizations picked apart the logic and facts supporting the Commission's leaked views on Social Security, it appears that a lot of the momentum in back of Social Security cuts has been blunted, but, as Arianna says, the debate is now down to a choice between the President's proposed, and very damaging to the economy, cuts and the GOPs “draconian” ones. But what can one expect from a debate that concedes the major premise of the deficit hawks in the first place?

If we had been fighting over the past two years about whether there really was a deficit problem, and whether it was ever proper to manage fiscal policy with an eye toward deficit and debt indicators, we would be looking at different debates today. We would not be down to damaging cuts vs. draconian ones, but to whether we should have any spending cuts at all, or instead should be spending whatever it takes to reach full employment and solve our other national problems. In other words, we'd be having the Hoover/Roosevelt debate right now, not the Obama/Tea Party one.

So this is my advice to Arianna. If you want a broader debate, then structure some between deficit doves and deficit owls. That is, get the Keynesians like Krugman, Johnson, and Stieglitz arguing with people who follow the Modern Monetary Theory (MMT) approach like Randy Wray, Warren Mosler, Stephanie Kelton, Scott Fullwiler, Marshall Auerback, Mike Norman and Jamie Galbraith. And get Bill Mitchell participating from Australia. And get some Congresspeople exposed to these perspectives. Then you'll see some fireworks, and you'll also begin to structure a debate that won't be about cuts, but about what we can do to get the economy growing rapidly and building the foundation our grandchildren will need to keep the dream alive.

Often when we're debating issues, it's not about “drowning out” or suppressing the truth from our point of view. What it's about, instead, is suppressing alternative points of view that we don't think can possibly be the truth, because their implications conflict with our preconceptions, and so are not worth taking our time to learn. The problem with this is that we're too often wrong about what can't possibly be the truth, and as a result we take the truth out of the debate before it has been tested against competing points of view. We can't continue to let that happen in the debate over fiscal policy. If we do, we may well be dooming working Americans to a future of needless continuing privation that will threaten the economic basis of American Democracy.

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

Federal Spending Doesn't Cost Anything!

Joseph M. Firestone — Sat, 26 Feb 2011 15:54:19 -0500

Over the past year, I've written numerous posts about fiscal sustainability, fiscal responsibility, and the various fairy tales and myths underlying what almost all of our policy makers have to say Government finance. I continue to search for a meme that will catch fire and lead people to seriously question the false idea that the US can't: afford to put everybody back to work, see to it that all Americans have good health care; provide an excellent education for our children, reconstruct the energy foundations of our economy, re-invent our infrastructure, and take the measures necessary to solve our other major problems before they get any worse.

It's the idea that we can't afford to pay for many things that we would like to do, that makes it so hard to legislate solutions. With “the national debt” at the level that it is, many legislators who might normally do whatever they could to address our various problems just throw up their hands. The rhetoric of fiscal sustainability and fiscal responsibility is too powerful for them to oppose. They want to be “responsible.” They want to be “grown-up.” They want to be known as people who can make “tough decisions.” So, as long as they believe that Government spending costs something, and adds to a crushing debt burden that we have to do something about, they will not vote for effective measures that will solve our national problems because either the cost/debt implications of solutions involving additional deficits are too great, or the tax implications of matching the costs with additional revenue are a burden they are unwilling to face.

So, here I go again with another meme, namely:

Federal deficit spending costs the US Government no net financial assets

And by the way,

Tax cuts that increase deficits also cost the US Government no net financial assets

How can that be? Well the short answer is that the US Government, viewed from a holistic perspective (Congress, Treasury, the Fed, and their interactions with one another) has no limits in its ability to create financial resources. My friend Warren Mosler, who last week reminded me that payroll tax cuts really cost the Government nothing, a reminder that led to my writing this post, likes to say that the Government is like the scorekeeper in a game. Like the scorekeeper, it never runs out of points to give to the players in the economic game, if the rules of the game make it necessary to hand out points.

First, when the Government decides to deficit spend, the Treasury typically does that by instructing the Federal Reserve Bank (FRB, or the Fed) to markup the reserve account of the bank of the recipient of the spending, and to instruct the bank to credit the recipient's account. Since by law the Fed can't allow the Treasury to run an overdraft in the Treasury General Account (TGA), Treasury must anticipate such an overdraft, and, following Congressionally imposed constraints, must sell debt instruments (e.g. Treasury Bills) in an amount necessary to ensure that there is no overdraft. So, step one places a debt instrument in the non-Government sector, and removes USD from that sector by debiting the purchaser's account, and the reserve account of the purchaser's bank, crediting Treasury Tax & Loan Accounts (TT&L), and ultimately the TGA.

Second, in step 2, the Government spends and marks up the non-Government sector reserve accounts, causing the spending recipient's account to be credited. At this point, the Government has withdrawn dollars from the non-Government sector, while adding the same amount of dollars through its spending, along with its debt instrument. It therefore has added a net financial asset to the non-Government sector, namely its debt instrument, having a specific principal value. What cost has it incurred in order to do that and perform its deficit spending? The answer is, virtually nothing.

Third, when the debt instrument sold by Treasury matures, Treasury will have to pay the principal and interest to the holder of the instrument. This repayment will then involve an exchange of money in return for the debt instrument, that is, an exchange of one type of financial asset for another. This is very likely to involve deficit spending again, but the financial asset remaining after the next cycle of spending and debt issuance will be larger.

Fourth, however, there is another scenario involving debt instrument redemption, as well. In that one, the Federal Reserve decides to buy debt instruments from the public. Unlike the Treasury, however, the Fed can simply markup accounts within the banking system without itself issuing debt. It creates money “out of thin air” and increases the money supply. When this happens we can see the full pattern. The Government has deficit spent, added a financial asset to the non-Government sector, and eventually converted that financial asset back to money, leaving an increased money supply in the non-Government sector, absent off-setting taxes or additional debt issuance.

Again, what does it “cost” the Government to deficit spend in this way? Virtually nothing. Also, note that the “cost” involved in deficit spending is the same whether or not the deficit involved is caused by new tax cuts or by new spending. So, again, Federal deficit spending costs the US Government no net financial assets; and tax cuts that increase deficits also cost the US Government no net financial assets.

Reading this, some of you may react by saying that the pattern I've sketched out is dependent on the ability of the Treasury to sell its debt instruments, and may ask: what happens if prospective buyers, especially foreign nations won't buy our debt anymore? Well, that is extremely unlikely to happen, for reasons I've outlined here.

But if it does, then the Government has other ways of deficit spending at no cost to itself. Specifically, Congress can stop requiring Treasury to issue debt when it deficit spends, and just let Treasury spend by marking up accounts. I've discussed that alternative here. Also, Treasury can use coin seigniorage to ensure that the TGA never runs an overdraft. I've discussed that here. Finally, Congress can place the Fed under the Treasury where it belongs, and the Treasury would regain full authority to create the currency needed for deficit spending.

In short, the Government can always deficit spend at no cost to itself. So, the idea that it can't afford to spend what's necessary to solve our various problems is just false. It's a bad joke, a fairy tale, or a lie, depending on who's telling it. Government spending certainly has real costs in resources and human effort that need to be arrayed against the real benefits of Government spending. Also, if the Government spends money beyond the capacity of the economy to produce goods and services, its money can be used to buy, then too much spending can cause demand-pull inflation. But the US Government, unlike the rest of us, has no financial limitations, only real ones of the sort I've just listed. So, since Federal spending doesn't cost anything, let's start doing it to provide everyone who wants to work a job, and while we're at it, let's save those state jobs in Wisconsin and every other state, and put our ridiculously bloated, ineffective, murderous, and corrupt health insurance industry out of business by passing HR 676, Medicare for All.

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

The Simplest and Best Way Out

Joseph M. Firestone — Thu, 24 Feb 2011 17:32:05 -0500

Well, the proverbial s__t is now hitting the fan in our State Governments, and we're looking at struggles in State after State between newly elected Republican Governors scapegoating civil servants, while they insist that taxes can't be raised on the wealthy and large corporations during a recession. Put briefly, the moves to austerity and the resulting conflicts in Wisconsin and other States are partly Democrats' fault, because they failed to pass a State revenue sharing bill to close the gap in State budgets, so that no cuts in services, employee benefits, or jobs would be necessary. A revenue sharing bill of $300 Billion passed in 2009 would have done the trick, and could have been passed as part of the stimulus package.

Why didn't they do it? Well, the gutless wonders in the 21st century Democratic Party wouldn't go after the filibuster when it would have made a difference in January of 2009, and that left them negotiating with a few “moderate Republicans” and blue dog Democrats who ended up controlling the final form of the very inadequate stimulus bill. There's no turning the clock back, of course. But the Democrats should still propose revenue sharing, make a big fuss about it, and talk about how the Rs were perfectly willing to bail out the big banks, AIG, and even foreign banks, but are not now unwilling to bail out their own American States, and would rather attack public employee unions and their collective bargaining rights rather than doing anything constructive about jobs. The Ds should also point out that all the Rs have done since winning the House is to kill jobs, and that their refusal to pass revenue sharing is just another instance of job-killing.

Of course, someone will read this proposal and say that the Federal Government can't afford even a bigger deficit than it has now so that it's not a serious proposal. To them I say that I prefer to deal in reality and not act as if I believe the fantasies of people who think the Government is like a household. I know that people believe that the Federal Government can't afford it. But that belief is based on various fairy tales and myths I've exposed before like:

-- The Government is running out of money

-- The Government can only raise money by taxing or borrowing

-- We can't keep adding debt to the national credit card

-- We need to cut Federal Government spending and make do with no more money

-- If the Government borrows more money, the bond markets will raise our interest rates

-- If we continue to issue more debt, then our main creditors may refuse to buy it, an event that would lead us to insolvency and severe austerity

-- Our grandchildren must have the heavy burden of repaying our national debt

-- There is a deficit/debt reduction problem for the Federal Government that is not self-imposed

-- The Federal Government is like a household and that since households sacrifice to live within their means, Government ought to do that too

-- The only way to tackle our deficit is to cut excessive spending wherever we find it

-- We should also find a bipartisan solution to strengthen Social Security for future generations

-- We face a crushing burden of Federal debt. The debt will soon eclipse our entire economy, and grow to catastrophic levels in the years ahead.

-- The next generation will inherit a stagnant economy and a diminished country

-- The United States is in danger of becoming the next Greece or Ireland

-- Fiscal Responsibility means stabilizing and then reducing the debt-to-GDP ratio and achieving a Federal Government surplus

-- Federal Government austerity will create jobs

Everyone of these myths/fairy tales is used to support the idea that the Federal Government can't afford to do the things it ought to do to end the economic suffering in America, and, in particular, that we can't afford to save State employee jobs and benefits by providing revenue sharing grants of $1,000 per person to every State to close their budgetary gaps. Every one one of them is untrue. Belief in any of them is stopping us from helping the 99ers, from educating our kids, from re-building our infrastructure, from healing our sick, from re-inventing our economy, from developing our alternative energy sources, from creating real wealth for our children and grandchildren, from extending Social Security benefits, and from stopping these completely unnecessary attacks on unions and collective bargaining.

What we badly need is a mental housecleaning in our economic thinking. We need to sweep away the false ideas of neo-liberalism and its practice of “Aztec Economics,” because our experience (most recently, Ireland, Greece, Spain, the Baltic nations, the UK, and even ourselves, since we held back on stimulus and health care reform out of austerity concerns) tells us that they are serving us very badly and causing suffering all over the world. It's time to try the ideas of Modern Monetary Theory instead, and see if they will work better. They tell us, in part, that Federal Government spending isn't in itself a “cost,” since our constitutional authority to spend is unlimited and we can now do so electronically. So, when considering such spending we must never look at its nominal financial cost; but only at its likely real impact. Does it increase value? For whom? What are its real costs in terms of resource consumption and negative outcomes? Does it bring full employment? Does it solve national problems? Is it likely to cause inflation? Does it create a better life for most people?

These are the kinds of questions we should be asking. Asking and answering them correctly and making fiscal decisions based on the answers is fiscal responsibility. Fiscal irresponsibility is watching the impact of spending on deficits, surpluses, debt-to-GDP ratios and other numbers of this type.

The current Administration is fiscally irresponsible, not fiscally responsible. The President's Fiscal Commission exhibited the height of fiscal irresponsibility. And the current Congress, in jumping on the bandwagon of Aztec Economics and austerity, will give us even more fiscal irresponsibility, while congratulating themselves about taking the tough decisions that fiscal responsibility calls for. What more is there to say? We live in Orwell's world. We must find a way out!

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

Lectured On Fiscal Responsibility By The Irresponsible

Isaiah J. Poole — Tue, 20 Apr 2010 11:50:13 -0400

Do you have to be clueless about the economy to talk about fiscal responsibility? This is a question that people should be asking, given the list of prominent economists and economic analysts who are headlining the debate on deficit reduction.

To kick off his deficit commission, President Obama is planning a big show on April 27 that will include a number of experts talking about the need to reduce the deficit. Not one person among this group saw the housing bubble and the risks that it posed to the economy.

The next day, billionaire Wall Street investment banker Peter Peterson is sponsoring a day-long deficit-fest. Peterson not only excluded all of the economists who had warned of the bubble, but his show actually features the leading villains in this story. Peterson has invited former Federal Reserve Board Chairman Alan Greenspan and former Treasury Secretary and Citigroup top honcho Robert Rubin to lecture the country on the need to tighten our belts.

Just to remind folks, Greenspan was the guy who insisted that everything was fine as the housing bubble grew ever larger. As more and more junk loans got pushed out the door to people who obviously could not afford them (this is not hindsight, it was known at the time to those of us who passed their third-grade arithmetic class), Greenspan touted the innovations in the financial system that were allowing more people to become homeowners. And, as Goldman, Lehman, Citigroup and the rest pushed complex derivative instruments around the world, Greenspan applauded their ability to diversify risk.

After leaving the Fed, Greenspan cut a multimillion-dollar book deal, made numerous speeches for several hundred thousand dollars a pop, and now draws a million dollar a year salary from hedge fund manager John Paulson. (Yes, the same Paulson featured prominently in the Goldman indictment.) This is, of course, in addition to drawing a pension from the federal government that is many times more generous than the Social Security benefits that he wants to cut.

Robert Rubin comes in a close second in terms of blame for the crash and the crisis. He deserves at least as much credit as Greenspan for setting the economy on its bubble-driven growth path. When he was Treasury secretary he pushed the high-dollar policy that made U.S. goods uncompetitive in the world, reversing the position of Lloyd Bentsen, his predecessor, who was happy to see the dollar decline in order to eliminate the trade deficit.

Rubin put muscle behind his high-dollar rhetoric when he got the International Monetary Fund to impose harsh conditions in its bailouts following the East Asian financial crisis. The deal was that the troubled countries had to repay their debts in full, but the United States allowed them to export like crazy to get the money to make the payments. The lesson to other developing countries was that it was necessary to build up huge amounts of reserves to avoid ever being put in this situation by the IMF. For them this meant lowering the value of their currency relative to the dollar in order to accumulate dollar reserves. For the U.S. it meant a massive trade deficit. This trade deficit was one of the central imbalances that led to the housing bubble.

Rubin was also a top advocate of deregulation of financial markets. This included the repeal of the Glass-Steagall Act, thus allowing holders of government-guaranteed deposits to get involved with high-risk trading. He also prevented the regulation of credit default swaps and other derivative instruments, stepping in to obstruct the efforts in this direction by Brooksley Born, the head of the Commodity Futures Trading Commission.

After leaving the Clinton administration, Rubin took a top job at Citigroup to enjoy the fruits of his labor. He made over $110 million for his work before leaving in the fall of 2008. At the time, Citigroup was on the edge of bankruptcy, only kept alive by virtue of tens of billions of taxpayer dollars and the promise of hundreds of billions more if the bets by the Rubin crew soured further.

So, the country is supposed to listen to lectures on the need for belt-tightening from Greenspan, Rubin and a whole group of other luminaries who could not see the $8 trillion housing bubble that wrecked the economy and put 15 million people out of work.

While it is obvious that this elite group cares little about the well-being of ordinary people, the remarkable part of this story is that the bubble was the most important item even from the standpoint of the issue that these folks care about most: the deficit. The economic collapse that followed in the wake of the crash of the housing bubble is projected to add more than $4 trillion to the debt by 2020. This is due to lost tax revenue, higher benefit payments, financial bailouts and stimulus spending.

In other words, even if Greenspan, Rubin, Peterson and the rest did not care about all the damage that would be done to people lives by this earthquake, but only about the deficit, they still should have been jumping up and down yelling about the housing bubble. But this gang did not issue warnings: they said that everything was just fine. And now they want to tell us that we have to cut our parents' Social Security and Medicare. Everyone should give their arguments the attention they deserve.

What Do We Really Want For Our Grandchildren?

Isaiah J. Poole — Thu, 02 Apr 2009 13:22:23 -0400

You can't just look at the debt; it's even more important to consider whether that debt helps our generation invest in things that will improve the lives of our children and grandchildren.

An Election, a Budget, and Two Summits = A Bold Obama Strategy for Health Care Change.

Roger Hickey — Sun, 08 Mar 2009 21:30:20 -0400

Like most participants in President Obama’s Health Care Summit last Thursday, I was thrilled to be invited to the White House for the big public meeting on health care. At the Summit, the President did what the leaders and activists of the 800 organizations in our Health Care for America Now coalition have been urging:
he announced his determination to reform the country’s health care system -- to cover everyone and to control health costs -- in this first year of his presidency.

I brought CD’s with 300,000 signatures and emails collected by MoveOn, HCAN and my organization. The message to Congress: “Don’t let conservatives and special interests block health care for all.” By challenging all participants to control health costs as well as coverage, Obama is setting up the coming debate to demonstrate that the conservatives and special interests are bankrupt when it comes to real health reform – because they and the interests they represent are part of the problem, not part of the solution.

Obama signaled he was serious about health care with his first budget documents, released before his February 24 speech to Congress, containing a $640 billion “down-payment” on the cost of health reform in the next 10 years. And he set up the rationale for the urgency of going ahead with health care at the February 23 Fiscal Responsibility Summit, where Obama and his OMB director Peter Orszag argued that the only serious way to “bend the budget toward balance” is reorganize the health care system to control costs in this sector of the private economy that is also responsible for runaway growth in the Federal budget.

At a time when he has gotten the Congress to spend hundreds of billions to revive the economy and unfreeze the banking system, the President took on the concerns of conservatives and Blue Dog Democrats about growing deficits to set up the following equation: “When the economy recovers, the number one factor pushing up deficits will be Medicare and Medicaid spending. But these Federal programs is driven by rising costs in the entire health care system. So it is imperative that we reform the whole health care system to reduce inflation that is driving growth in Medicare and Medicaid spending.”

But the important point that I want to emphasize today is that on Medicare and Medicaid, in particular -- which everybody here understands is the 800-pound gorilla -- I don't see us being able to get an effective reform package around those entitlements without fixing the underlying problem of health care inflation. If we've got 6, 7, 8 percent health care inflation we could fix Medicare and Medicaid temporarily for a couple of years, but we would be back in the same fix 10 years from now. And so our most urgent task is to drive down costs both on the private side and on the public side, because Medicare and Medicaid costs have actually gone up fairly comparably to what's been happening in the private sector what businesses and families and others have been doing. That's why I think it's so important for us to focus on costs as part of this overall reform package. http://www.whitehouse.gov/the_press_office/Closing-Remarks-by-the-President-at-White-House-Forum-on-Health-Reform/

What is truly impressive is President Obama’s ability to reach out to deficit hawks who disagree with him fundamentally on the budget – or insurance company executives who have a very different approach to health care – and make them (and the media) feel as though they have been consulted, heard, and at least partially agreed with. Sooner or later, many of these forces will break with Obama, and he will have to assemble a majority in the Congress who support his approach -- and he will need the power of a powerful progressive movement to help him win. But for now this public openness works.

The new team has gotten this domestic policy summit thing down: Fill the East Room with a couple hundred Congresspeople and Senators and policy and organizational leaders from across the political spectrum. Give the President the microphone and let him impress us with his mastery of the issues – and then send us off for two hours of wonky “break out sessions” where Congressional leaders dominate but others also get to weigh in. Finally, bring us all together to hear the President summarize the discussions (from reports from his staff) and declare his intentions -- to bend the arc of the budget toward balance (in the case of the Fiscal Summit) and (at the Health Summit) to reorganize the health care sector to cover everyone in a way that controls the main cause of long term budget imbalance, the spiraling costs of health care.

These gatherings are designed to do a number of things at once: to dominate the hourly cable and talk-radio programs and the daily and weekly news; to make a large number of elected officials and citizen leaders feel they have had an opportunity to advise the White House and posture in public, and to convey to the voters who elected him that he has a plan to achieve what he said he would do if he got to the White House. And on each occasion the President sent off the participants with the admonition to work together for progress – and the implication failure to work together is a betrayal of the common good.

The good news is that many of the participants now feel pressure not to oppose the President directly. On health care, for example, the groups that wielded the knife that killed the Clinton health plan, the health insurance lobby and some groups claiming to represent small and big business, attended the Health Summit and pledged to help this time. Karen Ignani, who runs the insurance company association, now called America's Health Insurance Plans, declared to the President. “We hear the American people about what's not working. You have our commitment to play, to contribute, and to help pass health care reform this year.” Dan Danner, representing the National Federation of Independent Businesses, the group that produced the Harry and Louise ads against Hillary Clinton’s health reform, replied to Obama, “I'm honored to be here representing small business . . . and for them, cost is still the top issue. And we very much look forward to finding a solution together that works for America's job creators.” http://www.whitehouse.gov/the_press_office/Closing-Remarks-by-the-President-at-White-House-Forum-on-Health-Reform/

But how does the insurance industry meet President Obama’s challenge to control health insurance costs, now bankrupting companies and experienced by you and me in rising premiums, growing out-of-pocket costs, and just plain inability to afford decent coverage? Here’s Karen Ignani’s answer, conveyed in the breakout session I was assigned to: She suggested that every player in the health system – insurance companies, doctors, hospitals and other providers – all get together and promise to voluntarily reduce their costs in the coming year by at least 1 percent. That’s it. That’s the best this representative of America’s Health Insurance Plans could come up with! Voluntary price restraint! Bernie Madoff should try making this promise of volunteerism when he finally goes to trail. (“Members of the jury, if you don’t send me to jail, I will voluntarily give back the money and do real investments, not ponzi schemes for the rest of my life.”) When American health consumers, like the Madoff jury, hear this offer, they are likely to look for another solution.

In his concluding remarks at the Health Summit, in what may have been a feint to confuse everyone, President Obama declared “I'm talking to you liberal bleeding hearts out there. (Laughter.) Don't think that we can solve this problem without tackling costs.” Well, it turns out that it is the liberals who have been promoting the most effective strategy for tackling costs that has so far been proposed: giving everyone the option of enrolling in a public health insurance plan, like Medicare for the non-elderly. The Lewin group estimates that something like half the population would enroll in such a plan, creating a very important benchmark and competitor for the private insurance industry. The Commonwealth Fund Commission found that a public health insurance plan will have premiums averaging 20% less than private insurance. And recent polling by Celinda Lake has found that 73% of Americans favor a choice of private or public health insurance over having just one or the other.

The public insurance option is controversial among some of the same people who, like Ronald Reagan in the 1950s, called the prospect of Medicare for seniors “socialistic.” But the real impact of a public insurance plan would be to bring to bear some good old-fashioned competition in the health insurance market, which is dominated by a few firms in most states. According to a study in Health Affairs, in 40 states the top three carriers account for between 60 and 100 percent of the market. By now, everyone should know that Medicare is more efficient than private insurance, with fewer overhead costs like advertising – and much simplified billing and other procedures than private companies. And it is just this kind of simplified nation-wide administrative structure that would allow a public insurance plan for the rest of us to institute cost-saving and quality-improving reforms.

Everyone talks about the virtues of Health Information Technology in controlling costs. A unified system (like a Medicare for the rest of us) would be able to deploy IT system-wide more easily that a whole lot of private firms, each with their own administrative, billing and reporting systems. And the real cost saving potential for health IT comes when linked with a new system of “comparative effectiveness research,” so that over time, the health system builds up a huge database of what works and what doesn’t work in health treatments. Senate Finance Committee Chairman, Max Baucus, in his highly-regarded White Paper called Call to Action: Health Reform 2009, which proposes creation of a public insurance plan similar to Obama’s, argues that the public plan, by virtue of its size and non-profit national charter, would be able to reorient America’s health care delivery system toward services and activities that improve patient care and “bend the curve” of growth in national health care spending.

Study after study has endorsed the importance of a public insurance plan as a very effective mechanism for controlling system-wide costs, spurring competition and innovation in the private sector, and improving the quality of health care.

And yet, the conservative ideology dominates one part of the political spectrum. At the White House Health Summit, after he called on Senator Baucus, President Obama graciously gave the microphone to Baucus’s minority party ranking member in the committee, Sen. Grassley, who thanked the President and then laid down the gauntlet on the public insurance option: ”So the only thing that I would throw out for your consideration -- and please don't respond to this now, because I'm asking you just to think about it -- there's a lot of us that feel that the public option that the government is an unfair competitor and that we're going to get an awful lot of crowd out.”

So the only time the public insurance option was seriously discussed with the President in the room, it was for the highest ranking leader of the Republicans at the Summit to try to rule it off the table, because – it would represent unfair competition with the private insurance companies.

President Obama didn’t respond conclusively, but he correctly summarized the case for the public insurance option: “The thinking on the public option has been that it gives consumers more choices, and it helps give -- keep the private sector honest, because there's some competition out there.”

So the debate has finally been joined. The President is in favor of competition and choice to bring down costs. And the Republicans, echoing the insurance industry, are afraid of competition and have no other real answers to the problem of rising health care costs. Sound like a good fight to me.

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I also attended the February 23 White House Fiscal Responsibility Summit and I was brought face-to-face with the reality that Republicans and some Democrats do have a proposal for dealing with Medicare and Social Security costs. They want an independent Commission on Entitlements that would propose caps on overall entitlement spending and automatic cuts to those programs when spending exceeded the caps. The Commission would devise the specifics and then present them to the Congress for an up or down vote – dispensing with the democratic niceties of debate or amendments.

Prior to this first summit I had worked with allies to urge the White House NOT to have Peter G. Peterson, the notorious budget hawk and advocate of such a commission, speak at the Summit – and to urge them not to announce a White House task force on Social Security. Perhaps to punish me for this successful pre-Summit agitation – or perhaps to let me see what they were up against, the White House assigned me to the Budget Process break out session that was dominated by Senators and Congresspeople -- like Judd Gregg and Evan Bayh and Kent Conrad – who made an entitlements commission the subject of the session. Their focus was on capping and automatically cutting Social Security and Medicare -- the very opposite of health care reform that takes on the drivers of health care inflation, the insurance companies.

I got only one opportunity to speak in a session dominated by Senators and Congresspeople, but I am especially proud of the small section (page 44) devoted in the official report to the dissenters:

Still others – for example, Representative Obey, Representative Van Hollen, and Roger Hickey – stated express opposition to a commission.

• Representative Obey stated that he believed a commission would thrill the policy wonks but nobody else, and that in the end nothing would be accomplished. “Cound me among the strong skeptics,” he said.

• Representative Van Hollen’s central concern with a commission process was his belief that Congress should not outsource the key fiscal policy decisions on health care, taxes, and Social Security to someone else. In his words: “Huge policy issues cannot be subcontracted.” He feared that a commission would be viewed as undemocratic and and abrogation of congressional responsibility.

• Roger Hickey believed that “an extraordinary procedure” has already been employed in the past year, to great effect – namely, the presidential election. He argued that the American people had spoken in favor of expanded health care and a fairer tax distribution, and also for greater honesty and transparency from their government – not in favor of handing over decisions on fundamental issues such as taxes, health, and retirement to a closed group of insiders.

My moment of glory at the Fiscal Responsibility Summit.