By William K. Black
(Cross Posted at Benzinga.com)
Everyone now agrees that the so-called “fiscal cliff” is a stupid policy that threatens our economy and our people. Everyone agrees why the “fiscal cliff” is stupid – it inflicts austerity at a time when it is likely to throw the nation into a gratuitous recession. Causing a recession leads to increased unemployment and a larger budget deficit. We have all seen austerity force the Eurozone into a gratuitous recession in which Italy, Spain, and Greece have Great Depression levels of unemployment.
Here’s the short version of why austerity is a self-destructive response to the Great Recession. A recession occurs when demand to purchase goods and services falls and the economy contracts, causing increased unemployment. This simultaneously causes tax revenues to fall and government expenditures for programs like unemployment compensation to increase. The fall in revenues and increase in expenses causes the federal budget deficit to grow rapidly.
Austerity is a policy of raising taxes and/or cutting governmental spending for the purported purpose of cutting the deficit. If one raises overall taxes in response to the Great Recession the result is a reduction in private sector demand. If one cuts governmental spending the result is a reduction in public sector demand. The result of reducing private and public sector demand in the recovery phase from the Great Recession, where overall demand is already grossly inadequate, is to throw the nation back into recession or even a depression. That causes the budget deficit to grow. A policy of austerity undertaken under the claim that it will reduce the deficit causes a gratuitous recession that leads to a massive loss of wealth, far higher unemployment, and in increased deficit. That is why austerity is a policy that is the self-destructive economic analogy to the medical insanity of bleeding patients.
We have known that austerity is an idiotic response to a severe crisis for 75 years. The U.S. was in the midst of a strong recovery from the Great Depression until FDR’s neo-liberal economists convinced him in 1937 that is was essential that the U.S. adopt an austerity program to reduce the federal deficit. Austerity forced our economy back into a Great Depression.
It was only the stimulus of federal spending in World War II that brought the U.S. out of the depression. During World War II and for the remainder of that decade the ratio of debt-to-GDP was at or near historically record levels. The result was the greatest industrial expansion in history, full employment (including a massive influx of women), strong economic growth, and sharply declining deficits and debt-to-GDP ratio because the growth led to large increases in revenue and the low unemployment greatly reduced spending on the unemployed. We also defeated the Axis powers, created Social Security and the GI Bill, and began an extraordinary expansion of our housing stock to house the baby boom.
We learned many lessons from the catastrophic failure of austerity and the extraordinary success of stimulus in this era. The U.S. adopted a fiscal system of “automatic stabilizers.” These are counter-cyclical (they push in the opposite direction of the business cycle) fiscal effects that are designed into the system and do not require new legislation once the recession or inflation begins. The result of these automatic stabilizers has been to reduce the severity and duration of recessions. Indeed, studies show that the larger the national governmental role in the economy, the less volatile the economy. This makes sense because the stabilization function should be more effective if the stabilizers are larger relative to the economy.
Unfortunately, these sensible counter-cyclical policies that make theoretical and common sense and have repeatedly worked in the real world were forgotten by many due to a campaign of deficit hysteria funded by Pete Peterson, a Republican billionaire financier who has made it his mission in life to destroy the safety net. His ultimate goal is to privatize social security so that Wall Street can receive hundreds of billions of dollars in fees investing our retirement funds.
I’ve explained in a prior column how the fiscal cliff was created through an insane bipartisan deal in August 2011. The fiscal cliff was always a terrible job-destroying idea that also began to unravel the safety net by cutting Medicare. Everyone involved in creating the fiscal cliff acted irresponsibly and inhumanely in seeking to inflict austerity, cause a recession, and unravel the safety net.
What is forgotten, however, in discussions of the idiocy of creating the fiscal cliff is that it was part of a broader bipartisan deal intended to inflict even more self-destructive austerity and even greater damage to the safety net. The fiscal cliff was an act of idiocy in pursuit of a policy of depravity called “the Grand Bargain” that was actually the Grand Betrayal.
The bipartisan madness has increased since the August 2011 budget deal. Today, the parties are simultaneously screaming (1) that the fiscal cliff is a disaster because it imposes austerity and will cause a recession and (2) that it is essential that we agree to a Grand Betrayal that will inflict even greater austerity and cause an even more severe recession. Indeed, the Grand Betrayal mandates austerity over a decade so it is likely to cause and/or deepen multiple recessions. The Republican and Democratic variants of the Grand Betrayal are doubly destructive and inhumane because they cut the safety net. President Obama wants to begin to unravel the safety net and cut social programs even though an overwhelming majority of Democrats oppose it and even though doing so will inflict even greater austerity. That will cause a deeper recession and likely make the deficit larger, so it is as nonsensical as it is cruel.
During this this entire financial farce I have been unable to get the dominant media to make the most obvious point. Since we all agree that austerity (the fiscal cliff) is a terrible idea that will cause a recession and likely increase the deficit we must logically conclude that all variants of the Grand Betrayal are austerity programs that must be defeated in order to prevent a recession that is likely to increase the deficit. We should all be opposing any cuts in the safety net because they would inflict austerity. An overwhelming majority of Democrats and a majority of Republicans also oppose cuts in the safety net as inhumane.
So why don’t the Democrats and Republicans stop trying to do a deal that will inflict austerity? Why not simply repeal the Budget Act of August 2011? That would kill the fiscal cliff. Repeal would kill austerity, prevent the recession, save the safety net, increase growth, and shrink the deficit. All versions of the Grand Betrayal (Republican and Democratic) inflict austerity, are likely to cause a recession, begin to unravel the safety net, destroy growth, and increase the deficit.
Under the same logic we should be able to agree on two related actions – renew the extension of long-term unemployment compensation and renew the moratorium on collecting the payroll tax. These policies are superb counter-cyclical programs and have the added advantage of reducing human misery and inequality. Republicans and Democrats have agreed in the past on the desirability of both actions.
Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.
Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.
Follow him on Twitter: @williamkblack
The GOP doesn’t seem very upset about it.
“We” aren’t a monolith. If greater numbers of people in the US are pauperized and the government is less able to regulate and tax the affairs of business, then our brave capitalists come out ahead, don’t they? If things are bad enough perhaps we can lower or eliminate the minimum wage and other federally imposed barriers to employment (the people who aren’t in your “everyone” would say).
It’s not gratuitous if its the goal.
Hence cheaper labor!
“Everyone” agrees that spending cuts plus GDP growth can make that irrelevant. An initial recession, if it succeeds in crushing labor and regulators, can lead to fast growth down the road.
I would be interested to see reports about asset acquisitions in those countries. I’ll bet a lot of valuable real estate and such is being traded and consolidated. To part of “everyone” — those countries must look like lands of tremendous, once-in-a-lifetime opportunity to acquire more power and a larger percentage of the global income.
Many of the people who are not capitalists (though they may be believers in and supporters of capitalism) — people who will be materially hurt by austerity — are strongly in favor of austerity because they are certain that government is generally incompetent and evil. Through the pain of austerity they hope to please god and/or the invisible hand with their virtue and so, come to enjoy peace and prosperity (once the beast is slain).
Excellent reply. Even in a zero- or negative sum game there are “winners.” For a while, anyway.
Develop a taste for Bald Eagle McNuggets. The Bain National Park system will have them on sale.
Mr and Mrs Low Information have largely by now bought the Terrible Cliff imagery. Good luck with facts and logic, as the thieves return to take all that remained from the last great swindle. MMT is not selling much beyond The Choir. It’s depressing.
Thomas Lord’s critique, and Bobby G’s comments are exactly on the mark: the first showing (explaining) why things are as they are, and the other stating how discouraging it is.
I think Prof. Black tends to sound angry, and frustrated, though his economic claims are clear and well stated. When he says he can’t get the “dominant media” to express the facts as he sees them, that focuses the problem, but doesn’t help. Of course he can’t. The group of Missouri State economists and their associates couldn’t be much farther out of the main stream (i.e. folks from DC, East Coast Universities, and big city news agencies.)
I discovered MMT ideas by accident in a radio interview with Stephanie Kelton on Harry Shearer. I don’t know anything about getting media coverage, or ‘getting the ear’ of policy makers or influential commentators. But some of you bloggers must know how it’s done. And I suppose there isn’t much hope of getting the general public to demand more sensible government. I always felt that Plato was right, sadly, about democracy. It doesn’t work well with ‘Mr. and Mrs. Low Information, as Bobby G. puts it.
Thanks, good luck, and happy new year.
I wonder what is going on with the year-long , free to the public, lecture series on Modern Money and Public Purpose at the Columbia Law School. Are they turning some influential heads?
Anyway, don’t squabble. Figure how to get these important ideas into practice, and in the process, what and who are frustrating the efforts, and the thoughtful conversation (except to the “choir” as Bobby G says.)
Read “Debt: the first 5,000 years” by Graeber. I had the good fortune of not knowing who he was until after I read it. The book is an amazing piece of scholarship. It aligns with so much of the MMT stuff. We have so much SO wrong.
I’m not sure how we can get traction with the low info public.
Here’s an MMT meme that would likely get 90%+ positive approval rating, and be a metaphor for bringing back service work as something Americans value. Have the Federal government reimburse the States for running their Departments of Motor Vehicles in the model of positively outrageous service. No 2 hour waits. Seamless integration of all relevant data systems. When everyone realizes it didn’t increase inflation, one would wonder what else could improve our lives, create good jobs, and add to productivity (no lost time at DMV). Gun registries/compliance? Mental health?
Pingback: Fueled by Deficit Hysteria, Obama and the Republicans Are Choosing the Path of “Economicide” - New Economic Perspectives
I think this entire manufactured deficit “crisis” is really just about who gets to take the inevitable nominal “Haircut.” The crap paper continues to bounce around the world, but the whack-a-mole game is coming to an end. But, the WallStreetIstanis are not about to let Obama et al do anything that might dilute their “holdings.”
I’m fairly new to MMT and am quickl becoming fascinated with the clarity of an economic analysis that I have long had a kinship to.
I was wondering how MMT and related concepts of maintaining deficit spending in order to avoid recession deal with capital markets and exchange rates. Apologies if I am less than eloquent, but aren’t there implications for the currency of a nation running deficits? If capital markets decided to dump dollar holdings en masse for instance wouldn’t this b problematic? Is sound MMT policy predicated upon restricts or at least regulated capital markets? Fixed exchange rates? 2 tier currency regime via a via china? I don’t think any of these are bad of course though they are looked upon pejoratively in other circles….
Any clarity would be greatly appreciated.