Keynes once said that “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist” (Keynes 1964, 383). Two among those modern economists must surely be Reinhart and Rogoff, as no other book in recent history has contributed so much to the mass phobia and delusion about the debt and the deficit as theirs. This is a book that reinforces some of the worst ideas in the economics profession, a profession that refuses to acknowledge that we are no longer on a gold standard and that a government which has a monopoly over its own currency can both supply it without facing default and regulate its value.
Now, you may be a gold bug who fantasizes about the gold standard of the middle ages and the Dickensian industrial world, or you may be Hayekian who dreams of a market with competing private media of exchange without any state ‘usurping’ power over the issue of money, or you may simply wish to barter with your fellow citizens and not bother with this debt business at all. This is all fine and good, but the latter two types of systems have rarely (if ever) existed in history and the gold standard episodes have always ended in deflations, crises, and disaster. So this is what we’ve got in the US—a state money system. A system in which the state determines the unit of account (an abstract measure called “the dollar”) and issues the very thing that serves as that unit of account and medium of exchange (a paper thingy that also happens to be called a ‘dollar’ or an electronic reserve with the same name). Yes! Monopoly money, or more accurately, state monopoly money. This is the system that we’ve got and the system that we have to work with. And as a monopolist that issues its own currency, the US government need not default. Ever. But Reinhard and Rogoff failed to distinguish between countries which control their own currencies from those that don’t when they warned of the ‘dangerous’ levels the US debt was approaching.
Politicians are the most notorious slaves of defunct economists. How a democratic president ended up offering $650 billion in cuts in the most important social programs in the United States (Social Security and Medicare) is something we need to ponder for many years to come. Fortunately (though there really isn’t anything fortunate in this whole situation), Republicans ‘saved’ President Obama from his folly when Speaker Boehner walked out of the debt talks. Now at least we could remove Social Security from the slaughterhouse. But there is little solace in this small ‘victory’ (if we can even call it that), when the slaves of the defunct idea of ‘austerity’ from the extreme right have been driving the policy agenda for the last 2 years culminating in the madness around the debt talks today.
And while policy makers are slaves to defunct economists, the American public has been caught in the middle between bad economics and bad politics. Sadly, just like a hostage held captive for too long, much of the general public has bought into the fundamentally flawed idea, propagated by their Democratic or Republican kidnappers, that the U.S. government is like a household which sooner or later has to pay off its debts and balance its books.
So how can we break the spell of this Stockholm syndrome? As I have explained before, there is a simple logical flaw with the taxpayer’s anger with the deficit (debt) itself.
If we want the government to correct its budget stance, then we must necessarily be asking ourselves to correct ours. If we demand that the government runs a surplus, then we are demanding that we, the private sector, run a deficit. If we are demanding of the government to pay off its entire debt, then we must be demanding that every single private portfolio, retirement, or college fund lose its Treasury securities. Surely the private sector does not want that. The government’s deficit is someone else’s surplus and the government’s debt is someone else’s asset. If you want to wipe out one, you must be asking to wipe out the other.
Recall the Clinton surpluses. What was then considered to be a very ‘prudent’ government stance was in fact only possible because the private sector acted imprudently and ran negative savings for many years. So, take your pick: would you like the private sector be in surplus or the government? You cannot have both. Presumably, we’d prefer the private sector to save and accumulate financial assets, which means that the government must run a deficit and accumulate financial liabilities… Because most people do not think about this basic accounting result, they tend to think that a responsible government is one that acts like a household, without recognizing that a ‘responsible’ government is possible only with an ‘irresponsible’ private sector behavior and vice versa.
Since all of us agree that it is prudent for the private sector to accumulate savings, we must be in agreement that the prudent thing for the government to do is to allow us to be prudent by running deficits. In other words, a truly prudent government is one that does not mimic the behavior of the private sector, but one that offsets it.
Unless we understand this very basic relationship, the American public will continue to be susceptible to debt and deficit fear mongering, and buy into the defunct ideas of their captors.
And what will happen on August 2nd if the White House and Republicans fail to reach an agreement? Probably not much, certainly not on Tuesday, maybe not on Wednesday. Financial markets may be rattled for a while, but global markets still implicitly believe that the US government will keep guaranteeing its bond payments. And they will be right, because interest payments on bonds are never cut. Indeed interest payments on government debt are subject to permanent appropriations, meaning that rentier income to bond holders is untouchable. Instead, what will actually happen is that the debt ceiling stalemate will force the US government to start cutting its expenditures immediately—that is, its other expenditures.
Programs will go, government offices will shut down, employees will be furloughed and laid off, social protection programs will be slashed, veteran hospitals will keep closing, homelessness will keep rising, grandma and grandpa will move in with their children unable to support themselves on social security, but what good will that do anyway in an economy with a 20% unemployment rate by any reasonable measure.
This is the real price to pay from the debt ceiling stalemate. There are far too many Austerity cases around the world to learn from. We know what the consequences are. All we have to do is look to IMF policies over the last 50 years to see the economic damage and suffering such policies have caused. But the slaves of the defunct economists keep singing the austerity song.
Astoundingly, Republicans got all the austerity they wanted and more from President Obama’s continuing compromises (see also Harry Reid’s plan). But it was not enough. So determined to unseat the president, they are willing to crash the economy to reach this objective. The calculus of course is that the carnage would be blamed on Obama and that the public would boot him out of office paving the way for Republican union busting, privatization of essential public goods, assets, and services, dismantling of Health Care reform, Financial Regulation reform, the Consumer protection agency and on and on and on.
How did it all come to this?
When bad ideas grip the imagination of the public, the only two outcomes are Terrible or Devastating. Apart from the MMT economists, who have long tried to explain some simple accounting that illustrates why the US government need not default and have offered specific proposals on how to deal with the debt crisis (see here, here and here), there is not a single economist out there who can cogently explain to the public that we do not face a Greek-style default and that reducing the deficit in and of itself should never be a singular policy objective, without considering what is happening to the real economy.
And so our defunct economists and their politician slaves have spiked the kool-aid and almost everyone is drinking it. Cuts and default are looming ahead and the subsequent carnage will spread to all of us, whether we like austerity or not.
The only way to cure this Stockholm syndrome is to break off this bad affair once and for all. So turn off your TV, your FoxNews, your MSNBC, pick up the phone and call your representatives. Tell them that you want no cuts, no austerity, and no default. Tell them that you want programs instead that directly create jobs which you can count and which you can see.
I would begin with “We need to talk…”