Deficit Hawks (Obama, Romney, Bowles, Boehner) Plan to Shrink YOUR Economy – Part 1

By Michael Hoexter

Most of the US political class has been infected with the “mind virus” of austerity that suggests to them that either virtue or necessity consists of cutting government spending and government programs.  Under the influence of this “folk economics” with no evidentiary support, the equivalent of economic superstition, politicians seem prepared to slash vital supports to the economy despite the ability of monetarily sovereign governments, like the US federal government, to afford continued spending on current and even expanded government programs.  Whatever one’s personal tastes and predilections are in government programs and the role of government overall, the net effect in dollar terms of reducing the spending of government, in the context of the current Lesser Depression is to stall and eventually shrink the economy. Because of a mountain of private sector debt and overvalued assets like real estate in which people are now under water, the only source of renewed spending on goods and services, the engine of economic growth, is government spending.  Alternatively, the restructuring of private debts, using for instance the policy format of Steve Keen’s modern debt jubilee, also most likely legislated and funded by a fiat-currency issuing government, would ease private debt loads for the public, and this would then release funds to purchase new goods and services. The concept that best describes the common dynamics of the current Depression, the Great Depression and Japan’s Lost Decade is “debt-deflation” but Richard Koo, economist at Nomura Bank. has also called this period, in milder terms, a “balance-sheet recession”.

There is considerable naïveté about how government spending actually functions among the political class and many believe that the currency-issuing U.S. federal government acquires money via taxes from the private sector.  Alternatively, the government, when it doesn’t “have” tax money, so goes the story, must borrow the money from abroad, selling Treasury bonds in the amount that funds are required.  This is the source of public debt, viewed in this naïve account as simply a debt that must be eventually repaid in full as a private debtor would need to repay a loan.  The above description of how government finances itself is approximately correct for non-currency issuing governments like US states, municipalities and Euro-Zone countries but is, perhaps counterintuitively, not valid for currency issuing governments like the national governments of the US, UK, Japan, Canada and others, some of which have now committed themselves, self-destructively, to austerity.  As we see in wartime or in financial crises when monetary means are always found by governments to pay for needed goods and services, in an era of fiat currencies, government spending of a currency issuing government is not limited by taxes collected nor public debt issued, which are operations that have functions different from the generation of “revenue” for government, and in certain cases, are ritual vestiges of an older era of convertible currencies.  The recognition of the lack of affordability constraints on monetarily sovereign governments is not an invitation to spend with abandon but simply a fact of life and, like it or not, a source of governmental power.

The current ubiquity of austerity advocates and the accompanying rise in fashionable gold-bugism are part of a nostalgia for a past that never was, a fantasy of the solidity and fixity of monetary value.  The increased attraction to the primitive idea that economic value is located in the currency itself, rather than generated and maintained by a dynamic real economy with a flexible currency managed by government, is a sign of a retreat from confidence in the private economy’s growth potential and in much-maligned government’s leadership role in managing and supporting that economy.  In the cultural and economic climate in which austerity advocacy flourishes there is a fundamental confusion about “where value is”: value becomes reified “inside” money, and the notion of setting an arbitrary limit to the amount of government creation of money functions as a defense mechanism against fears of the loss of the value of existing stores of money:  if the scarcity of money is maintained, value is believed to be preserved.   Trotting out the “boogie man” of hyperinflation continuously, sometimes in a manner that suggests monomania,  becomes an effort to paralyze all good faith attempts to increase public and private spending to improve overall social welfare.  It is understandable that people who have accumulated a lot of monetary units in their own bank accounts, increasingly garnered from the Ponzi/casino economy of a bloated FIRE (Finance, insurance and real estate) sector, would be more prone to entertain the fantasy that once they have gained all these monetary units that their value would suddenly become a solid object rather than be as it actually is, a signifier, a measure of something else, real and changing economic value, generated by a dynamic economy.

Even if you believe that money is or should be a quasi-physical “container” for a fixed portion of value, following the dictates of the austerity mind-virus still doesn’t pencil out as a governing philosophy. So-called “deficit doves” share with deficit hawks a very similar view of what money is but they point out that the US government can apparently borrow these monetary units at currently a very low price from the private sector, enabling in their account of government finance, a much higher level of government spending than austerity advocates, the deficit hawks, say is feasible or desirable.  “Deficit doves” who are for the most part neoclassical economists with progressive political commitments (Paul Krugman and Robert Reich are notable examples), are aware that aggregate demand is now low and therefore money must be gotten into the hands of people who need to spend it.  Only, “deficit doves” claim that government spending must always be “counter-cyclical” and that in good times the government must “save” the money it issues, sometimes running a surplus (i.e. collecting more taxes than it spends) to “restock” the government coffers or reduce government debt.

“Deficit doves”, i.e. left neoclassical economists and their followers, are generally more aware of the social and economic costs of cutting government spending during the current debt-deflation than “deficit hawks” and, as a group, are able to make some trenchant points against the “deficit hawks”.  However they are often accusing the deficit hawks of being hypocrites about the deficit and that they, the “deficit doves”, are the people who care more sincerely about balanced government budgets than the deficit hawks.  Senator Bernie Sanders, who is a relatively effective anti-austerity campaigner in the Senate, nevertheless hews to the “deficit dove” line recommending as a virtue, the reduction of deficits as a policy goal in itself.

In these beliefs, deficit doves are also mistaken, and they reinforce beliefs about the role of government and of money that in the end defeat the purpose of their protest.  If “deficit hawks” are in fact insincere about deficits, which many of them are, the “deficit doves” are placing themselves into the position of “useful idiots” for believing in the importance of reducing deficits.   If the actual goal of the deficit hawks is to reduce the size of or eliminate the welfare state but reserve government’s power, including its currency-issuing authority, for bailing out or funding favored industries like banking or defense, “deficit doves” are providing cover for them by reinforcing the notion that there is a fixed quota of government “scrip” which can run out.

President Obama has tended towards the “deficit hawk” position though has recruited “deficit doves” to play along with him at times.  Early in his Administration there were a number of “deficit doves” in his and in Vice President Biden’s teams, including Jared Berstein and Christine Romer but these have, interestingly, been sidelined in favor of economic advisors who are the Democratic, “centrist” version of deficit hawks.  In his recent speaking and writing, Obama has moved more decisively towards the deficit hawk position as he has seemed to have swallowed whole many myths about the private sector’s autonomous role in the economy, government’s ineffectiveness as a tool in that economy, and the notion that reducing government spending is an almost universal good.  Obama appears to either sincerely believe that government possesses only a fixed amount of “money things” or he is cynically manipulating this belief in others to restructure the American state increasingly in the direction of a “private-public partnership” where the private sector makes most of the rules.

The “deficit owl” position is the view most consistent and most grounded in the reality of the monetary system and a monetary economy more generally.  Deficit owls do not see government surpluses as a sign of virtue but as either the product of misguided policy or, in the rarest cases, as a justified attempt to dampen an inflationary spiral by increased taxation in a targeted or a more generalized way.  A deficit owl, however, is generally more concerned about full employment and maintaining sufficient aggregate demand rather than solely on controlling inflation, a goal which over the past three decades has become the prime focus of monetary policy to the exclusion of other economic goals.   Inflation is a concern for deficit owls but only in the context of evidence of increases in core inflation rather than the chimerical hyperinflation evoked by deficit hawks. Deficit owls openly state that the size of the public debt doesn’t dictate policy and view government deficits instead as a support for the growth of private sector wealth, i.e. private sector surpluses.  Ultimately the “deficit owl” position is the only position among the deficit “aviary” that accounts for macroeconomic sectoral balances and the need for monetary economies to be to a greater or lesser degree “stoked” by government spending to achieve economic growth, full employment, and other elements of the public purpose.

Why then, is the voice of the deficit owls, the most realistic voice in this discussion, barely heard in the halls of power?  Why is it that the damaging and foolish “deficit hawk” position is so widely held and now is inscribed in the fiscal policy of the current Administration and Congress?

Simple Morality Tales

One explanation for the popularity of deficit hawk economic self-destructiveness is that people and politicians are prone to believe in simple morality tales in which there are “good” and “bad” people and in which there is a simple division between “good” and “bad” behavior.  In this there is the idea that “saving money” is “good”, so to be “good” means to “save money” and pare down government programs.  This conception of “the good” is based on current popular belief in self-control and abstention from indulgences as the highest of virtues.  We live in a kind of “anorexic” cultural moment which suggests that spending is “flab” to be trimmed.  In the media and in everyday life, personal virtue is often equated with weight control and therefore to appear to be “lean” and to restrict one’s consumption is considered to be a virtue.

Politicians, especially in countries where elections tend to focus more on personality than ideas, tend to gravitate towards stances that suggest that they are virtuous individuals, so the notion that “saving money” and “not spending” are good has become a means by which politicians hope to gain or maintain favor with voters.  The “first past the post” electoral systems in the US and the UK have pushed both political systems to emphasize the personal characteristics of officials rather than their plans and ideas.  The US is the leader in this, where elections appear to be increasingly about whom voters would want to “have a beer with” rather than what candidates would do for society.

In a world where people are in a relentless struggle to show and maintain the appearance of virtue, the deficit owl position requires greater complexity of thought: self-control and abstention from over-indulgence might indeed be personal virtues but spending should be increased in the overall economy.  While government should preferentially be spending on useful projects, “wasteful” spending that still spurs consumption is better than reducing government spending overall.  In the real deficit owl world, the point is not demonstrations of individual personal virtue but real action to maintain and increase overall social welfare.  The deficit owl position requires that one have a “systems level ethics” as well as personal ethics a task which may be more demanding than one might think.

“It’s Not Me, It’s the Other Guy”

Less flattering but probably more important in understanding the “honeymoon phase” of political support for the self-induced economic catastrophe of austerity among elites and the citizenry at large is that austerity seems to suggest that “other people” are to blame for our economic woes and these malefactors will, shortly, be punished for their wrongdoing.  Supporters of austerity generally think that they will be spared the effects of cutting government because they believe that their livelihoods are somehow entirely independent of government expenditure.  This is a very common delusion on the Right in the United States, especially in regions where, in fact, the government has massively subsidized the economy for decades if not centuries.  In the largely “red” states where Republicans dominate and from which the Tea Party gets its base, there are either one of two factors present:  either these states were part of the Confederacy and some people in them still see US federal law as a quasi-foreign imposition or, in other cases, these states are heavily dependent upon farm subsidies, federal water works and the military for their historical growth and/or current economic well-being.  A common view among supporters of the Tea Party is that any government program that they take part in is not related to government but essentially their own private property (“Keep Government Out of My Medicare”).  They see themselves as worthy and having earned these rewards while others, they think, have not earned them.  Some are so poorly informed or so prone to self-serving delusion, that they actually think that Medicare is not a government program.

In the first instance here there is then the notion of the government being “the Other Guy”, as foreign and an imposition on the economy and on people more generally.  Government is not viewed as part and parcel of society for a number of reasons, including what is taught in academia about the nature of our society and economy.  Neoclassical and “Austrian” economics are both culpable in providing a policy rationalization for undercutting the funding and quality of government services to the public and the economy.  The “government-less” model of the economy, a quasi-anarchic view of how markets work, has its roots in the anti-mercantilist tradition in economics based on the work of Adam Smith.  Smith saw government as inevitably a corrupting (though necessary) institution in what later, after Smith, became formalized as a model where markets operate without there being anything like a state that supplies infrastructure and among other things, a currency.  Economic models that do not include the institution of government as integral to the functioning of the economy, and more often than not blame it for most economic ills have enabled the institution of government to be scapegoated for all that ails the economy by opportunistic political actors, academics prone to ideological polemic, and consequently the public at large.

Racism, Anti-Racism, and Austerity

In the United States, the racialist and racist overtones of this distrust of government and attribution to government of all that is negative cannot be overlooked and form the core of attitudes and political base that support austerity.  The current anti-government campaign has been fueled by opposition by sectors of the white population to the 1964 Civil Rights Act, Affirmative Action, the Great Society anti-poverty programs and their echoes within the political debate concerning an activist government.  The government activism of the 1960’s, in addition to long overdue campaigns to combat racism, was differentially supposed to help the disadvantaged and seemed to designed to have as primary beneficiaries the non-white population located both in the American South but also throughout the informally segregated North and West (Nixon’s “Southern Strategy” was built on these resentments).

In America’s history of slavery and white racism, it is unfortunate that government support for racial equality coincided in time with questionably- designed social programs that led many middle and working class whites to feel that the government was necessarily “playing favorites” against them.  Hyman Minsky’s critique of the “War on Poverty” still stands as a prescient view on how universal rather than targeted government programs are both more effective in reducing poverty and, as well, tend not to brand government as part of the problem.  The moral imperative to counter-balance the wrong of slavery and post-slavery racism became mixed in with the idea that government did not “care” about the white population.  Minsky’s and those who work in the Minskyian tradition’s views that it would have been far more politically astute to combat poverty via a universal WPA style jobs program would seem to have protected the instrument of government from the charge that it would be serving differentially one racial group over another.

I do not have any illusions that even if Pres. Johnson’s programs were better designed that there would not have been white resentment and a backlash against both government and the movement for racial equality.  However their faulty design has added energy to New Right attitudes about government’s fallibility and to delusional Tea Party-style libertarianism.  Though nominally race-blind, libertarianism, neoliberalism and market fundamentalism with their aversion to “social engineering” by government all gained energy by absorbing racist sentiment, with the assumption being that the US federal government would only be helpful to or would favor non-whites.   These anti-government ideologies then became oblique, socially-acceptable means of expressing racism.

President Obama’s perverse embrace of austerity and hints of anti-government rhetoric in a time when we now require more government spending might very well be seen as a personal reaction and statement of identity against the charge that he, being black or bi-racial, is somehow particularly motivated beyond the dictates of his Presidential office to stand up for the federal government, to defy the stereotypes that he anticipated would be and are thrown at him.  Unfortunately there is a good deal of idiocy and racial hatred on the Right that is distorting Obama’s actual ideological orientation and administrative record as “socialistic” because of the color of his skin.  Instead he should be viewed as a moderate conservative who happens to black or African-American.  Somehow, in the now all-too-common racist thinking, his ethnicity is thought to be dictating the content of his conscience.

While some might think this is too much to ask of Obama, to put aside personal history, defiance of individual stereotypes and image for the greater good, I believe this personal and political challenge shouldn’t preclude him from reckoning with the reality that government spending is now a very important support for the economy as a whole.  In other words, if he takes ethics seriously, he shouldn’t use his personal-political struggle as an occasion to fashion the “Grand Bargain” to cut universal benefits programs like Social Security and Medicare for everyone, black and white.

If it would make a difference to Obama at all to think in these terms, he may actually be letting stereotypes of blacks in America dictate his policy as much or more by attempting to do the “opposite” of what is “expected” by racists of him.  When one lives in defiance of a stereotype one is still controlled by that stereotype.  It would be far better if he would be guided by the economic data and realistic economic models of how real mixed economies, rather than imaginary market economies, operate.