By Michael Hoexter
The electoral competition between Barack Obama and Mitt Romney seems to be largely over and barring an “October Surprise” for Mr. Obama, the attention now shifts to how he and the newly elected Congress will manage the US federal government. The composition of that Congress matters somewhat though there is surprising unity between the two major parties on the goal of neutering the federal government’s ability to help state governments and the larger economy through pro-active fiscal policy. Mr. Obama’s listless first debate performance has added suspense but so many factors seem to be now weighing in his favor that it would require substantial efforts at self-sabotage or a sharp pre-election slump in the economy for Mr. Obama to lose. Recent favorable job numbers suggest that the latter will not happen and the former is up to Mr. Obama and his own determination to be President for a second term or not.
The austerity agenda remains the consensus position in both parties, where government officials would and are engaging in unilateral self-sabotage of the economy as a whole by agreeing to abide by the myth that monetarily sovereign governments should balance their budgets and “save money”, money they issue and spend at near-zero real cost, by cutting vital programs. A number of conditions make legislators’ preference to undermine the still-fragile economy seem thinkable despite its basis in delusions about how the economy works and, additionally, its moral repugnance:
1) the shibboleths of neoclassical, Austrian and supply-side economics, more fixedly believed by Republicans but also holding significant mind-share among leading Democrats, have made legislators feel that government spending’s contribution to economic growth is optional.
2) many wealthy political patrons have shown a preference for the budget balancing mania. The blandishments of large campaign contributions and cushy post-office appointments for themselves and their families seem to outweigh any sense of duty to the common good that these legislators may feel.
3) for Republican legislators, a “win at all costs” mentality has meant sabotage of the economy is preferable to helping their constituents in their hour of need, and thereby helping the incumbent Democratic President win re-election.
Reason “1”, economists’ ambivalent embrace of the lessons of the Great Depression and of the work of Keynes, has played a critical enabling role in legislators’ abandonment of duty to hold up their end of our inevitably mixed economy and the wholesale corruption that follows from this abandonment of duty. With the social scientific rationale for government’s economic role under constant attack from within economics, it is no wonder that we are now caught in a “low level equilibrium trap” with regard to economic governance.
One of the chief agitators and supporters of austerity in the US is Erskine Bowles, a Democrat with intimate ties to Wall Street, who serves on a number of corporate boards. Bowles is one of chief Democratic allies of Republican Pete Peterson, the Wall Street billionaire who has taken it upon himself to change the accounting rules of government and scare legislators and politicians into submission to the boogieman of the “bond markets”. Together they both sit as directors at the Committee for a Responsible Federal Budget, a front-group/think tank housed at the ostensibly liberal New America Foundation. Many of Washington’s key deficit hawks have thus lodged themselves at one of DC’s supposedly left-leaning brain trust, cleverly providing themselves cover for their essentially right-wing agenda. Ari Berman of the Nation has called them Washington’s “austerity class”. The CRFB’s webpage declares with agit-prop style graphics that we must “Fix the Debt” as if public indebtedness were the core problem our generation faces and should inspire demonstrations on the street and at the US Capitol. Bowles is thought to be a likely candidate for Secretary of the Treasury to replace Timothy Geithner for Obama’s second term.
Peterson’s obsession with government deficits and the national debt is something of a monomania with two clever twists: Peterson’s or his friends’ investments in the finance, insurance and real estate (FIRE) sector would stand to profit from a largely privatized health and pension system. To privatize Social Security and health insurance for the elderly, in part or in full, would open up huge “markets” for the FIRE sector of the economy from which Peterson made his billions. Peterson is not the only financier with an interest in cutting social programs: Democrat Robert Rubin, Treasury Secretary under Clinton and Wall Street banker has also been pushing for cuts to Social Security via his “Hamilton Project”. Peterson’s seemingly sincere belief in economy-stalling budget rules and piety about public debt is the latest cover for this long-held dream of the finance industry. The establishment press has been bamboozled by the many front-groups that Peterson and Rubin have put up to distract from the speculative financial interests that would benefit from cutting social spending. Also Peterson is clever enough in an era, post-2008 Crash, when Wall Street is not well liked on Main Street to co-opt as much of the Democratic Party as he can to realize his long-time wish to abolish the welfare state. Siting the CRFB at the New America Foundation is just one example of this strategic positioning of deficit hawkery as “neither Right nor Left” when it in substance has been part of the cherished agenda of the anti-Roosevelt Right from the 1930’s and thereafter.
Erskine Bowles shares with Peterson and Rubin what can be viewed as either a sincere but self-centered obsession with business accounting rules or a short-sighted and power-hungry ambition to gut the US government’s ability to keep on providing the spending necessary to keep afloat the private sector of the US economy, which includes its over 100 million households. In a recent hour-long public event/interview at the Council on Foreign Relations, one central theme in Bowles’ public self-presentation is as a morally-motivated “numbers guy” who submits himself to the discipline of business accounting rules and thinks the federal government should do the same. In the interview, Bowles expresses an admiration for Congressman Paul Ryan as a still sharper “numbers guy” than himself. Bowles’s stories from his career as a public administrator (he led the North Carolina university system) and official (chief of staff during the Clinton Administration) would seem to indicate to the unsuspecting that he might know something about government accounting but as we shall see he doesn’t really seem to have that deep a grasp of the topic that has made him a household name.
Like Peterson, Bowles has earned and continues to earn most of his income from his activities in the financial sector and sitting on corporate boards, among others on the board of the Wall Street investment bank, Morgan Stanley. A business major in college, Bowles’s first job out of business school was also at Morgan Stanley and it would seem that his worldview is based within the Democratic “side” of the financial sector: somewhat more liberal on social issues and more urbane than his Republican counterparts but sharing the same economic worldview: money should remain controlled by the financial elite with government tethered to Wall Street’s goals. As with Peterson, the financial community where Bowles plays a leadership role would stand to benefit from a privatized pension and old age health insurance system.
A Confusion of Accounting Entities
The deficit hawk argument advanced by these gentlemen is based on a fundamental confusion of accounting entities, which, for many of its most notable advocates and activists, is, as we have seen, a motivated misunderstanding driven by narrow sectoral political-economic interests. Deficit hawks argue that all governments should abide by the same accounting rules that businesses and households need to abide by, that monetary expenses cannot in the long term exceed revenue. Bowles and Peterson seem to believe or talk as if they believe this is a moral matter, that the government is as burdened by debt as private economic entities would be: the public debt is “broken” and must be “fixed”.
The typical accounting entity with which conventional business accounting deals (a business or a household) is attempting to maximize income while minimize costs; in the long run income must equal or exceed costs or the entity (household or business) goes bankrupt. By shedding costs, a business or a household can stay afloat or maximize their income and thereby maximize their wealth. Perfectly “balancing” costs and income is not the usual goal of most conventional accounting entities as they are usually set on increasing their savings rather than simply breaking even.
Even if we had never heard of Modern Monetary Theory, someone who thought about a world of interacting multiple accounting entities attempting to maximize their incomes, a “naïve macroeconomist”, would need to invent an institution like a deficit-spending government to enable net economic growth, counted in monetary terms, of the sum total of these private entities to occur. Growth is currently the goal of economic policy and activity overall, and is only controversial at the margins of political debate.
A heterodox, though realistic, theory of money and banking, endogenous money, observes that private banks also create money by issuing debt, the principal of which is destroyed upon repayment. During the time of its circulation, the loaned money is treated as money issued by government but for cash transactions in that circuit, a certain amount of the “high powered money” of the government is required. Even if a naive macroeconomist would believe that most of the growth of the money in circulation (and of the overall economy) should occur via the route of banks or other private financial institutions lending alone rather than government spending (a “limited government”), the net growth of that economy (the interest repayments and the profits of the banking institutions) would need to come from net surplus spending of government over taxes collected. That (unrealistic) lending-only world of economic and monetary growth would lead to a lopsided economy (more lopsided than today) where all profits would accrue only to financial institutions and net economic losses for all other sectors of the private economy combined. Furthermore, in reality, endogenous money is extremely pro-cyclical, amplifying the business cycle, as banks lend on the expectation of profit. In an economic downturn, endogenous money contracts severely, exacerbating the downturn.
So to ask that all accounting entities, all economic actors including government, have balance sheets that are balanced or “in the black”, as a naïve accountant with experience in the private sector would recommend, means that one must completely dismiss the generally accepted goal of growth for the economy and net savings for the private sector as a whole. No deficit hawk and certainly not Bowles or Peterson represents a consistent anti-growth position, a position by the way, which would lead them to be ostracized from the Washington and economic elites. However, their insistence that government balance its budget leads exactly to that outcome. They are not at all prepared intellectually or otherwise to deal with the consequences of such an anti-growth stance, if it is their intention. So deficit hawks including Erskine Bowles are deeply confused or insincere in their commitment to budget balancing.
“Incitement” to Current Account (Trade) Surplus
A complicating factor in this equation is that, in theory and reality, governments of nations with current account surpluses can also, if they wish, balance their budgets and, simultaneously that nation’s private sector can experience net growth via inflow of funds from abroad. “Current account” is the more inclusive term for net inflow/outflow of funds from trade and foreign investment together. The US has a very large trade/current account deficit, which coincides historically pretty nearly with increases in US federal government budget deficits.
With only momentary reflection, most people will realize that not every country can run a trade surplus. A consistent model of the world’s economy will show us that total current account surpluses will equal current account deficits to the penny. The nations with the largest current account surpluses, China and Germany, have heavily subsidized their industrial sectors to the point that other nations would like to see some re-dress from international trade bodies. That Germany for instance now can balance its federal government budget (and demands the same of other Euro-Zone countries) is not something that its trading partners with trade deficits can emulate, as we have seen over the past decade rising trade/current account deficits in France and Southern European countries within the Euro-Zone. In contrast to Germany, Japan, a country with a large current account surplus, also runs government budget deficits, to keep its heavily indebted private sector afloat.
As just noted, the association of current account surpluses and budget surpluses is ragged in the real world even though in theory one could have both at the same time. Neither does the causality work the other way around: balancing government budgets would not lead to a current account surplus, if this is considered desirable. Almost invariantly large trade surpluses are the product of a concerted effort by government and industry in building a “Japan Inc”, a “Made in Germany” export powerhouse or a Chinese “Workshop of the World”. The balanced budget meme as a spur to international competitiveness is on the level of national governments, the equivalent of a magical incantation that governments with current account (“trade”) deficits suddenly produce the conditions of a current account surplus, either in appearance on balance sheets or in reality in terms of manufacturing prowess, trade and business transactions.
In sum, not everybody can be a “virtuous saver”, and run a surplus, so it is either a matter of inducing or forcing other economic actors to occupy the role of being a net spender or allowing deficit-spending, monetarily-sovereign governments to occupy that role. Deficit hawks like Bowles and Peterson hold out the utopian ideal of everybody becoming a saver as means to bludgeon political leaders into following their lead.
Macroeconomic Accounting Is Different
The accounting rules of a currency-issuing government or groups of governments are consequently different than those of a business or a household. The accounting entities which macroeconomic accounting need to account for are:
1) The currency-issuing sovereign government itself and its financial operations
2) The national economies and aggregations of national economies inclusive of the public and private sectors, which include the currency-issuing sovereign government.
The critical entity and distinguishing agent within macroeconomics, a monetarily sovereign national government or an alliance of governments like the WTO or other UN agencies, needs to account for the systemic features of a national or world economic system and allow for expenses that are not accounted for by either individual accounting entities (businesses and households) or their spontaneous aggregation in markets.
Features of macroeconomic accounting relevant to this discussion of government budgeting and deficits that distinguish it from traditional balance sheet accounting are as follows:
1) In the post-1971 era of fiat currencies with floating exchange rates, expenditures are not limited by taxes collected or funds borrowed from abroad (formerly government income in the era of convertible currencies)
2) The net increase in national private sector monetary wealth is the total of any budget deficits (government expenditures minus taxes collected) plus any current account surplus.
3) The decision to sell bonds equivalent to budget deficits is a political decision that also enables government to influence private interest rates yet is unnecessary for “greater-than-taxes-collected” expenditure for purchases of goods and services in the national currency. All public debt denominated in the national currency of account could be paid off instantaneously via “keystrokes” at any time.
4) Government expenditures and levies (taxation) are politically determined with reference to the following conditions:
- Level of aggregate demand for goods and services overall in the private economy
- Level of employment overall and in specific sectors
- Public infrastructure and services that are not supplied by or supplied inefficiently or ineffectively by private actors
- Current and future costs not addressed by or addressed ineffectively or inefficiently by private actors that impinge on overall societal and economic well-being
- i. Social costs
- ii. Environmental costs
- Acceptable levels of inflation/avoidance of deflation
- Acceptable levels of currency depreciation/appreciation
5) Expenditures and levies reflect political assessment of the overall values and aspirations of the nation (the public purpose).
6) Expenditures and levies also account for typical fallibilities and oversights that characterize “average, expectable” behavior by the citizenry (i.e. failure to save or to plan, building on flood plains or near the coast).
7) Trade policy can reflect a wide range of national ambitions, objective economic strengths and weaknesses of a given nation and is decided via the political process.
To insist that all expenditures must equal all levies collected, i.e. to balance budgets or run a budget surplus and “fix the debt”, is to ignore the role of government expenditure in supporting an economy that is necessarily and critically dependent upon it. The fantasy of a self-sufficient private sector or the idea that all economic units must self-sufficiently balance their budgets is just as utopian as was the fantasy of a worker’s paradise via Soviet Communism.
Furthermore the critical macroeconomic accounting entity (monetarily sovereign government) needs to account for the economic activities of sub-units of the sovereign government and regional governmental entities which in fact need to balance their budgets or meet budgetary targets. However these sub-units of government (departments) or local and regional governments (towns, cities and states) are not somehow “better” or more morally upstanding for having to balance their books. In fact they must often work with their monetarily sovereign federal or national government to obtain sufficient funds to be able to “balance their books” in the first place, otherwise in an economic downturn, they will cut vital services, dependent as they are on tax revenue. Their fiscal “probity” is an illusion provided by transfers of funds or a political luxury enabled by shriveling their functions and services. Alternatively some wealthy regions with net monetary inflows from outside their bounds, will be able to maintain this illusion without central government subsidy at the expense of their poorer neighbors.
Though not labeled as such by its advocates, the movement to find a replacement for GDP or GNP as a measure of social welfare and economic well-being, can be construed as one fairly well-publicized effort at finding a new central statistic for macroeconomic accounting. That Bhutan has come up with a Gross National Happiness Index is an interesting development that has sparked international attention.
That macroeconomic accounting is now considered optional, exotic, or extraneous has a lot to do with the state of macroeconomics, the discipline which would provide the analyses that support the macroeconomic accounting process for a given nation or international body. Macroeconomics has become colonized by microeconomics, with the popularity among establishment economists of the notion that microeconomic models, themselves fictions, were the basis of all economics including macro. Unfortunately most of (neoclassical) microeconomics is unrealistic bunk but even if it weren’t, a realistic micro-economics would not deliver analyses that would create a realistic macroeconomic accounting framework.
In our current economic system, macroeconomic accounting must, for one, counter-balance the effects of microeconomic decision making, including the drive towards profit-maximization and the shedding of costs onto others and the environment. The degree to which it does this depends on political decision-making, a critical factor in macroeconomic decision-making. The government budgeting process driven by politics generates a full account of what government in aggregate “believes” it should spend money on and where it should extract money from the economy via taxes. Still, this simultaneous counter-balancing and support of microeconomic decisions cannot be reduced to micro-economic theory, either in some realistic future version or the current neoclassical hokum. The work of Keynes still remains the starting point, though not the end point, for developing a still unfinished “handbook” for macroeconomic accounting.
A shorter summary of the deficit hawk position represented by Bowles and Peterson is that they pretend that macroeconomic accounting can be reduced to business or household accounting not realizing or not caring that this creates an infinite regress which leads government to abandon its unique role in society and in the economy. Or alternatively, they wish to ensnare politicians and the public in this infinite regress whereby government is lamed and unable to solve the pressing issues of the day, as would be its ordinary role.