Real Fiscal Responsibility I: Preliminaries

By Joe Firestone

This is the first in a lengthy blog series that will evaluate the US Government’s record on Real Fiscal Responsibility, Administration period by Administration period, since the Administration of Jimmy Carter in 1977. In evaluating the US Government’s record, it’s important to state clearly that I will be evaluating more than just each Administration and its activities.

The record of fiscal responsibility is not the product of the Executive Branch alone. It is the outcome of the interaction of the Executive with the two Houses of Congress and the Federal Reserve System, even on occasion the interaction of one or more of these with the Supreme Court. All bear joint, though not equal responsibility for the record of Government fiscal responsibility or fiscal irresponsibility, as the case may be, during each Administration period.

Why start this series with Jimmy Carter; since, after all, other Presidents before him have been concerned about balancing the budget and deficit reduction? Well, first, such concerns had justification before President Nixon closed the gold window in 1971, and left the United States with a non-convertible currency, with a floating exchange rate, and no debts payable in other currencies. But after that, and with the passage of enough time to give people a chance to understand and digest the significance of that change for increased policy space in the fiscal and monetary areas, it is reasonable to expect that orientations toward deficit spending and balanced budgets among the parts of the US Government should have changed with the change in the realities of the Government financing system.

How much time is enough time for this to happen? That is debatable, of course. But I will assume that given the pressures on them, it is probably too much to expect that the Nixon/Ford Administration could have come to a changed understanding of the newly existing space for fiscal policy. Also, neither of these Presidents appear to have established deficit reduction as a goal, essential in itself for good government, so much as an expedient concern to meet the dual challenges of high unemployment and OPEC-induced inflation. But with Jimmy Carter, we get something new in the post-WWII period.

In 1976, Carter ran, in part, on a platform of “fiscal responsibility,” a virtuous “adult” behavior, while also promising to restore full employment. He did not, either during the campaign or afterward, state his policy using today’s neoliberal fiscal responsibility/austerity doctrine, nor did he trouble to define what he meant by “fiscal responsibility”, and to provide a rationale for his definition, but he appeared to believe, in common with today’s austerians, that 1) achieving small deficits, or, even better, balanced budgets, would create full employment, and also 2) that the public debt-to-GDP ratio needed to be decreased over time to moderate inflation. So, because of this change in orientation and also the fact that he took office nearly 6 years after Nixon dispensed entirely with the gold standard, it seems to me right to view him as the first modern president who could reasonably have been expected to figure out that Real Fiscal Responsibility isn’t a matter of reducing deficits or balancing budgets, but rather of spending or taxing for the public purpose, and to have acted accordingly.

The same goes for the heavily Democratic post-Watergate Congress that served along with him, and the Board of Governors of the Federal Reserve. All had enough time to figure the new reality out, all were responsible for not taking advantage of the new fiscal reality in which they live. But they didn’t take advantage of it; instead they acted with fiscal irresponsibility; as year after year, up to the present, has every succeeding President, Congress, and Federal Reserve. And in so doing, they have made themselves, every government of the United States since 1977, responsible for the decline of economic, social and political equality, and repeated episodes of economic stagnation the United States has had since that time.

fiscal sustainability is:

the extent to which patterns of Government spending do not undermine the capability of the Government to continue to spend to achieve its public purpose, and

fiscal responsibility is fiscal policy intended to achieve public purpose while also maintaining or increasing fiscal sustainability.

Proceeding from these definitions, and also a specification of public purpose you will find here, it may be fiscally responsible, in theory, to both implement fiscal policy based on its expected economic impact while also targeting managing the size of the deficit, the public debt, and the debt to GDP ratio; but, only in cases where an economic system is using a currency that it cannot issue in unlimited amounts to maintain its solvency. That includes all economic systems using currencies that are convertible to a commodity, or systems whose political authorities peg the value of its currency to the currency of another economic system, or systems whose political authorities have adopted a foreign currency. But it doesn’t include those systems whose political authorities (including central banks) can issue their own currency and reserves at will; more formally, systems with convertible fiat currencies, floating exchange rates, and no debts in currencies they do not have the authority to issue.

These last economic systems, fiat currency sovereigns such as the United States, the United Kingdom, Japan, Canada, and Australia, to name several, have no need to target the levels of public debt or the debt to GDP ratio to maintain fiscal sustainability, and only need to be concerned about the deficit if it grows large enough in a single time period to impact an important component of public purpose such as the inflation rate. For these nations, in fact, it is irresponsible to target levels of public debt, and the debt-to-GDP ratio, and in any way to prioritize or trade-off changes in these levels over fiscal policy impacts on full employment, price stability, health and well-being, environmental sustainability, climate sustainability, energy foundations, educational attainment, public facilities, or any of the other components of public purpose, since no fiscal sustainability goal would be served by doing so.

Indeed, the opposite is the case, since the sustainability of the capability to freely issue fiat sovereign currency and reserves without undesirable effects such as hyperinflation, depends on the continuing productive capacity of the economic system whose political authorities are issuing such a currency. It is only when such systems have or can easily generate the goods and services needed to meet demand generated by Government deficit spending that the full freedom of such systems to spend in order to respond to economic cycles and to adapt to other problems can be realized. So, one of the most fiscally irresponsible things a Government can do is to target deficit reduction and budget balancing at the expense of maintaining and expanding productive capacity, including both the constructed capital providing that capacity and the competencies, skill, and knowledge, of the human beings who can use it to generate goods and services.

And yet, in pursuing Government austerity through policies targeting deficit reduction and budget balancing, that is what most Governments having fiat currency systems have done since shortly after the world followed the United States and went entirely off the gold standard in the 1970s. In particular, by almost never achieving full employment and by, instead, using an unemployed buffer stock as a hedge against inflation, they have frequently damaged and wasted skills, competencies, and knowledge of their own citizens who want to work, and have decreased real national wealth compared to what might have been created.

In this series, I’ll analyze and evaluate in detail each Administration period since 1977, from the viewpoint of fiscal responsibility I’ve defined above, and relative to the specification of public purpose I’ve outlined here, and will use in each blog. Readers may not agree with my specification of public purpose and so may disagree with my evaluation. But I think there is less room to disagree with the idea that Government taxing and spending in a democracy ought to align with some specification of public purpose, rather than aligning with mere private purposes of elites. So, it remains for those who will disagree to offer their own ideas of public purpose and then explain why these require the kinds of deficit reduction, budget balancing and austerity policies that each US Government, to lesser or greater degree, has pursued since 1977.

16 responses to “Real Fiscal Responsibility I: Preliminaries

  1. Hi, Joe,

    Many austerians consider the Carter/Volcker monetary policy to be one of their finest hours (with a nod to Sheik Yemani for eventually glutting the oil market).

    What would have been the preferred MMT response to the external price shocks and wage push inflation that Carter wound up facing?

    • Well, Joe can handle this but I would note. The increase in oil prices was a supply shock. It went through the entire economy. Volcker thought he could contain it with higher interest rates. Look how that turned out. How do you tell the Saudis to lower their prices with higher interest rates here.?

      How also would you control a price rise with lower crop yields? The ability to do so may be limited.

    • Please read post 3 in the series.

  2. Prof. Firestone,
    Please tell me where my errors are when I make the following statements.
    1. USG buys lowest bid chair for 100$.
    2. USG debits their books for 100$.
    3. USG credits chair-maker’s bank account for 100$.
    4. 100$ debit = 100$ credit = no debt.
    5. Chair-maker pays 10$ in USG taxes, USG credits their books, now there is a 90$ debit (not debt)
    6. 90$ will remain in the economy until needed to pay USG taxes.
    7. No real need to borrow money.

    • Auburn Parks

      You are right on for the first three Rich, but for 4-6 you are confusing the micro accounting for the macro accounting.

      The macro accounting would look like this:

      4. US Govt credits $1000 worth of reserves to Non-Govt accounts (spending)
      5. US Govt debits $900 worth of reserves in Non-Govt accounts (taxing)
      6. The Non-Govt is left with $100 worth of reserves (Non-Govt net savings)
      7. The Govt issues securities worth $100 so those reserves have a place to go and A) earn interest and B) not drive down the Fed’s target interest rate. (Still Non-Govt net savings)

      So you are right there is no need to issue T-securities. Its no use calling this process borrowing, because as you can see, thats not whats happening here. The Govt issues T-securities as a financial service it provides for public purpose, not to get the money that only it can legally create.

  3. I am looking forward to it. Good start here.

  4. J Christensen

    And yet, we still have politicians who will try to use the “deadly innocent frauds” to advantage the federal (currency creating) political position over their counterparts at provincial (or state) and municipal levels even when it disadvantages the public of every political stripe.

    I was gob smacked when I listened to the Canadian federal minister of finance Joe Oliver (conservative) answer to questions about a federal/provincial “fiscal imbalance” raised at a conference between provincial premiers last week. He was interviewed on the national broadcaster’s (Canadian broadcasting Corporation) program Power and Politics with Evan Solomon which proclaims to “hold our politicians feet to the fire” yesterday. The program has been posted at the link below.

  5. I, too, had problems with Joe Oliver’s knowledge of how money works:

    To the Minister of Finance, Joe Oliver

    Recently in The Daily Gleaner newspaper (August 8, 2014) I read your suggestions to the New Brunswick government regarding our fiscal situation. It seems to me that you should really get your facts straight before publicly stating your opinions.
    For example #1, Mr. Oliver, you said that economic planning and fiscal discipline are the same for households and for governments. The provincial governments are dependent on taxation along with federal transfer money but the federal government does not get its revenue through taxation. To say so, is not true and should not be repeated.

    A sovereign country with its own currency is not restricted in its spending like the provinces. The federal government can spend for whatever it wants or needs as long as it is in Canadian dollars. Revenues do not have to be collected before the federal government can spend.
    “Fact: Federal government spending is in no case operationally constrained by revenues, meaning that there is no “solvency risk.” In other words, the federal government can always make any and all payments in its own currency, no matter how large the deficit is, or how few taxes it collects ” (page 11 of )

    Example # 2, shale gas extraction is not benign as you suggest. There are contaminants associated with fracking and there was water contamination in Alberta, contrary to what you said about not finding “a single instance of drinable water contamination.”

    “Jessica Ernst, a former consultant to the oil and gas industry, sued Encana Corporation in 2007 for allegedly contaminating her water supply due to its fracking of a shallow coal bed to extract methane near Rosebud, Alberta. While Alberta’s chief justice ruled that Alberta’s Energy Resources Conversation Board, which granted the fracking license, cannot be sued, the case against Encana is still before the courts. In its statement of defense the company claims that it did not frack any coal beds but merely “stimulated” them. Ernst has compiled a 93 page document describing multiple cases of water contamination from fracking operations.
    “According to journalist Andrew Nikiforuk, ranchers are saying that “Alberta Environment now has so many complaints about hydraulic fracturing from landowners in southern Alberta’s foothills that it is completely backlogged.” (page 6, )

    If the Federal Government were serious about the economic conditions in our small province, Mr. Oliver, you would help us with our debt some of which is a result of the reconditioning of Point Lepreau. It seems as though the Federal Government would like to shuffle off all responsibility to the provinces while it is busy chasing votes policy by policy.
    Please, Minister Oliver, be sure of your facts before you relay information to us.

  6. @ J Christensen

    This is the illness of the federative state. Provinces (and cities) are competing among themselves for the federal funds and this is crucial to the political careers of the provincial prime ministers. They talk about how they handle the healthcare, yet our health care is far from perfect. They talk about increases in the money they receive from the federal level, but they spend it unwisely and prefer short term over the long term benefits… These are the main problems that we face right now.

  7. Joe,

    Superb start. I look forward to your series.

    At some early point in the next Part you may wish to speak to the need, the Administration’s, to have a Congressional appropriation to complete the act of spending. While that eventuality poses significant problems for this Administration it’s worth noting that the opposition is most resistant to serving public purpose when it cynically and cravenly resists legitimate spending request.

  8. … the extent to which patterns of Government spending do not undermine the capability of the Government to continue to spend to achieve its public purpose, ….
    Clearly, the Public Policy of the Republic as created and chartered by its constitution was NEVER intended to create economic equality. However we disect the actions of those in control of the money, we will never find a government that was run for the benefit of ALL.
    Always and everywhere the 1% made sure they got their$ and the rest of us were left to squable over what was left!
    Fiscal policy is an accounting of the inequality, but the REAL problem is a corrupted TAX CODE which prepetrates the myth of a Capitalistic Democracy, and ignores the economic reality that ALL wealth is created by labor. The TAX CODE is and always has been the TRUE mechanism used by the power elite to transfer wealth from the have nots to the 1%.

  9. Pingback: Real Fiscal Responsibility 3; Carter: Inflation and Health Care - New Economic PerspectivesNew Economic Perspectives