The New Populism Needs to Get This Straight

By Joe Firestone

Let’s look again at the new populism through the lens provided by Robert Borosage in his recent attempt to tell us what it is about. He says:

The apostles of the new inequality have unrelenting sought to starve the public sector. President Reagan opened the offensive against domestic investments. Perhaps the hinge moment was in the final years of the Clinton administration when the budget went into surplus, and Clinton, the finest public educator of his time, pushed for paying down the national debt rather than making the case for public investment. He left the field open for George W. Bush to give the projected surpluses away in tax cuts skewed to the top end.

The hinge moment wasn’t then. It was when he decided, either early in his first term, or even before he took office, to rely on deficit reduction coupled with low interest rates from Alan Greenspan, on the advice of Robert Rubin and Larry Summers, rather than on deficit spending on human capital investments as advocated by Robert Eisner and Robert Reich. Rubin’s victory in the internal debates within the Administration was well-known at the time (1993), and set the deficit reduction course that played along with the Fed’s bubbles to create the private sector debt-fueled “goldilocks” prosperity, and surpluses of his second term. By the time Clinton faced the choice Borosage refers to, the die had already been cast. It was very unlikely that Clinton would turn away from further Government austerity policy, and turn instead toward investments in infrastructure, public facilities and “human capital.”

But this is a side point, the real focus of this passage is the notion that the Clinton surpluses were good because they created an opportunity for public investment by using those surpluses. The trouble with this, is that it is a point purely about politics and communications which neglects the economic fact that the surpluses of the Clinton’s term, as well as his deficit reduction policies, were bad for the US because they reduced or eliminated private sector surpluses causing a growth in private sector debt in Clinton’s “goldilocks” economy.

Eventually, the years of Government surpluses and private sector debts caused the recession of 2000 – 2002, and arguably was a contributing factor in George Bush’s Supreme Court – manipulated election, while at the same time, the years of surplus provided Bush the justification he needed for pushing through his extremely low fiscal multiplier tax cuts, which have contributed so greatly to increasing inequality since then.

What Borosage and the new populism both have to get straight is that when a nation runs a trade deficit: say 3% of GDP, and also manages the Government deficit aggressively to achieve a 3% of GDP Government surplus, the private sector must then compensate by decreasing its savings by 6% of GDP. That kind of result is bad for the private sector even when it is flush with savings. But when households have depleted savings as they have post-crash 2008, and given the great ability of large businesses to direct flows of savings to the private sector to themselves (and then to hoard those savings) rather than to small businesses or to households, then Government surpluses are particularly damaging to the economy.

In that kind of situation, the private sector may be able to avoid recession by continuing to consume at previous or greater levels by increasing private sector debts. But this way of going is unsustainable as we found out in 2000 – 2002, and in the onset of the Great Recession. Sooner or later, the private sector will pull back from making loan funds available to businesses and people who have been going more and more deeply into debt. And when that happens a recession or depression will follow.
In short, if a nation wants to run a trade deficit, and also wants to have private sector savings, then having a government surplus is not good news for people. It is bad news for them, because it means that the private sector as a whole, and disproportionately households, are losing net financial assets over the period in which the surplus is run.

The new populism, Robert Borosage, and the whole Washington, DC progressive establishment needs to learn the above lesson, once and for all, simply because it is a simple and inescapable fact of life. And it means that this new movement should never, never, celebrate surpluses in the presence of trade deficits, or praise politicians who achieve such surpluses, because, in doing so, they are celebrating the impoverishment of the private sector at the hands of the Government, and this is the height of stupidity. It would greatly help the new populism and the DC progressive establishment, also, if it took the trouble to learn a simple macroeconomic equation, which is an accounting identity, and which will help them gain clarity of thinking when it comes to fiscal policy, trade policy, and their inter-relationship. That equation is:

The Government Sector Balance + The Private Sector Balance + The Foreign Sector Balance = 0; where the balances refer to transaction flows in an accounting period.

The Government Sector Balance is positive when the Government taxes more dollars than it spends. That’s what we’ve been calling “a surplus.” The private sector is positive when it saves more dollars than it spends, and the foreign sector is positive when it saves more dollars than it spends. This last, please note, is equivalent to what I’ve been calling a “trade deficit.”

So now, let’s say people want to save 6% of GDP per year, and they also want to run a trade deficit of 4% of GDP per year. Then a policy of deficit reduction that aims at a deficit of 3% obviously won’t accommodate these private sector desires, since 6% + 4% requires a government deficit of 10% for support.
We have no good models that can tell us how matters will adjust if a Government aggressively attempts to force that 3% deficit down people’s throats instead of letting the deficit float, as it ought to do. But it’s likely that the trade deficit won’t fall below 2% of GDP, given the US track record of trade deficits for many years past, and that implies that we would have only 1% of GDP in private sector savings, which would probably be monopolized almost entirely by the FIRE sector and some other very powerful industries. Households would come out strongly negative in such scenarios, preparing the way for another crash the longer such fiscal policies are continued.

The scary part of all this is that neither the new populists, nor any of the DC-based public and private groups that have developed budgetary projections for fiscal policies they advocate, think in terms that take account of this accounting identity. As a result, all of them have specified a 10 year plan focused on imposing deficits that would reach 3% or less if their plans are implemented. All of them, including the budget plan of the Congressional Progressive Caucus (CPC), are austerity budgets that, unwittingly in some cases, and perhaps deliberately in others, build in, but do not project, recessions during the 10 year period each covers. That is why it is so important that the new populism, and the DC establishment gets the lesson of the Sector Financial Balances (SFB) model straight. The last thing the greatly shaken American public needs now is another recession within “the Long Depression.”

Also, look at what Borosage says next in his post:

The result is a public squalor that undermines the health of both Americans and the economy. From falling bridges to exploding sewer pipes, slow broadband and an outmoded electric grid, aging schools and shabby public parks, our core infrastructure desperately needs rebuilding. And we aren’t making the investments vital to our future – in the basics of education from preschool to affordable college, in public research and development, in a full-bore commitment to capture the lead in the green industrial revolution that will sweep the world.

Now, that’s absolutely right, and it doesn’t even mention the enhancements to the social safety net, and achievement of full employment, we need to provide a decent level of living to our work force and vulnerable populations. But there’s no way all this real wealth can be provided any time in the near future on a “pay-go” basis, with the Government destroying as much in private sector net financial assets as it creates through its spending. “Pay-go” may be necessary for a currency user; but for a currency issuer it won’t work. To do the things the new populism wants to do, we must have deficit spending along with the contributions of net financial assets to the private sector it produces.

The new populism must embrace this reality. And assuming savings and import desires are at the level I specified in my earlier example, the implication of a policy that would let the deficit float to accommodate those desires, is that we’d be budgeting roughly $1.2 Trillion in annual deficit spending beyond what’s specified (about $0.5 Trillion) in the various budgets we see in Washington right now, and that number would be growing along with GDP over a period of 10 years. Deficit spending appropriations on that scale, year in and year out will be able to support the program of the new populists, while the CPC’s and similar budgets will not.

So, the new populists need to embrace this last reality too, and then they will need to consider the nexus of issues surrounding public finance of Government deficit spending programs. Specifically, will they use current debt issuance methods of creating the reserves needed to deficit spend in the Treasury’s spending accounts, or will they support public financing reforms such as placing the Fed under Treasury in the Executive Branch, or using Platinum Coin Seigniorage (PCS), to bridge the gap between tax revenue and spending? That issue and its relation to a fiscal policy supporting public purpose, along with extensive consideration of issues surrounding PCS, is covered in detail in my e-book, which, I suggest, all good new populists ought to read, if they really want to answer the question: “How you gonna pay for it?”

(Cross-posted from New Economic Perspectives.)

25 responses to “The New Populism Needs to Get This Straight

  1. William Wilson

    Joe, I like this analysis and proposal, however, to whom are you going to address such a proposal in the real world – a place which has been under the control of the kleptocrats for at least the past 40+ years (some might argue since the beginning of the republic). As long as government administrators depend upon moneyed interests, are the debtors going to listen to rational voices or to their creditors?

    • One day people will get Mad As Hell and Won’t Take It Anymore, and they’ll sweep in the new populists. When they do, I don’t want the TNPs to be using the trope they’re thinking with now. So, this is addressed to them and to Borosage.

      • Joe ~ I have always loved your writing, and I believe MMT for the masses, not just the ruling class, would be a very good thing. The question is this: How to get the message past editors? The ruling class has buried MMT in cyberspace. If Krugman came around, that would be a BIG thing, but he seems to be too busy stroking his own ego to take a serious look at MMT. As Mosler has disclosed, Laffer and the trickle-down segment of the ruling class have understood MMT from the beginning. They have been using this understanding, and QE, to fatten their pocketbooks for some time. While we, the 99%, look for jobs and hope that QE will some day trickle down to us, the equity gap grows even larger. MMT needs an activist movement marching for jobs and writing thousands of letters to Janet Yellen.

        • Joe Firestone

          Thank you, Beshiva, I know what Warren says, but I think he’s assuming that once he explains MMT to a person and they say they understand then they understand for good and all. But that’s not the way it works. You have to apply yourself everyday for months before gaining even a superficial understanding and having that become second nature. The paradigm is different, to use that overused word. I really don’t think many of the plutocrats do understand MMT, not the way it’s presented on this blog.

  2. Nice post. One thought, this part seems a little unclear: “The private sector is positive when it saves more dollars than it spends”

    I think it makes sense if you can already imagine the entire sector as an entity, but it’s confusing in our daily terminology. In this case, paying taxes would fall under “spending” and most spending we think about is done within the sector as a whole. You clarified the other two sectors colloquially, so maybe doing so for the private sector could help clear up the point even better.

    • Joe Firestone

      Thanks. I meant to say ““The private sector balance is positive (in surplus) when it saves more dollars than it spends.” Is that better?

      • Well to me the ambiguity is the concept of the private sector “spending” to other sectors. I guess intra-sectoral private spending gets whittled away through taxes, and there’s definitely spending that goes to the foreign sector by trade. But it seems like the vast amount of private sector ‘spending’ & ‘saving’ are two sides of the same coin, done continuously within the private sector. It’s hard to visualize the private sector (as a whole) spending or saving, as those words don’t typically conjure the concepts of paying taxes, working for the government, or trading with the foreign sector (which seem to me to be the drivers of the inter-sector flows being described).

        • I think that’s right, but if we’re going to do analysis using sectoral financial balances we need to think of them as the inter-sectoral flows they are.

  3. Until I started reading this blog and reading about MMT in other places as well, I depended on my knowledge of economics from what I learned in the early 1960s. I was a firm believer in Keynesian economics. However, I did not understand the debt and deficit the way I do now as explained in this article.

    The people who blog in places like this need to understand that even their potential allies, who escaped the brainwashing of the Kochs and of Pete Peterson, may still have trouble understanding the impact of deficits and surpluses.

    So keeping up the efforts to re-educate and specifically communicating with progressives is essential to shifting the countries thinking.

  4. financial matters

    It is hard to get that message out but I think our leaders could do that if they gave it some effort.

    First why does anyone take Robert Rubin seriously? He is probably the poster boy of inequality, fraud and mismanagement having run Citigroup into the ground while running off with millions for his trouble.

    I think people understand spending money productively and government spending could be seen in this light by providing employment that would be helpful to the economy as a whole. Simply putting people to work doing useful things. Investing in education and useful skills. But first starting with where we are. I think anyone could walk around one of our urban areas and identify useful jobs that don’t require a lot of training but could lead to improved skills.

  5. “So now, let’s say people want to save 6% of GDP per year, and they also want to run a trade deficit of 4% of GDP per year. ”

    What people would those be? Do they have names? Are they the entire general population, a majority, an influential elite or what? Who gets the right to make economic decisions that affect everybody else? If those decisions don’t work out, what are the consequences for the decision-maker? Central planning doesn’t seem to have been very successful in the past, why should we embrace it in fiscal and monetary matters?

    • I can’t say what people Joe Firestone had in mind, but I read it as the collection of people in the US who decide this by their individual actions in the private sector market place.

      The trade deficit is made up by people’s desire or need to buy foreign goods as compared to their need or desire to buy domestic goods and the other people of the world’s desire and need for US goods.

      The savings is made up of individuals’ desire or need to buy things as opposed to their need to set money aside for future needs,

      You can see how this is decided by individuals by thinking of the paradox that Keynes noted. If everybody decides they want to save more, then the economy crashes and people cannot save at all.

      All of this is the antithesis of central planning. The actual solution is some central planning to get us out of this hole that we put ourselves in by the sum of our individual choices. It is not necessarily that we are making individual bad choices. Market forces compel people to make some of these choices, and no individual is big enough to counteract these forces. Only a government sovereign in its own currency has the ability to do it.

    • I would add more explicitly that the central planning we should fear occurs when some small number of people decide the federal deficit should be X% over some period, as opposed to being whatever is necessary to support a healthy economy under the circumstances at hand.

  6. Most of what Borosage has to say comes via my inbox, obviously from some list that I am on. I don’t think this article gives the “New Populism” enough credit. In other words, I think they do know what is taught in the average college level macro class. The foreclosure crisis, for example, seemed to be an excuse to fundraise and sign petitions, without any critical thinking. For anyone directly burned by that nationwide tragedy, it’s unlikely they’ll be fooled by “inbox” populism.

    • Actuly, I don’t really think Borosage is a new populist. But I think Occupyrelated people are and also Jill Stein’s Green Party shadow cabinet. Some of them, Alexis Goldstein and Jesse Myerson come to mind are beginning to grok MMT,. Many others do not emphasize the deficit. But reading their work, one still sees the emphasis on taxing the rich to “pay for” needed reform. They still don’t decouple the issues.

  7. New Populism? That label comes back every again every couple of decades. It’s a bullshit label. When are you MMT people going to stop pretending you are going to get your message out? The ruling class (1%) has known about MMT from the outset. Remember that steam room in the Racquet Club in Chicago? Do you really think Rummy sent Warren to Laffer just to be helpful? Come on, man. What we have now is the same old story. . .the rich always get the good stuff first. QE is MMT for the 1%. The ruling class focus now is on keeping MMT confined to MMT blogs like NEP and out of the mainstream media. Sure, the Coin briefly caught the interest of one mainstream pundit (Chris Hayes), but you can bet his editors will be more alert next time. MMT for the masses? No way! And if you thought 32 trillion hidden offshore was a lot, wait until the next count comes in.

  8. Beshivas post comes across as a troll, but happens to exactly right

  9. Actually, the more I think about this article’s criticism of Borsage, the less I really understand that aspect.

    “But this is a side point, the real focus of this passage is the notion that the Clinton surpluses were good because they created an opportunity for public investment by using those surpluses. ”

    If the opportunity had been used to make public investment with those surpluses, they wouldn’t have been surpluses because the government would have spent the money. What Borsage is saying is that the government used the money to cut back on its debt instead of spending it on the things that would have improved the country and kept the debt at least constant if not raising it a bit more.

    • Joe Firestone

      You’re right that’s what he’s saying. But he’s also saying that it was the surpluses that provided that opportunity, whereas that opportunity always exists in the absence of demand-pull inflation, no matter how high the national debt is.

  10. Actually, I haven’t seen the label before. But who cares whether it’s new or old. What they believe is more important and that’s what this piece is about. As far as never getting our message through is concerned, you can believe that if you want to. I’m going to believe that we can and will get it through and I also believe that MMT views are now much more widespread in the mainstream than they were a few years ago.

    Finally, on the coin, there were many more mainstream people who discussed and supported some form of coin remedy. You just didn’t see very many of them on cable, though they had many articles on mainstream blogs.

    • Well, one thing the New Populists might reasonably ask is how, if they ever get in charge, they can keep the US dollar from turning into the Argentine Peso.

  11. Joe Firestone

    I’ll leave Argentina to Pavlina.