By Fadhel Kaboub
When British economist and public intellectual John Maynard Keynes wrote his famous essay entitled “The Economic Consequences of Mr. Churchill” in 1925, the British economy was still suffering the consequences of WWI, and was slowly sliding into the worst economic depression in world history. Today, as the Great Recession continues to devastate millions of people’s lives in the United States, Americans will decide in a matter of days whether they want Mr. Obama to continue on as President for another four-year term, or elect Governor Romney to replace him in the White House. As an economist who is committed to social justice, I would like to offer a brief assessment of President Obama’s economic policies during his first term, and speculate on the likely direction that the U.S. will take under a second term Obama administration versus a possible Romney White House.
President Obama came into power with massive popular support at home and abroad, with a lot of hope for real change in the way Washington operates, and especially with hope for the millions of Americans who began losing their homes and their jobs in 2007 and 2008. Instead of capitalizing on his election momentum to clean up the financial system and put forward a comprehensive and bold jobs program, President Obama surrounded himself by Wall Street economists such as Larry Summers, one of the leading figures behind the 1999 Banking Modernization Act, which unleashed Wall Street into the subprime lending frenzy that brought down the system in 2008. Obama’s bailouts mostly went to Wall Street, and relied on tax cuts rather than direct job creation.
Next, Obama wasted his political capital on a failed healthcare reform that amounted to the biggest subsidy to the health insurance industry in the history of the world. Obama’s political capital was big enough to buy him the best single-payer healthcare system in the world, but alas he settled for a minor reform, and gave a lot of ammunition to those who would like to scale back all social and medical support to the most vulnerable groups in society.
Furthermore, Obama stood on the sideline as workers in Wisconsin and Ohio (and more recently, Chicago’s teachers) were building a strong momentum for a social movement to fight back against the Tea Party and the ALEC-sponsored anti-labor laws across the country. Instead of jumping on such opportunities to support workers, President Obama again preferred to please his Wall Street supporters, hoping for their backing in the 2012 election.
Finally, Obama’s economic consequences and the weakness of his economic policy record have given plenty of ammunition to the Tea Party and Governor Romney to attack him and to argue that government-led economic recovery is a failed strategy. Romney can now sell his free market mantra to the average American hoping for a better future; a future that Obama’s administration refused to deliver, by choice.
A second term Obama may be far more flexible in spending his political capital on the progressive agenda. The problem, however, is that the social movement to get him reelected may not be there for him on November 6, and even if he is reelected, that movement may not be enthusiastic and energetic enough to back him up after he failed to deliver on his 2008 promises.
A Romney White House will be Obama’s worst economic consequence. Neoliberals love taking office during an economic crisis because it gives them the best excuse to cut government spending. They will begin by cutting the most valuable programs to the least fortunate members of society, especially the homeless, the mentally ill, the poor, ethnic communities, and all those with no power to politically retaliate. This is why it is so crucial to organize not just before elections, but most importantly after the elections, regardless of who wins next week. The anti-deficit hysteria will be used to erode what is left of the American welfare system under the careless watch of both Democrats and Republicans.
Dr. Fadhel Kaboub is an Assistant Professor of Economics at Denison University, a Research Associate at the John F. Kennedy School of Government at Harvard University (MA), the Levy Economics Institute (NY), the Center for Full Employment and Price Stability (MO), and the International Economic Policy Institute (Canada). Dr. Kaboub’s research focuses on job creation programs, monetary theory and policy, and the political economy of the Middle East. His work is available online at www.kaboub.com
Now putting all this garage on one man’s head is not fair. However it appears that Mr. Obama cannot easily change his gears/directions to avoid scratches and has been repeating the same mistakes. Or he remained surrounded by those who could not show that much flexibility needed to avoid rising waves to save the ship.
Suggestion: start sending links to neweconomicperspectives articles in the online comment section of whitehouse.gov…upper right corner. No lectures. Tell the President to read them. Someone will get through.
I agree with your indictment. In fact, I have one of my own here.
Dear Professor Kaboub:
Well said, and oh so true. The most tragic thing is to get our hopes up and to be failed once again. I just sent an angry note to the Obama campaign which is uncannily similar to what you have written. The only thing that you didn’t mention is what others have noted in disbelief, that should Obama win he might very well take another page from the Republicans and pursue a policy of austerity. Remember another of Keynes’s dicta: the time for austerity is during the boom, not the depression.
The great and blindingly obvious failing of Keyne’s dictum is that no government EVER chooses austerity during a boom. It astounds me that Keynesians still say this with a straight face. So given that government will never tighten their belt in the good times, it follows that we cannot go wild on deficit spending during downturns. It is required that we develop economic policies that can happen in the real political world – not pretty lines intersecting on clean sheets of paper.
Free market principles are equally abused. “Let the market work” translates into assets being sold at distressed prices. Keynesian is abused and free market principles are abused. Free markets also have pretty little lines of supply and demand. It doesn’t happen.
I agree completely. That is why I am not a libertarian free-marketer. The difference in this one particular case is that government has the ability to compel one to act, and may manipulate rates to the detriment of savers while running up stunning debt.
If you want to know the future of Obama winning just look at EUROPE. Undeniable evidence of spending money that is not there.
And the future of America under Romney? The US in 2008 under Bush? or America in 1930 under Hoover?
@Broge : Do you even read the articles presented on this site? The U.S. as a sovereign currency issuer can create money at will, unlike the hamstrung governments of the Eurozone with their failed currency experiment.
Until full employment is reached and all productive capacity of the economy is engaged, the US govt. can create and spend as much money as it wants (witness the 13 trillion bank bailout and the yearly trillion dollar defense budgets). It is the failed free market neoliberal economics borrowed from the 19th century that are the problem. God help us with either of these austerity ghouls, Obama or Romney.
There’s more than one opinion on that matter, like this one, for instance: http://detlevschlichter.com/2012/11/all-power-to-the-state-money-madness-at-the-imf/
Or even this one: http://www.monetary.org/mmtevaluation
As an economist who is committed to social justice
Social justice is kind of a nebulous term. And wouldn’t a commitment to it, whatever it is, pretty much remove any scientific objectivity in the observation of economics? Economics as social justice would be similar to biologists trying to produce taller people. By the way, forget the equalitarian wealth goals in social justice, provide cosmetic surgery to the ugly, that would make them much happier.
with a lot of hope for real change in the way Washington operates
Who’s capable of changing that? It’s the way it is because that’s the way they want it. There’s no reason why, in the 21st century, that the congress even needs to meet in Washington. A central location was required in the 18th century because all communication involved one human being speaking to another or a personal delivery of written matter. Now, even in DC, legislators converse via phone, FAX, email, etc. There’s no need for them to gather in one spot where they’re easy prey for lobbyists and miles away from their constituents. The capitol should be made into a big museum or art gallery. I’m willing to bet that none of that ever happens, though.
Chuck: Social justice is kind of a nebulous term. No it isn’t. Everybody perfectly well knows what it means – it may not be possible to say that situation A is precisely socially just as situation B, but it can be damn easy to say when A is worse than B. A rich nation like the USA today with scads of homeless people even in booms is a lot less sane & just than a poorer nation that didn’t have homelessness – like the USA in 1972.
Economics as social justice would be similar to biologists trying to produce taller people. No, it is similar to biologists trying to produce healthier people. They’re called “doctors”, “nurses”, “medical researchers”. Less scientific objectivity from such a social goal? Not really.
provide cosmetic surgery to the ugly, that would make them much happier. Yes, it does. People like these do such good work.
Everybody perfectly well knows what it means
Izzat so? The wording of the US Constitution is pretty straight-forward compared to the many concepts and interpretations of “social justice” but it takes nine highly paid life-time appointees with god-like powers to give us the actual meaning of declarative sentences in simple English. Pardon me if I scoff.
Very true. Very recently I had a reading of the American Constitution after a long time and the wording the constitution is really straight-forward and is simple English.
AustinTexas : ” no government EVER chooses austerity during a boom.” Just not true. The biggest exception is during wartime, the only time that governments generally run their economies with minimal sanity – If you run a wartime economy like peacetime ones are throttled – you lose the war. Then taxes go up & austerity is practiced – but “good austerity” which actually does accomplish something, not depression peacetime austerity, which is just plain stupid – it just makes a smaller pond so the biggest fish can feel bigger and enjoy the sight of the little fishes dying.
But today’s government taxation & spending , remnants of a more enlightened age serve as automatic stabilizers, austeritizing during booms & boosting spending during slumps, as Keynes advised. The JG is just an automatic stabilizer that will always serve to maintain full employment. The problem is not even that politicians will never vote for austerity – factually false even in peacetime – the tax hike of the late 60s was an example of the US Congress consciously raising taxes to disinflate per Keynesian advice, but that the timing can be off. Legislation takes time and the austerity or profligacy might not arrive at the correct boom / slump time. SO MMTers prefer the JG & automatic stabilizers over discretionary fine-tuning spending, which is only easy when the problems become very large. (Though the neoclassical/mainstreamers of the last decades have thoughtfully created these easy to solve giant problems.) They very much have ” develop[ed] economic policies that can happen in the real political world”.
So given that government will never tighten their belt in the good times, it follows that we cannot go wild on deficit spending during downturns. Even if the first were true, the second does not follow, for the only conceivable problem from wild spending during downturns and no austerity during the boom is inflation, and inflation has to be very high – levels never seen in the USA – 40% or so a year, for even definite, perceptible effects, while unemployment during the slump causes massive, immediate, irreparable damage.
The real tragedy, as Keynes identified – is the opposite of what you are saying. Destructive, insane, bad austerity is sold as good austerity so wonderfully well to masses brainwashed to vote to cut their own throats, vote for politicians who promise endless, pointless, purposeless suffering, and that only the most predatory, parasitic and irrational, Wall Street – says “no austerity for us, ever.”
I do not equate wartime with a normal boom. I agree that Wall Street is the major problem, never said or implied differently. I continue to insist that most of Keynes’ theory works on paper and nowhere effectively else.
As for the tragedy of austerity now, what deficit would satisfy you? $2 trillion? $$3 trillion. Mighty big experiment to run in the real world to see if your “clean sheet” theories work.
AustinTexas: I continue to insist that most of Keynes’ theory works on paper and nowhere effectively else. Not something that one can conclude from studying the theories and looking at the real world. They make sense and they have always worked very well.
Mighty big experiment to run in the real world to see if your “clean sheet” theories work. No, the wacky experiment is loony tunes austerity, government disemployment, neoclassical economics. “The experiment” of Keynes worked fine, to the extent it was performed, during the Great Depression, and for decades after, even in debased form. And with millennia of antecedents.
“The Conservative belief that there is some law of nature which prevents men from being employed … is crazily improbable – the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years. ..Our main task, therefore, will be to confirm the reader’s instinct that what seems sensible is sensible, and what seems nonsense is nonsense.” (Keynes)
MMT, real Keynesian economics is common sense. Neoclassical austeronomics is nonsense. Worrying about deficits when there is no inflation is crazy. If people are given jobs – they’re surely always given taxes and prices – they will have jobs. Pretty much the end of the story. (“Take care of the employment and the budget will take care of itself”)
There it is. The inevitable excuse that the theories were not followed closely enough, or the deficits were not big enough to be effective. It is always that it would have worked, but…. I again refer you to Morganthau’s comments in 1939. It didn’t work, period.
At the theoretical level I agree that, on paper, one can make lines intersect and move in a predetermined way. The problem is that there is zero chance that government can be relied upon to tighten its belt properly when inflation does arise – at least not in the modern era of politics.
Meanwhile our betters at the Fed hold 2 year treasury yields at 0.30%; five years ago they yielded 5%. The wealth of savers has been transferred to the banking system in pursuit of economic theories. Those of us living in the real world are getting hammered while our betters, who got us into this mess, dance on the heads of favorite theories.
Why are you comparing monetary policy of the Fed and fiscal policy? That’s like night and day. ZIRP is betting that the same banking system that created the housing bubble is going to lend us back to prosperity.
Obviously because monetary policy IS fiscal policy, and vice versa, at the boundary.
They are two completely different things.
Only when your theory requires them to be different. To argue they are different with the Fed buying the majority of Treasuries, or the Fed holding to ZIRP – which affects pension funding and borrowing decisions – is merely academic.
Its not merely academic. Each action forces a decision for entirely different actors in the economy. ZIRP makes bank operations cheaper. That means the banking system considers its profit potential. Treasury purchases make money managers decide if they want to chase yields into more speculative areas. Fiscal policy can be a tax cut which puts more money into the hands of people who want to spend. Fiscal spending makes the government the decision maker on what to make and who to put to work assuming the worker accepts. They are completely different. Fiscal policy and Fed policy are not even remotely similar.
There it is. The inevitable excuse that the theories were not followed closely enough, or the deficits were not big enough to be effective. It is always that it would have worked, but…. I again refer you to Morganthau’s comments in 1939. It didn’t work, period.
What excuse? What “but”? I made no excuses. I said it “worked very well”, not that “it would have worked”. If someone dying of thirst is given 1/2 a cup of water per some time period, it will make him better. One can reasonably say that 1 cup/period would have made him better faster. Or that 2 cups would be too much and make him vomit. This is not at all the same thing as saying 1/2 cup didn’t work, or making excuses about the failure of the water-for-thirst cure. This is not a theoretical disagreement, but a factual one. As Marshall Auerback has led in pointing out, even liberal academics belittle the New Deal’s accomplishments. See his Time For a New “New Deal”. [Link to Word version with graphs at end] Or his The Real Lesson from the Great Depression: Fiscal Policy Works! FDR’s New Deal made most people’s lives a lot better. It worked. That’s why they kept voting for him.
As for Morgenthau, thank God he eventually spend most of his time on foreign policy, where he did some good. His budget-balancing economic advice was disastrous – but thankfully rarely followed. The fuller version of Morgenthau’s remarks is interesting and puts him in a better light, IMHO. A good index of how seriously they should be taken is “After eight years of this administration …” FDR inaugurated in March 1933. So six years, two months. Ahem. And needless(?) to say, Morgenthau was wrong about unemployment: it was lower in 1939 than 1933. About 20% to about 10% , after the temporary increase of the 1937-38 Roosevelt Recession, brought on partly by wrongheaded & useless budget-balancing supported by Morgenthau. (See the graphs in Auerback’s paper)
As for belt-tightening against inflation – yes, politics can interfere – but even the US Congress has been known to do it – the late 60s example I gave.
Meanwhile our betters at the Fed hold 2 year treasury yields at 0.30%; five years ago they yielded 5%. The wealth of savers has been transferred to the banking system in pursuit of economic theories.Surely one should care most about the real interest rate? If MMT policy lowers inflation, will lower bond yields mean that much to savers? Second, Mosler & Wray & others have criticized the Fed’s current ZIRP as a deflationary, not stimulatory as religious econo-dogma has it – and while supporting a ZIRP in principle, this is only in the context of spending sufficient to maintain zero unemployment. So basically the MMTers are on your side here.
@Austin,
I am sure that you will agree that the years 1994 to 1999 were as close to boom times as we have had in recent years. If what you say is correct, the Clinton budget surpluses would never have been possible, because according to you additional taxation does not happen in boom times! It just so happened that the surpluses were likely too much austerity for the economy to take!
I can’t see where I ever said anything about tax levels. The discussion was entirely about deficits and whether a country can borrow itself out of a debt malaise. One suspects that you are primed for a position that has not been argued.
But since you mention it… I would be happy to repeat the later Clinton years. With the fall of the Berlin Wall, Clinton was able to allow defense spending to fall 50% relative to GDP. A harder problem would be to replicate the internet boom that generated billions in capital gains, but I’m all for it. Lastly, I truly wish that Obama had learned the lesson that Clinton did after they both got hammered in the midterm elections. You will remember Clinton pivoting to the statement that “the era of big government is over.” Obama doesn’t have Clinton’s savvy, but I agree with you that this was a huge success for Clinton and our economy.
I will agree with the principle. Very little good will happen until government is simplified. Note I did not say made smaller. The size matters less than how well citizens can understand its functions. It should be run at the 7th grade level. Private companies can build cars because its complex. Governments are good at putting up stop signs which is to say governments should work on stopping stupidity and let everyone else handle the rest. If we need PHDs to understand the money system ,its a de facto oligarchy. Natural monopolies like roads, sewers, and bridges isn’t that complicated. Neither is a simple money system.
Yes! We completely agree on something. Now let’s work on whether a $5 trillion deficit solves our problems where a $1 trillion deficit hasn’t.
Of course 1 trillion will not work. It took adding a trillion a year in mortgage debt to have us near full employment and that is with budget deficits. Now the trillion dollar budget merely replaces that . So we are not only missing the 1.5 trillion in mortgage deleveraging but also the budget deficits we were running during the mid 2000. We are missing at least a trillion a year. The monetary system is designed to always add debt somewhere. It is what it is. Of course any money system that does not stop over saving dies. Money is always net saved. Unless new money is added constantly we end up with debt deflation. Its difficult to save at first but once you get into the top 90% its easy. So the top 10% net save massive amounts of coin. We are talking money saving not investment. The more income inequality we have the more net saving we have which is why I may be understanding the need for deficits even more. You either need to tax these people or run huge deficits. Pick one.
This does not address what kind of employment we have. That is another issue outside the problem MMT is trying to solve. However why we don’t have full employment is rather easy to see as is why 1 trillion dollar deficits come nowhere near the money flows we had before.
it is similar to biologists trying to produce healthier people. They’re called “doctors”, “nurses”, “medical researchers”.
Nurses are biologists? Biologists study life forms to see how they work. Medical professionals use the information accumulated by biologists to develop and implement therapeutic procedures and preventative measures. Perhaps the distinction is too subtle to grasp.
As a scientist, an economist attempts to determine how economies actually function, not how they should function. For instance, the development of a light rail system in a given locality wouldn’t be promoted or discouraged by real economists. That’s the role of politicians and central planners, who would use public choice to justify the project. Economists might present their views on the possibilities of various outcomes of the project but its actual development, from financing to construction to operation would be undertaken by others. They wouldn’t determine the route, schedule or wages of employees. Eventually, economists would try to discover what effect the system had on the surrounding economy.
A biologist might discover that in reality the consumption of carrots does not improve one’s eyesight. A medical professional would tell his patient that his deteriorating vision won’t be helped by eating more carrots, get reading glasses instead. When someone is overcome by nausea they don’t go see a biologist, they get an appointment with a doctor.
“As a scientist, an economist attempts to determine how economies actually function, not how they should function.”
That’s what MMT is, or don’t you read what’s written here.
Economists as Scientists? Sorry, Science is based on evidence. Economists seem to be excellent at ignoring evidence and going on ‘faith’.
In the biological sciences there is a board that reviews all proposed experiments on animals to be sure that rabbits, say, are not abused. In medicine the first dictum is “Do no harm.” In political economics (notice the modifier), practitioners want to subject us to their theories to prove a point. We are all rabbits to be manipulated to political economists.
Here is a better proposal: develop a theory that keeps the value of the accounting unit (money) stable so that people can plan and long duration contracts are predictable. View government as a string referee, not as a player on the field. Radically shrink the power of banks, but recognize that banks are necessary. Advocate a system of laws that ensures that financiers AND politicians that abuse their positions serve time.
Do those four things only and you have solved 95% of any problem our economy might encounter.
Economics is no more a hard science than soiciology or anthropology. It is a study of human behavior where causes and effects feed each other (Stretton lays this out nicely). Even the simplest transaction is preloaded with so much human emotion and circumstance, there can be no way to consider economics a data driven science. To wit, Keynes, as all economists at the time were, a political-economist.
Social justice can be considered scientifically, in terms of costs, which is obstensibly the mainstay of Theo-Classical Economis. Consider Brazil and the extra costs of doing business in an extremely stratified society (armored cars, more security). Consider the western countries in the 19th century. The 1848 revolutions were certainly disruptive in an economic sense and consider Fort Sheridan north of Chicago. These are all real costs (aside from lives) of stratified societies. Currently our main injustice tax is the ER bills we all end up paying. Of course many Theo-Classicals I know would suggest turning away poor from any medical care to incentivize them. I believe Ryan considers this.
If the evidence of the US 1930s and 1940s doesn’t convince you Keynes was spot on, nothing will, and you may as well stop reading these blogs.
On the debt, since it increased, how has your life changed? Theo-Classicals tout the idea of science meaning data driven analysis, without having data. Where is the evidence something has changed since the debt increased?
“If the evidence of the US 1930s and 1940s doesn’t convince you Keynes was spot on, nothing will, and you may as well stop reading these blogs.”
Really? how about FDR’s Secretary of the Treasury writing in 1939: “We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong … somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. … I say after eight years of this Administration we have just as much unemployment as when we started. … And an enormous debt to boot.” A prophesy of Obama’s next term I’ll wager.
“On the debt, since it increased, how has your life changed?”
Well, for starters I earn ZIRP on my retirement savings. Being older and needing a risk free return, your theory has taken the income from me and every saver in America. Pension plans are underfunded and under-earning what they need, and can never get those years of return back. Conservative investors are being forced out onto the risk spectrum – as intended by the Fed. When, not it, the market tanks those folks will see their money gone forever.
When that happens you will claim that your theory wasn’t applied in exactly the right way, or some completely unforeseeable event interfered. Mighty big experiment you are running with other peoples’ lives.
FDR’s Secretary of the Treasury:
The austerity kings got to FDR in 1937 and forced him to ‘balance the budget’. Unemployment shot back up to Depression rates…immediately. One of the few things you can read on Wikipedia that is unbiased.
But WWII was where the economists discovered the real power of fiat currency domestically. They spent massively into the economy putting people back to work. Here are the amounts of US Government Spending for the years 1936-1945: http://www.usgovernmentspending.com/us_20th_century_chart.html
1936 83.8
1937 91.9
1938 86.1
1939 92.2
1940 101.4
1941 126.7
1942 161.9
1943 198.6
1944 219.8
1945 223
Almost 3X US Government Spending in five years.
A recent book called Keep from All Thoughtful Men: How U.S. Economists Won World War II by Jim Lacey tells the real story of how three economists discovered the power inherent in the new fiat currency (since 1934 domestically) to win a war by putting the country back to work to produce goods and services. From Amazon:
You really should listen to this presentation. I feel for you having depleted funds to retire on because of this mess. It’s an absolute travesty to have retirees go through this, and unnecessary. But watch this, and listen all the way to the end of the Q&A.
http://www.modernmoneyandpublicpurpose.com/seminar-2.html
The problem with your “deficits to paradise” theory is that the junkie can never get off the juice.
I agreed that WWII spending was part of what bailed us out of the Depression, but there were other, unique components.
Imagine today if we were able to take all of our unemployed men and put them in the armed service for 5 years and give them a GI bill afterwards. Ramp up durable goods production exponentially by government dictate, send those goods to a foreign country and blow them up, so no excess capacity issues – rinse and repeat for 5 years. Then somehow we kill a third of the productive labor force of our competitors while wiping off the map 90% of their industrial capacity. Take over their governments for 10 years and run them as we see fit.
THEN I agree with you that ramping up government spending can dig us out of a Depression. But I think this program would not be tolerated today, no?
Austin – Those “other, unique components” you seem to think somehow helped bail us out of the Depression were BAD. They hurt the recovery. Except the GI Bill – IIRC there was ultimately more spent on it than all of FDR’s New Deal programs put together.
Those things made the US & everybody else’s economy much, much worse, not better. They made the spending far less effective. Destruction, killing people, putting workers in the army, wiping out industrial capacity makes everyone poorer. This is just common sense.
I’ve seen many people say such things. But one should stop & listen to what one is saying & reflect. This is a reductio ad absurdum. If one’s economic theories lead to such fantastic conclusions, there is something wrong with them.
Economics is no more a hard science than soiciology or anthropology.
No kidding. That’s why the Keynesian-dependent metricians with their charts and graphs indicating macros and micros and aggregates have zero credibility. Even a lowly goat herd knows that human behavior can’t be predicted but cloistered academics have the hubris to juggle billions of dollars that represent the sweat and tears of total strangers to advance their pet theories that are dependent on the actions of those strangers. All in the same of “social justice”.
It is madness to enforce austerity when unemployment is high and inflation is low. Inflation is determined by the joint force of aggregate demand and aggregate supply. Therefore, during recessions when big corporations sit on cash and refuse to invest, the government has the responsibility to increase public investment, which then increases employment and thus production. In this case, demand and supply increase proportionately and price stability is maintained. This is why during recessions and depressions, inflation is the least to worry about. In the case of full employment, however, continuous deficit spending merely creates inflationary forces. But again, we’ve never seen this anyway, not in the American capitalist system.
Meanwhile, the Fed can only do so much. The low interest rate does not motivate corporations to invest, profit does. More precisely, the expectation on future profit weighs much heavier than a minor change in the cost of financing. This is why the Fed cannot fix depressions because aggregate demand is essentially intact with any of the Fed’s policies.
Unemployment simply indicates waste in human capital. It is costly to cope with the negative consequences of unemployment. Why shouldn’t the government spend money in job creation while it is already spending lots of money in social problems associated with unemployment? There are certainly better ways to use our GDP.
Now the author makes a good point: no matter who wins the presidential election, “… it is so crucial to organize not just before elections, but most importantly after the elections, regardless of who wins next week. The anti-deficit hysteria will be used to erode what is left of the American welfare system under the careless watch of both Democrats and Republicans.” Obama has failed his first term in rescuing the economy and reforming the healthcare system. But Romney even chooses a neoliberal route that is doomed to fail. I am speculating that this will be a very very slow economic recovery.
Where to start?
“During recessions when big corporations sit on cash and refuse to invest, the government has the responsibility to increase public investment…”. You conflate “investment” with “transfer payments”, which are not even related. An investment is a capital expense that pays returns over time above the cost of capital. Modern history shows there are no “shovel ready jobs”. We merely support unemployment transfers. As admirable as that is, it is not an investment.
“The low interest rate does not motivate corporations to invest, profit does. This is why the Fed cannot fix depressions…” Precisely. Please call Bernanke and point this out to him. He is catastrophically impoverishing the Baby Bulge generation and their retirement in a quixotic quest that is doomed to fail.
“Why shouldn’t the government spend money in job creation…”. Because politics prevents government from making even average investments. Hoover Dam or the TVA are completely impossible in today’s environment.
“The anti-deficit hysteria will be used to erode what is left of the American welfare system under the careless watch of both Democrats and Republicans.” Nonsense. We can cut 5% of federal spending and never miss it. We can raise taxes (I prefer a flatter, wider, no deductions route), 5% and not hurt the economy. That’s all it takes to reinvigorate animal spirits. Some certainty that idiots in government aren’t taking us over a cliff.
Public investment is government spending on projects like roads and construction, and this is not transfer payment. Thus, your saying that “we merely support unemployment transfers” is incorrect, and we undoubtedly have public investment in this country. The problem is the scale. Obama only slightly increased public investment in his first term, and this is why his demand management was weak and thus successful.
You seemed to advocate for a balanced budget even during depressions. However, please explain first why deficits are bad and why surpluses are good. By accounting definition, a public sector surplus is a private sector deficit. You simply cannot apply the same accounting principles for individuals to the government. The reason that the average Egyptians and Tunisians remained poor despite their high-growth economy is partly that both countries practiced balanced budget for decades, and thus little wealth can be accumulated by the private sector.
“You seemed to advocate for a balanced budget even during depressions.”
Where have I said that? The problem with political economists is that, having staked out a professional reputation based on a school of thought, they become a hammer and every problem a nail. So many of these response attribute things to me that I have not said or do not follow from what I have said.
You said that, ” ‘The anti-deficit hysteria will be used to erode what is left of the American welfare system under the careless watch of both Democrats and Republicans.’ Nonsense. We can cut 5% of federal spending and never miss it. We can raise taxes (I prefer a flatter, wider, no deductions route), 5% and not hurt the economy. That’s all it takes to reinvigorate animal spirits.”
If you cut spending and raise taxes, you have a more balanced budget in depression, and I’m not sure how it would “reinvigorate animal spirits” when aggregate demand is low.
What is eroding animal spirits is the uncertainty that huge deficits and the shadow of increasing taxes down the road. You approach aggregate demand as a line on a sheet of paper. I approach it from a human psychology point of view. You take it as given that aggregate demand is low, so – zip! – move this line to the right and the intersection with another curve goes up. I believe we must ask WHY is aggregate demand not recovering? A big reason is that people with disposable income are not willing to dispose of it. FDR complained of a capital strike throughout his administration.
So raise taxes by 5% and cut spending by 5% – not “balance the budegt” for crying out loud. But give people the belief that the government is not bankrupting them. If you want to see demand collapse, implement a $5 trillion deficit. The liquidity trap would be instantaneous.
The average marginal propensity to consume is 0.95 in the United States, meaning that most people spend 95 cents of every dollar they earn on consumption. Why is aggregate demand low? It is not because people are not willing to spend. It is because people don’t have the income to spend anymore. And why do people lack income? Because corporations sit on cash and don’t want to invest when market cannot fix itself. In times like this, psychological tricks would not solve the problem. Furthermore, why is the government bankrupting people if running a deficit? A government deficit is simply a surplus for the private sector.
If you want the economic system to work, there must be buyers and sellers, and there must be demand and supply. The reality is that too many people are willing to sell their labor but there is simply little demand for that. When market cannot equilibrate itself, government’s public investment essentially creates a demand for labor compensate for the fluctuations in the market. This is why demand management is important right now and you should not cut spending. However, there are certainly better ways to spend.
Furthermore, regarding your statement “give people the belief that the government is not bankrupting them,” this is not even possible because United States has full financial sovereignty. This distinguishes US from Argentina who has no financial sovereignty and therefore cannot possibly practice effective demand management.
Of course. You are quoting ECON 101 that we learned from Samuelson’s text 35 years ago. But you seem to wish to misread what I write. In “give people the belief that the government is not bankrupting them,” “them” is the object being bankrupted, not the government. of course the government is infinitely liquid. Of course this is the difference between the US and Argentina. No one disputes this. Question: if the US borrows another $10 trillion to stimulate demand, where does the money come from to service the debt? Taxpayers know exactly where. A doctor, say, Those with disposable income understands that – given $10 trillion in new stimulus – his or her real income will not rise appreciably. But he or she will certainly be called upon to fund the debt. That taxpayer is marginally detered from buying a new car, TV etc.
So please we all agree with your point, which was never disputed, that sovereign borrowers, borrowing in their currency, face no solvency issues. That is not the question. My question is: how do you prevent new stimulus from merely transferring “animal spirits” from the currently employed to the newly stimulated?
Aggregate demand, aka sales, motivates companies to invest and to hire. That is why austerity does not work. Government needs to fill the spending gap. Nothing prevents government from increasing demand and hiring people other than our own lack of trying and discipline.
If you cut federal spending, you will likely trigger another recession. And, aside from a need to redistribute income, there is no need to raise taxes on anyone. In fact we should have a middle class tax cut. There is nothing wrong with SS or medicare. We can fund them both indefinitely.
A deficit now is a good thing and it should continue into the indefinite future. Our federal debt is meaningless.
As I wrote to another:
Question: if the US borrows another $10 trillion to stimulate demand, where does the money come from to service the debt? Taxpayers know exactly where. A doctor, say, Those with disposable income understands that – given $10 trillion in new stimulus – his or her real income will not rise appreciably. But he or she will certainly be called upon to fund the debt. That taxpayer is marginally detered from buying a new car, TV etc.
So please we all agree with your point, which was never disputed, that sovereign borrowers, borrowing in their currency, face no solvency issues. That is not the question. My question is: how do you prevent new stimulus from merely transferring “animal spirits” from the currently employed to the newly stimulated?
I do not think you understand the meaning of financial sovereignty. On one hand you agree that the U.S. is sovereign because it borrows from itself denominated in its own currency. On the other hand you argue that taxpayers would deterred their consumption because of deficits and national debts. This is only necessary if you believe in balanced budget. Otherwise, why should you even care about the debt in the first place? Federal debt is essentially meaningless because people are simply borrowing from themselves. America is both the creditor and debtor. That is why U.S. is capable of increasing its government spending to stimulate demand while not worrying defaulting. And please, tell me now how the U.S. will bankrupt its people even with your hypothetical 10 trillion in new stimulus.
if the US borrows another $10 trillion to stimulate demand, where does the money come from to service the debt? Taxpayers know exactly where. A doctor, say, Those with disposable income understands that – given $10 trillion in new stimulus – his or her real income will not rise appreciably. But he or she will certainly be called upon to fund the debt. That taxpayer is marginally detered from buying a new car, TV etc.
First, the transaction of trading a government bond for government currency simply is not borrowing. That is not what “borrowing” means in any other context. It is a swap of financial assets/liabilities from the same debtor. The money for the borrowing, or to service the debt comes from the spending. All government spending comes from various ways of printing money, including the sort of money/NFA called “bonds”.
To quote FDR, who deep down understood a lot more about money that Morgenthau, “Government credit & government currency are one and the same thing.” Not all that much more to MMT than that. There is a tremendous amount of bullshit to hide the underlying simplicity. Bonds are just a tool to drain reserves and maintain positive interest rates. That’s all. Just think about things as if the government didn’t even issue bonds or pretend to borrow – all that is really just a distraction. Think about it as if it just printed the money, credited accounts, cut checks. And taxed.
Second. “Taxpayers know exactly where.” The problem is what people “know” that ain’t so. “Taxpayer money” doesn’t “pay for” government debt service. The doctor’s real income would rise appreciably with that size stimulus, which would probably be inflationary. But the problem is always keeping the money from flowing too fast to the higher brackets.
But he or she will certainly be called upon to fund the debt. No, he CERTAINLY won’t. Doubly so if a non-inflationary sensible full-employment deficit is run. Taxes don’t fund government debt. The money the government takes in taxes is destroyed by being cancelled with the tax liability. Government spending “funds” itself. The actual mechanics of government spending differ from what (I think) you think they are.
That taxpayer is marginally detered from buying a new car, TV etc. Very unlikely in the case of a huge, inflationary stimulus. For a smaller, non-inflationary MMT/Keynesian stimulus to get to full employment – why? He’s doing better, everyone’s doing better. His money is worth as much as ever, his taxes aren’t going up. Nobody behaves like that or ever has.
Basically the point is that innumerate anti-Keynesian insane “sound finance” neoclassical quackonomics just tortures the poor & unemployed, for no speakable reason at all. It financially hurts the rich and the middle too. But a tiny fraction of the rich and their academic mouthpieces bamboozle the middles that somehow this torture of the poor makes them better off, that somehow the middles will have to pay for not-torturing. Which just leads to more and more of the middles becoming the poor and the unemployed themselves. Madness.
Agree with everything you said. The U.S. has the luxury to practice functional finance but is constantly hindered by the ideology of sound finance. Ultimately perception creates reality, and people choose their own path.
Idiots in government? How about the certifiable clowns in the private sector?
Using credit produced from government fiscal policy looks bad until you realize the alternative is bankers. MMT is a terrible system ,and I freely admit to this. Its almost as bad as central planning by bankers. Government credit spent on stupid things is certainly bad. Its almost as bad as interest bearing bank credit on already existing capital that bloats it in price. Its almost as bad as bloating fixed ground rents in price than cannot expand with new credit. The 15 trillion dollar debt is bad. Its almost as bad as the 27 trillion in bank credit created during the housing bubble at retail interest rates. 1.5% on ten year treasuries on the circulating money stock is certainly bad, but its less than half as bad a 5% retail mortgage credit in circulation. 1.5% on treasuries is certainly bad and its almost as bad as entirely debt free money creation when held by the central bank. It certainly is bad ,and its already as bad as it could be but we have decided to go for worse. You think bankers you cannot even vote out of office are going to save you? What faith you have.
I spent my professional life at the intersect of Wall Street and K street, and I will tell you my personal experience. Wall Street is as corrupt as you might imagine. There is no greater cynic than I regarding bankers.
HOWEVER, government at the highest levels ( paradoxically not the agency level where career folks on a salary tend to be solid, honest folks) – I am speaking here of elected Congressmen and Senators – is a cesspool. Federal, state, or local – I always took a shower at the end of the day. The only difference between bankers and a congressman is that the IRR on a congressman is much higher – they are purchased so cheaply.
So I agree with you and Churchill’s dictum regarding the worst system except for all others. But I cannot escape my experience that tells me that any theory that requires government intervention IN OUR SOLE INTEREST is doomed to fail. We can, with effort and not many recently, put bankers in jail. The same is not true of Congress.
The difference is we can vote for congress. That leaves little hope but its a precondition for change. Goldman Sachs and company is going to destroy this country. It is already in progress. The other thing as we discussed is to addresses the principle weakness of democracy . The two are tyranny of the majority and the lack of education of the populace. A complex money system takes advantage of this principle be hiding in complexity.
Now mind you the populace alone is rather helpless. The only real hope is when an oligarchical interest decides to ally itself with the populace. Then we have to hope its a good one and a smart one.
The other option is the complete destruction of wealth and rent seeking opportunities. That is the historical option.
” A Romney White House will be Obama’s worst economic consequence. ”
No kidding. As bad as Obama has been this Romney/Ryan team will really mess things up.
@AustinTexas: I’m paraphrasing, but your argument that Keynes’ policies never work seems to consist of “some guy in 1939 said they don’t work.” Try a little harder.
“Some guy” was Morgenthau as you know. Extremely poor paraphrasing – try harder.