No, Barack, It Just Ain’t Gonna Happen!

By Joe Firestone

Who else thinks the President’s speech didn’t include any plans to create the 29 million full-time jobs for the dis-employed? Please raise your hand!

About jobs he said:

”We can help big factories and small businesses double their exports, and if we choose this path, we can create a million new manufacturing jobs in the next four years.”

”If you choose this path, we can cut our oil imports in half by 2020 and support more than 600,000 new jobs in natural gas alone.”

And, except to say he wants time to finish the job, that’s it! Over the next 4 years the economy will probably need another 4 million jobs just to employ new entrants into the job market, and not even to reduce that 29 million dis-employment figure. So he needs 33 million new full-time jobs to get to full employment, and he’s talking about 1.6 million in his acceptance speech. What planet is he living on?

Maybe, like Herbert Hoover, if he keeps saying prosperity is just around the corner, and does almost nothing to make it happen, then he thinks his beloved private sector will quit generating profits from financial manipulation and start creating jobs at a living wage. I think we’ve seen this movie; and it doesn’t end happily for working Americans.

The President had a lot more to say about deficits, then about jobs; showing that he lives a fantasy world of faux problems:

”You can choose a future where we reduce our deficit without sticking it to the middle class. Independent experts say that my plan would cut our deficits by $4 trillion. And last summer, I worked with Republicans in Congress to cut billions in spending because those of us who believe government can be a force for good should work harder than anyone to reform it, so that it’s leaner, and more efficient, and more responsive to the American people.”

But why reduce our deficit at all? Have we got an inflation problem? Does either the level of our debt at $16 T, or our debt-to-GDP ratio of more than 100 percent either impair our ability to deficit spend in the future, or to pay off the debt without either taxing or borrowing? The answers to these questions are: There’s no reason to do it; No, and No! Here’s more from O:

“I want to reform the tax code so that it’s simple, fair, and asks the wealthiest households to pay higher taxes on incomes over $250,000, the same rate we had when Bill Clinton was president; the same rate we had when our economy created nearly 23 million new jobs, the biggest surplus in history, and a whole lot of millionaires to boot.

I love higher taxes on the wealthy, as much as the next person. I wouldn’t mind going back to the marginal tax rates of World War II and the inheritance tax rates of Harry Truman’s times. But does anyone really think that the same tax rates we had under Bill Clinton really caused the 23 million new jobs during his Administration; so that if we want to have that kind of job growth again, we really must have Clinton’s tax rates? Give me a break!

We know that the prosperity of the 1990s was primarily fueled by debt bubbles, and had little to do with Clinton’s higher tax rates. In fact, his surpluses, coupled with the Internet bust, produced the recession he bequeathed to Bush 43, a recession that was ameliorated, but never really ended for most working people by Bush’s deficit spending.

“Now, I’m still eager to reach an agreement based on the principles of my bipartisan debt commission. No party has a monopoly on wisdom. No democracy works without compromise. I want to get this done, and we can get it done. But when Governor Romney and his friends in Congress tell us we can somehow lower our deficits by spending trillions more on new tax breaks for the wealthy, well, what’d Bill Clinton call it? You do the arithmetic, you do the math.”

The problem, Mr. President, is that there’s more than arithmetic involved here, which is why the Bill Clinton/Jack Lew surpluses produced that recession at the end of their term, the one that played a part in Al Gore’s defeat. The economy is dynamic. If you try to cut deficit spending or run surpluses by raising taxes and cutting Government spending, then you had better estimate what impact that’s going to have on non-Government, including private, savings and investment, and the trade balance; because cutting deficit spending can lead to a net reduction or elimination in net savings and investment, as well as a reduction in the trade deficit.
Then the President told us what he wouldn’t do to cut the deficit:

“I refuse to go along with that. And as long as I’m President, I never will.
“I refuse to ask middle class families to give up their deductions for owning a home or raising their kids just to pay for another millionaire’s tax cut.
“I refuse to ask students to pay more for college; or kick children out of Head Start programs, to eliminate health insurance for millions of Americans who are poor, and elderly, or disabled, all so those with the most can pay less.
“I’m not going along with that.
“And I will — I will never turn Medicare into a voucher.
“No American should ever have to spend their golden years at the mercy of insurance companies. They should retire with the care and the dignity they have earned. Yes, we will reform and strengthen Medicare for the long haul, but we’ll do it by reducing the cost of health care, not by asking seniors to pay thousands of dollars more. And we will keep the promise of Social Security by taking the responsible steps to strengthen it, not by turning it over to Wall Street.”

I’m glad for all these refusals and lines in the sand. He’s told us what he won’t do to make things even easier for the wealthy; but as Digby says, that doesn’t mean he won’t trade some or all of these things, for tax hikes on the wealthy. Tax hikes on the rich will please people wanting greater fairness; but that will be cold comfort for people whose safety net benefits are traded away for a smidgeon of greater fairness.

There’s also another thing he hasn’t told us. Maybe someone will make him do it in the debates. And that is what he plans to do to solve that 29 million jobs problem. That question is a really interesting one considering that he plans for the US Government to average $400 Billion in deficit reduction over the next 10 years. That is really, really a bad idea, because in doing that he’s pretty much condemning the US to a stagnant economy with perpetually high unemployment for the next 10 years, giving us a 14 year period of high unemployment, Obama’s “new normal” legacy to future generations.

Why do I say that? Well let’s look at some basic macroeconomics from Bill Mitchell:

 ”The basic income-expenditure model in macroeconomics can be viewed in (at least) two ways: (a) from the perspective of the sources of spending; and (b) from the perspective of the uses of the income produced. Bringing these two perspectives (of the same thing) together generates the sectoral balances.

From the sources perspective we write:

GDP = C + I + G + (X – M)

which says that total national income (GDP) is the sum of total final consumption spending (C), total private investment (I), total government spending (G) and net exports (X – M).”</blockquote>

That is, X is exports and M is imports. So if X is greater than M, we have what is colloquially called a “trade surplus”; but if M is greater than X then we have a “trade deficit,” which is what the United States has enjoyed for many years. I say enjoyed, because people in other nations send us goods, real wealth, and we send them electronic bits of information called US Dollar electronic credits. Seems like we’d have the better of that kind of deal, if we had sense enough to employ the people put out of work by our persistent trade deficit.

However, that aside, we should note that the US seems to be running a trade deficit of 4% of GDP right now. We’ll see shortly the importance of this number. Bill continues:

“From the uses perspective, national income (GDP) can be used for:
GDP = C + S + T
which says that GDP (income) ultimately comes back to households who consume (C), save (S) or pay taxes (T) with it once all the distributions are made.

Equating these two perspectives we get:

C + S + T = GDP = C + I + G + (X – M)

So after simplification (but obeying the equation) we get the sectoral balances view of the national accounts.

(I – S) + (G – T) + (X – M) = 0

That is, the three balances have to sum to zero.”

So, we have an investment/savings balance, a Government spending/tax balance, and a foreign trade (exports/imports) balance. The sum of these balances must equal zero, and this true by definition alone. It is what economists call “an accounting identity.” Are accounting identities always “true”? They are always “true” in the sense that they are logically valid. But reasoning from them can result in false conclusions, because 1) the wrong data is correlated to the one or more of the terms of the identity, or 2) because further reasoning about the causal relations among the terms in an identity may give false conclusions, and/or 3) reasoning about the dynamics relating the terms in an identity over time may be in error.

If we want the private sector to collectively save, then S must be greater than I, and we must have an investment/savings balance deficit, or, in other words the private sector as a whole must be accumulating nominal financial wealth within some time period.

If we want to import more than we export, then M must be greater than X, and we must have a “trade deficit”, which means that US entities as a whole must be accumulating more goods and services from abroad and must be sending more dollars into accounts at the Federal Reserve owned by foreign entities than they are receiving from them in return for our own exports.

Notice here, that the USD provided to foreign nations when we run a trade deficit, go into their accounts at the Federal Reserve. They never do leave this country. So, don’t listen to people who constantly tell you that our trading dollars are going overseas. They’re not. They’re in our own central bank.

Lastly, according to the model, if we want the private sector to collectively save, and if we want it to collectively spend more on foreign goods and services than it receives in nominal financial wealth for our goods and services, then the Government sector will have to spend more than it taxes. That is, it will have to run a deficit in the Government balance to accommodate the savings and import desires of the private sector by replacing the leakage in aggregate demand that savings and more imports than export represent. But just how much of a deficit will the Government sector need to make sure that the balance called for in the model happens without decreasing savings or reducing the size of our trade deficit?

Well, I said earlier that we’re running roughly a 4% of GDP trade deficit in the US. We also know that the private sector needs to save to repair household balance sheets after the disaster of the financial crisis of 2008, coupled with the housing crash. Let’s say that US private savings desires are currently 6% of GDP, a reasonable estimate given behavior over the past few years. Then, we’re saying that we want (I – S) to be – 6% of GDP and (X-M ) to be – 4% of GDP, which implies that we also want (G – T), the Government balance to be positive and equal to 10% of GDP. In other words, we’re saying that the Government ought to be running a budget deficit of $1.6 Trillion this fiscal year, which judging from how things are going is approximately $400 Billion more than we will actually be spending.

So, it should be clear that the Federal Government, far from running too large a deficit, is now running a deficit that is $400 Billion smaller than it should be to accommodate the desires of the private sector to import and save, and to replace the aggregate demand lost to savings and more imports than exports.

Now, let’s say the Obama Administration compromises on a deficit reduction bill specifying $4 Trillion in Government deficit spending reductions over 10 years phased something like this: 8%; 8%, 6%, 6%, 6%, 4%, 4%, 3%, 3% and 2%, where the percents refer to the deficit spending levels as a percent of GDP. Then, there will be increasingly less space for private savings and imports.

No doubt the President would like to see a shrinking percentage of GDP spent on imports over the next decade because that means that the budget deficit can be smaller if private savings stay the same. But, it’s pretty clear that in the next two years, we won’t be able to shrink the trade deficit by even 1% of GDP or roughly $160 – $170 B annually.

So, that means that if we follow the plan for deficits I just stated, then the savings desires of the private sector can’t be accommodated at 6%, and household balance sheets won’t continue to build. As, deficits move down to 6% in 2015 – 17, imports will be squeezed further, as will savings. By the second half of the decade, both imports and savings will be subjected to very high downward pressure.

The result will be that our trading partners will resist efforts to re-balance trade. They will lower prices of their goods and services in an effort to maintain the balance. We, in turn, will also have to lower costs, and that probably means lower wages – a race to the bottom to continue to increase our levels of exports. That will feed back to domestic private savings, and also to aggregate demand here, which will both decrease; though maybe not by as much as demand will increase from the decrease in imports. Causality moves in conflicting directions and without rigorous modeling we can say what the overall increase in demand outcome will be.

In addition, the decreased space for savings will result in people seeking to save more and in increased economic conflict in the private sector with people and classes fighting over a shrinking pie. In the US currently, political power is arranged in such a way that an increasingly small group is able to direct nominal financial income its way by using the political system to its advantage.

So, austerity will mean that a very few wealthy will grab the shrinking pie of savings, and more people will be faced with the choice of maintaining their consumption levels by going into debt, and maintaining their rate of savings by cutting back on consumption. This developing situation will be unsustainable; and the second half of the decade, after a period of a stagnating economy, will surely see a deepening depression, and a strengthened economic and political oligarchy.

That’s the scenario if things go smoothly with austerity policies being planned by the elite led by Peter G. Peterson and the President of the United States. However, it is likely that things will not go according to plan and that the politicians will not be able to maintain the deficit targets in any long-term deficit reduction plan. The reason is that if demand flags because people try to buck the program by imposing strict spending discipline on themselves, or if foreign demand for our exports flags so that export industries must cut employees, causing a weakening of demand here; then rising unemployment here will impact the automatic stabilizers like unemployment insurance food stamp benefits, and Medicaid, driving up deficits beyond the levels in the deficit reduction plan.

The experience of Europe tells us that ideological neo-liberal austerians will not then admit that they were wrong about austerity and the possibility of implementing a deficit reduction plan successfully. But that, instead, they will double-down on it, shrinking aggregate demand even more, and driving the economy down even further, as they have in every European nation where austerity is being tried.

What if the President, or Mr. Romney succeeds in making the “grand bargain” to raise a few taxes, and cut 3 times as much spending, including entitlements in the process of passing a long-term deficit reduction plan, and what happens if in the first three years the plan fails to meet its targets and also creates a new recession in our fragile economy? Will the austerians then admit they were wrong and start paying attention to the sectoral balances and people’s needs? Or will political necessity prevent them from admitting error and force them to double- down on austerity because that is the only viable political choice? We know what they will do, because no politician ever admits they were wrong, until perhaps they’re thrown out of office, and not very frequently even then.

Look at Obama himself, it was apparent by the Fall of 2009, that his ARRA was too small to do the job of creating a full recovery. Did he and the Democrats admit it? Did they pull out all the stops to pass a jobs bills in the rest of 2009 and take care of their unfinished business? Or did they double-down on insisting that the stimulus worked, and move on increasingly to a health care bill that bailed out the insurance companies and burned all their political capital, that coupled with the tepid recovery, lost them the election of 2010?

I think we know what will happen if President O wins on his “austerity grand bargain.” First, it will never succeed because it is inconsistent with what the sectoral balances tell us. And when it doesn’t he will double-down and then plunge us into a worse recession than ever, and in 2016 an impoverished population will face at least four more years of looting by the 1%, and increasing poverty from the other corporatist party of the emerging plutocracy.

So, Mr. President  and  Paul Krugman, don’t tell me we’re going to have both an economic recovery and a forced move towards a lower deficit over the next four years, because the sectoral financial balances model says that without a new credit bubble that will lead to an expansion of aggregate demand coming from rapidly increasing private debt, that will eventually burst and give us a new great financial crisis;  it just ain’t gonna happen.


13 responses to “No, Barack, It Just Ain’t Gonna Happen!

  1. MMT makes me wish I had never eaten the red pill. Warren Mosler is obviously Morpheous, Dr. Kelton is the Oracle, Dr. Wray is Neo – and now that I know the truth, all I want to be is Cypher.

    Just kidding – I’m glad I ate the red pill. But the food here sucks.

  2. “No, Barack, It Just Ain’t Gonna Happen!…
    So, Mr. President and Paul Krugman, don’t tell me we’re going to have both an economic recovery and a forced move towards a lower deficit over the next four years, because the sectoral financial balances model says that without a new credit bubble that will lead to an expansion of aggregate demand coming from rapidly increasing private debt, that will eventually burst and give us a new great financial crisis; it just ain’t gonna happen.”

    BUT MR PRESIDENT, You stated the answer as to how -WE CAN SOLVE THE PROBLEMS ! !

    (as stated on ” 60 minutes” (12/11/11)”

    President Obama said,”You can’t raise revenues by lowering taxes unless you get the money from somewhere else.” ?
    DAMN STRAIGHT ! Reduce income taxes to zero and raise $5.5 trillion in revenue per annum for the next 36 years .
    Summary: GOOGLE – “Justaluckyfool,Wealth Redistribution”
    To lower taxes,you must raise revenue somewhere.How does a government fund, “a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity,…”” at the same time reduce federal personal income taxes to zero ?
    The answer lies in how the most powerful force in the universe is used to redistribute what it creates !
    A simple scenario, what if … solve housing crisis, credit expansion bubble, jobs crisis, the President with the US Treasury and Federal Reserve were to implement the following
    plan with legislation THAT IS ALREADY IN PLACE .?
    1. ALL loans and purchase transactions by all banks and financial institutions must be 100% liquid, that is at 100% margin.This perhaps would produce “total financial collapse” except for :
    2. All currency needed regardless of what amount may be borrowed @2% for 36 years from the Federal Reserve.(This would be a zero increase in the deficit as the Feds can purchase any amount of assets )
    3.The Feds would purchase all REAL ESTATE mortgages at the ridiculous value of par.
    This will allow de leveraging without collapse. It will also stabilize the housing market, increase jobs and return a revenue of trillions per year.(Details how it would be revenue profitable is a little lenthy but available)
    These three steps will allow for the termination of federal income taxes and put in place-
    People and businesses raising revenue by paying INTEREST on our own money instead of income taxes.
    Justaluckyfool asks,”What if..?
    and awaits some profound answers.

  3. P.S.
    If this required $100 trillion the revenue stream would be $5.5 trillion/year
    If $200 trillion…umm, $11 trillion, OMG…$300 trillion….
    By the way payments , revenue must by law go to the US Tearsury.
    Whether you believe it or not it is only a redistribution- nothing new, instead of the 1% making this profit, the 100% would.

  4. Is that the only choice we have? Eat the red pill or the blue one? Is there nothing else of any consequence in the election other than the economy? Really? Fairness doesn’t matter? Income disparity doesn’t matter? The environment doesn’t matter? Nothing else matters except the economy?

    Somebody has their head buried in the sand such that all I can see of them is their ass.

    • WOW! Who harmed you off so bad?
      Yes all those things do matter, and yes we must improve our choices if we can not improve blue or red.
      If only you were to join “an improvement group” instead of where you are.
      Maybe then you’ll stop seeing just their…..
      And by the way”justaluckyfool” asks,”If we were to have a great economy and properity for all,whouldn’t that solve almost all those problem and more?”

    • Fairness, income disparity, and the environment matter. 29 million dis-employed Americans also matter.

      Perhaps we can employ the 29 million dis-employed by having an economy based on green jobs and every working American having an income above the poverty line.

  5. Good post. But I’m voting for Obama who is at least likely to keep the status quo politically until such time as people come to their senses. The way of Romney is the way of losing the possibility of change (think Supreme Court, for example)…

  6. Instead of The Matrix, I think another movie is worth referencing: Shakespeare in Love. This British-American comedy-drama from the late 90’s had a recurring optimistic theme that may be relevant to this blog. The script included the following lines:

    Philip Henslowe: Mr. Fennyman, allow me to explain… the natural condition is one of insurmountable obstacles on the road to imminent disaster.
    Hugh Fennyman: So what do we do?
    Philip Henslowe: Nothing. Strangely enough, it all turns out well.
    Hugh Fennyman: How?
    Philip Henslowe: I don’t know. It’s a mystery.

    How could things “turn out well” for the US? I am a European and one thing I can say for sure is that Americans are far better off than we are… and it is not only because you are not tied down by the Euro shackle. You also are narrowing the gap between yourselves and China in terms of labor costs and you are world leaders in robotics (key for this century). As a society you are able to reinvent yourselves much more swiftly than most others.

    Importantly, you are sitting on vast reserves of shale oil and gas – reserves with the potential of becoming some of the cheapest energy in the world. America’s reliance on fuel imports has sucked vigor from its economy for decades. Now an oil and gas boom could herald a new era for the US; an era of stronger economic growth and of reduced production costs at US factories, signifying a major comeback of “Made in America”.

    The shale energy revolution could even turn the US into a net exporter of many fuels in little more than a decade, transforming energy from the economy’s Achilles’ heel to a source of strength, in addition to totally redrawing the geopolitical map.

    I am not saying that what current politicians are doing is correct, and I agree that the sectorial balances approach is a great tool. However, strangely enough things may end up turning out well… ☺

    • Alex, you’re kidding right! If we go with all that shale oil, we’ll all have to move to Canada because the United States will be far too hot for human habitation. I used to think the US was far better than other at reinventing itself. But the last time it did, in the 1970s, it re-invented itself into a great big hole which we are fully experiencing now.

      It isn’t clear we can out of this hole at all, because the trend to plutocracy is very strong right now. Maybe strong enough to snuff out the spirit of re-invention, or at least its democratization!

    • The shale gas bounty is largely illusory. There probably isn’t nearly the quantity recoverable that we are being promised, and we will wreck our ground and surface waters in getting it out what is there. And Joe, yes, burning all that will heat up the climate but Canada won’t be any place to go because they’re ruining the environment at the same time with oil sand development.

  7. Look, what I think everyone in America should do is first of all do whatever it can to get Obama re-elected. The GOP is a party without reason and without facts. Then, we do everything in our power to spread the word. Not just in America, but everywhere. Then when it becomes both accepted in the economics profession and known in the public sphere, we can effect real change.

  8. What they say means absolutely nothing! The important thing is what they do. Obama didn’t keep his election promises but Romney is just another Bush. America deserves much better than either of those two but this time I refuse to vote for the lesser evil. Like many others this year, I will vote for no one. If this is all we have to chose from then maybe it is time to be leaderless!

    • “I will vote for no one.”
      America is unique in that it is a nation in which the people are the governing.
      So unique that their governing power is is so protected that it is secret when exercised.
      It is a duty to vote. It is a responsibility to vote.
      To not vote you by your silence take away your right to govern and in turn give it to someone else.
      You should not complain after the election since you then have helped that elected offical into office.
      15 million blue will cancell out 15 million red-its the other 3 million that make the choice-Why wouldn’t you vote chossing only those you feel are better for your purpose of governing.
      Starting with the lowest rank of the elected at each election begin to build “those who would serve your best interest.
      But remember, “unintentional consequences”, you may get what you wish, and YOU COULD BE WRONG !