By Michael Hoexter, Ph.D.
We have come to accept in the Orwellian world of mass communication and media spin that pressure groups and political organizations name themselves in ways that contradict their actual mission. We have become cynical about truth and about good intentions, trusting only after long observation certain political actors and then only reservedly. There is now such an alphabet soup of organizations in Washington, a veritable smorgasbord of lobbyists that only political junkies and Washington insiders will know every acronym and player.
However there is a constellation of particularly influential groupings in Washington that should be known by every American for what they are and what they are not. These groups form a powerful hub at the center of the fiscal austerity campaign. Purveying an economics based on political pose and hunch, these groups have relied on the deep pockets of Wall Street billionaire Pete Peterson and others from the financial industry to fund their activities involving sometimes massive lobbying, publicity, and astroturf “grassroots” activism. Utilizing strategies reminiscent of the mid-20th Century American Communist Party, Peterson’s overall tactic has been to found and/or fund a number of front organizations to create the illusion of a broad consensus arrayed in favor of his personal views, which are shared for the most part by a wealthy few within the financial and political elites. These views in turn are extremely unpopular with the electorate, particularly as regards cutting or partially privatizing universal social programs like Social Security and Medicare.
The current “Central Committee” of the fiscal austerity drive is the Committee for a Responsible Federal Budget that has been cleverly sited at the liberal New America Foundation. The directors of the CRFB include Peterson, Erskine Bowles, Alan Simpson, Alice Rivlin, as well as a number of conservative Democrats and “centrist” Republicans. The composition of the board overall reflects a cross-section of Washington elite opinion that is ignorant of basic macroeconomics but attempts to portray this ignorance, or apparent ignorance, as virtue. The menagerie of political opinion collected there shares a common belief in the private or non-government ownership of the US dollar, which according to them, is either taxed away from private citizens for government use or is borrowed from foreigners.
The greatest coup of the deficit hawks so far has been fostering an alliance with President Barack Obama, who has turned out to be as committed to fiscal austerity as almost any Democrat and more than many Republicans. Obama appointed two of Washington’s deficit hawks, Erskine Bowles and Alan Simpson, to head his bipartisan “National Commission on Fiscal Responsibility and Reform”. Obama’s true belief in the fiscal austerity “meme” may come from a number of sources: a naturally conservative character, a belief in bipartisanship as an end in itself, a long-term political strategy of protecting his right flank, endorsement of neoliberal principles altogether and perhaps, an interest in graduating to a comfortable post-Presidency mingling with the Washington and Wall Street elites. Overall Obama has governed as a moderate conservative rather than the liberal that his right-wing critics portray him as and that progressives wish he had been. Obama seems entirely in his element satirizing the now marginalized “Left” in the US and is hesitant, surprisingly inarticulate, and a little awestruck when he is attacked from the Right. The deficit hawks’ apparent victory consists not only in having an ideological ally in the White House but furthermore having that ally be the leader of the “left-ward” major political party in the US. This has pacified the resistance to austerity in the US so far.
Mishandling the Tool of the Currency and Government Spending
At its heart, the Peterson campaign is based on common misconceptions about what money is and where it comes from. It bases its popularity on the psychology of the abandoned gold standard, which still has a following in the right-ward side of the electorate. Unlike the mental model of money that goldbugs promote, the value of money is not fixed in a set of objects, especially in our current era of fiat currencies, but a representation of what people owe each other and the real value to people that can be obtained by spending it; it is a tool most often provided by governments to market participants but also applied by governments to achieve the public purpose, i.e. the fulfillment of “the social contract”, however construed. Governments with their own currencies must be free to respond to economic conditions and spend on vital programs and in quantities depending on how the public purpose is defined by the polity as a whole. One of the pillars of the American social contract has been social mobility enabled by economic growth. While the Peterson-funded campaigners would claim that they too are “for” economic growth, their preferred policies stifle economic growth by throttling government spending.
Economic growth and broadly shared prosperity are a matter of simple arithmetic that escapes Peterson, those who are in his thrall and/or those who have inhaled of the myths of market fundamentalism too deeply: all of the net gains in wealth of the private sector on an annual basis are the sum of the balance of trade plus the sum of the government budget deficit. All net gains made by the private sector, which includes private businesses and households, are the sum of the deficits of the government and the rest of the world. If the government runs a surplus, i.e. taxes more than it spends, it takes away in net from the domestic private sector and the “rest of the world”. Peterson and his retinue claim that government budget balancing will lead to the reward of “confidence” from the private sector, which obviously an examination of the numbers doesn’t support. In reality, actual business confidence, rather than the ideological-cudgel version favored by Peterson and his lackeys, would require greater government spending than taxation, and more so in the present conditions of lowered private demand and private over-indebtedness.
Government is responsible for upholding the social contract, which involves consideration of a number of social and environmental factors that private businesses in their activities and contractual negotiations do not generally account for or encompass. One aspect of that social contract is “meta-business ethics” the legal and regulatory structure that “referees” business transactions. Sometimes the social contract must be renegotiated because economic and social conditions change: this renegotiation process most often costs money (mobilization of real economic resources) which is sustained by government spending. Disguised as “conservatives” or “centrists”, the deficit hawks are attempting to radically rewrite the social contract with the assumption that it is just another business contract, with a similarly narrow focus and without regard for the “meta-business” framework which government must provide in order for a workable civilization to be maintained.
The narrative that the Peterson groups purvey suggests to federal legislators that they do not have the policy space to spend beyond taxes collected when this is in fact not the case, as the Treasury in combination with the Federal Reserve under Congress’s supervision can “mark up bank accounts” with no meaningful affordability constraints. The government has the ability to spend in “deficit” unlimitedly because the government does not need to tax or borrow the currency which it creates by spending. Whether it should do this for one or the other expenditure is a matter of political discussion but the arbitrary limit of expenditure to taxes collected or, even worse, efforts to collect more taxes than spending, hampers the stabilizing effect and leadership role of government in our inevitably mixed economy. Real economic considerations that would limit spending are
a) inflation above a certain politically determined limit (not continually predicting hyperinflation when government spends money),
b) currency depreciation/appreciation beyond a certain politically determined limit,
c) the diversion of real resources from the private sector into the public sector beyond some political-economically determined limit. i.e. how large a public sector do you need to fulfill the public purpose but not larger?
None of these constraints are arrived at via counting how much money has been collected in taxes. Instead, their determination requires actual macroeconomic analyses and serious, reality-based political-ethical discussions, analyses and serious discussions which the deficit hawks are unable to produce.
Now more than ever, the real effects of increased government spending, particularly on projects that produce public goods of high value and also increase employment, have a very high net positive value for the economy. The budgetary rule that Peterson and the so-called Center for a Responsible Federal Budget would like to impose leads American legislators exactly in the direction of the mistakes of the founders of the Euro-Zone when they agreed to limit deficit spending to 3% of GDP, not thinking that a financial crisis could hit, requiring governments to counteract a downturn in the private economy. Equally their efforts to lame the spending capacity of government so that it conforms to rules that ordinary households must use could not meet the enormous challenges of disasters such as Hurricane Sandy. The Peterson crowd would have Washington tailor government’s spending to fit a self-satisfied businessman’s fantasy about government’s economic role rather than its real economic role. Thus the Center for a Responsible Federal Budget and allied organizations like the Concord Coalition preach a deep fiscal irresponsibility.
“Responsible” Only to a Misinterpretation of Financial Market Sentiment
The deficit hawk narrative has become all too familiar in the times when there is a Democrat in the Presidency, nominally the leftward of the two main political parties in the US. People like Peterson warn that “entitlements” are bankrupting the government or making financial markets frown on buying the debt issued by the US Treasury. The President of Peterson’s Committee for a Responsible Federal Budget, Maya MacGuineas, has called herself at other times in her career a “bond vigilante”, and has a background in financial services. The “bond vigilantes”, supposed enforcers of rough “justice” in the bond markets, talk up their displeasure at government embarking upon ambitious programs of spending that benefit ordinary people rather than elites.
As it turns out, bond markets are only too happy to buy the bonds of the US, Japan and other nations that control their own currencies, whatever the level of indebtedness of those national governments. The notion that bond vigilantes are frowning on the deficit spending of governments is only true in circumstances where a government does not control its own currency or pegs its currency to a foreign currency. The story that they are particularly opposed to social spending is a political fabrication that may reflect the social outlook of financial market speculators and investors but not necessarily their bond-buying behavior.
The focus on bond markets and their sentiments inverts the priorities of government, tuning fiscal policy to a side-effect, the selling of bonds in the amount of budget deficits, of the current deficit spending arrangements of the US government and a hold-over from the era of convertible currencies. Peterson and CRFB would have misplaced fears about bond market sentiment and the opinions of foreign investors about the US rule the fiscal arrangements of the US government. He would trap legislators and political discourse in the era of the gold standard while attempting to sequester the power of the fiat currency issuing government for the use of the financial elite. Ultimately national sovereignty is at stake and Peterson’s and the deficit hawks’ advice jeopardizes national sovereignty, while falsely claiming to do the opposite.
Irresponsible to the American People
One of the primary purposes of the fiscal arrangements of the US government is to enable the pursuit of happiness for the American people as a whole, however that is defined at a given point in time in the political, social and ethical development of the polity of the United States. The rules that Peterson’s deficit hawks would impose on the federal government would short-circuit this mission of government and tie the fiscal operations of government to the short-term interests of the speculative and rentier financial interests that helped bring down the world economy in 2007-2008.
Wall Street has for a long time, had its eye on privatizing the markets for old age pensions and insurance, which are currently anchored by Social Security and Medicare. Furthermore Wall Street titans fear government will re-regulate them as happened in the period after the last great financial crash in 1929. Re-regulation of Wall Street in favor of the real economy and ordinary debtors would under many scenarios mean credit writedowns or some form of devaluation of the asset holdings of Wall Street to enable repayment of these restructured debts from the reduced incomes of our current era relative to the valuation of these assets dating from the peak of the bubble. These bankers are unwilling or unable to take losses in their portfolios in order to start the economy on a new path. In some scenarios banks would be nationalized, their managements thrown out, and then broken up and restructured. The austerity drive, originating among the Wall Street elite and popular there, is a way to distract from these issues of the real economy and lame government as a potential regulator, as well as prospectively weaken the provision of social insurance by government to enable the eventual takeover of these functions by Wall Street.
Resurrecting and re-regulating the private credit system is not the only or most important responsibility of government at this time. Since the invention of macroeconomics in the wake of the last Great Depression, it has been government’s role to be relatively generous in a downturn, to spend in a counter-cyclical manner, when people are unwilling or unable to invest in the future. While war-time government spending on both sides in the World War II were some of the most dramatic forms of economic stimulus of that period, governments have continued since then to spend more in times when businesses were spending less.
Critical public goods, like schools, public services, and transport systems are decaying in America while unemployment is at high levels. Median and below median incomes have stagnated. Investing in public infrastructure is crucially important both during times of prosperity and times of crisis. Investment in public education is declining. All of these investments are necessities for America to decisively enter the 21st Century and these necessities require not just rhetoric but spending to succeed. The path of direct investment in these public goods has yielded the most success in countries around the world, yet we in the United States continue to avoid the obvious. Vainly, some call upon the private market to provide public goods at lesser public expenditure but this path has proven to be an ideological sinkhole. In the years in which Americans have played around with “market solutions” to the provision of public goods, its world ranking in areas like infrastructure and healthcare have sunk in international comparisons. In a recent rankings of prosperity of nations and cities, the United States did not make the top ten in either category, a sign of the failure of the market fundamentalism/neoliberalism to deliver on its promise of riches for the many, rather than simply for the few.
While many of these investments would re-employ skilled workers, there is also a broader category of the unemployed which require more support in entering the workforce. Government should create a WPA style jobs program, a job guarantee for all who are willing to work for a reasonable minimum wage. This program would provide the work environment necessary for some of the long-term unemployed to get a foothold in the labor market to enter the private sector or public sector job markets if they so chose. Such a program could offer additional social services like day-care that would enable parents with young children to participate in the job market if they so chose.
This government spending, above the amount of taxes collected, would have the additional, though critically important virtue of spurring aggregate demand for both the goods and services directly purchased by government but also to stimulate the economy more generally as that income was re-spent throughout the economy. A necessary element of economic growth in all nations, especially those with trade deficits will always be government spending more money than it collects in taxes, a fact of macroeconomics that has escaped those who have not thought it through.
The pursuit of budget balancing and reducing public debt is then an abandonment of responsibility of government to enable the pursuit of happiness as some form of broadly shared prosperity, enabled by government provision of basic social insurance and maintenance of full employment levels. In claiming that they represent responsibility to the phantom demands of bond markets or the arbitrary amounts of taxes collected in a given year, Peterson and the Center for a Responsible Federal Budget are asking lawmakers to abandon now or at some future point in time, most of the current responsibilities of government as regards the real American economy.
Irresponsible in the Face of the Climate and Energy Crises
The pursuit of an irrelevant budgetary rule to suit the vanity of an old man is the height of fiscal irresponsibility in the face of the most important challenge for the US and the world as a planetary civilization. The calamity of Hurricane Sandy is only the latest reminder of a climate becoming increasingly hostile to the designs of human beings, an indication of the role of rising global temperatures in spurring extreme weather events. These rising average temperatures are in large part driven or accelerated by human activity, most often emissions of greenhouse gases like carbon dioxide.
To reduce carbon emissions substantially and make lines of communication and the commons more resilient to the effects of climate change, government will play a crucial role, spending billions and trillions to build new infrastructure that will utilize renewable energy and draw lesser amounts of energy overall.to achieve a comfortable standard of living. The spending to build these types of public goods is best motivated not by profit for specific individuals and families but by a desire to invest in a common future, much as the road network has been built in the United States. To privatize public infrastructure, as is sometimes currently advocated, is a kneejerk reaction to local governments starved of federal funding in a recession and would yield a neofeudal tollbooth economy with higher transaction costs and still greater social inequality.
With adequate explanation by political leaders about the necessity to insulate society from the depletion of fossil fuels as well as reduce their negative effects on the natural basis of our livelihoods, we, the members of the private sector, would be all too willing to accept these fiat issued dollars to build that infrastructure through our labor and exchange of goods and services. We would with excitement await the day when we or our children would be able to use this infrastructure in the conduct of our lives in a society that was wiser for the excesses of the 20th Century.
Such a society would be hard at work in caring for itself as well as creating the basis for a post-carbon civilization as an expression of care for future generations. If the spending of government on these projects were to create unacceptable levels of inflation in concrete or steel or other construction materials, targeted taxation or price controls could be brought in to dampen inflationary pressure. A mixture of market mechanisms, regulation, and government direct investment would yield the quickest results in our time of increasing need to simply save our society and a functioning economy.
The irreplaceable benefits of the climate in which our species evolved are far more valuable than the imaginary storehouse of monetary treasure, modeled after the bullion reserves of old, with which the deficit hawks would like us to think the government operates. The currency issuing power of government enables resources to be mobilized to help save the most valuable real assets we have, the environment which enables us and future generations to keep on living.