Daily Archives: June 30, 2011

Mark Halperin Was Right

By Marshall Auerback







It may not have been the most felicitous choice of phrase, but Mark Halperin’s characterization of Barack Obama was not far off the mark, even if he did get suspended for it.  The President is a dick, at least as far as his understanding of basic economics goes.  Obama’s perverse fixation with deficit reduction uber alles takes him to areas where even George W. Bush and Ronald Reagan dared not to venture.  Medicare and Social Security are now on the table.  In fact entitlements of all kinds (excluding the myriad of subsidies still present to Wall Street) are all deemed fair game.
To what end?  Deficit control and deficit reduction, despite the fact that at present, the US has massive excess capacity including millions of unemployed and underemployed, a negative contribution from net exports, and a stagnant private spending growth horizon.  Yet the President marches on, oblivious to the harm his policies would introduce to an already bleeding economy, using the tired analogy between a household and a sovereign government to support his tired arguments. It may have been impolitic, but  “dick” is what immediately sprang to mind as one listened incredulously to the President’s press conference, which went from the sublime to the ridiculous.

Discussion of government budget deficits often begins with an analogy to a household’s budget, and the President continues that horrible pattern of misinformation. Obama challenged the view that the government might side-step the debt ceiling constraint by just paying “interest on the debt” and said:

This is the equivalent of me saying, you know what, I will choose to pay my mortgage, but I’m not going to pay my car note. Or I’m going to pay my car note but I’m not going to pay my student loan. Now, a lot of people in really tough situations are having to make those tough decisions. But for the U.S. government to start picking and choosing like that is not going to inspire a lot of confidence. 

Let’s state it again: households do not have the power to levy taxes, to issue the currency we use, and to demand that those taxes are paid in the currency it issues. Rather, households are users of the currency issued by the sovereign government. Here the same distinction applies to private businesses, which are also users of the currency.  There’s a big difference, as all us on this blog have repeatedly stressed:  Users of a currency do face an external constraint in a way that a sovereign issuer of its currency does not.

This key point, which is persistently obscured in these discussions, is that if a government issues a currency that is not backed by any metal or pegged to another currency, then there is no reason why it should be constrained in its ability to “finance” its spending by issuing currency.  Unfortunately, this elementary concept seems to have eluded the President and, presumably, the countless members of Congress involved in the debt ceiling negotiations.  Typical is this statement from the President:

I do think that the steps that I talked about to deal with job growth and economic growth right now are vitally important to deficit reduction. Just as deficit reduction is important to grow the economy and to create jobs — well, creating jobs and growing the economy also helps reduce the deficit. If we just increased the growth rate by one percentage point, that would drastically bring down the long-term projections of the deficit, because people are paying more into the coffers and fewer people are drawing unemployment insurance. It makes a huge difference.

The President has the causation here totally backward.  A growing economy, characterized by rising employment, rising incomes and rising capacity utilization causes the deficit to shrink, not the other way around.  Rising prosperity means rising tax revenues and reduced social welfare payments, whereas there is an overwhelming body of evidence to support the opposite – cutting budget deficits when there is slack private spending growth and external deficits will erode growth and destroy net jobs. Even the IMF (in its October 2010 World Economic Outlook)  recognized that fiscal consolidations, even though they tend to be accompanied by lower interest rates and lower exchange rates, are more frequently associated with economic contractions.  Amazing to think that we’d ever see the day where the President outflanks the IMF.

Expansionary fiscal consolidations are virtually impossible – the initial conditions, as well as the structure of the economy in question, must be right to support a stronger trade improvement, or a more aggressive spending path by domestic firms and households, which largely OFFSETS the impact of decreased government spending.  Again, the key is looking at the impact of government spending reductions within the context of what the other two major sectors of the economy – private households and firms , and the external account (exports and imports) – are doing.  In fact, if we had a balanced foreign sector (i.e. no trade deficit), there would be no way for the private sector as a whole to save unless the government runs a deficit. Without a government deficit, there would be no private saving. Yes, one individual can spend less than her income, but another would have to spend more than his income. It all has to balance in the end, as any accountant can tell you.

To be fair to the President, most of his Republican counterparts are also “dicks.”   Consider the comments of Senate Minority Leader, Mitch McConnell:




What Republicans want is simple: We want to cut spending now, we want to cap runaway spending in the future and we want to save our entitlements and our country from bankruptcy by requiring the nation to balance its budget. We want to finally get our economy growing again at a pace that will lead to significant job growth.

Like the President, McConnell evidently also feels that the US government can run out of dollars or, at the very least, computer keyboards to mark up or down the numbers in our national accounts.  This is the only way one could make sense of his nonsensical bankruptcy comments.  This perverse inability to distinguish between issuers and users of currencies is a disease which  afflicts members of both parties and largely explains the willingness to hack away at what’s left of the American social welfare net (the President unilaterally disarming his party on Medicare before securing a single concession from the GOP).  Change you can believe in!  And the President wonders why his base is totally dispirited!

Let’s be clear: the government creates ‘money’ whenever it spends; it destroys ‘money’ whenever it taxes.  The issue, which the President should be out and front explaining, is whether or not its spending too much or taxing too little.  With a rising unemployment rate, and a huge reserve of underemployed and disadvantaged workers, it is the height of insanity to cut spending overall which is what the US President is claiming is an important and urgent policy goal when there is so much idle productive capacity.  Yet both the President and his Republican negotiators on the other side of this issue take it as a given that public debt per se is an unalloyed evil that should be eliminated as a long term policy goal. That is only possible if the external surplus is large enough. Otherwise, if you attempt to achieve that stage via fiscal cutbacks the policy strategy will undermine employment and growth. The upshot is that the budget deficit is likely to rise because of the slowing economy will undermine tax revenue.

Yes, it’s true that government deficits are not always good, or that the bigger the deficit, the better. The point the President and his equally misinformed economic advisors continue to ignore is that we have to recognize the macro relations among the sectors, much as a surgeon has to consider the impact of removing an organ from the patient in the overall context of how it will affect the rest of the body’s functioning.  Blaming the deficit for our economic woes is akin to blaming the thermometer when it records a temperature from a patient suffering from the flu.  They are both forms of quackery.  To believe otherwise is to be, well, a “dick.”  There’s no other word to describe it.