Deficit Hawks (Obama, Romney, Bowles, Boehner) Plan to Shrink YOUR Economy – Part 2

By Michael Hoexter

Shrinking “Their” Economy Shrinks Yours

The word “economy” comes from the Greek “oikos” meaning “hearth” or “household”.  Everybody has a household economy that looks slightly different from that of their neighbors.  However, because of the nature of a monetary economy, household economies are linked quite tightly together and trends that effect one household start to have effects in other households soon or over the longer term.  While within the same economy some households can prosper while others do not, generally there is a movement in tandem for some obvious reasons related to how society and the monetary system work.

Very obviously, when more people have surplus income, they are more inclined to spend it on more goods and services which in turn brings in income (profits or wages) for other people.  When there is a decrease in the surplus of income, this has a knock-on effect of reducing the incomes of others.  These observations are implied in the paradox of thrift based on ancient observations of how commerce works as an entire economic system, which Keynes also observed. As well, on a social level, people influence each other creating trends that sweep through society, having both cultural and economic effects.

Over the longer term, as well as movements in tandem there are movements in the differential between households that create large-scale systemic effects.  Over a period of decades, imbalances in savings, i.e. growing wealth inequality, can start to undermine the ability of goods and services in the economy to find buyers.  For a time, the ability to borrow money, if available, enables those with lesser incomes to buy enough or more than enough to live on, including larger asset purchases, but this too collapses when incomes do not rise enough to cover both daily needs and servicing increasing amounts of debt.   Unemployment rises as effective demand for goods and services goes down.

Now that the functions of the economy have increasingly become distributed across nations, some economic sectors within the historically more prosperous nations weaken, threatening the ability of many of the less advantaged to find sources of work that were previously abundant or for which they had received training.  Debt instruments become themselves derivative financial instruments and sources of financial speculation as do shares of equity in productive and unproductive capital.  Increases in speculation and the spiral towards ever more uncontrolled lending leads to a Ponzi economy, where trading real and virtual assets becomes the primary focus of significant groups within and outside the financial industry.  That the debts or assets upon which some of this speculation is based become themselves “bad” and unable to be paid or are revealed to be overvalued, eventually triggers a crisis.  As observed by Minsky, financial crises and crashes become more frequent, which in turn threaten the credit system used by businesses to fund their operations.

While government spending is always necessary, increased government spending becomes during and after a great financial crisis a critical support for an economy such as the one we live in.  To cut government spending is not to cut “someone else’s” livelihood but to cut into the web of spending, selling, debt repayment, and saving that means the difference between economic growth and economic stagnation or decay.  Households are affected by marginal differences in the amount of demand for goods and services and as demand is weakened by a heavily indebted private sector, employment falls and/or wages decrease, and government must step in, in order to energize demand enough so that people can find work and receive incomes.

So while, to austerity advocates, they believe that they are meting out “justice” to “slackers” within the economy, a category in which they include government but as well “lazy people” who may also be of a different race, they are actually cutting down the size of their own future incomes by shrinking the overall economy.  They are so focused on or would like to focus the credulous public’s attention upon a quixotic struggle between supposed “good” actors and supposed “evil” actors in the economy, that they misconstrue or misrepresent how the macro-economy actually works.

Probably there are a few austerity advocates, no doubt among its leadership, who are not at all interested in public welfare and increasing economic prosperity for the general public:  their focus is on a power struggle to maintain political power in Washington and in the economy of whatever health or size more generally for powerful private interests.  The “defeat” of their enemies and attempt to realize unrealistic visions about the economy acquired from reading the fiction of Soviet émigré Ayn Rand is more important to them than actual broad-based prosperity.

In summary, cutting government spending pursued as a good “in itself”, and the cutting of government spending in particular to programs that supply those with the greatest propensity to spend the funds, like Medicare, Social Security, Medicaid, unemployment insurance, and aid to state governments, reduces demand overall for goods and services from the private sector, cutting the size of the private sector, thereby downsizing the whole national economy, both public and private sectors.  Thus, in this effort, in the mind of austerians, the “surgical” pain that austerity is supposed to deliver to the economic “malefactors,” “deadbeats,” or “slackers”, ends up stalling the whole economy,

 

Very Little Choice at the Ballot Box

As the title of this piece states, the mainstream of both major parties in the US, Democrats and Republicans, are currently united in their commitment to ritual self-sabotage of the economy.  Voters in November do not have a clear anti-austerity electoral choice in a vast majority of districts.  To declare partisan support for one or the other party is to make no clear statement about one’s “position” on austerity.  The only politician on the national stage who is principled and well-enough informed to resist the drive towards austerity is the soon-to-be-ex Congressman Dennis Kucinich.  Senator Sanders and members of the Congressional Progressive Coalition are “deficit doves” of greater or lesser ferocity in their commitment to bailing out the public.

The Democrats with Obama at the helm seem to offer a form of “Austerity Lite” that suggests to voters that somehow Democrats “care” more than austerity-crazed Republicans and are therefore to be campaigned for.  Unfortunately, as far as the economy is concerned, this supposed “caring” does not do people much good if it is not accompanied by a willingness to spend or fight for maintained or increased spending by government.  This makes the Democrats and Obama a dangerously seductive choice for voters:  they seem to be voting their “conscience” but instead get policies that hurt their economic interests and the economy more generally.

The person of Obama has a very critical role at this time which may or may not be entirely intentional on his part.  Obama’s personality, his African-American heritage, and his unique personal story make him a talisman of liberal good intentions despite that fact that many of his policies are not very “liberal” or progressive at all.  The talismanic function of his person is, if it is engineered, a master stroke in achieving a split or even the compliant assent to the destruction of the economic content of progressive and liberal policies by progressives/liberals themselves.  Yes, Obama is “better than” a number of recent Presidents on issues of gay rights and women’s rights but this is not saying much at all.  While important issues, these concerns are also well within the neoliberal policy program of individual empowerment having priority over community and societal empowerment.  Uncritical supporters of Obama for these reasons alone have to ask themselves if they are willing to stop campaigning for economic prosperity and justice overall in favor of the particular type of social progress that is, at least at the moment, most important to them.

If Obama is viewed as a type of “Manchurian Candidate” either of his own manufacture or cultivated by political operatives and patrons from the FIRE sector, his effect is equally devastating on the black community, the heart of progressive politics in the United States.  Lingering feelings of pride in the African American community at having elected the first black President mean that blacks and nominal black progressives are often some of the President’s most vociferous defenders, despite his apparent interest in furthering the austerity agenda.  Glen Ford of the Black Agenda Report has called Obama “the more effective evil” because his personal characteristics enable him to pursue conservative or right-wing policies without the resistance of the black community and the left.  Thus progressives and the black community are effectively split or even participate in making their own political principles irrelevant.  Meanwhile the black community will be one of the communities most severely effected by austerity.

Criticizing Obama or calling him “the more effective evil” doesn’t make Republican legislators and candidates any better than he and they may in some ways be worse.  Republican intentions would, if realized, in many cases be more damaging than Obama’s though they would also meet more resistance than has Obama from progressives.  The masterstroke for those who support the austerity agenda, is that Obama’s personal appeal splits resistance to austerity.  A Republican Administration would probably be met with mass demonstrations and civil unrest, while with an Obama Administration, some of the organizational nucleus of such a movement has seemingly been “pacified”.

Without a substantive choice at the ballot box, lobbying, public education, protest, and civil disobedience then become the means by which the general public can hope to influence policymakers to use government for the greater good and for their individual benefits.  An argument can be made that voting for Democrats and Obama but with no illusions and “speaking truth to power” may be the most popular choice that people have currently.  There is also no substitute for vigorous protest that captures the moral high ground and is based in sound social and economic theory.

 

Standing Up for a Strong Mixed Economy

There are a number of specific issues that anti-austerity activists are already working on or might be working on in the future:

  1. Popular debt restructuring and forgiveness
  2. Cuts to social services and federal aid to local governments
  3. Enhanced social services, public transportation, and social programs
  4. Resisting and protesting privatized replacements for public goods and infrastructure.

Yet there is also the danger that an anti-austerity movement becomes defined by the specific issues it focuses upon, leading to a loss of vision and ability to make coalitions between single-issue activists.

I wrote the “Mixed Economy Manifesto” a few months ago as a means to clarify and accurately name what is both the actual object of study of most modern economists as well as what is the political terrain upon which politicians, pundits, and ordinary citizens fight to shape the economy as it serves their ideals and/or interests.  Different political tendencies and economic schools for the most part are fighting over what kind of mixed economy to have not whether to have a mixed economy (public sector + private sector) in the first place.  Lack of time has prevented me from writing up a taxonomy of existing and potential future mixed economies but at some point I will do this.

However, before that taxonomy gets written, political actors acting in different social institutions need to act to stop the economic self-sabotage of austerity by, I believe, offering a positive view of what they want to see happen in government policy and the economy as a whole.  Rather than simply being anti-austerity, a successful movement towards a better society needs a vision of where it is going.  I’m going to suggest one medium-term vision of where to go which is a much better place than where we are currently headed.

The functioning of our current monetary capitalist economies requires government as a stabilizer and support for the private sector, helping both those who are vulnerable and less advantaged as well as those who have many advantages and power in the private sector.  We have seen devastating problems with societies that are structured purely around the state (i.e. Soviet Communism) as well as societies that are led largely by a private sector that is a “law unto itself” (19th Century and early 21st Century America, failed states, warlordism etc.).  Meanwhile it appears that nations where governments take an active role in the economy are showing fewer signs of dysfunction and are facing some of the 21st Century dilemmas more fully than the US.  These are the nations of Western Europe (especially pre-Euro), Canada, Australia, post-reform China, and Korea.

There is then a type of mixed economy which we could call a “strong mixed economy” where government is allowed an independent and differentiated role from the private sector.  Not everything in society can be reduced to market-like interactions and dynamics and one of them is the role of government.  The social-scientific and political race to reduce everything to markets (see “public choice theory”) must be halted and reversed in many cases.  Rather than let institutions like the public education system and US Post Office decay and crumble because it isn’t a “market” institution, those in favor of a strong mixed economy will support adequate investment in these public institutions.  The struggle is not just over preserving individual institutions but over a complete vision of what is the “good society”.  One of the critical roles of government in a strong mixed economy is the supply and management of the currency to grow or maintain general prosperity, including full employment.

In order for a strong mixed economy to function, the emerging plutocracy needs to be dismantled, as currently large corporations and super-rich individuals have inordinate power over government.  In this context, the government cannot serve a broadly shared “public purpose” but instead overtly, covertly and indirectly serves the powerful private interests, whose interests at many points conflict with those of the broad population.  Electoral and campaign reforms are required as are higher standards of quality for public media and political information.

Activists and writers then, in opposing austerity, can offer the vision of a strong mixed economy where government doesn’t shirk from supplying needed services to the population and uses its sovereign powers to maintain effective demand.  Additionally, as below, it is only via a strong mixed economy that many of the transformations we require to live prosperously in the 21st Century will be put into effect, transformations that include reducing the carbon and ecological footprints of economic activity..

 

Sidebar:  What if the Economy Should Shrink (For Ecological Reasons)

As someone who works on advancing ecological and biophysical approaches to economics, to find myself in the position of defending economic growth is an interesting place to be.  In bringing this up here, I am not at all suggesting that austerity advocates consciously intend to shrink the economy, nor if they did, do they have any recognizable ecological concerns.  Austerity advocates are so far from having a grasp of the real macro-economy let alone, beyond that, the real biophysical substrate of that economy that, in a way, I’m honoring them by bringing up this issue in the context of this piece.

In my opinion, we have not yet developed adequate formal tools for understanding the complex “layer cake” of social, economic and biophysical systems.  Advocates of real economic shrinkage, generally associated with the Peak Oil community, have not completely thought through the social and economic dynamics involved and some, who revel in Schadenfreude, don’t care.  A shrinking economy is a grim place to be: with a diminishing economic “pie” more economic actors will sink into despondency or turn to criminal and violent means to secure a slice of what remains.  The trust that is required for trade to occur will be undermined and the transaction costs of every exchange will go up.   This is what the ecological economist Robert Costanza calls the “Mad Max” scenario.  Without a great deal of thought and understanding of the interaction of social systems and natural systems, one does not simply and spontaneously end up with a “leaner” greener economy where people make do with less.

Much of the economic surplus and ecological excess of the existing economy is unevenly distributed both within nations and between nations.  To declare, suddenly after an economic crisis, that the economy should shrink on a permanent basis begs the question of where it should shrink and by how much.  If it should shrink in even measure for everyone (i.e. “shared sacrifice”), the shrinkage will be on a personal level painless for those of substantial means while enormously painful if not lethal for many of lesser wealth.  In their still more harebrained strategy, austerity advocates seem to want to take away the few supports that the less advantaged have (social insurance) while only making theatrical gestures towards sacrifice for the powerful players that they represent.  Advocates of environmental and climate justice often overlook inequities within societies and instead focus on international inequities, assuming, it would seem that the less advantaged within the richer nations should be satisfied with their current lot or be willing to sacrifice for the global greater good.  A fundamental sense that the domestic social order is just will enable people to decide to make group sacrifices for planetary well-being.

In the almost immediate future, our economies in order to survive need to reduce their carbon and ecological footprints as the population of the world grows and its “free” resources diminish, including the buffering capacity of the atmosphere and oceans.  The irreversible effects of climate change have already begun but humans’ biological niche can be narrowed still more by rampant disregard for planetary limits.  Runaway emissions and runaway material expansion of the world’s economies are the death knell of the natural basis for a livable economy.

There are three dynamics that need to be pursued in tandem to enable this to happen at all smoothly:

1)    More equitable distribution of the benefits of economic activity and/or growth

2)    Greater detachment of increases in the production of economic value (what we call “growth”) from the consumption of fossil energy and non-renewable material goods (decarbonization of economic growth).

3)    Greater coordination of human activity both via market mechanisms and via non-market mechanisms (international cooperation and domestic government fiscal policy) towards the transition to a decarbonized economy.

In order to make the transition to a more sustainable economy, a very dynamic but focused economy is required to build the infrastructure necessary to provide the basis for a future fairly prosperous economy powered by non-fossil energy sources.  A stagnant economy might slow the growth of carbon emissions but will not be able to fundamentally reduce them as it will operate with tools that require fossil fuel inputs.

The only political economic instrument/set of institutions capable of managing the transition to a more sustainable economy is some version of a strong mixed economy, where government and the private sector cooperate but have differentiated roles.  Beyond the obvious anti-ecological predilections and tendencies of its advocates, austerity is a direct attack on the institutions of a strong mixed economy and therefore leads away from durable solutions to our ecological and climate crises.

 

11 Responses to Deficit Hawks (Obama, Romney, Bowles, Boehner) Plan to Shrink YOUR Economy – Part 2

  1. Thanks for a very interesting post.
    On the failure of politics part, hearing that Obama has Bowles as near-top replacement for Geithner is as show-and-tell as it gets.
    On the actually more-advanced discussion of how economic growth – or stability – must have a negative effect on the biosphere, economics must re-begin from a more holistic understanding that integrates what has become ecology INTO the study of economics.
    My favored basis is in Soddy’s lectures on Cartesian Economics – “On the Bearing of Physical Science Upon State Stewardship”.
    It is from this and other of Soddy’s work, really, that the modern study of ecological economics has emerged.
    Yes, it is a difficult row to hoe when we advocate for restoring economic justice in the face of the dying planet.
    But only if one grasp’s Soddy’s understanding of the “distributive” nature of money can we begin to chart the way forward.
    Thanks.

  2. the cutting of government spending in particular to programs that supply those with the greatest propensity to spend the funds, . . . unemployment insurance, and aid to state governments, reduces demand overall for goods and services from the private sector, cutting the size of the private sector, thereby downsizing the whole national economy, both public and private sectors.

    A myth that’s been repeated so many times that it may actually be perceived by the naive as factual. Unemployment insurance payments do not go, in the main, to discretionary spending. They are used principally to pay existing debts, mortgages, rent, car payments, credit card balances, etc. They are not used to finance the purchase of new motorcycles, dance lessons or subscriptions to the New York Times. Unemployment insurance could just as well be called rent insurance or car payment insurance. That’s not necessarily a bad thing but neither is it an “economic stimulus”.

    • Chuck,
      My point is that these payments go directly into the economy (not sure how much debt repayment can be done on these meager amounts), not that they are hugely stimulative. We are now talking about the difference between supports and potential further collapse of the economy.

      • chuck martel

        I once worked with Bureau of Land Management employees who were designated “permanent seasonal” and were involved in support of wild fire suppression. Every year, when the fire danger became nil, these employees applied for and received unemployment benefits which they received while living in Mexican seaside resort cities.

  3. chuck,
    I have a hard time understanding this.
    The quote essentially says that – the cutting of government spending…. reduces demand overall for goods and services from the private sector…. as to downsize the national economy.
    It looks more like a truism than a myth.
    Thanks.

  4. The problem is simple enough: our money supply is lent into existence and thus ceases to exist when it is repaid UNLESS additional and accelerating borrowing occurs such that the interest on existing borrowing can be paid.

    But the above is absurd. A monetarily sovereign government can simply spend government money into existence and tax SOME of that money out of existence again if necessary to control price inflation.

    As for the private sector, the banks rely on several government privileges such as government deposit insurance and a central bank in order to be able to lend money into existence. Those privileges should be abolished.

  5. “Voters in November do not have a clear anti-austerity electoral choice in a vast majority of districts.”
    False! Jill Stein (Greens) is on enough state ballots to potentially win, covering roughly 85% of the population, and she is clearly anti austerity!

    “The only politician on the national stage who is principled and well-enough informed to resist the drive towards austerity is the soon-to-be-ex Congressman Dennis Kucinich ….”
    Well then, isn’t it time to do your part to put others, such as Stein, who are indeed principled and well informed enough, to do same, and at the same time have a positive alternative that incorporates much of what you have laid out, ON that national stage?

    “An argument can be made that voting for Democrats and Obama but with no illusions and “speaking truth to power” may be the most popular choice that people have currently.”
    Sure an argument can be made that it is “the most popular choice”, but I fail to see how anyone could argue that it is the best choice …. And, ISTM, that if it IS the “most popular” that is because the best choice is so routinely ignored on blogs such as this …

    Are you totally unfamiliar with the Green platform – a platform that reflects and resembles your analysis and policy prescriptions a great deal – that you leave its bearers out of the discussion of principled anti austerians, or do you have a problem with it?

    • One would think that the monetary-economic intellectuals would be voting their platform, but alike others of uncommon-sense in political economics, the lesser of two evils will do today.
      I do think that Dennis Kucinich is the best-informed on money in this Congress, and only hope that we can muster in the Assembly for a real discussion of his proposal to nationalize and make public the money system.
      http://kucinich.house.gov/uploadedfiles/need_act_final_112th.pdf

      Tomorrow Kucinich is sponsoring a presentation for Committee staff and invitees by IMF Researcher Michael Kumhof, who studied the Chicago Plan proposal of the 30′s that provided the framework for the Kucinich Bill.
      Dr. Kumhof’s paper supports the claimed advantages of the Chicago Plan, and using standard macro-economic modeling finds a couple of additional advantages as well.
      http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf

      Isee the supposed common-sense argument of voting for the lesser of two evils only as a vehicle towards greater and greater evil. The proof is in the pudding.

      A Virginia voter for Jill Stein.

      • Kucinich may be able to use his twilight time to foster discussion, but his blind loyalty to the Dem party means that his time on the national stage is quickly drawing to a close. So the question is – who now would this forward in the halls of Congress where these fruits of academe might be planted and nourished instead of left to rot on the vine? ISTM that it would behoove those who profess to support these ideas to use their bully pulpits, however large or small, to at least expose, if not promote, to their public those who would carry the work to its intended purpose – being incarnated into law and policy. What is the worth of all this if it is not put into practice? Why not promote those who would do so, especially when these folk are ignored by the MSM ….

  6. Michael, Really fine post, thanks.

  7. The idea of decarbonization of economic growth has been nicely emphasized. Austerity blindly advocated and pursued will definitely hamper economic growth and equitable distribution of economic benefits ie inclusive growth should be monitored by the government. A mixed economy which should mean a beneficial mix of public and private economies, will uplift the have nots and of course suppress the haves. The current situation has been well explained by Michael Hoexter not only in the American context but also for other countries which have been adversely affected by 2008 crisis.