debt burden

Neoliberalism Kills: Part Two

Joseph M. Firestone — Wed, 24 Oct 2012 14:18:23 -0400

During Part One of this series, I approached the end of my post with this paragraph.

Apart from the political opposition from the insurance companies that Medicare for All would have engendered, I think the main justification for abandoning Medicare for All and switching to the PO and eventually the PO-less ACA, was actually neoliberalism. The President, his main advisers, the Democratic leaders in Congress, and most progressives working for Washington progressive organizations were steeped in neoliberal doctrine. They viewed the Bush tax cuts and the two Wars as unpaid for. The ARRA stimulus Act was similarly unpaid for and added to deficit spending and to the debt-subject-to-the-limit. They believed and most believe today that the Federal Government can have solvency problems if the debt-to-GDP ratio increases too much, and interest rates on the national debt are driven up by the bond vigilantes.

A Medicare for All Act would have required Federal spending on health care to rise by $800 - $900 Billion per year over present levels. They were not ready to cover that with higher tax revenues, and they were not ready to deficit spend it because they viewed that as fiscally irresponsible, and believed then and still believe now that it's necessary to decrease the debt-to-GDP ratio over time.

So, they wouldn't consider spending for Medicare for All. They wouldn't look seriously at the hundreds of thousands of lives they were consigning to oblivion, at the bankruptcies and divorces they could prevent, or at the obvious fact that while HR 676 would have cost the Government $900 Billion more in money annually that the Government can create at will and at zero real cost; it would have saved the people who have to pay for health insurance, and health care out of pocket and in the form of “co-pays” $1.8 Trillion annually, thus providing a marvelous boost to the economy. Instead, they just said to everybody, that it was impractical and that the United States couldn't afford it; but that it would be able to to afford a self-supporting PO bill, and later when that was taken off the table, a deficit neutral insurance bailout like the ACA.

My friend Lambert Strether liked Part One and cross-posted it at Yves Smith's Naked Capitalism site. But the above statement bothers him because he thinks that using the label neoliberalism alone without explaining what aspects of that paradigm provided the justification for taking Medicare for All off the Table, and who the political actors are who adhere to this, makes my treatment incomplete. Even though I agree with the view that it's easy enough to google “neoliberalism” if someone doubts what I mean by the “term,” I also agree with Lambert that it would add something to Part One for me to be more specific about my thinking and show the connections between neoliberalism and the decision to take Medicare for All off the Table. Hence, this Part Two.

What is Neoliberalism?

Neoliberalism is an evolving ideological paradigm which can be traced back to the work of Hayek and von Mises in the 1920s and even earlier than that. I won't however, do a historical survey here of the various developments and nuances. Instead, I'll just rely on the definitions and specifications of this body of thought that seem to me to be the clearest statements of the current state of the paradigm. Let's begin with this contemporary definition and characterization of neoliberalism by Thorsen and Lie (2007):

Neoliberalism is, as we see it, a loosely demarcated set of political beliefs which most prominently and prototypically include the conviction that the only legitimate purpose of the state is to safeguard individual, especially commercial, liberty, as well as strong private property rights (cf. especially Mises 1962; Nozick 1974; Hayek 1979). This conviction usually issues, in turn, in a belief that the state ought to be minimal or at least drastically reduced in strength and size, and that any transgression by the state beyond its sole legitimate purpose is unacceptable (ibid.). These beliefs could apply to the international level as well, where a system of free markets and free trade ought to be implemented as well; the only acceptable reason for regulating international trade is to safeguard the same kind of commercial liberty and the same kinds of strong property rights which ought to be realised on a national level (Norberg 2001; Friedman 2006).

Neoliberalism generally also includes the belief that freely adopted market mechanisms is the optimal way of organising all exchanges of goods and services (Friedman 1962; 1980; Norberg 2001). Free markets and free trade will, it is believed, set free the creative potential and the entrepreneurial spirit which is built into the spontaneous order of any human society, and thereby lead to more individual liberty and well-being, and a more efficient allocation of resources (Hayek 1973; Rothbard [1962/1970] 2004). Neoliberalism could also include a perspective on moral virtue: the good and virtuous person is one who is able to access the relevant markets and function as a competent actor in these markets. He or she is willing to accept the risks associated with participating in free markets, and to adapt to rapid changes arising from such participation (Friedman 1980). Individuals are also seen as being solely responsible for the consequences of the choices and decisions they freely make: instances of inequality and glaring social injustice are morally acceptable, at least to the degree in which they could be seen as the result of freely made decisions (Nozick 1974; Hayek 1976). If a person demands that the state should regulate the market or make reparations to the unfortunate who has been caught at the losing end of a freely initiated market transaction, this is viewed as an indication that the person in question is morally depraved and underdeveloped, and scarcely different from a proponent of a totalitarian state (Mises 1962).

Thus understood and defined, neoliberalism becomes a loose set of ideas of how the relationship between the state and its external environment ought to be organised, and not a complete political philosophy or ideology (Blomgren 1997; Malnes 1998). In fact, it is not understood as a theory about how political processes ought to be organised at all. Neoliberalism is for instance silent on the issue of whether or not there ought to be democracy and free exchanges of political ideas. This means, as Harvey (2005) indicates, that policies inspired by neoliberalism could be implemented under the auspices of autocrats as well as within liberal democracies. In fact, neoliberals merely claim, in effect, that as much as possible ought to be left to the market or other processes which individuals freely choose to take part in, and consequently that as little as possible ought to be subjected to genuinely political processes. Proponents of neoliberalism are therefore often in the “critical literature? portrayed as sceptics of democracy: if the democratic process slows down neoliberal reforms, or threatens individual and commercial liberty, which it sometimes does, then democracy ought to be sidestepped and replaced by the rule of experts or legal instruments designed for that purpose. The practical implementation of neoliberal policies will, therefore, lead to a relocation of power from political to economic processes, from the state to markets and individuals, and finally from the legislature and executives authorities to the judiciary (cf. Østerud et al. 2003; Trollstøl and Stensrud 2005; Tranøy 2006).

Thorsen and Lie's view of neoliberalism as an encompassing system of thought with the above characteristics is the best account of it I've seen. This view is a general statement about neoliberalism. And it lets us see how dangerous and anti-humanistic neoliberalism is in its broad implications for many spheres of life. But, of necessity, it can't cover the finer points, and isn't specified to economic neoliberalism's take on the role of, and constraints on, Government policy in its relations with the economy. So, we need to go more deeply into the economic side of this. That further specification of one aspect, the economic side of neoliberalism, is called the Washington Consensus.

The Washington Consensus

Wikipedia offers a good statement of the 10 points in the Washington consensus specified by John Williamson, of the Peter G. Peterson funded Institute for International Economics. The points were used by the World Bank, the IMF, and other financial institutions to guide their relations with developing nations, and also as a set of principles or guidelines to inform the policies of Eurozone central authorities.

-- Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP;

-- Redirection of public spending from subsidies ("especially indiscriminate subsidies") toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;

-- Tax reform, broadening the tax base and adopting moderate marginal tax rates;

-- Interest rates that are market determined and positive (but moderate) in real terms;

-- Competitive exchange rates;

-- Trade liberalization: liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;

-- Liberalization of inward foreign direct investment;

-- Privatization of state enterprises;

-- Deregulation: abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions;

-- Legal security for property rights.

It's said by many that the Washington Consensus is dead now because of the Crash of 2008 and events since then. But I think it's plain that its influence lives on in the thinking of people like Erskine Bowles, Peter G. Peterson, David Walker, President Obama, media organizations such as CBS, NBC, ABC, CNN, and The Washington Post, many media commentators and reporters, think tanks around Washington such as the Committee for a Responsible Federal Budget, The New America Foundation, AmericaSpeaks, The Brookings Institution, so-called non-partisan organizations formed to influence the two major parties and even spawn a third party, such as Americans Elect, and No Labels, and many in Congress including the “Gang of Eight,” which Virginia Democratic Senate candidate and former Governor Tim Kaine says he will immediately join, if elected.

I think it's influence is felt even in liberal or progressive organizations, and among progressive commentators and writers, who all share, or at least constantly give lip service to, ideas like fiscal policy discipline, and tax reform, as well as more specific ideas derived from these principles which we will turn to now.

The Washington Consensus and the drive for Fiscal Sustainabiity/Responsibility Interpreted as Austerity and Long-term Deficit Reduction

The influence of the Washington Consensus is reflected in the myths and fairy tales being told by the continuing Fiscal Sustainability/Responsibility/Austerity political movement being driven by the above groups and people and many others. This movement has developed a more specific “Washington Consensus” in the form of myths and fairy tales derived from further specifying Williamson's Washington Consensus. In another place I've listed and debunked them. Here, I'll simply list them, so that their relationship to more general neoliberal principles and the original Washington Consensus can be seen:

-- 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.

Each of the links provided refutes a claim offered by the more specific fiscal sustainability/responsibility/austerity version of the Washington Consensus. That version began to gather urgency in Washington soon after President Obama assumed office, and became a major force early 2010 with the President's appointment of the President's National Commission on Fiscal Responsibility and Reform. After nearly four years of the Obama Administration, these myths and fairy tales dominate the Washington conversation about fiscal responsibility, fiscal sustainability, and deficit reduction, and still push these issues to the center of our concerns, even after years of high unemployment, and the destruction of 40% of the accumulated wealth of middle class Americans, the continuing decline in the quality of our schools, our collapsing infrastructure, the continuing decline in social and economic mobility in the United States, the continuing subversion of the political system by monied elites, both personal and corporate, the continued failure of our health care system to deliver health care that works to all Americans, and doesn't economically devastate those who enter the health care system, and the continued exacerbation of many of our other problems. Why do the neoliberal partisans of austerity and long-term deficit reduction say that the fiscal responsibility problem is a more important problem than all of the others, or even a problem at all? Why do they prioritize fiscal discipline over everything else?

It's because they say that the US Government is constrained in its spending by its need to raise revenue from taxing and borrowing, and its dependence on the bond markets for reasonable interest rates when it borrows. This is the Government Budget Constraint (GBC) which is at the very center of their story, and which drives their reasoning to the conclusion that unless we get the national debt under control, so that the debt-to-GDP ratio stops growing and stabilizes at some reasonable level, our financing from the bond markets will carry prohibitive interest rates. And that if we continue borrowing beyond that our credit will finally collapse preventing us from funding many of of our essential programs and even our common defense.

All the claims, I've reviewed here, except perhaps for the last, are based on the idea that this GBC exists. There's plenty of evidence that it exists, they say. Look at households, look at private businesses, look at non-profit organizations, look at state Governments, look at Greece, Ireland, Spain, etc. They all have GBCs don't they, and since the Government is just like an enormous household, it has a GBC too, right? Wrong!

Modern Money Theory (MMT) says that for a Government with a non-convertible fiat currency, a floating exchange rate, and no debts in a currency not its own, there is no GBC. That claim is at the heart of the counter-narrative asserting that the US has no budget constraint except for self-imposed ones.

Some rightly point out that even though the Constitution allows creation of financial wealth without limit, a GBC does exist in the US because Congress has imposed it, by locating the power to create money “out of thin air” in the Fed, and by requiring that the Fed not extend credit to the Treasury, by either allowing it run a negative balance in its accounts, or by monetizing Treasury debt by buying it directly. However, these claims don't hold up because 1) Congress can always remove these constraints since they are political rather than economic, and 2) they ignore the 1996 legislation allowing the Secretary of the Treasury to mint proof platinum coins of arbitrarily high face value, e.g. $60 Trillion.

Treasury can use that law to fill the public purse, pay off all debt subject to the limit, and cease to issue any new debt. Since this capability exists, even without Congress removing its constraints on Treasury money creation, Treasury can still create whatever it needs to close any gap that might appear between tax revenues and Federal spending of Congressional Appropriations.

Conclusion

So, here we are, a Government without a GBC that can never run out of money involuntarily, and we're facing a persistent, well-funded and powerful neolliberal consensus in Washington that wants to impose austerity on all of us in the name of a non-existent GBC that it passionately asserts will cause the nation to “go broke,” if we give priority to all of our major problems, while forgetting about their fantasy that we are doomed if we don't reach some entirely arbitrary level of debt-to-GDP ratio, that they have no way of even deriving in any rigorous way from their neoliberal theory of government fiscal responsibility.

With increasingly grave warnings of doom they try to make us believe that we are facing a national crisis that must be met with a bipartisan solution that will be impervious to the inevitable protests that will arise from most people when their solution causes suffering -- as it inevitably will, since as MMT shows, deficit reduction and government surpluses, in the presence of trade deficits, and desires to save in the private sector will inevitably cause destruction of private sector financial assets. Since the elites are in a better position to protect their financial assets than other Americans, the burden of austerity and the resulting hardships and fatalities will inevitably fall on most of us.

We will be sharing the sacrifices. They will be getting richer from their efforts in the international gambling casino, and from seizing everyone else's property when austerity renders debtors unable to repay their debts.

Negotiation of that “grand bargain” they are seeking will probably use Bowles-Simpson as a framework, even though that framework was never adopted by the “Catfood Commission,” and even though it has received great resistance in Congress since it was published by the two Chairs in the absence of agreement needed to make it a commission product. In any event, the main thrust of the austerians/deficit hawks: that fiscal policy should focus on a long-term deficit reduction plan cutting back the social safety net, is still very much alive politically in Washington, DC and another attempt to implement it is likely either in the lame duck session, or early next year in the new Congress, barring an implosion in Europe before then that could derail the neoliberal deficit hawk drive for austerity.

(Cross-posted from New Economic Perspectives.)

Neoliberalism Kills: Part One

Joseph M. Firestone — Sat, 20 Oct 2012 19:51:29 -0400

During the run-up to passage of the Affordable Care Act (ACA), I wrote a number of posts (here, here, and here) assessing the ACA very negatively, and pointing out the shortcomings of the various versions of this bill, preceding its final passage. My focus was on contrasting varying versions with HR 676, the Conyers-Kucinich Medicare for All bill, in relation to its likely impact on fatalities, bankruptcies and divorces attributed to lack of health insurance coverage in the US.

At that time, about 47 million people were uninsured, and based on the rate of 1,000 fatalities per million established by the Wolper-Woolhandler-Himmelstein et al study of 2007-2009, I anticipated 47,000 fatalities in 2010. In addition, I predicted that

-- In the “band-aid” period before the health insurance exchanges became operational in 2014 we were still looking at an average of 31,000 fatalities per year due to lack of insurance, or a total of about 140,000 expected fatalities before the exchanges would be effective sometime in 2014.

-- After that we were still looking at 23,000 annual deaths per year through 2019.

-- A grand total of expected fatalities of 267,000 by the end of 2019

-- The bill will not cover 30 million additional people, as claimed by its advocates, but more like 15 million due to rising insurance costs and un-indexed subsidies in the ACA.

-- In addition, due to population growth, we would still be looking at 35 million uncovered and 35,000 fatalities due to lack of coverage.

Now 2.6 years have passed since I made those predictions, and the Commonwealth Fund has just released a new study of the ACA. The study projects what we can expect from ACA coverage compared to what we can expect from a baseline do nothing scenario and from Mitt Romney's latest pronouncements about his health care plan, which, in all likelihood will be obsolete before election day.

The projections are based on Jonathan Gruber's simulation model. Gruber is a consultant whose ideas were incorporated both into Romneycare in Massachusetts and the ACA at the national level. Gruber's model isn't something one can count on in my view, if only because long-term economic projection models using CBO-like methodologies are subject to accumulating errors over time as well as wide deviations from their policy assumptions in reality. Decade long projections are particularly likely to be science fiction rather than science.

Having said that, however, it's still worthwhile to use Gruber's projections as a basis for comparison of the various scenarios, simply because they are likely to under-estimate the rate of coverage, as well as the level of projected fatalities, over time. We can be pretty confident, for example that if Gruber's model projects 286,000 fatalities over a particular period of time; then actual fatalities will be at least that high.

The Comparison

Here's a Table I constructed using data from the study. There are four scenarios compared in the Table: The ACA, the Romney Plan as described on his web site, a baseline scenario assuming that the ACA wasn't implemented, and a final scenario assuming that HR 676, Medicare for All, had been passed by June of 2009 either through Democrats forgetting bipartisanship and using reconciliation, or the Constitutional Option to overcome the Senate filibuster. The Commonwealth Fund doesn't include this scenario; but I think it needs to be included in any comparison to indicate what might have happened if the President and Congress had wanted to solve the most serious consequence of maintaining the private health industry, rather than simply put a band-aid on the health insurance problem while bailing out the health insurance companies.

Let's begin by looking at the first three years 2010 – 2012. Think about the numbers for a minute. It's nearly three years since a Medicare for All Bill might have gone into effect. If we were living under the Romney Plan, roughly 148,200 people would have died. Under the baseline of no legislation at all, the fatalities would have been slightly lower at 146,600, and under the ACA we've had nearly 140,500 fatalities. The ACA is slightly better than the other two alternatives; but the conclusion that jumps out at one is that the failure to pass and implement Medicare for All has cost at least 140,000 lives in three years, or 47 times the number of lives lost on September 11, and about 14.6 times the number of fatalities on 9/11, during the Iraq War, and in Afghanistan up to the present, combined. I'll return to this point later.

The years between 2013 and 2022 show a marked divergence of the uninsured estimates among the Romney, ACA, and benchmark scenarios. The ACA saves hundreds of thousands of lives compared with the benchmark and Romney scenarios; but it still projects an additional 286,000 fatalities through 2022 under the ACA scenario, and a total of 427,000 fatalities from 2010 through 2022. This compares to nearly 800,000 under the Romney scenario and just over 700,000 for the no change benchmark. Certainly, the ACA is much better than the Benchmark or Romney alternatives, but it's hard to avoid noting that the most striking comparison is between any of these three alternatives, and the Medicare for All alternative. Had that alternative been legislated in 2009 and implemented by January of 2010, we'd be looking at virtually no fatalities due to lack of insurance rather than 400,000 or 700,000, or 800,000. Since The Commonwealth Fund Report excludes the Medicare for All alternative from consideration, and in doing so, moves the Overton Window of its policy impact evaluation to the Right, it doesn't bring the real cost of legislating the ACA option to the fore. That cost, based on Gruber's simulation is 427,000 lives over the time horizon ending in 2022.

What Was the Justification for Accepting the Cost of Those Lives?

There are a lot of reasons, motivations, and political dynamics which together explain why the ACA, rather than HR 676 passed the Congress. I've written a lot about these in the past and have imputed corrupt motives to various people involved in the legislative process producing the ACA often enough. But apart from all this, there is the question of justification or rationalization, of why Medicare for All could be so quickly and easily taken off the table without a major fight from the progressives?

Part of the reason was the promise of Administration support for the public option sparkle pony, as it came to be called in some of the more cynical progressive circles. The PO idea split progressives and stripped away support of DC-based progressive organizations from Medicare for All, on grounds that the PO was a more politically “realistic” alternative than Medicare for All. That is a sad story that has been told very often. But looking past it; what was unrealistic about Medicare for All, the type of system that has been successful in providing coverage and lowering costs in so many nations?

Apart from the political opposition from the insurance companies that Medicare for All would have engendered, I think the main justification for abandoning Medicare for All and switching to the PO and eventually the PO-less ACA, was actually neoliberalism. The President, his main advisers, the Democratic leaders in Congress, and most progressives working for Washington progressive organizations were steeped in neoliberal doctrine. They viewed the Bush tax cuts and the two Wars as unpaid for. The ARRA stimulus Act was similarly unpaid for and added to deficit spending and to the debt-subject-to-the-limit. They believed and most believe today that the Federal Government can have solvency problems if the debt-to-GDP ratio increases too much, and interest rates on the national debt are driven up by the bond vigilantes.

A Medicare for All Act would have required Federal spending on health care to rise by $800 - $900 Billion per year over present levels. They were not ready to cover that with higher tax revenues, and they were not ready to deficit spend it because they viewed that as fiscally irresponsible, and believed then and still believe now that it's necessary to decrease the debt-to-GDP ratio over time.

So, they wouldn't consider spending for Medicare for All. They wouldn't look seriously at the hundreds of thousands of lives they were consigning to oblivion, at the bankruptcies and divorces they could prevent, or at the obvious fact that while HR 676 would have cost the Government $900 Billion more in money annually that the Government can create at will and at zero real cost; it would have saved the people who have to pay for health insurance, and health care out of pocket and in the form of “co-pays” $1.8 Trillion annually, thus providing a marvelous boost to the economy. Instead, they just said to everybody, that it was impractical and that the United States couldn't afford it; but that it would be able to to afford a self-supporting PO bill, and later when that was taken off the table, a deficit neutral insurance bailout like the ACA.

So, here we are at the denouement, neoliberalism, and other false social and economic theories, kill. In this case, belief in neoliberalism has already killed approximately 140,000 Americans since the beginning of 2010. And if we don't reject it, over the next decade it will kill 286,000 more, more than 2/3 the number of US fatalities during WW II. And these are only the fatalities resulting from a refusal to deficit spend to pass Medicare for All.

In addition, there are also the fatalities resulting from our collective failure to end the joblessness, the crime, the reactions to family breakup, the social disintegration, and the climate change and environmental effects, and all the other serious problems we refuse to solve because we and our leaders have been captured by neoliberalism and its false notions about fiscal responsibility and fiscal sustainability. We have reached the point, now, where it is neoliberalism or American Democracy, or, if you like neoliberalism or us. There is no alternative! Neoliberalism is one of our worst ideas. And as Popper said, life is about killing your worst ideas before they kill you. So, it's time for us to free ourselves of neoliberalism, switch to a paradigm that works, and get full employment, Medicare for All, and much else. That paradigm is called Modern Money Theory.

(Cross-posted from New Economic Perspectives.)

Paul K's Strange Logic

Joseph M. Firestone — Sat, 20 Oct 2012 19:36:01 -0400

In an October 12th Post entitled "Foreigners and the Burden of Debt," Paul Krugman made the following comment.

. . . we'd all agree that deficits make us poorer if they crowd out investment spending, which they would if the economy were near full employment, but won't if we're deeply depressed. All we have to do is realize that net foreign investment purchases minus sales of assets from and to foreigners is also a form of investment. Or to put it a bit more simply, sure, budget deficits can make us poorer as a nation if they lead to bigger trade deficits.

I have to say I have a bit of a problem understanding this one. Let's assume we're in a depressed state as we are now and the Government decides to run an additional $1 Trillion deficit, without, for simplicity, any corresponding debt issuance. Then, assuming that the private sector saves at the rate of 6% of GDP and the trade deficit is 4%, and, neglecting any fiscal multiplier, the additional Government deficit adds $900 Billion in aggregate demand to the US economy, $60 Billion immediately to savings, and $40 Billion to the foreign sector. So, the Government deficit spending has certainly made both the domestic non-Government sector, and the foreign sector richer in USD nominal wealth, though the domestic government sector has been made 24 times more wealthy than the foreign sector.

Of course, if we take into account the fiscal multiplier on the $900 B deficit, and we assume that the Fed will add to the money supply as necessary during the ensuing economic expansion, then that 900B deficit might end up adding as much as $2.7 Trillion in GDP to the economy if it's spent in the right way. So how has this made us poorer?

Maybe Paul K has real wealth in mind in the quote and not nominal wealth. So, would the $40 Billion in increased trade deficit decrease out real wealth? I don't see how, since in a trade deficit we send USD to the foreign sellers in return for real wealth, thus increasing the real wealth held by Americans. But maybe I'm missing something about the logic of the IS-LM model?

So, how, again, can budget deficits that increase trade deficits make us poorer?

(Cross-posted from New Economic Perspectives.)

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

Joseph M. Firestone — Thu, 22 Dec 2011 11:44:04 -0500

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

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

In the previous two posts

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

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

Beware the Trade Deficit?

Mosler's fifth dif is:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Mosler's sixth dif is

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

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

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

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

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

“investment adds to savings.”

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

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

“investment adds to savings”

holds.

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

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

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

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

Public Sector Deficits and Taxes

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

“higher deficits today, mean higher taxes tomorrow.”

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

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

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

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

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

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

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

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

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

Fairy Tales of the SOTU Related to Deficit Reduction

Joseph M. Firestone — Wed, 26 Jan 2011 01:44:53 -0500

In "All Together Now: There Is No Deficit/Debt Problem,” I warned against the message calling for deficit reduction that the President would probably deliver in his State of the Union Address. And in a series of later posts, I looked at 7 fairy tales I thought he would tell. Finally, in a summary post, I offered a table summarizing the fairy tales and corresponding truths. In this post, I'll do a post-mortem. How many of the 7 fairy tales did he tell us? How heavily did he emphasize the non-existent deficit/debt problem? And what are likely to be the practical consequences of his continuing expressed concern about the deficits and the national debt?

How Many Fairy Tales?

1. The Government is running out of money. Maybe!

The President said that now that the worst of the recession is over, we now need to reduce Government deficits, and that it is not sustainable to spend more than Government takes in. He never said that this was because the Government is running out of money, but this is the clearest implication of the erroneous claim that deficits aren't sustainable and that we need to reduce them. In any event it isn't true that deficits aren't sustainable.

In fact, in economies that have a trade deficit, and whose private sector wants to save, the leakage in aggregate demand from that private sector means that the Government must run a deficit equivalent to the leakage of demand to private savings and imports. If the Government refuses to run that deficit by cutting spending, raising taxes or both, then the private sector will be forced to both import less and save less, or not at all, and GDP will inevitably decline, as will employment, unless the private sector compensates for the lack of Government spending by saving less and eventually increasing private debt. This is not speculative. It is a consequence of the Macro-economic sectoral balance model based on an accounting identity. Again, If the Government forces deficit reductions, then the consequence of that is private sector and GDP shrinkage, or, if GDP is to increase, the private sector must save less, and finally incur debt, in response to the reduction in Government deficit spending.

So, ironically, it is not deficits that are unsustainable. Instead it is deficit reduction itself. The very thing the President, and even more, the Republicans, are calling for.

2. The Government can only raise money to spend by either taxing or borrowing. No!

3. We can't keep adding debt to the national credit card. No!

4. We need to cut government spending and make do with no more money. Yes!

In saying that continued deficits are unsustainable and in mostly talking about spending cuts, the President seemed to buy into this one, even though he also said that the Bush tax cuts for the wealthy should not be extended further than they already have been. Of course, I don't agree that we need to cut spending and make do with no more money. In fact, I think the acceptance of that is to accept high under- and unemployment. We simply don't have enough deficit spending yet to create full employment.

In particular, we'll be grievously hurt if we don't help the States to meet their $140 Billion shortfall with a $500 per person revenue sharing plan, because the loss of State-level jobs about to occur will reverberate throughout the economy. We also need to stimulate consumption further, because unless demand is out there, business won't spend and create those jobs. With a Republican House, the President should propose a payroll tax holiday for employers and employees until full employment is reached. That will immediately produce more aggregate demand with a high multiplier and get business spending. Finally, it makes no sense to sit around and wait for the privates sector to end unemployment, telling people that “prosperity is just around the corner.” That is Hooverism. What we need is a Federal Jobs Guarantee program for anyone who wants full-time work that will pay a miniwage plus Medicare health insurance and other fringe benefits. This program will be self-adjusting since it will pay a miniwage of $8.00 per hour, and the Government spending for it will automatically decline as the private sector hires people away from the program.

Measures like these are needed to create full employment once again and really get the economy growing. The President's approach involving innovation, education, and infrastructure, funded through deficit neutral spending, will subtract aggregate demand from the economy, while it adds it. It's possible that this approach may produce a positive Keynesian multiplier if the spending that's cut has a lower multiplier than the new spending fulfilling the President's approach. But if it doesn't there won't be a net gain in jobs. Also, unlike the measures I've described just above, the gains in jobs will be some time in coming, even if the Republicans cooperated. Meanwhile we have close to 20% under- and unemployment. Jobless Americans can't wait for Hooverism to create new jobs. The human cost is too great, and if we continue to fiddle while waiting for businessmen to create new jobs, then we can't just expect Main Street, to just sit quietly and endure its continuing descent into third-world poverty. It's not going to happen. There will be political instability, and our political and economic oligarchs will have no one but themselves to blame.

5. If the Government borrows more money, the bond markets will raise our interest rates. No!

Perhaps this one isn't quite so surprising Presidents don't usually talk about Bond Markets in SOTU addresses.

6. If we continue to issue more debt, our main creditors: the Chinese, the Japanese, and our oil suppliers, may cease to buy our debt making it impossible for us to raise money through borrowing which, in turn, would force us into radical austerity, or perhaps even into insolvency, which would then be followed by radical austerity and repudiation of our national obligations. No!

I was really surprised that the President didn't tell this one. It's really scary to many people.

7. Our grandchildren must have the heavy burden of repaying our national debt. No!

And I was really surprised that we didn't hear about our grandchildren's burden in the deficit reduction context, since that's such a popular meme of the deficit hawks. So, the President gave us, at most 2 out of the 7 Fairy Tales. And all in all, there wasn't a great deal of “shock doctrine” in the speech, which was a good thing. However, when the Republicans come back with their debt ceiling antics, and later when we get to the Omnibus spending bill, then we can expect a lot of shock doctrine from both sides and then we'll see whether the President continues to defend Social Security as he appeared to do in this speech, with some language that appeared to leave room for cuts that wouldn't be interpreted as “slashing” the program.

In addition, there was only one mention of Medicare and Medicaid in the speech, blaming them for the deficits and the deficit reduction problem, and given the deficit reduction framing of key parts of it, I think we can expect attempts to cut both Medicare/Medicaid. And, of course, the proposal to freeze “discretionary” spending for years to come, is effectively a cut in many of those programs, which would reduce aggregate demand, and have to be made up by private sector spending, at a time when the private sector is still more interested in saving than it is in spending.

How Heavily Was Deficit Reduction Emphasized?

On the surface, the emphasis on deficit reduction was light. This certainly wasn't a Peter G. Peterson speech. Nor did it accept the proposal of the Co-Chairs of the Catfood Commission, Erskine Bowles and Alan Simpson. Nevertheless, the framing of all future advances in innovation, infrastructure, and education, was in the context of the importance and necessity of deficit reduction because, supposedly, continued deficits, presumably at the same level as we now enjoy, are unsustainable. So, this gives in to the Republican argument, shares their frame, and ensures that attempts to create jobs in the future, or to accomplish anything that will cost money, will have to be deficit neutral, or even projected to cut deficits, as the health care “reform” bill was. The President didn't spout deficit hawkism, but his deficit dovism, combined with his emphasis on the need for bipartisan solutions to the “deficit problem,” doesn't leave me with a great deal of confidence that ruinous cuts won't be coming as part of a “necessary compromise” in response to Republican pressure.

Consequences of the President's Deficit Reduction Orientation

The deficit reduction orientation in the speech, took a back seat to the over-riding theme of the need for increased national competitiveness. The President proposed spending on innovation, education, and infrastructure. Since that spending will have to be deficit neutral or even to involve surpluses, it may not be much of a job generator unless the private sector responds with decreased savings or even increased debt. So, that means there needs to be another source of jobs and also a way to reduce the leakage of demand to the trade sector. That means increasing exports. In fact, the President's competitiveness model for progress implies that he wants America to be more like nations with export-led economies.

Good luck with that! It's not that America can't be competitive with other nations. We can certainly grow our competitiveness. But the problem is that all nations are attempting to reach prosperity this way, and that it is not possible for all to succeed. There must be some nations that lose in that race, and other nations that win. But even more important, if every nation is trying to have an export-led economy, then the competitors must race to the bottom in cutting costs, in order to be competitive. We know that in such races to the bottom the burden mostly falls on working people to cut their incomes and real wages. So, to engage in that kind of race may produce jobs for Americans. But it will be a very tough race against Europe, China, Japan, and India. And it's very doubtful that it will produce good jobs for very long, or even at all, unless we are can completely reverse the trends of the past 40 years.

I've written about the race to the bottom before, and you can see what I think of it in more detail here and here. But, meanwhile, I'll conclude by saying that in entering the race among export-led economies, the President is doing something else that will benefit the oligarchs and continue the United States on the road to plutocracy and undemocratic globalization. This isn't really surprising to me since he seems to do very little that is aimed at any other result.

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

Fairy Tales of the Coming State of the Union: Fairy Tales and Truths

Joseph M. Firestone — Fri, 14 Jan 2011 21:24:51 -0500

In "All Together Now: There Is No Deficit/Debt Problem,” I warned against the message calling for deficit reduction that the President will probably deliver in his State of the Union Address next month. I view the coming narrative as very likely to be composed of a number of fairy tales. In previous posts in this series I've analyzed and critiqued seven of the fairy tales I expect the President to tell us in his coming State of the Union speech. In this post, I'll look at all the fairy tales together side-by-side with the truth as I see it.

Table One: Fairy Tales and Truths

No.	Fairy Tale/Link To More Detailed Post	The Truth
1	The Government is running out of money.	The Government has the Constitutional Authority to create an infinite amount of money provided Congress appropriates the spending, and places no constraints on spending such as a need to issue debt when the Government deficit spends, or debt ceiling limits. So, all constraints on spending appropriations are purely voluntary and are due to Congressional mandates that Congress can repeal at any time.
2	The Government can only raise money to spend by either taxing or borrowing.	The Government doesn't raise money to fund spending. Today, it spends mostly by marking up bank accounts in the non-Government sector in accordance with Congressional appropriations. The Government does collect previously created dollars by taxing or borrowing. But this money is not used for spending.
3	We can't keep adding debt to the national credit card.	Congress has placed a debt ceiling on the Government, and it has also mandated debt issuance when the Government deficit spends. So, it is only the self-imposed constraint of Congress that prevents the Government from continuing to add “debt to the national credit card.” There is nothing inherent in the international economic system, or our own Constitution that prevents us from adding debt as needed.
4	We need to cut government spending and make do with no more money.	We don't need to do that as long as the economy is operating below its full productive capacity and full employment. Since the Government can always create more money, there is no need to make do with less. In fact, the Government must spend more to lift private sector aggregate demand and enable the Economy to get to full employment.
5	If the Government borrows more money, the bond markets will raise our interest rates.	The bond markets don't control the interest rates paid to them. The Treasury can flood overnight bank reserves and float short-term debt to meet its targeted interest rates, however low they may be. The Government, if Congress would let it, can even stop issuing debt when it deficit spends, in which case the bond market interest rates would be entirely irrelevant.
6	If we continue to issue more debt, our main creditors: the Chinese, the Japanese, and our oil suppliers, may cease to buy our debt making it impossible for us to raise money through borrowing which, in turn, would force us into radical austerity, or perhaps even into insolvency, which would then be followed by radical austerity and repudiation of our national obligations.	Our creditors all want export-led economies. This means that they must accumulate dollars, because the US is where the consumption power is, and if they want to keep exporting they must keep the American consumers' business. Their dollar surpluses can sit idle in their Federal Reserve accounts or be used in a way that makes them money. Buying our debt makes them some money. Buying our goods and services reduces their trade surpluses with us, and goes against their export-led policies. Selling our currency, weakens the value of the USD holdings they retain. In short they have little choice other than to buy our debt. Even more importantly, we don't need to raise money by borrowing USD from them. We can simply spend/create it ourselves if Congress repeals its mandate to stop issuing debt. The result of this would be paying off the national debt over time, without austerity.
7	Our grandchildren must have the heavy burden of repaying our national debt.	No generation except one has ever repaid the national debt. That generation was rewarded with a depression. Moreover, each time the nation ran substantial surpluses for a period of time, the country fell into depression or recession. It's a bad idea to repay the national debt or even to run surpluses, so our grandchildren won't do it unless they can do it without discontinuing deficit spending. That's possible, but only if the Congress repeals the mandate to issue debt when the Government deficit spends, or alternatively, the Government freely uses its coin seigniorage power. In both cases the national debt can be repaid without requiring that tax revenues match or exceed Government spending.

Before you watch the State of the Union, print out this post and note how many of these fairy tales the President tells us. And when he asks for austerity, and tells us that we Americans must all sacrifice, keep in mind how much of his argument is based on one or more of these fairy tales. If any of it is based on these or similar fairy tales, you'll know that he deserves a big Bronx cheer, and that you need to get busy telling your Congressman and Senators that you were not fooled by the fairy tales, and that you know very well that no deficit reduction plan is necessary or desirable, and that what you want Congress and the President to do is to quit representing Wall Street and the financial oligarchs and to get all Americans who want to work fully employed, and the recession over, before any more American lives and futures go down the drain.

Tell them it's time for justice, though the heavens fall.

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

Fairy Tales of SOTU: Our Grandchildren Must Repay National Debt

Joseph M. Firestone — Thu, 13 Jan 2011 00:29:32 -0500

In "All Together Now: There Is No Deficit/Debt Problem,” I warned against the message calling for deficit reduction that the President will probably deliver in his State of the Union Address next month. I view the coming narrative as very likely to be composed of a number of fairy tales. In previous posts in this series I've analyzed and critiqued six of the fairy tales I expect the President to tell us in his coming State of the Union speech. In this post, I'll discuss a seventh fairy tale: the idea that our grandchildren must have the heavy burden of repaying our national debt.

Let's begin with a little history, only once, in the history of the Republic has the United States fully repaid that national debt, and that was in 1835, when Andrew Jackson's second Administration paid off the debt. That pay-off and the further attempt to establish a fund that would compensate for future deficits was followed by the one of the worst depressions in American history in 1837. That depression brought back the deficit and the national debt, and though the Government has sometimes run surpluses since then, it has never again paid off the national debt.

It has been 173 years since 1837, and even though no generation of Americans has paid off the national debt, this nation has grown from a population of 17,000,000 to one of approximately 308,000,000, and our wealth has multiplied to levels unimaginable in 1837. Yet amidst all our growth and our accumulation of great national wealth, it has never been necessary for any generation of Americans to repay the “debt burden” created by their parents or grandparents.

Since 1776, the Government has run substantial budget surpluses only seven times: 1817-1821; 1823 -1836; 1852 -1857; 1867 -1873; 1880 -1893; 1920 -1930; and 1998 – 2001. It is notable, that every such period of reduction in the national debt, except the last, was followed by a depression. The Clinton surpluses were not followed by a depression, because of the effects of the social safety net introduced by the New Deal. But when the Bush Administration entered office it was greeted by a recession and the return of deficit spending.

This historical record suggests that attempts to pay down the national debt by running surpluses for multiple years are always followed by depressions or recessions. Also, the well-known macroeconomic sectoral balance model, provides an explanation for the historical facts. This model tells us that as a matter of accounting, the USD flows between the Government and non-Government sectors of the economy must balance out to zero. So, if the Government runs a surplus, the non-Government sector, including the private sector must run a deficit. What does this mean? It means that for the Government to save more financial assets than it spends; the non-Government sector must spend more than it saves, and therefore that it must lose financial resources, assuming that it is not running a trade surplus.

So, during periods when the Government ran surpluses, net financial assets were removed from the private sector. Over a period of years, this removal was not sustainable, because the private sector could only compensate for it with an unsustainable expansion of its debt as it did during the 1990s during the past decade. Eventually, there was and had to be, a contraction of economic activity, due to the removal of financial resources from the private sector.

Both the history and the explanation of the results of historical attempts to pay down the national debt, suggest a number of things. First, that the national debt is not a burden to the US private sector, because it represents the cumulative transfer of net financial assets from the Government to the non-Government sector, and it is these financial assets that we use to run our economy. So, far from the national debt being a burden, it actually represents the financial assets that those who hold it use to support economic activity.

Second, any attempt to pay down the national debt will depress economic activity by removing financial assets from the private sector, unless the Government surplus involved is matched by an equal trade surplus with other nations. Third, it suggests, that if we are running a trade deficit, as we have for many years now, and also if the private sector runs a surplus because it is saving financial resources, then the Government must run a deficit big enough to match the amount of the trade deficit and the amount of private sector savings.

And if the Government tries to run a surplus in such circumstances, the effect of this on the private sector will be a reduction in savings and imports and an impoverishment of the private sector. Nor will the Governments efforts to run a surplus through higher taxing or lower spending necessarily be successful if attempted, because the removal of assets from the private sector will further reduce private sector financial resources until recessions or depressions bring back unintended deficits.

All this is by way of saying that it is very unwise to try to either pay down or repay the national debt, because to do so will cause our children and grandchildren to get into recessions. So, if they have any economic sense at all they will not try to do that, and so will have no burden from it.

But, what about the fact that the larger the debt gets the more the interest burden our grandchildren will have to carry? Won't this burden be too heavy for them? The answer to that is no.

In previous posts, I've made it clear that the bond markets don't actually control the interest rates we pay on the national debt, and I explained how, by issuing only short-term debt, and flooding the banks with overnight reserves it is possible to get our interest rates down to very low levels approaching zero, as the Japanese have already done. In this way, we, and our grandchildren, can manage the national debt so that it is no burden.

In yet another post, I've made clear that the debt represents no solvency risk for a country like ours which spends by marking up accounts, and has no limits on this power, save self-imposed ones, created by a Congress that, unfortunately still acts as if we were on the Gold Standard.

Third, so far my analysis assumes that there will continue to be a national debt, because Congress will insist that Federal deficit spending be matched by debt issuance. However, this need not be the case, and so our grandchildren need have no debt at all, much less any burden from it. That is, we can pay off the national debt gradually, over a period of years while continuing to expand net financial assets in the non-Government sector through deficit spending. There are at least two ways to do this. 1) Congress can lift the mandate to issue debt when the Government deficit spends. If it does that, then the Treasury will incur no new debt, while it pays off the old debt instruments when they come due. This process will end the national debt and all the interest payments on it. 2) The Executive can currently get around the Congressional mandate to issue debt when it anticipates deficit spending, through coin seigniorage.

The Treasury, which the US Mint is part of, could order the mint to produce special very large face value Platinum coins (e.g. each coin might have a face value of 50 Billion USD), and to deposit those coins in the Mint's account at the Fed. The Fed could not refuse the coins or fail to credit their face value because they are legal tender. Since the Fed is technically in the private sector, acceptance by them of a deposit in the form of the jumbo coins, resulting in the markup of the Mint's Account by their face value, gets recorded technically as a sale of the coins to the private sector. The receipts from the "sale" representing the Mint's seigniorage profit, may then be periodically swept into the Treasury General Account, and would go into the category of "miscellaneous receipts" to the Treasury lifting the Treasury's revenue total.

Enough jumbo coins could erase the annual deficit, and since part of government expenditures in any year involves paying off interest and principal on the national debt, enough of them would also erase the national debt over a decade or more. There would be no national debt to leave to our grandchildren, and also there would be a continuously declining debt-to-GDP ratio. Technically, there would also be no more deficit spending, but unlike deficit neutral budgets at present in which tax revenues match Government spending, in the coin seigniorage situation I've just described, Government spending would continue to exceed tax revenues, so that the Government could keep expanding net financial assets in the private sector.

So, that's it. The idea that our grandchildren must have the heavy burden of repaying our national debt is a fairy tale. It's a fairy tale because they don't have to repay it, and it would be a bad idea to try to repay it, because such attempts have always caused depressions and recessions. It's also a fairy tale because all we have to do to pay off the national debt is for Congress to eliminate its requirement that the Treasury needs to issue debt when it deficit spends, and then for Treasury to deficit spend while it pays off that national debt. Finally, it's also a fairy tale because the Executive could get around Congress's mandate about debt issuance by using coin seigniorage, and, again, could spend more than it taxes, while gradually paying off the national debt.

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