Monthly Archives: July 2011

Pinch-Hitting for Peterson. Part 2: How Progressives Helped Stoke Deficit Hysteria; A Case Study

By L. Randall Wray

In Part 1 I argued that Beltway progressives aided and abetted deficit hawk Pete Peterson in his efforts to gut the last remaining vestiges of Roosevelt’s New Deal. By adopting Peterson’s views on government finances, they were unable to provide a progressive alternative to budget cuts. Since Republicans were willing to make a Custer’s Last Stand on the debt limit, and since President Obama was Wall Street’s designate to privatize healthcare and retirement, Democrats needed that progressive voice. But Beltway progressives had already caved, for reasons I discussed.

Indeed, it appears even worse than that. Yves Smith already blew the whistle on three progressive research groups (Roosevelt Institute, Economic Policy Institute, and the Center for American Progress) that produced reports with funding from Peterson. These reports adopted the deficit hysterian’s argument that the US budget is on an “unsustainable” course, and advocated a return to “fiscal responsibility”. Getting progressives to adopt neoliberal terminology was a real coup for the deficit hawks. With such hyped-up talk, there was no doubt that Obama would be able to put Social Security and Medicare on the chopping block.

I have recently discussed what I see to be problems with the Roosevelt Institute’s report over at FDL. This was also the main target of Yves. (Go here).

Let me say, however, that I think critics have been too hard on these three groups. I have argued that taking tainted money from Peterson can be justified if one uses the money to produce progressive research. I am sure all three groups believe that is precisely what they did—they thought they would get a progressive view into the debate, something that had been sadly lacking. In their budgeting exercises, they preserved what they saw to be progressive programs, they budgeted some new progressive programs, and they shifted tax burdens to higher income individuals and corporations. Surely, they believed, that is better than standing on the sidelines and letting Peterson choose which programs to cut? I get that. I sympathize with them.

But here’s the problem. They accepted—at least implicitly—the Peterson agenda. Deficits and debt ratios have to be reduced, if not immediately then eventually. In other words, they budgeted, but with Peterson’s Austerian constraints.

I do not know if Peterson demanded that they submit budget projections that showed debt and deficit reduction relative to the base case. But the RI proudly displays on the report’s homepage projections of very significant debt reduction relative to the “do nothing” baseline. (see here) In other words, they accepted the premise that debt and deficit ratios should be reduced. Once that is done, there is nothing to do but cut some programs and raise taxes.

Part 1 should have made clear, however, that progressives had already moved very close to the Peterson view before he put them on the payroll. For a variety of reasons they had already adopted a “deficit dove” position. The difference between a hawk and a dove is this: hawks want deficit reduction more-or-less immediately. Many of them hold the position that deficits are always bad because they always cause inflation and slow economic growth. The extreme hawk position is that even now, with official unemployment above 9%, government spending should be reduced. There is no plausible economic theory standing behind that position—it is ideological, or as Representative Ryan put it, it is a “moral” position. More “reasonable” hawks are willing to wait until a stronger recovery gets underway. Even Pete Peterson is on record favoring postponement of deficit-cutting until 2012 (see below).

By contrast, deficit doves believe that deficits are not only OK in a deep recession, they are even necessary. (Prominent deficit doves include Paul Krugman as well as many of the writers at New Deal 2.0 as well as individuals at the three institutions that accepted Peterson’s funds.) However, doves believe that “eventually” deficits need to be cut so that debt stops growing; they typically want to stabilize the debt-to-GDP ratio at some level. Some admit that the choice of a final resting place for the debt ratio is somewhat arbitrary—perhaps it should be 60%, or perhaps 100%. But doves are sure that 200% is worse than 100%, and that 100% is worse than 60%. Thus, “eventually” deficits must be cut—and that means hard choices.

A progressive dove can be identified by her preferred means of obtaining that final “sustainable” debt ratio. Tax increases on the rich and on corporations are good. Reductions in military spending and subsidies for corporate agriculture and oil companies are advocated. Raising taxes on the poor and cutting their benefits are rejected by progressive doves.

The problem is that most progressives accept the intergenerational warrior’s claim that “entitlements” (Roosevelt’s New Deal) will bankrupt the nation 25 to 50 years down the road. And those portions of the budget are already large and growing. Hence, as Peterson and his minions have argued for years, “TINA”—there is no alternative to hacking away at entitlements.

The more progressive doves advocate relatively small tweaks to Social Security (raising or eliminating the “cap” so that higher income folks contribute more payroll taxes; raising the retirement age; taxing benefits received by high income retirees; reducing the COLAs; and so on) or bigger tweaks to Medicare and Medicaid (greater emphasis on cost control—some go so far as to recommending the “public option”—or to slow health care cost growth more generally, using centralized bargaining over drug prices). The game played then becomes one of finding the least painful way to reduce longer-term budget deficits and growth of debt in order to move the government’s finances back toward “fiscal responsibility”.

That was a long excursion by way of introduction to what follows—an examination of EPI’s “progressive budget”. I want to make clear three points about EPI. First, EPI’s progressive credentials are not in question. It is without doubt the most important progressive voice in Washington. Second, EPI’s preferred budget was created before it accepted any Peterson money. I will actually refer to the budget it published in 2010, long before Peterson solicited EPI to produce a report. In all important respects, the earlier budget is the same as the budget EPI produced for Peterson. Thus, those critics who have argued that EPI “sold out” to get Peterson funds are wrong.

And, finally, I want to say that much of the budget is indeed “progressive”—it preserves progressive programs, it adds funding for new progressive programs, and it shifts taxes to higher income individuals and corporations. It obtains deficit and debt reduction mostly by increasing taxes. We could quibble over the allocation of funds or the budget priorities of EPI, but I have no problem agreeing that the priorities are consistent with a progressive agenda—albeit not necessarily one I would endorse. Further, EPI has been steadfast in its protection of Social Security. Unlike some other progressives, for example, EPI has rejected any attempt to cut benefits by raising retirement ages or fiddling with COLAs. So I want to make clear that when I criticize Beltway progressives for aiding Social Security’s enemies I am not including EPI, which has been a strong voice in support of Social Security.

Before closely examining EPI’s report let me quickly summarize my complaints about Beltway progressives:

  1. By adopting a deficit dove position, they legitimize the Peterson crowd’s focus on deficit ratios and debt ratios;
  2. By adopting the intergenerational warrior’s long-term budgeting methods, they legitimize the fear-mongering surrounding “unfunded entitlements”;
  3. This leads inexorably to weakening support for New Deal social programs by questioning their “affordability”; and
  4. More generally, it legitimizes the arguments of fiscal conservatives who want to reduce the role of government in the economy.

For the purposes of my analysis, I will compare an EPI report from 2010 (before EPI received funding from Peterson) with a Peterson-funded report from 2009, both of which provided “blueprints” for deficit and debt reduction. As one might expect, the dovish EPI report preserves and even enhances spending on progressive programs, while raising taxes on higher income individuals and corporations. The Peterson report is much more hysterical about a looming financial crisis if we do not do something immediately about unfunded entitlements. Further, the EPI budget would move toward deficit cutting much more slowly, and would stabilize the debt ratio at a higher level.

Still, as one reads the EPI report, one is struck by two things. First, both the goals of the research exercise as well as the major points made are remarkably similar to the earlier Peterson diatribe on the coming fiscal crisis: medium-term and longer-term deficits and debt ratios need to be reduced. I will next examine those similarities. Second, while EPI adopts a dovish position on budget deficits and debt, it offers no serious argument to justify that position. It simply takes as granted the belief that rising debts and deficits are bad, and the bigger they are the badder they are. I surmise that EPI simply presumes that everyone “knows” government deficits and debt are bad, so no explanation is required. Everyone, that is, within the Washington beltway. I suppose that because they all breathe the same hyperventilator’s air, it is just so obvious that Beltway progressives do not need to consider the assumption that the US is on an “unsustainable” course.

The EPI 2010 report provides the following summary of its “blueprint” for a progressive approach to budgeting that adopts a “sound fiscal path”:

1. Jobs first. Jobs and economic growth are essential to our capacity to reduce deficits, and there should be no across-the-board spending reductions until the economy fully recovers. In fact, efforts to spur job creation today will put us on a better economic path and create a solid revenue base. We believe there should be no consideration of overall spending reductions until unemployment has fallen to 6% and remained at or below that level for six months. 2. Stabilize debt. Over the long term, national debt as a share of the economy should be stabilized and eventually brought onto a downward trajectory. 3. Build on economy-boosting investments. We must build and maintain initiatives that directly support long-term job and economic growth. Failing to invest adequately in these efforts – or sacrificing them to short-term deficit reduction – would be a dereliction of sound public management. 4. Target revenue increases. Revenue increases should come primarily from those who have benefited most from the economic gains of the last few decades. 5. No cost shifting. Debt reduction must be weighed against other economic priorities. Policies that simply shift costs from the federal government to individuals and families may improve the government’s balance sheet but would worsen the condition of many Americans, leaving the overall economy no better off.…. We document the hard choices that need to be made and suggest specific policies that will yield lower deficits and a sustainable debt while preserving essential initiatives and investments. (p. V)

Note that of the 5 bullet points that summarize the blueprint, three address the supposed debt and deficit problems. Bullet 2 argues for stabilizing and then reducing the debt ratio; Bullet 4 argues for increasing tax revenues; and Bullet 1 postpones blood-letting through spending reductions until unemployment falls to 6%. It is also important to note, however, that EPI recognizes that it does no good to shift debt from government to households—so, for example, reducing Medicare costs by putting them on households only reduces government deficits and debt by increasing household deficits and debt.

Let us look at EPI’s projections, that compare the “do nothing” scenario against Obama’s proposals and the EPI proposals (labeled “OFS” for “our fiscal security”). This graph shows that EPI’s proposals will cut the deficit to GDP ratio by almost half over the medium term.

The next graph compares the medium term debt-to-GDP ratios under the three scenarios:

What is the source of the government’s financial problems? Rising healthcare costs and lack of adequate tax revenue. (“Any realistic solution to the long-term budget outlook must confront the real drivers of the growth of the national debt, namely the rapid rise in health care costs and the lack of adequate revenue.”, p. 2). It is important to note here that EPI wants to protect Social Security benefits—it does not advocate any cuts. So to close the “fiscal gap” it recommends higher payroll taxes by raising the “cap”. It tweaks “Obamacare” to reduce the rate of growth of health insurance costs. (Interested readers can go to the report. While I do not support either of these proposals, one could label them “progressive” given the narrow range of what passes for progressive discourse in America.) In summary, their proposal achieves deficit and debt reduction (relative to current policy):

Our suggested budget blueprint achieves lower deficits in the medium term and balances the primary federal budget (the year’s current revenue and spending, not counting interest payments on past debt) in less than a decade. This path recognizes the need to increase revenue while targeting certain areas for reductions in spending; in particular, our proposed path reallocates spending away from the Department of Defense by adopting common sense spending reductions. Finally, the blueprint protects core priorities such as Social Security and health care from economically counterproductive reductions in benefits. The net impact of the spending and revenue adjustments we put forth in this blueprint will produce the following short- and long-term results: • Substantial and sustained increased funding for job creation and investments, especially in the near term; • A budget path that significantly improves the 10-year budget window; • A transition from a primary deficit to a primary surplus in 2018, and sustainable debt levels by the end of the decade; • An improvement in the path for public debt in the long term (stabilizing debt as a share of the economy beyond 2025); • A solid footing for Social Security, Medicare, and Medicaid for the long term; • A modernized tax code that raises adequate revenue fairly and efficiently.

The following figure shows a significantly lower long-term debt trajectory as a result of EPI’s proposals.

Throughout the report, EPI refers to “fiscal security”, “fiscal responsibility”, a “sound fiscal path”, “sustainable debt”, and the current “unsustainability of the national budget”. None of these terms is ever adequately defined.

The report also discusses the “75 year fiscal gap”, that must be reduced to “stabilize the debt ratio at today’s level”, requiring tax increases or spending reductions amounting to 7-9% of GDP. It warns that the government is not raising sufficient revenue to cover its expenses and that we cannot face national challenges without adequate funding and a return to fiscal responsibility. I will return to these claims below.

It is interesting to compare the EPI Blueprint with the Peterson-Pew Commission’s report from 2009. The Peterson report is cited as a source for the EPI blueprint, and shares similar phrasing and analysis. Like the EPI Blueprint, the Peterson report advocates a return to “fiscal responsibility”, and the need to “return to a sustainable path”. And like the EPI, the Peterson group is committed to stabilizing the public debt over the medium term and then reducing the debt ratio over the long term. The Peterson report also attributes the fiscal problems to growing healthcare costs and insufficient growth of tax revenue, but it also adds as a cause an aging population. Hence, its attack on Social Security is direct, as one would expect from a group funded by Peterson. In summary, the Peterson report

“recommends that Congress and the White House follow a six-step plan: Step 1: Commit immediately to stabilize the debt at 60 percent of GDP by 2018; Step 2: Develop a specific and credible debt stabilization package in 2010; Step 3: Begin to phase in policy changes in 2012; Step 4: Review progress annually and implement an enforcement regime to stay on track; Step 5: Stabilize the debt by 2018; and Step 6: Continue to reduce the debt as a share of the economy over the longer term.”

The differences between the Peterson plan and the EPI blueprint are that EPI would move toward deficit and debt reduction more slowly, and its debt stabilization would be at higher levels (a ratio of about 80% for the medium term and 60% for the longer term, versus 60% and 40%, respectively, for the Peterson plan). According to the Peterson report, the consequences of not getting debt and deficits under control are: “An ever-growing debt would likely hurt the American standard of living by fueling inflation, forcing up interest rates, dampening wages, slowing economic growth and job creation, and shrinking the government’s ability to cut taxes, invest, or provide a safety net.”

I carefully searched the EPI report to find exactly what it is about growing debt and deficits that makes them “unsustainable” and “undesired”. There is no serious attempt made to justify the recommendation to “stabilize” and then reduce debt ratios. Indeed, in the 70-plus page document, the supposed negative impacts of growing debt ratios are discussed only briefly in three places. It boils down to this:

a) budget deficits and government debt might crowd-out private investment;
b) high deficit and debt ratios would hinder government’s ability to deal with future financial crises;
c) high debt ratios could trigger a fiscal crisis;
d) high debt service (ie paying interest on bonds) could crowd out other government spending;
e) high debt ratios could threaten confidence in government debt.

The Peterson report is much more hysterical about the possibility—nay, near certainty—of a fiscal crisis if debt ratios are not reduced. It also adds to the list above the possibility that deficits will spark inflation and devaluation of the dollar, and claims that deficits slow economic growth. But in general outline, the two analyses warn of similar dangers without providing any serious discussion of the mechanisms through which deficits and debts generate these outcomes.

Let me stick to the EPI fears. While we probably disagree about operational details, I suspect EPI agrees that government can make all payments as they come due in its own sovereign currency—that is a position to which even Ben Bernanke, Alan Greenspan, and Paul Krugman subscribe. But if that is so, I do not see how a “fiscal crisis” can be triggered. Let us say that market confidence in Treasuries is shaken. A sovereign government can offer to redeem all of them—that is, stand ready to pay off interest and principal by crediting bank accounts with US dollars. Yes, I know that the inflation hyperventilators are already screaming. But EPI did not list inflation as a possible result; it listed fiscal crisis. How can you have a fiscal crisis when you spend your own currency? EPI is silent on the matter.

The EPI report lists two types of crowding out. The first is the old and thoroughly discredited loanable funds idea: there is a fixed amount of loanable funds in markets and if government borrows, there is less available for private firms. Interest rates rise, investment falls, and growth suffers (one of the Peterson claims). There is also an ISLM version—but that is equally discredited (all modern macro has a horizontal LM curve) and too wonky for this blog. One must conclude that EPI’s macroeconomics is based on pre-Keynesian theory.

Actually, finance is not a scarce resource. (Anyone who thinks it is scarce had a Rip Van Winkle nap during the last two decades, when finance was more abundant than hot air within the Beltway.) Government deficits cannot financially crowd out investment. Yes, if we went beyond full employment of all resources, more government spending could crowd out private spending because there would be no real resources to devote to production of additional output. But it is pretty clear that EPI is not worried about real resources, since its Blueprint devotes Bullet 3 to ramping up public investment.

The second kind of crowding out listed is based on the belief that government faces a fixed budget so that if it spends more on interest it must cut spending (or raise taxes) elsewhere. This is also related to the view popularized by neoliberals Reinhart and Rogoff that low debt ratios are good because when a crisis hits there is fiscal policy space that can be used for bail-outs and stimulus packages. But that means EPI is using a circular argument: we must reduce the debt by cutting spending because the debt imposes a constraint on spending.

The reality is, as all those reading this blog know well, a sovereign government is never financially constrained in its own currency. Government spends by keystrokes. It can stroke keys to pay interest and as well stroke keys to undertake any progressive spending policies EPI proposes. And it still has “room” to stroke keys for bailouts. There is no affordability tradeoff. What matters is inflation—too much government spending drives the economy to the inflation barrier. And real resource use: a government that takes too many resources for its use (hopefully, to serve the public purpose) leaves too few for the private sector. But that requires full capacity use—otherwise at most you get bottlenecks.

Further, as all readers here know, the interest rate is a policy variable. The central bank chooses the overnight interest rate; the short maturity government bill rate tracks that closely since bills are close substitutes for bank reserves. Other rates are more complexly determined. Government bills and bonds are interest-earning alternatives to the rates paid on reserves by the central bank. Let us say that government decides it wants to spend less on interest on longer maturity bonds. Easy enough: stop issuing them. Facing a drought of longer maturity bonds, markets will bid up their prices and rates will fall. Government can stay in the short end of the market as long as it wants; indeed, it can stop issuing even bills and just pay 25 basis points on reserves (as it now does). Yes, this requires a change from current operating procedure. I won’t go through this now as NEP has provided ample analysis of operating procedures and the simple changes that would lead to an era of zero government debt (as conventionally measured, since reserves and currency are not counted).

Now, EPI might challenge me: what would my progressive 15 to 25 year government budget proposal look like? My response: I wouldn’t budget for 5 years, let alone 25. It is a silly exercise that only stokes the fires of Peterson’s hyperventilators.

The best argument against doing long-term budgeting exercises is here, a co-authored Policy Brief that was based on testimony we supplied to Congress. A quick summary is contained in my FDL piece (here). This blog is already too long to repeat the arguments. Budgeting by sovereign government does make sense, and one could even envision budgeting for particular long-lived projects for periods as long as 25 years. But it makes no sense to project total government spending, taxing, and deficits out to 15 or 25 years, let alone to infinity and beyond. And once we bring in recognition of the three sectors balances and the necessity they sum to zero, the futility of calculating budget deficits for year 2035 becomes obvious. You cannot even get a budget deficit unless the private sector wants to net save and the rest of the world wants to earn dollars by net exporting. To calculate the budget deficit in 2035 we would have to be able to project out the current account balance and the private sector balance. That is something EPI did not do—and so, the whole exercise is not only silly but seriously incoherent from the vantage point of the sectoral balances.

In conclusion: critics have wrongly implied that EPI (and perhaps RI and CAP) adopted Peterson’s hawkish approach because they were paid to do so. The similarity between the EPI and the Peterson position on sustainability of deficits and debts predates the funding. The EPI Blueprint does adopt a progressive approach to budgeting, so long as one agrees that progressives should adopt a dovish approach to budget deficits, and that it is progressive to draw up budgets for the far distant future. Personally, I reject both of those stances.

But, MMTers are in a distinct minority—we are deficit owls. As I have argued here, most progressives have lined up on the Peterson side because they adopt the deficit dove position. And that is why all progressive policies adopted since the Great Depression are now in danger.

Counterfactuals can never be proven. What if Beltway progressives had mounted a strong opposition against Peterson? What if they understood and endorsed MMT? Would Democrats have found the will to call the Republican’s bluff? Would Obama have stood up to the attacks on the New Deal? We will never know.

I conclude: progressives have unwittingly aided and abetted the deficit hawks because they do not have any strong alternative to the argument that deficit and debt trajectories are “unsustainable”.

Can Seinfeld Help Obama Start Making Better Policy Decisions?

By Stephanie Kelton

My mother used to say, “If at first you don’t succeed, try, try again.” It’s good advice when you’re encouraging a child to take her first steps or hit a fastball out of the park. You pretty much want the person to stick with the general approach until the effort pays off. But it would be crazy to stand there and flap your arms, convinced that if you just keep trying you’ll eventually be soaring with the eagles.

Paul Samuelson described FDR as a president who “knew which whiskey wasn’t working.” With unemployment above 20 percent, the banking system in complete disarray, and the mortgage market in serious crisis, Roosevelt’s challenges were far more daunting than Obama’s. Of course, he didn’t get everything right on his first pass, but he didn’t stand there and flap his arms either.

When offering businesses a carrot (incentives) to hire the unemployed didn’t spur job creation, he created the Works Progress Administration (WPA), the Civilian Conservation Corps (CCC) and the National Youth Administration (NYA), and he hired the unemployed himself. When modest tweaks to banking laws failed to stabilize the financial system, the government created the Federal Deposit Insurance Corporation (FDIC) and the Security and Exchange Commission (SEC). When the housing market failed to stabilize, the National Housing Act of 1934 established new lending practices, propping up home values. And, when Americans struggled to make ends meet, Congress passed the Social Security Act and the Fair Labor Standards Act (which introduced a minimum wage). And he did much more.

President Obama, in contrast, seems determined to keep flapping. He thinks:

  • Getting our fiscal house in order will create the confidence the business sector needs to start hiring again
  • Removing $4 trillion of aggregate demand will help the economy
  • The government is ‘out of money’
  • We need to raise revenues in order to take care of seniors, poor kids, medical researchers, infrastructure, etc.
  • Job training will fuel job growth
  • When the private sector tightens its belt, the government should too
  • We need to double our exports in order to grow jobs
  • We need to appease the ratings agencies and the bond markets or the government won’t be able to raise money and pay its bills
  • Entitlement reform will ‘make Social Security stronger’

It’s as if every instinct he has is wrong. So maybe he should start doing the opposite of whatever his gut (or Larry and Timmy) are telling him. The general approach is modeled beautifully here:

Pinch-Hitting for Peterson. Part 1: How Progressives Helped Put Social Security on the Chopping Block

By L. Randall Wray

It’s official. Obama has decided to become a one term president. He caved in to the Republicans, agreeing to gut Social Security in order to get them to agree to raise the debt limit. This was never a real trade-off, as it made sense only within the Washington beltway. Obama has adopted the Jimmy Carter approach: promising pain and more pain, presenting a dreary (and false) message of no hope, just mindless human sacrifice to please the gods on Wall Street.

In the days of Carter, it was all about stagflation, running out of oil, and national malaise; today it is all about jobless “recovery” as far as the eye can see and unfunded infinite horizon entitlements for the undeserving. I do not know which is worse, but I am positive that voters will reject Obama’s perverted vision of our future, just as they rebelled against Carter’s. American voters are an optimistic lot and they know our best days are ahead of us. We do not face the futures envisioned then by Carter or today by Obama. Voters do have the audacity of hope, even though Obama does not and probably never did. I do not know who will be the next president, but Obama’s actions indicate he has decided he does not want the job. Voters are looking for the next Reagan who shares their optimism.

It was clear all along that this was the real agenda of the fake debate. It never had anything to do with debts and deficits and tens of trillions of dollars of unfunded “entitlements”. The goal all along has been to find a Democratic president willing to kill Social Security. Washington finally has one. Al Gore probably would have done it—but his “lockbox” proposal was too silly to sell with a straight face, so he never got the chance. Obama became the willing sacrificial lamb.

Wall Street wants blood for its vampire squids, and Obama is willing to deliver it by the truckload. To be clear, he is no martyr. Martyrs have to be unwilling, at least up to a point. It appears that President Obama wanted this outcome from day one.

But that is not the story I want to pursue here. What is interesting is how Social Security’s enemies enlisted progressives to fight their battle for them, lining them up to pinch-hit for Pete Peterson.

In the old days, the enemies were simply too obvious to be successful—using Cold War rhetoric and labeling the program a communist plot, they never gained traction.

As they became more sophisticated, they moved on to railing against future costs of taking care of babyboomers. They enlisted Alan Greenspan, who chaired a commission that unnecessarily jacked up payroll taxes to run surpluses to be “saved” for future use—something that was impossible for a sovereign government to do since Trust Fund assets were simply government IOUs (something later admitted by Greenspan). But the high taxes helped to build hostility to the program.

Then the enemies created the Concorde Coalition—that included some Democrat wolves in sheep clothing—to fan across the country beating the drums and scaring college students about rotten “money’s worth” calculations that showed they’d be much better off “investing” in stocks rather than paying high FICA taxes. The dot-com crash did not help that cause—which was always a hard sell because the Concorde Coalition’s members were so darned intellectually dishonest—people like Bob Rubin, Paul Tsongas, Charles Robb, Sam Nunn, Warren Rudman, and Bob Kerry. I debated them on college campuses and I can definitely attest to the greasy propaganda that they thought would capture the imagination of students. It did not. Bad haircuts, bad breath, leisure suits, and stupid arguments were all they had to offer. It was a big zip. Nada. Zero.

So, finally, hedge fund billionaire Pete Peterson helped push the notion of trillions of dollars of unfunded entitlements that would bankrupt our nation. Unfortunately, he was getting nowhere, even with the help of Reaganites like Pete du Pont, and Larry Kotlikoff.

Until Obama got elected, that is.

A peculiar alignment of the stars pushed the Peterson agenda forward. First of course there was the financial collapse, which brought on the worst recession since the Great Depression (a downturn that is not over and that still might morph into the first depression of this century). That crashed tax revenue and generated a huge budget deficit—fueling the fires of deficit hysterians.

Second, Obama’s campaign platform had featured deficit reduction as a major goal. Those of us with some audacity had hoped he was not serious about this. He was. And he brought into his administration a number of Clinton people, all of whom had sworn allegiance to Wall Street and the Clinton spin that deregulation of finance plus budget surpluses had created Goldilocks. In return for tens or hundreds of millions of dollars of rewards, they had agreed to act as Wall Street’s fifth column. For all practical purposes, Peterson was selected to head Obama’s deficit-cutting team.

Which leads to point 3: many Democrats had learned the wrong lesson from the Clinton boom. They convinced themselves (against all reason) that the Clinton budget surplus caused the boom. In reality, it killed the Goldilocks economy and brought on the Bush recession. But, no matter. Wall Street was very generous with its billions, and it had decided that the Obama wave was something it wanted to surf right into Washington. Whatever finance wanted, finance got. What finance wanted was tens of trillions of dollars of bailouts, Obamacare (more financialization of health insurance), and elimination of Social Security (financiers hate the competition).

Point 4. Finally, Beltway progressives decided to join the deficit hysteria bandwagon. The endgame was a foregone conclusion. With no opposition from the left, the Austerians would get whatever they wanted. And what they wanted was to eliminate Social Security, Medicare, and Medicaid.

But why would Washington’s progressive think tanks decide to join forces with hedge fund manager Pete Peterson to undermine the Rooseveltian New Deal? Here the plot thickens.

Some had actually joined up during the “W” years—using the rising budget deficits under Bush (actually due to the recession he inherited from Clinton) as an argument that he was mismanaging the budget with taxcuts for the rich. If only Bush would balance the budget, Goldilocks would rise from the dead. It was an embarrassing display of stupid politics, as progressives sold their souls to Peterson to beat down Bush as a big deficit spender.

Some Beltway progressives—including organized labor—had actually signed up even earlier, during the Gore campaign, manufacturing a fake financial crisis for Social Security in order to offer lock boxes as a better alternative than Bush’s plan to privatize the program. Joining the bandwagon by arguing that Social Security was unsustainable, they offered critical assistance to Peterson. And, of course, they lost the election. (Oh, I know, they continue to claim “but Gore really won”. Come on, if a candidate cannot beat a “W” by double digits, he does not deserve office.)

Still others signed on to the Peterson agenda after the financial crisis hit, in order to argue against payroll tax relief on the bizarre argument that Social Security already faces an uncertain financial future, hence, if we give payroll tax relief to workers now we won’t be able to afford the program in 2050. (We have dealt with that issue here at NEP and also over at New Deal 2.0.) They desperately wanted to hang the fortunes of Social Security on a supposed American love affair with payroll tax hikes.

Again, too stupid for school. No one likes the payroll tax. It is regressive. It taxes work. It makes American workers uncompetitive. And by tying Social Security benefits to payroll tax revenue, it ensures program accounting insolvency—as the Peterson crowd argues. Indeed, it is only because of the payroll tax that we can calculate bad “money’s worth” and project the exact date at which Social Security becomes insolvent. Eliminate the tax and it becomes impossible to calculate solvency or insolvency. But our progressives instead chose certain death for the program on the argument that the albatross of payroll taxes makes the program too popular to kill. (Hint: they were wrong. Evidence? Obama.)

And, finally, there was the debt limit. In the past, we got political posturing, but the limits were routinely raised. This time around, it was clear that Republicans had much more incentive to draw blood—they would require the Democrats give up some popular program before the limit would be raised, and this would cost them in the next election. Yet, success was far from certain as the Dems could have just called the bluff. But the stars were aligned, because by this time there were no longer any dissenting voices within the beltway on the need to cut deficits.

Progressives had a choice—they could take the high road, which meant isolation from the beltway and its funding spigots; or they could join the deficit cutting party and drink the Kool-Aid. That is, they could swing the progressive bat or pinch-hit for Peterson. They chose to pinch-hit.

So how did the remaining progressives get co-opted? Peterson had the brilliant idea of hiring Beltway progressive organizations to join his team. Why not pay progressives to come up with deficit and debt cutting plans? If you can’t defeat them, pay them off. It is like choosing from among the prisoners which ones get to do the whipping and hanging of the recalcitrants.

So progressives lined up at the Peterson Pig Trough. I’ll have more to say about Peterson’s funding of Beltway progressives in Part 2.

With no Beltway progressives left to fight Peterson’s deficit hysteria, Republicans knew they had a winning hand—so they demanded the so-called third rail: Social Security. Democrats in Congress had nowhere to turn for support. Progressives had abandoned the debate, and Obama had been hand-selected by Wall Street to offer up Social Security. Just as only a Republican President could go to China, only a Democrat could finally kill the last remaining remnants of the New Deal. President Clinton had destroyed all the financial regulations, eliminated welfare, and undercut consumer protection. Now it is up to Obama to eliminate Social Security and Medicare.

Obamacare will hand over the nation’s healthcare system to Wall Street, with elimination of Medicare removing the last remaining obstacle to complete financialization of medical care. Similarly, getting rid of Social Security will put Wall Street in complete control of our nation’s retirement system. Wall Street hates competition.

And so does Peterson. It is unfortunate that Beltway progressives voluntarily muzzled themselves, to eliminate any alternative to Peterson’s propaganda.

In Part 2, I will look at a specific case of self-muzzling by the premiere Beltway progressive research institute. Stay tuned.


In recent weeks we have examined in some detail the three balances approach developed largely by Wynne Godley. In some sense all of that is preliminary to examining the nature of modern money. Further, as many of you have no doubt already recognized, a key distinguishing characteristic of MMT is its view on how government really spends. Beginning with this blog we will begin to develop our theory of sovereign currency.

So in coming weeks we examine spending by government that issues its own domestic currency. We first present general principles that are applicable to any issuer of domestic currency. These principles apply to both developed and developing nations, and regardless of exchange rate regime. We later move on to analysis of special considerations that apply to developing nations. Finally we will discuss implications of the analysis for different currency regimes.

In this blog we examine the concept of a sovereign currency.

Domestic Currency. We first introduce the concept of the money of account—the Australian dollar, the US dollar, the Japanese Yen, the British Pound, and the European Euro are all examples of a money of account. The first four of these monies of account are each associated with a single nation. By contrast, the Euro is a money of account adopted by a number of countries that have joined the European Monetary Union. Throughout history, the usual situation has been “one nation, one currency”, although there have been a number of exceptions to this rule, including the modern Euro. Most of the discussion that follows will be focused on the more common case in which a nation adopts its own money of account, and in which the government issues a currency denominated in that unit of account. When we address the exceptional cases, such as the European Monetary Union, we will carefully identify the differences that arise when a currency is divorced from the nation.

Note that most developing nations adopt their own domestic currency. However, some of these peg their currencies, hence, surrender a degree of domestic policy space, as will be discussed below. However, since they do issue their own currencies, the analysis here of the money of account does apply to them.

Note also, following the discussion at the end of Blog 4, we recognize that individual households and firms (and even governments) can use foreign currencies even within their domestic economy. For example, within Kazakhstan (and many other developing nations) some transactions can occur in US Dollars, while others take the form of Tenge. And individuals can accumulate net wealth denominated in Dollars or in Tenge. However, the accounting principles that apply to a money of account will still apply (separately) to each of these currencies.

One nation, one currency. The overwhelmingly dominant practice is for a nation to adopt its own unique money of account—the US Dollar (US$) in America; the Australian Dollar (A$) in Australia; the Kazakhstan Tenge. The government of the nation issues a currency (usually consisting of metal coins and paper notes of various denominations) denominated in its money of account. Spending by the government as well as tax liabilities, fees, and fines owed to the government are denominated in the same money of account. The court system assesses damages in civil cases using the same money of account.

For example, wages are counted in the nation’s money of account and in the event that an employer fails to pay wages due, the courts will enforce the labor contract and assess monetary damages on the employer to be paid to the employee.

A government might also use a foreign currency for some of its purchases, and might accept a foreign currency in payment. It might also borrow—issuing IOUs—in a foreign currency. Usually, this is done when the government is making purchases of imports or when it is trying to accumulate foreign currency reserves (for example when it pegs its currency). While important, this does not change the accounting of the domestic currency. That is, if the Kazakhstan government spends more Tenge than it collects in Tenge taxes, it runs a budget deficit in Tenge that exactly equals the nongovernment sector’s accumulation of Tenge through its budget surplus (assuming a balanced foreign sector it will be the domestic private sector that accumulates the Tenge).

We will argue that the government has much more leeway (called “domestic policy space”) when it spends and taxes in its own currency than when it spends or taxes in a foreign currency. For the Kazakhstan government to run a budget deficit in US Dollars, it would have to get hold of the extra Dollars by borrowing them. This is more difficult than simply spending by issuing Tenge to a domestic private sector that wants to accumulate some net saving in Tenge.

It is also important to note that in many nations there are private contracts that are written in foreign monies of account. For example, in some Latin American countries as well as some other developing nations around the world it is common to write some kinds of contracts in terms of the US Dollar. It is also common in many nations to use US currency in payment in private transactions. According to some estimates, the total value of US currency circulating outside America exceeds the value of US currency used at home. Thus, one or more foreign monies of account as well as foreign currencies might be used in addition to the domestic money of account and the domestic currency denominated in that unit.

Sometimes this is explicitly recognized by, and permitted by, the authorities while other times it is part of the underground economy that tries to avoid detection by using foreign currency. It might be surprising to learn that in the United States foreign currencies circulated alongside the US dollar well into the 19th century; indeed, the US Treasury even accepted payment of taxes in foreign currency until the middle of the 19th century.

However, such practices are now extremely rare in the developed nations that issue their own currencies (with the exception of the Euro nations—each of which uses the Euro that is effectively a “foreign” currency from the perspective of the individual nation). Still it is not uncommon in developing nations for foreign currencies to circulate alongside domestic currency, and sometimes their governments willingly accept foreign currencies. In some cases, sellers even prefer foreign currencies over domestic currencies.

This has implications for policy, as discussed later.

Sovereignty and the currency. The national currency is often referred to as a “sovereign currency”, that is, the currency issued by the sovereign government. The sovereign government retains for itself a variety of powers that are not given to private individuals or institutions. Here, we are only concerned with those powers associated with money.

The sovereign government, alone, has the power to determine which money of account it will recognize for official accounts (as discussed, it might choose to accept a foreign currency for some payments—but that is the sovereign’s prerogative). Further, modern sovereign governments, alone, are invested with the power to issue the currency denominated in its money of account.

If any entity other than the government tried to issue domestic currency (unless explicitly permitted to do so by government) it would be prosecuted as a counterfeiter, with severe penalties resulting.

Further, the sovereign government imposes tax liabilities (as well as fines and fees) in its money of account, and decides how these liabilities can be paid—that is, it decides what it will accept in payment so that taxpayers can fulfil their obligations.

Finally, the sovereign government also decides how it will make its own payments—what it will deliver to purchase goods or services, or to meet its own obligations (such as payments it must make to retirees). Most modern sovereign governments make payments in their own currency, and require tax payments in the same currency.

Next week we will continue this discussion, investigating “what backs up” modern money.

QE3, Treasury Style—Go Around, Not Over the Debt Ceiling Limit

By Scott Fullwiler 

Cullen Roche’s excellent post at Pragmatic Capitalism explains—via comments from frequent MMT commentator Beowulf (see here) and several previous posts by fellow MMT blogger Joe Firestone (see the links at the end of Cullen’s post and also here and here)—that the debt ceiling debate could be ended right now given that the US Constitution bestows upon the US Treasury the authority to mint coins (particularly platinum coins).  Further, this simple change would lift the veil on how current monetary operations work and thereby demonstrate clearly that a currency-issuing government under flexible exchange rates cannot be forced into default against its will and is not beholden to “vigilante” bond markets.  As Beowulf explains in a later comment, “The anomaly it addresses is that the US Govt has a debt limit yet an agency of the US Govt (the Federal Reserve) does not have a debt limit.  Clearly this is a structural defect.”

Continue reading

Time to Panic (II)

Today’s unemployment data suggests that we are experiencing something far worse than a mere “bump in the road”, as our President described it last month.  In fact, if last month was the time to panic, as Stephanie Kelton argued here, then today’s data should create real palpitations in the White House.  This isn’t just a “bump,” but a fully-fledged New York City style pot hole.
First the headline number everyone looks at: non-farm payrolls. Up 18,000 in June, the increase was 100,000 less than expectations.  In addition the prior two month payroll increases were revised down by -44,000 overall.  That’s weak – but not terrible.

Dig a bit deeper into the data and it looks absolutely awful:  The household measure of employment fell by -445,000.  Okay, it’s a noisy number. But, as Frank Veneroso has pointed out to me in an email correspondence, this measure of employment which is never revised now shows no employment growth over the last five months and very negative employment growth over the last three.
But it gets worse:  The work week was down one tenth.  Overtime was down one tenth.  The labor participation rate at 64.1% was the lowest since 1984.  The broad U6 unemployment rate rose from 15.8% to 16.2%.  In other words, as Frank suggested to me this morning, “many other employment indicators in this report confirm the deep disappointment in the payroll series and the much more negative message of the household series.”

Are there seasonal factors which could explain this?  Perhaps, especially in the gap between the BLS and ADP payroll numbers.  But as Philippa Dunne of “The Liscio Report” suggested:

After the release, some bulls turned to that old reliable excuse – bad seasonals. According to one analysis making the rounds, had the BLS used last year’s factor – computed, of course, using exactly the same concurrent technique as this year’s factor – the gain would have been 221,000! (Whoever did this made a mistake by comparing the NSA and SA levels for the two months–you have to compare the over-the-month changes.) Still, if you’re going to play this game, you should be consistent, and apply last year’s seasonals to several months, not just one. If you do that, May’s gain of 25,000 would turn into a loss of 19,000, and April’s gain would be a mere 73,000. In any case, why should you do that? The seasonals are recomputed every month based on recent experience and calendar quirks, and should be more aggressive in a recovery. (Hope we won’t be using the trend set in the depth of the recession as the bar going forward.) Also, there is no adjustment to the headline number – the sectors are adjusted separately (96 different industries at the 3-digit NAICS level, to be precise) and the total is the sum of those components. The whole argument is bogus.

Many of us who contribute to this blog have been concerned about these trends for months.  We expressed concern that the prevailing deficit hysteria and corresponding cutbacks in government spending (based on a wholly misconceived notion of “national solvency” or “fiscal sustainability” – whatever that means), would engender precisely the kinds of economic conditions that we’re seeing today.  Unfortunately, the President, his ineffectual Treasury Secretary and Congress all remain in thrall of Wall Street Pollyannas and mainstream economists, who have continued to predict significantly above trend economic growth quarter after quarter after quarter.
Yet quarter after quarter after quarter growth has come in less than they expected.  Why?   Because of this persistent tendency to diminish the importance of fiscal policy and an irrational belief in the efficacy of gimmicks such as QE2.  The reality is much more grim:  Growth  has come in at less than a 2% rate in the first and second quarters of this year,  and instead of responding to the real crisis of unemployment, our policy makers remain fixated on deficit reduction, and cutbacks in “unsustainable” entitlement programs, in effect withdrawing even more income out of an economy steadily heading back toward the precipice of recession.
And with a deal on the debt ceiling likely to include yet more cuts in government spending, and a major squeeze on real consumer incomes from commodity prices buoyed by speculation to the point of manipulation, the Administration inexplicably continues to forecast, yet again, a resumption of significant growth, because its fundraising buddies on Wall Street continue to reassure them that this will be the case.

Not if we keep proceeding along the path we’re going down.  Further declines a la Europe (where fiscal austerity remains fully in swing), gives some clue of where we are heading.  Spanish retail sales have been a disaster.
They were down 6.6% versus a year ago.  That is much worse than the already horrible 4.4% decline during the prior five months.  Spain’s unemployment rate is 21%.  Greece, which has just implemented yet another round of cuts in government spending, has an unemployment rate above 16% and trending higher.  And Italy is finally coming up in the headlines; per-capita income in that country has grown 0% over the last decade.  Today the Bank of France put out their monthly business survey: 

“Industrial activity declined in June due to the weaker performance of the automotive, equipment manufacturing and other industrial goods sectors. The capacity utilisation rate fell. Order books were still considered to be above normal levels but appear to be in a less favourable position than in past months.” 

That’s the core, not just the periphery.  It’s no longer just a problem of the “Mediterranean profligates.”

The collective embrace of fiscal austerity has gone beyond perverse.  It’s as if Josef Mengele was reborn as an economist, working on some weird new social experiment to inflict the maximum amount of damage on the maximum amount of people.  It’s a sick variation on that old joke:
Patient: “Doctor, it hurts when I do this.”
Doctor: “Then keep doing it.”
Twenty eight developed governments have moved to get the oil price down to save the global economic recovery.  Professional investors, speculators and fellow traveler manipulators have given these governments the finger over the last week and a half by bidding the oil price up.  Given this report and the terrible front end economic data coming out of Europe lately, these governments had better find a way to keep food and fuel prices from taking off once again or its Great Recession Part II right around the corner.
But, hey, what’s the worry?  Just a bump in the road!  Let’s cut some more government spending (Social Security looks to be the next target) because of course the realization that we are “being responsible” about no longer “living beyond our means” will do wonders to restore confidence and get us out of the ditch in which 95% of the world finds itself.  Or so our President will no doubt be telling us if and when he “celebrates” a deal on the debt ceiling.   In reality, the only people who ought to be celebrating are the GOP hopefuls in the upcoming Presidential election, one of whom looks increasingly likely to turn Barack Obama into a one-term President.


This week I am going to be unusually and thankfully brief (it is 4th of July holiday, after all). I will respond to the following comments:
  1. From Neil, can we tell from the sectoral balances what the multiplier effect from government spending might be?
Answer: No. It would be great if we could, but we need estimates on things like spending and saving propensities across sectors, and then we need those things to be stable across a cycle. I am extremely skeptical that they are stable. I do believe multipliers are reasonably big on direct government employment programs. Other than that, all bets are off. But look at it this way. Say the multiplier is one or less than one. Then we can have more tax cuts and more government spending on stuff we need. Personally, I’d like better roads, 21st century infrastructure, and some of those flying saucers we were promised when I was a kid. My Toyota looks an awful lot like my dad’s 1959 Olds. That is sad. I expected much more. My cellphone approximates something like what I was looking forward to. Dinosaurs that drink petroleum and still require rubber on the road is not even close.
  1. Jean: can you carry the graph back to look at growth of “transfers”. Yes. But of course we are an aging society and so yes you will see growing spending on Social Security since Ida May Fuller first began to collect benefits. (Yogi says: look it up)
  2. Murray: many questions, most to be addressed in coming weeks and months. One response now: what about gambling. As a rough rule of thumb, it is ignored. Only the profits and wages of gambling houses show up in the data. The bets (and losses) do not.
  3. Willorng: 45 mph speed limit. Mosler beat you to it—his campaign platform included a national 35mph speed limit. I did not sign on. Sorry, call me old fashioned. I’d rather drive fast and save the planet by foregoing meat—our meat consumption is far more disastrous for the environment than driving SUVs at 100mph.
  4. Dale on net imports: I mostly agree. It takes two to tango so we actually have little power over the outcome, anyway. I do not imply morality on imports and exports. I would not say net imports are good or bad. They just “are”.
  5. Anon: fast or slow collapse and rich vs poor savings: I do not want a collapse at all. I want debt relief and jobs creation. On the empirical evidence—who is cutting spending and increasing saving—I do not know. I suspect it is low to middle income that has cut spending but I am not sure.
  6. Wh10: again, I prefer to keep morality out of this, however, I am willing to say that in the circumstances that have existed since the early 2000s, increasing private sector deficits and debts is “bad”, unsustainable, and ultimately will (did) create a crisis. And, again, it takes two to tango. The rest of the world wants dollar assets. In such a situation, given US endorsement of mostly “free trade”, we will run a current account deficit. That is not good or bad, and it is sustainable. Now most analysts believe it is both bad and unsustainable. Hence, I called them out—how can they advocate private sector savings ,and government sector balanced budget without telling us how we will bring the current account to a surplus. They have no plausible story. They are either stupid or dishonest. I simply ask them to tell us which label they prefer. Personally, I am indifferent.

William Black Interviewed on Benzinga Radio

William K. Black was interviewed recently regarding Bank of America’s proposed settlement announced last week.  Listen to the audio here.

How Economics and Law Will Help Religious Bodies Come to Terms with Marriage Equality

By William K. Black

The Wall Street Journal published an op ed by R. Albert Mohler, Jr. on July 1, 2011 entitled “Evangelicals and the Gay Moral Revolution.” This column discusses the economic implications of Mohler’s arguments about the consequences of ending legal discrimination against homosexuals.

Mohler heads a Southern Baptist Convention (SBC) theological seminary. He argues that the “Christian church’s” foundations are shaking due to homosexual rights – and they have no exit strategy to escape. He states that only “liberal churches” (which he implicitly defines as non-Christian) can refuse to discriminate against homosexuals because they believe that such discrimination is immoral and un-Christian. The “Christian church” must discriminate against homosexuals. The SBC argues that the Supreme Court decision (Lawrence v. Texas) holding that it was unconstitutional to criminalize adult, consensual homosexual sex was improperly decided. Homosexual sex is a sin and should lead to criminal penalties. The SBC argues that Christian business people in the private sector have a constitutionally protected right (under the 1st Amendment) to refuse to deal with homosexuals as customers and employees because homosexuals are depraved sinners. Indeed, the SBC, depending on the particular context, either urges or mandates that its members discriminate against homosexuals.

Mohler argues that the SBC cannot cease condemning homosexuals and urging or mandating that its members discriminate against homosexuals. That is not accurate. The SBC, of all entities, knows that it can cease discriminating for it has done so. The SBC was created for one purpose – defending the enslavement of dark-skinned people of African descent. The SBC claimed that the inerrant word of God in the bible mandated this policy. Even after slavery ended prominent SBC members took the political lead in discriminating against blacks for over 100 years. It took roughly 150 years for the SBC to admit that it had misread the bible. The SBC’s position became that the inerrant word of God prohibited slavery.

The thrust of this column is why law and economics will combine to push the SBC towards a similar reinterpretation of the bible – and in less than 150 years. The SBC’s pro-discrimination policies will be a nightmare for businesses and the U.S. military. This will make the states in which SBC members have decisive political power increasingly unattractive as sites for national and international firms. Consider first several examples that the SBC has already raised.

The SBC boycotted Disney for years. The resolution declaring the boycott cited two primary justifications. Disney provided health benefits to its employees’ domestic partners and gay groups organized nights in which large numbers of homosexuals would attend a Disney theme park. Providing benefits to employees’ domestic partners is a common benefit that corporations find useful as a means to recruit and retain superior employees. Disney did not organize the nights when gays met in large numbers at its theme parks. What was it supposed to do – demand to know whether the customer was gay and set a quota on how many gays it would admit?

Put yourself in the position of the President of Cox Newspapers while reading the following SBC resolution concerning another SBC action that seems to threaten or encourage another boycott.:

Resolution On Persecution Of Christians
June 1988

WHEREAS, The publisher of the Dayton Daily News in Dayton, Ohio, is a committed Christian and an active Southern Baptist; and

WHEREAS, The publisher, Dennis Shere, recently made a decision to refuse advertising by gay and lesbian groups due to their detrimental effects on the family and society; and

WHEREAS, The president of Cox Newspapers, Atlanta, Georgia, parent company of the Dayton Daily News, fired the publisher of the Dayton Daily News solely on the basis of the publisher’s decision as a Christian not to legitimize homosexuality by accepting advertisement from gay and lesbian organizations; and

WHEREAS, Cox Newspapers is national in scope, owning newspapers in many cities where Southern Baptists live, such as Austin, Waco, Longview, and Lufkin, Texas; Atlanta, Georgia; Miami and West Palm Beach, Florida; and numerous other communities across the country; and

WHEREAS, The action taken against the Christian publisher by Cox Newspapers has national ramifications since it sets a precedent for other newspapers to prohibit Christians from bringing their values to bear upon their profession.

Be it therefore, RESOLVED, That the messengers to the Southern Baptist Convention, meeting in San Antonio, Texas, June 14-16, 1988, express to Cox Newspapers, Inc., our outrage over the firing of a competent, highly professional Christian solely on the basis of the employee’s commitment to defend traditional moral and family values; and

Be it finally RESOLVED, That the messengers to the Southern Baptist Convention call upon all media to refuse advertising that promotes homosexuality or any other lifestyle that is destructive to the family.

Cox did not hire Mr. Shere so that he could “defend traditional moral and family values.” They hired him to run a profitable paper. Newspapers’ principal revenue source is selling advertising space. Refusing to sell advertising space to “gay and lesbian groups due to their detrimental effects on the family and society” harmed Cox’s business interests. It is also unlikely that Cox’s President believed that selling the advertising space would harm “the family and society.” Tens of millions of employees doubtless have idiosyncratic views that their employer disagrees with. Many American employees believe that “pagans”, Muslims, women, atheists, Latinos, blacks, people with diseases or sores, and Mormons harm “the family and society.” It is common for them to ascribe these discriminatory beliefs to their religious beliefs.

There is no evidence that Cox’s president “fir[ed] a competent, highly professional Christian solely on the basis of the employee’s commitment to defend traditional moral and family values.” Cox’s president fired him because he was harming the corporation.

Consider what would happen if Cox could not fire Shere as long as he held a religious belief in favor of discriminating against particular customers or employees. Assume that Shere announces he won’t take sell advertising to any homosexual, Muslim, or politician who is a member of the Democratic Party. This becomes the biggest story in Dayton. Competing media rush to mock the station. Tens of thousands of people cancel their subscriptions and their ads. Simultaneously, the SBC threatens a boycott of all Cox media if Shere is fired. The fired employees and excluded advertisers (who may have been sought to run anti-AIDS ads) and the EEOC begin to sue Cox and the Dayton paper. Jon Stewart features Cox and Shere on his show for three days. Cox will also face a nightmare in trying to hire future top employees if they can be fired at any time because a more senior officer felt that they were a sinner. Given the fact that everyone is a sinner the SBC “freedom to discriminate” doctrine would mean that bosses could now fire anyone with impunity because of their status or non-work conduct because they viewed that status or conduct as sinful. The SBC also claims that the employer should have the right to denounce the immorality of the customer or employee. These religious rants would harm employee morale and create extremely negative publicity for the firm.

The SBC made its demand for legal impunity for discrimination explicit in its resolution opposing the repeal of “don’t ask; don’t tell.”

Resolution On Homosexuality, Military Service And Civil Rights
June 1993

WHEREAS, Homosexuality is immoral, contrary to the Bible (Lev. 18:22; 1 Cor. 6:9-10) and contrary to traditional Judeo-Christian moral standards, and the open affirmation of homosexuality represents a sign of God’s surrendering a society to its perversions (Rom. 1:18-32); and

WHEREAS, Open and avowed homosexuality is incompatible with the requirements of military service according to high ranking military leaders and most military personnel; and

WHEREAS, Homosexual conduct is inconsistent with the Uniform Code of Military Justice and is detrimental to morale, unit cohesion, good order, discipline, and mission accomplishment; and

WHEREAS, Homosexuality in the military would endanger the life and health of military personnel by the increased exposure to sexually transmitted diseases and by enhanced danger of tainted blood in battlefield conditions; and

WHEREAS, Open homosexuality in the military would have significant adverse impact on the Pentagon’s budget including medical, legal and social costs; and

WHEREAS, Southern Baptist and other evangelical military chaplains may be pressured to compromise the essential gospel message, withhold their biblical convictions about this sexual perversion and submit to sensitivity training” concerning homosexuality if openly declared homosexuals are permitted to serve; and

WHEREAS, Southern Baptists and other evangelical members of the armed forces will be placed in compromising environments which will violate their conscience if the ban is lifted and will discourage other potential evangelical recruits from serving in the armed forces; and

WHEREAS, Homosexual politics is masquerading today as “civil rights,” in order to exploit the moral high ground of the civil rights movement even though homosexual conduct and other learned sexual deviance have nothing in common with the moral movement to stop discrimination against race and gender; and

WHEREAS, Government should not give special legal protection and endorsement to homosexuality, nor impose legal sanctions against those who believe homosexual conduct to be immoral.

Therefore, Be It RESOLVED, That we, the messengers to the Southern Baptist Convention, meeting at Houston, Texas, June 15-17, 1993, affirm the biblical truth that homosexuality is sin, as well as the biblical promise that all persons, including homosexuals, can receive abundant, new and eternal life by repenting of their sin and trusting Jesus Christ as Savior and Lord (1 Cor. 6:11); and

Be it further RESOLVED, That we oppose all effort to provide government endorsement, sanction, recognition, acceptance, or civil rights advantage on the basis of homosexuality; and

Be it further RESOLVED, That we oppose lifting the ban on homosexuals serving in the armed forces, and that we support passage of any legislation before Congress which restores and enforces the ban; and

Be it further RESOLVED, That we deplore acts of hatred or violence committed by homosexuals against those who take a stand for traditional morality as well as acts of hatred or violence committed against homosexuals; and

Be it finally RESOLVED, That we express our profound pride in and support of those who serve in the United States military, and for our chaplains in the military as they perform their ministry based on biblical principles and moral convictions, in an increasingly tumultuous environment.

Houston, Texas

The first thing that the resolution demonstrates is the lack of candor in Mohler’s op ed.

“We have demonstrated our own form of homophobia—not in the way that activists have used that word, but in the sense that we have been afraid to face this issue where it is most difficult . . . face to face.”

No, the SBC repeatedly demonstrated the conventional form of homophobia. Service members with “tainted blood” are discharged. (The SBC has blamed the AIDS epidemic primarily on homosexuals and further blamed them for the spread of AIDs to “innocent” victims.) The clause in the resolution that begins by deploring attacks by homosexual members of the armed services on non-homosexuals – as if straight-bashing was the problem in the armed services – is vile. It is reminiscent of the May 1906 SBC resolution against lynching that blamed the problem on unduly stringent court protections for rapists in the South and called for the removal of protections for the accused: “so that innocent and good people may rely on the law for protection rather than rush into irregular and dangerous force under methods of their own.” The resolution, of course, made no mention of the race of those being lynched in the South by the “innocent and good people.”

The SBC deepened its conventional form of homophobia in a more recent resolution about the repeal of “don’t ask; don’t tell.”

On Homosexuality And The United States Military
June 2010

“WHEREAS, The Bible describes homosexual behavior as both a contributing cause (Genesis 18:20-21; Leviticus 18:24-28; Jude 7) and a consequence of God’s judgment on nations and individuals (Romans 1:18-32);”

It’s subtle, but it’s nasty. “Homosexual behavior” is a “consequence” “of God’s judgment on nations and individuals.” Homosexuality is a curse. God has found certain “nations and individuals” guilty of being intrinsically degraded and cursed them. At this juncture the SBC sinks to the depths of Westboro Baptist and reprises the shameful history that rested on the ludicrous (but purportedly inerrant) claim that blacks were a degraded race consigned by God to slavery because they were the seed of Ham, who God had cursed (for ambiguous reasons).

The SBC resolution on the military calls on the United States not to: “impose legal sanctions against those who believe homosexual conduct to be immoral.” Again, even if that seems attractive to you the particular reader consider how many things the SBC teaches are “immoral” (swearing, yoga, and women holding positions of power over men). Under the SBC’s logic virtually anyone could be fired with impunity by any private sector employer. Indeed, if the SBC freedom to discriminate logic were adopted every corporation should immediately hire the most ultra-fundamentalist SBC member they can locate to head their HR department. Everybody does something the SBC consider “immoral” and the HR head could fire them with impunity.

The SBC’s demands for the “freedom” of it military chaplains should concern both the military and private and governmental employers.

“WHEREAS, Southern Baptist and other evangelical military chaplains may be pressured to compromise the essential gospel message, withhold their biblical convictions about this sexual perversion and submit to sensitivity training” concerning homosexuality if openly declared homosexuals are permitted to serve;”

First, whether homosexuals are closeted or out does not change any employer’s compelling interest that employees not spend their work time vilifying their colleagues. Second, the question is why any military chaplain, after the senior officers have decided to end discrimination against homosexuals, would think it appropriate to sermonize about “this sexual perversion.” The SBC teaches that God will consign the vast majority of humans to a literal, eternal hell. The SBC teaches that it is unbiblical to permit women to have a position of power over men. What is the military, or Ford Motor, supposed to do if it promotes a woman or a homosexual and a military chaplain or Ford employee responds by giving a sermon to the troops or posting throughout the office a rant denouncing the newly promoted officer as a heretic or a sexual pervert because of her gender or sexual orientation? “Biblical convictions” aren’t any more privileged than personal convictions in this context.

Anti-discrimination laws, conventional military discipline, and the economic incentives of for-profit firms are the best hope for the SBC leadership. They will discover that homosexuals aren’t depraved and female managers do not threaten any legitimate male interests. The military was strengthened when it stopped discriminating against non-whites and it will be strengthened by the end of legal discrimination against homosexuals. California will soon, whether by court decision or the next proposition, join New York in adopting marriage equality. Larger firms will find that states that continue to discriminate against homosexuals pose hiring and relocation difficulties. Heterosexual marriages will continue to be unaffected by marriage equality. The economic and moral pressures on the SBC will grow. The SBC leadership knows that its youth increasingly oppose its position on homosexuals and fears the continuing loss of disaffected members. The SBC, particularly the current leadership, has shown that it can reinterpret the bible. It will ultimately be the economy, our anti-discrimination laws and embrace of the morality of non-discrimination, and the need to keep its young that will lead the SBC leadership to find an exit strategy. The SBC’s position on religious impunity for discrimination and attacking one’s colleagues would be a nightmare for businesses. That is the principal reason why it will not prevail and why, this time, it won’t take the SBC 150 years to find an exit strategy.

Government Budget Deficits are Largely Nondiscretionary: the Case of the Great Recession of 2007

In previous blogs we have examined the three balances identity and established that the sum of deficits and surpluses across the three sectors (domestic private, government, and foreign) must be zero. We have also attempted to say something about causation because it is not enough to simply lay out identities. We have argued that while household income largely determines spending at the individual level, at the level of the economy as a whole it is best to reverse that causation: spending determines income.

Individual households can certainly decide to spend less in order to save more. But if all households were to try to spend less, this would reduce aggregate consumption and thus national income. Firms would reduce output, thus, would lay-off workers, cut the wage bill, and thereby lower household income. This is Keynes’s well-known “paradox of thrift”—trying to save more by cutting consumption will not increase saving. We’ll have more to say about that in later MMP blogs.

However there is an issue of immediate interest given the deficit hysteria that has gripped the United States (as well as many other countries). In the aftermath of the global financial crisis (GFC) social spending by government (for example, on unemployment compensations) has risen while tax revenues have collapsed. The deficit has grown rapidly leading to widespread fears of eventual insolvency or bankruptcy. Those, too, are issues for later blogs. The implication of growing deficits has been attempts to cut spending (and perhaps to increase taxes) to reduce deficits. The national conversation (in the US, the UK, and Greece, for example) presumes that government budget deficits are discretionary. If only the government were to try hard enough, it could slash its deficit.

As I have argued in previous blogs (particularly in responses to questions), however, anyone who proposes to cut government deficits must be prepared to project impacts on the other balances (private and foreign) because by identity the budget deficit cannot be reduced unless the private sector surplus or the foreign surplus (flip side to the domestic current account deficit) is reduced. In this blog, let us look at the rise of the US government budget deficit since the GFC hit. We will ask whether the deficit has been, and might be, under discretionary control—if not then that raises questions about the attempts by deficit hysterians to reduce deficits.

In the aftermath of the Great Recession of 2007, the US federal government budget moved sharply to large deficits. While many attributed this to various fiscal stimulus packages (including bail-outs of the auto industry and Wall Street), the largest portion of the increase in the deficit came from automatic stabilizers and not from discretionary spending. This is easily observable in the graph below which shows the rate of growth of tax revenues (mostly automatic), government consumption expenditures (somewhat discretionary) and transfer payments (again mostly automatic) relative to the same quarter of the previous year:

In 2005 tax revenues were humming, with a growth rate hitting 15% per year—far above GDP growth–hence, reducing non-government sector income—and faster than government spending, which grew just above 5%. Such fiscal tightening (called fiscal drag) often is followed by a downturn—and the downturn that accompanied the GFC was no exception. When it came, the budget deficits increased, mostly automatically. While government consumption expenditures remained relatively stable over the downturn (after a short spike in 2007-2008), the rate of growth of tax revenues dropped sharply from a 5% growth rate to a 10% negative growth rate over just three quarters (from Q 4 of 2007 to Q 2 of 2008), reaching another low of -15% in Q1 of 2009. Tax receipts quite simply fell off a cliff.

Transfer payments grew at an average rate of 10% since 2007, with the higher rate in part due to the rotten economy. Decreasing taxes coupled with increased transfer payments automatically pushed the budget into a larger deficit, notwithstanding the flat consumption expenditures. The automatic stabilizer–and not the bailouts or stimulus—is the main reason why the economy did not go into a freefall as it had in the Great Depression of the 1930s. As the economy slowed, the budget automatically went into a deficit putting a floor on aggregate demand. With countercyclical spending and pro-cyclical taxes, the government’s budget acts as a powerful automatic stabilizer: deficits increase sharply in a downturn.

The expansion before the GFC had been led (mostly) by the 2000s housing boom, during which households borrowed (and spent) on an unprecedented scale. We already visited the three balances that demonstrated the private sector taken as a whole deficit spent for almost a decade in the lead-up to the GFC. In the Clinton boom, about half the deficit spending was by firms; however in the 2000s boom it was entirely the household sector that spent more than its income. Both the Clinton boom and the 2000s boom caused the budget deficit to fall (and to actually move into a large surplus during the Clinton years).

Since the crash, the household sector has retrenched (as it always does in recession), and saving remains high. Slow growth has been the major cause of the rapidly growing budget deficit—and the slow growth, in turn, is due to a high propensity to save by the retrenching household sector. See the next graph (thanks to Dimitri Papadimitriou of the Levy Economics Institute for providing the next two graphs to me):

What we see is a rather remarkable reduction of household saving on trend since the mid-1980s. The cause is beyond the scope of this blog. But the flip-side to that has been the rise of household debt. That trend turned around sharply after the GFC, with households saving like it was 1992 all over again. Given loss of jobs, and stagnant incomes (at best) for most Americans, the notion that the household propensity to spend will sharply reverse course seems unlikely.

As we discussed above, shrinking the government’s deficit will require either that the private sector spend more relative to its income or that the US current account deficit fall sharply. But households are still heavily indebted and indeed more and more homeowners are falling “underwater”—so the likelihood that they will drop saving back down to the 2-3% range we saw in the 2000s seems unlikely. (Note that saving as a percent of disposable income is not exactly the same as the household balance that goes into our three sector balance equation. That is why although this is a small positive saving number, in the sectoral balances equation households actually spent more than their income. See the note at the end of this blog for the wonky stuff.)

Another possibility is a domestic private business sector boom. That, too is unlikely with high unemployment and depressed domestic demand and stagnant sales—investment by firms is not going to grow that much. (I won’t go into it here, but there is a lot of evidence that “investment-led booms” are really residential housing investment booms—housing construction is included in investment numbers–and there is little chance that we will see a housing construction boom in the near future.)

The final possibility is the foreign sector. The next graph shows US imports and exports on current account.

Imports are running around 18% of GDP (rebounding sharply since the GFC) and exports are at 14% of GDP—so exports are up, but imports are climbing a bit faster (this difference is mostly due to oil). While it is true that the US current account balance has become less negative in recent months, much more movement will be required to actually get to positive territory (more than 3% of GDP of adjustment would be required). Note that the last time we actually had a positive current account balance was in the Bush, Sr., recession—two decades ago.

Remember, to reduce the government sector deficit from the current 9% or so of GDP toward balance will require some combination of a private sector movement toward deficit and a current account movement toward surplus amounting to a total of 9% points of GDP. That is huge. The problem is that actually trying to balance the budget through spending cuts or tax increases could reduce economic growth (I think it will actually cause a sharp downturn, but I do not need to make that case). Lower economic growth could conceivably reduce our current account deficit—by making Americans too poor to buy imports, by lowering US wages and prices to make our exports more competitive, and by reducing the value of the dollar. Note that all of those are painful adjustments for Americans. And it might not work, because it requires the US to slow without that affecting the global economy—if it also slows, US exports will not increase.

Now, deficit warriors insist that cutting government will induce faster growth of the private sector. If that were true, it actually makes it easier to reduce the budget deficit—as the private sector’s balance worsens toward deficit. On the other hand, more rapid growth will probably cause deterioration of the current account deficit (our imports will rise; our wages and prices will not fall; and the dollar could gain strength). That in turn must be matched by some combination of private sector and government sector movements toward deficits. The US has a higher propensity to import than do our trading partners—what that means is that if we grow at about the same rate as the rest of the world, our imports grow faster than our exports.

So, to balance the government’s budget we need to grow faster, but faster growth will probably increase our current account deficit so that the three balances identity will imply either that our private sector returns to excessive spending (as it did for the past decade) or that the government’s deficit cannot be reduced. It is something of a Hobson’s choice—with no morality implied—because what appears to be a “free choice” of reducing the budget deficit through faster growth means we actually are accepting bigger household debts and a bigger current account deficit.

That is the problem with analysis and policy recommendations that do not take account of the three balances—they ignore what is implied for the other balances.

Let us summarize the points. First, the three balances must balance to zero. This implies it is impossible to change one of the balances without having a change in at least one other. Second, at the aggregate level, spending (mostly) determines income. A sector can spend more than its income, but that means another spends less. While we can take government spending as more-or-less discretionary, government tax revenue (its equivalent to its income) depends largely on economic performance. Chart 1 above showed that tax receipt growth is highly variable, moving pro-cyclically (growing rapidly in boom and collapsing in slump).

Government can always decide to spend more (yes, it is politically constrained), and it can always decide to raise tax rates (again, given political constraints), but it cannot decide what its tax revenue will be because we apply a tax rate to variables like income and wealth that are outside government control. And that means the budgetary outcome—whether surplus, balanced, or deficit—is not really discretionary.

Turning to our foreign sector, exports are largely outside control of the US (we say they are “exogenous” or “autonomous to US income”). They depend on lots of factors, including growth in the rest of the world, US exchange rates, trade policy, and relative prices and wages (US efforts to increase exports will almost certainly lead to responses abroad). It is true that economic outcomes in the US can influence exports (as discussed, slower US growth can slow global growth)—but impacts of policy on exports are loose.

On the other hand, US imports depend largely on US income (plus exchange rates, relative wages and prices, and trade policy; again, if the US tried to reduce imports this would almost certainly lead to responses by trading partners that are pursuing trade-led growth). Imports are largely pro-cyclical, too. Again, our current account outcome—whether deficit, surplus, or balanced—is also largely nondiscretionary.

What is discretionary? Domestic spending—by households, firms, and government—is largely discretionary. And spending largely determines our income. Sectoral balances, however, should be taken as mostly nondiscretionary because they depend in very complex ways on the discretionary variables plus the nondiscretionary variables and on the constraints imposed by the macro identity. It makes most sense to promote spending that will utilize domestic resources close to capacity, and then let sectoral balances fall where they may. As we will argue in coming months, the best domestic policy is to pursue full employment and price stability—not to target arbitrary government deficit or debt limits, which are mostly nondiscretionary, anyway.

Note 1: The main differences between the personal saving rate and the household net saving as a % of GDP are the following (thanks to Scott Fullwiler):

  1. Household net saving is as a % of GDP, whereas personal saving rate is as a % of disposable income
  2. Household net saving subtracts all household spending, including consumption and residential investment, whereas personal saving only subtracts consumption spending

A few additional smaller differences for the really wonky:

  1. Household net saving adds an allowance for household capital consumption (i.e., depreciation), personal saving doesn’t,
  2. Household net saving imputes insurance and pension reserves to households from govt sector, personal saving doesn’t, and
  3. Household net saving includes wage accruals less disbursements from businesses to households, personal saving doesn’t.

Note 2: Thanks to the MMT gang. You know who you are.