In July 2011, President Obama and Speaker Boehner reached an agreement in principle on a deal crafted to inflict $4 trillion in austerity by raising taxes modestly, slashing social spending, and beginning to unravel the safety net. The deal would have been a disaster for America. Unemployment was 9.1%. The deal would have thrown us back into a recession and caused unemployment to surge. Recessions and increased unemployment cause tax revenues to fall and increase demand for social services (e.g., for unemployment compensation) – they produce large deficits. Austerity kills jobs and frequently increases deficits. The Eurozone is the latest demonstration of this fact.
We should, therefore, all be celebrating the failure of the July 2011 austerity deal. We almost committed an act of economic self-mutilation of tragic proportions. Instead, because of the failure to adopt austerity in July 2011 we followed an economic policy based on modest stimulus. As predicted by most economists (including my UMKC colleagues) that policy produced modest growth and modest reductions in unemployment. The recovery produced the sharpest reduction in budgetary deficits in modern U.S. history. The Eurozone’s leaders’ austerity policies forced many nations back into recession. Austerity was most draconian in the periphery where it produced Great Depression levels of unemployment, particularly for young adults. The dominant media meme about the “fiscal cliff” is that it is an insane austerity program that would force the U.S. back into a gratuitous recession and cause large increases in unemployment. Logically, that should cause the media to recognize that the far more severe austerity blows that Obama and Boehner sought to inflict on the U.S. in July 2011 at a time when our economic recovery was much weaker than it is today would have been disastrous and that we should be overjoyed that the deal fell apart.
The media, however, constantly warns us of the need not to repeat the “failure” to reach the July 2011 deal. They show no sign of recognizing the logical incoherence in simultaneously warning that the fiscal cliff’s austerity must be avoided lest it force the nation back into recession and that it is urgent that we adopt austerity. Media reports virtually never explain that if the July 2011 austerity deal had been finalized the results would have been catastrophic.
The media is similarly incoherent when discussing (more precisely, ignoring) another key aspect of the fiscal cliff – its origins. The “fiscal cliff” is not really a cliff, but it is definitely an economically illiterate and self-destructive austerity program. That is the first key analytical aspect of the origins of the fiscal cliff – it was known to be an economically illiterate and self-destructive austerity program when it was adopted. The obvious question, which the general media studiously ignores, is why the parties agreed to the “fiscal cliff” deal when it was obvious that it would cause catastrophic damage to our economy and people. The “fiscal cliff” (austerity) deal is the deal that did not fail – it was the bipartisan deal that became law in August 2011.
It is revealing that no one in the media even attempts anymore to defend the bipartisan fiscal cliff (austerity) deal. The media normally have a romantic crush on anything bipartisan, no matter how much it harms the nation. The fiscal cliff austerity deal is so obviously stupid that even the media almost universally criticize it. This should prompt three obvious questions.
- What idiot designed the fiscal cliff (austerity) deal?
- Why did both parties support it?
- Why did the media not denounce the deal before it was adopted?
The answers are:
- President Obama took the lead in crafting the “fiscal cliff.” He did so with terrible counsel provided by Treasury Secretary Geithner and William Daley, Obama’s chief of staff (Wall Street’s leading representative within the administration and, like Geithner, a strong opponent of stimulus and a strong proponent of austerity).
- Both parties “knew” that austerity was essential.
- The media “knew” that austerity was essential.
Obama is the person in the world who benefitted most from the failure of the July 2011 austerity deal he reached in principle with Boehner. If the austerity deal had been finalized the nation would have be forced back into recession. Unemployment was 9.1% in July 2011. It would have risen sharply above 10% and it would have gone up every month in 2012 as the election approached. Obama would have been crushed by Governor Romney. The irony is that Obama tried five times in 2011 to inflict austerity on America. Had he succeeded, he would have caused grave damage to our nation. Had he succeeded in inflicting austerity he would have also destroyed his re-election chances, given the Republicans control of the U.S. Senate, slashed public services when they were most needed, and begun the process of destroying the safety net. He would have gone down in history as a grotesque failure.
Obama’s first major effort to inflict austerity on the nation in 2011 was his July austerity deal in principle with Boehner. Their shared goal was a $4 trillion austerity program with mild increases in tax revenues and fierce cuts to social programs and the safety net.
Obama’s second effort to inflict austerity was the creation of the “fiscal cliff” austerity deal in August 2011. The premise of the August deal was that austerity needed to be inflicted on America.
Debt-Ceiling Deal: President Obama Signs Bill as Next Fight Looms
By DEVIN DWYER and SUNLEN MILLER
Aug. 2, 2011—
U.S. Averts First-Ever Default but Economic Impact Still Uncertain
“‘It’s an important first step to ensuring that as a nation we live within our means, yet it also allows us to keep making key investments in things like education and research that lead to new jobs and assures that we’re not cutting too abruptly while the economy’s still fragile,’ Obama said in a statement from the White House Rose Garden before signing the bill.
‘I’ve said it before, I’ll say it again,’ Obama said. ‘We can’t balance the budget on the backs of the very people who have borne the brunt of this recession. Everyone has to chip in. It’s only fair. That’s the principle I’ll be fighting for in the next phase.’”
I know that these statements by Obama strike many Americans as sensible, but they betray a basic misunderstanding of economics and explain why he embraces austerity. We are a nation with a sovereign currency. Our national government is nothing like a household. “Balancing the budget” (“live within our means”) in response to the Great Recession is austerity. Austerity is a disastrous policy in such circumstances because it causes nations to fall back into recession or depression.
The issue is not “fair[ness]” through joint sacrifice. If “everyone” “chip[s] in” through austerity it still produces a gratuitous recession or depression. That is not “fair” – it is insane – there is no such thing as a “fair” recession. “Fighting” for “fair” austerity so that everyone suffers equally through a “fair” recession is impossible because recessions cause increased unemployment, which is inherently unfair. But the more essential point is that it is insane to cause recessions through austerity. That’s the principle for which we fight at UMKC. The economic crises we face are jobs and homes.
Similarly, you do not “cut” federal spending when the economy is operating well before full capacity because of a Great Recession. Obama’s stated policy was to cut federal spending in 2011, but not “too abruptly.” Cutting overall spending in response to a Great Recession causes gratuitous recessions, even if you make “key investments.”
Obama intended the prospect of the fiscal cliff’s dramatic mandatory cuts in social programs to extort progressive Congressional Democrats into agreeing to inflict severe austerity by voting in favor of what Obama hoped would be massive cuts in social programs and the safety net adopted by the Congressional “super committee” created by the same bipartisan austerity deal that created the “fiscal cliff.” Obama encouraged the “super committee” to inflict massive spending cuts and tax increases (super-sized austerity).
Obama’s fourth effort occurred during the super committee negotiations. Some members of Congress opposed the imposition of the “fiscal cliff” austerity provisions and sought to remove, delay, or reduce them. Obama intervened to block any effort to avoid or reduce the austerity inflicted by the “fiscal cliff.”
“President Obama called the Democratic and Republican chairmen of Congress’s special deficit reduction supercommittee Friday and urged them to reach a deal….
But he also carried another message: Congress should not undo the painful consequences for failing to reach a deal that were agreed to when the supercommittee was created in the August debt deal.
But the so-called sequester could not be undone without a sign-off from Obama, and he made clear Friday that he would not agree.
‘The sequester was agreed to by both parties to ensure there was a meaningful enforcement mechanism to force a result from the Committee,’ the White House said in a statement. ‘Congress must not shirk its responsibilities. The American people deserve to have their leaders come together and make the tough choices necessary to live within our means, just as American families do every day in these tough economic times.’
He urged them to strike a deal that would cut both entitlements and raise revenues.”
Yes, President Obama “urged” the infliction of severe austerity through cuts in the safety net, massive cuts in social programs, and deliberately created and used the “fiscal cliff’s” self-destructive austerity threat to extort these betrayals of the American people. His surrogates (Erskine Bowles and Alan Simpson – the co-chairs of Obama’s austerity commission) pushed the “super committee” to “go big” and inflict $4 trillion in austerity. (Simpson predicted that the markets would “tank” absent such an austerity deal.)
Obama urged austerity under the “logic” that a national government with a sovereign currency is “just” like a household – the most basic and common economic error in this field. The President of the United States thinks that the U.S. government is “just” like a household and should try to balance the budget (“live within our means”) through austerity in response to the Great Recession. He also thinks we should seize the political opportunity, even if it had nothing to do with the budget deficit, to begin to unravel the safety net. It is this sad record that led me (and many others) to warn before the election that Obama’s effort to secure a “Grand Bargain” constituted a “Great Betrayal” motivated by his desire to create his legacy. Obama’s self-portrait is that he was willing to agree to sacrifice his Party’s greatest accomplishments (the safety net) in order to secure a bipartisan agreement imposing austerity. The actual sacrifices, however, will be made by the elderly, the poor, and the working class, the victims of his betrayal. If Obama succeeds in producing another recession through austerity you can add the nation to the list of sacrificial victims.
When the super committee failed to reach a bipartisan austerity deal in November 2011, members of Congress sought to pass legislation removing the fiscal cliff’s austerity provisions. Obama’s fifth effort to inflict austerity occurred when he threatened to veto any reduction in fiscal cliff austerity.
Nov 21, 2011 4:52pm
Obama Threatens Veto on Bid to Avoid Automatic Cuts as Supercommittee Fails
“President Obama said today he will veto any efforts to get rid of the automatic spending cuts that will be triggered by the supercommittee’s failure to reach a bipartisan solution to deficit reduction.
‘There will be no easy off-ramps on this one. We need to keep the pressure up to compromise, not turn off the pressure,’ the president said this evening. ‘The only way these spending cuts will not take place is if Congress gets back to work and agrees on a balanced plan to reduce the deficit by at least $1.2 trillion.’”
Fortunately for the nation (and Obama), fate conspired to cause four of Obama’s efforts to inflict austerity to fail while the fifth (the “fiscal cliff”) does not begin to kick in until 2013. For opposite reasons, the Tea Party and progressive Democrats have interacted in a manner that blocked Obama’s efforts to inflict austerity on the nation. (The Tea Party loves austerity, but hates even modest tax increases for the wealthy.)
Obama was not an outlier in repeatedly seeking to inflict austerity on the nation in 2011: “about 100 members of Congress from both parties are urging the [super committee] to go big on the reductions, to the tune of $4 trillion.”
The general media did not warn about the insanity of inflicting the “fiscal cliff” austerity program on the nation. Instead, it fed the hysteria about the deficit and urged even greater austerity. The New York Times exemplifies the general response. The title of their article about the August 2011 austerity deal that created the “fiscal cliff” set the pro-austerity tone.
August 2, 2011
Spending Cuts Seen as Step, Not as Cure
The thrust of the article was that the proponents of the August 2011 bipartisan austerity deal had to defend it against charges that it imposed too little austerity. The article also claimed that while economists were divided on the issue, most economists favored austerity. Our national debt was about to cause interest rates to surge, causing a disastrous feedback loop.
“Proponents of the deal counter that it is an important first step, constrained by the political realities of divided government.
‘Is this the deal I would have preferred? No,’ Mr. Obama said Sunday in announcing the agreement. ‘But this compromise does make a serious down payment on the deficit reduction we need, and gives each party a strong incentive to get a balanced plan done before the end of the year.’”
The problem facing the nation has been clear for some time. The Congressional Budget Office estimates that the federal debt is likely to exceed 100 percent of the nation’s annual economic output by 2021, largely because of the rising cost of Medicare, Medicaid and Social Security.
Americans will face higher taxes, particularly as investors begin to demand higher interest rates. Economists disagree about the amount of debt a nation can safely carry relative to the size of its economy, but there is widespread concern that 100 percent is too much, and that the weight of debt would begin to suppress economic activity.
All of this was economically illiterate. Interest rates fell, as my colleagues and economists like Paul Krugman predicted. Inflicting austerity in response to a Great Recession is a superb strategy for increasing unemployment, the deficit, inequality, and debt because it reduces already inadequate private and public sector demand and causes recessions and depressions. Even the modest stimulus policy the U.S. followed despite Obama’s and Boehner’s best efforts to inflict austerity, proved vastly superior to the Eurozone’s austerity policy that forced the Eurozone into recession and much of the periphery into Great Depression levels of unemployment. The U.S. budget deficit has fallen at the fastest rate in modern history due to the success of even the greatly inadequate stimulus program that Obama adopted before he turned against stimulus under Geithner and Daley’s influence. America’s problem is jobs, not the deficit.
Beware of anyone who uses phrases like “down payment” when it comes to the federal deficit for they have no meaning and are designed to mislead. Reducing social spending in response to the Great Recession is austerity – not a “down payment on … deficit reduction.” Indeed, it is likely to increase the deficit by causing a recession.
Geithner also spoke in favor of the August deal, and he completed the pro-austerity mantra by invoking what Paul Krugman has aptly dubbed the “confidence fairy.”
“‘You’re going to see this basic underlying growth we’ve see in the United States improve over time because people will be more confident we can live within our means,’ [Geithner] said. ‘With more confidence we can get our arms around this long term. We will have more room to do the things we need to strengthen investment jobs now.’”
The confidence fairy stubbornly refuses to appear, but Geithner’s faith in fairies abides.
Note Obama’s explanation for why he approved the August 2011 austerity program. He was delighted that the “fiscal cliff” provision imposed “a strong incentive” on Democrats to agree to inflict severe cuts in social programs and the safety net. Obama issued a formal statement embracing (1) austerity, (2) the “fiscal cliff” as a device to force Congress to inflict austerity, and (3) the claim that the federal government is just like a household and should balance its budget (“live within our means”).
“‘The sequester was agreed to by both parties to ensure there was a meaningful enforcement mechanism to force a result from the Committee,’ the White House said in a statement. ‘Congress must not shirk its responsibilities. The American people deserve to have their leaders come together and make the tough choices necessary to live within our means, just as American families do every day in these tough economic times.’” – Washington Post
Austerity is not a “tough choice.” It is a vicious, self-destructive policy that is the result of equal parts ignorance and inhuman indifference to the senseless suffering it causes. Obama and the nation have been saved from austerity by luck, the Tea Party’s extremism, and progressive Democrats’ refusal to be bullied or panicked by Obama’s and the general media’s hysterical and false claims about deficits and the safety net. Obama’s pitch for austerity and unraveling the safety net cannot withstand even cursory review. His “logic” is:
- We must act urgently to avoid the “fiscal cliff” because it would inflict austerity and force the nation back into a gratuitous recession, and therefore,
- We must urgently adopt a budget deal that inflicts even greater austerity and begins to destroy the safety net
As our Senator, Claire McCaskill, said recently: “whiplash!”
I propose that we all celebrate the failure of the July 2011 Obama/Boehner deal to inflict austerity on the nation and the failure of Obama’s effort to use the “fiscal cliff” to extort progressive members of Congress into supporting austerity and the unraveling of the safety net. I also propose that we send Obama on an inspection tour of Ireland, Portugal, Spain, Italy, and Greece. This visit would not involve meeting heads of state. Obama should visit each of these nations and talk with the people. We would never have to defend the nation from another effort by him to engage in the self-mutilation of our economy and people. Absent such an awakening by Obama, progressives will need to step up and save Obama from Obama, America from austerity, and the safety net from Wall Street at least one more time.
I keep asking myself why Obama, obviously an intelligent man, believes this economic BS. Two thoughts come to mind: Obama was raised largely by his grandparents, his grandmother was a banker by profession and both g.parents were products of the Great Depression. The other thought is that Obama is surrounded by bankers and financiers from Wall Street and the Chicago school of Capitalism. With two strikes against him already, it’s no wonder he is about to go down swinging. The pity is he will take the whole team down with him.
I could not agree more. Barack Obama is a very smart lawyer, but he is a lawyer. He knows less than nothing about how economies works, is worse than useless as a negotiator. He also has what his best friends call a “man-crush” on top Wall Street lobbyist Tim (“Foam- the-runway-with-the-little-people.”) Geithner. If we end up relying on these guys, we’re doomed.
But look at it this way: since no party to this process has any real idea what they are doing, they often cancel each other out. Post-cliff, we get most of the tax cuts that matter back, plus a lot of the sequester goes away via Pentagon pressure and then even Obama may be able to get either a little stimulus or a little something on the payroll tax in return.
O.K., probably I’m kidding myself. But if they give me the rest of December in my fool’s paradise, I, for one, will keep drinking the egg-nog.
I don’t know of a link that sends a mass email to all members of the progressive caucus, but this at least names them:
http://cpc.grijalva.house.gov/caucus-members/
Cheers
Just for the record, Obama is not presently a licensed attorney. At one time he was, but he has never tried a single case, or – as best I can determine – ever represented/advised even one client in even one matter. It’s a part of contemporary American-Leftist mythology to describe his as a “civil right attorney” – that’s a vulgar insult to Marshall and all of those who earned that description.
You’re right about him just being a lawyer, but many lawyers are excellent negotiators. For many its their main claim and source of income. I understand that on other issues Obama asks for all kinds of opinions, asks penetrating questions, weighs the facts, and makes decisions. The economy seems to be the exception. This seems puzzling since so much of his presidency hinges on getting the economy right.
I don’t think he’s confused about the economy. I think Obama is a conservative. He thinks the interests of creditors are more important than the interests of debtors. He thinks the poor are lazy and the government is too big. He thinks people need to be more self-reliant, and pull themselves up by their bootstraps. He thinks the protection of private property is the chief role of government. He thinks he’s more virtuous than other people, and that is why he has succeeded where so many others have failed. He thinks the rich are too important to society to be prosecuted for crimes. He thinks the private sector always works better than the public sector.
Beliefs that he might have learned as his grandmother’s knee.
And also Recall that Obama set up Bowles Simpson Commission which planned to cut federal deficit by nearly $4 trillion, stabilizing the growth of debt held by the public by 2014, reduce debt 60 percent by 2023 and 40 percent by 2035.
Should also celebrate the failure of Bowles Simpson.
I am quite shocked and surprised that William Black appears to fully in support the QE policies of the New Keynesians. Although austerity policies will undoubtedly and necessarily cause pain, the other alternative — printing vast amounts of fiat, would seem to promote the effect of vastly prolonging and increasing the deficit and debt situation ad infinitum. Perhaps less pain but, with this proposed QE economic solution, the economic pain will undoubtedly be perpetuated for a longer time than for austerity, that is in direct proportion to the amount of fiat paper that is printed.
I am also doubly surprised at William Black because he has been screaming, quite rightly, for proper regulation of the megabanks for so long. There seems to be a contradiction in his views here which I shall explain.
The true amount of QE that has been dished out by the Fed to both American and foreign banks over this crisis is already in the region of $16 trillion. But nevertheless, when confronted by the failure of the last few rounds of QE, Paul Krugman has persistently shouted and wailed “Not enough!!” But the failure of QE — and a huge amount of QE at that — was not caused by too little QE ($16 trillion not enough then?) — the grand mistake was to give all this QE charity to the megabanks as the first point of issue — in the vain and truly dumb hope that this extra cash would be spent and lent by the banks within America to help promote recovery.
That didn’t really happen did it ?
Instead, all the megabanks initially transformed this vast QE charity into US Treasuries to increase their assets in order to protect their own somewhat meager financial positions. Then, somewhere down the timeline and in his vast wisdom, Obama declared the banks too big to fail. So the megabanks thought what the heck it’s a win-win situation, and so they threw all that QE money out onto the markets — and not a drop landed in the US — where they invested in foreign stocks, bonds, land or businesses or anything just to get out of a rapidly (and deliberately) inflating dollar. Furthermore, their was no direct order or effective government mandate from Obama as to how these banks should use their money.
The situation of course was very similar in China — also in a recession at the time. So their government, who have the great advantage of owning and running the country’s nationalized megabanks, gave out QE and ordered their own banks to spend and lend — and they obeyed to the letter because they had no choice. As a result, China has recovered very quickly from her initial recession and is still doing rather better than most limping western economies in so-called recovery up till now.
Just to be very clear — I don’t care whether you give $1 trillion, $5 trillion or $10 trillion in QE to the megabanks in the future — why should anyone of these US megabanks spend and lend and invest in a sick and dying(non-productive) economy like America when they can make much more profit investing in the foreign Mercantilist giants abroad?
William Black’s support of QE policies therefore seems to also directly contradict everything he has ever written about on corrupt banking in the US. By supporting QE William Black is effectively saying “Hey, you can trust the American megabanks to do the right thing with the QE money for America!!”.
Really?
In other words, how the heck can William Black support QE policies — and the banks as the first point of issue of QE — when, in every book and article he’s written, he has quite rightly scolded, warned and complained about the megabanks in regard to their own persistent and corrupt profit seeking behaviours.
So does William Black now fully trust American Banks to do the right thing with the QE money then? In my own humble opinion and for the record, it has become very apparent to me that US megabanks are the only business entities that are benefiting from the QE. US banks love QE and they love debt — they both go hand in hand, with both overt and covert help from the Fed to so easily multiply their own profits simply by the flick of a digital switch.
Who here now honestly believes, when given trillions of dollars as a QE hand out, that these corrupt banks will “Do The Right Thing” with the money? Any takers?
Steve Keen is quite right. Trickle down economics died an excrutiating and embarrassing death some decades ago. So anyone who truly believes that the US megabanks will so staunchly act as a safe monetary QE conduit to help the US economy fully recover is either a person who is vastly misled or simply a mentally myopic idiot.
Krugman seems more to say we need to effective measures to increase jobs via making high speed internet and sustainable energy, etc. ubiquitous than to push for QE very much, as he notes it is a very poor option for any widespread economic stimulus. So I think your reasoning here has leaped off some fiscal cliff. The question is not QE vs. austerity, it is stimulus vs. austerity. So most of your two page rant comes off as a non-cognitive scream on the way down.
Bill thanks so much for digging these facts out of the memory hole. I have been astonished recently by how many Democrats have conveniently forgotten that Obama negotiated and signed the Budget Control Act of 2011. They act like he’s some sort of victim of the fiscal cliff, doing the best he can in a bad situation. But Obama is following the strategy pursued by Republicans for years of creating a fiscal train wreck to force reductions in the progressive components of government. It’s just that he’s using the tactic against his own party.
Regarding Europe, you note that “austerity was most draconian in the periphery where it produced Great Depression levels of unemployment, particularly for young adults.” As a lawyer, can you answer this question: Is there a case to be made that some political or financial leaders in Europe are guilty of crimes against humanity? Is it possible to make such a case in the economic sphere? After all, in Europe we have tens of millions of people who are being systematically deprived of their human right to earn a living. Millions have been reduced to penury by a cruel, fanatical and absolutely unnecessary austerity regime, following an economic collapse caused by a financial crime spree.
Of course, to inflict austerity upon a nation is met by the reaction of many to try to maintain their living standards and past precedent shows that they attempt to achieve this by increasing their level of private debt with the principal beneficiaries of this activity being the FIRE sector and the politicians they sponsor. Clearly this is all delusional because the lack of credit restraint is repeatedly pushing debt beyond the carrying capacity of the real economy and deflation ensues. But once a vampire squid has gotten into the habit of easy gorging the blood of the sheep-like masses it is hard to shake it off.
Too many people attribute Obama’s wrongheaded economic plans to ignorance of Monetary Sovereignty. Do you really believe that the President of the United States, the Treasurer of the United States, the Chairman of the Federal Reserve, and the dozens of economist who surround these people truly do not understand that cutting Social Security and Medicare will hurt the economy?
Not possible.
The fact is, they are motivated to cut benefits to the 99%, because they are supported by the 1%, whose main goal is to increase the income gap. See: Are you enjoying the good cop, bad cop kabuki theater of the absurd?
This article is incoherent itself. According to the author, and as he cites, Paul Krugman, the answer to our current economic situation isn’t to reduce spending, but rather to vastly increase the deficit (“stimulus”). I heard the author on “Stand Up” with Pete Dominic on XM/Sirius this afternoon, and he claimed the only time that deficit reduction is appropriate is when the economy is operating at full capacity. But yet, he also argues that taking money out of the economy through spending cuts will cause the economy to shrink. So the minute you get to the point of an economy running at full capacity, any attempts to reduce the deficit would cause a contraction, thereby requiring more stimulus and no deficit reduction. In other words, we would never see a point where spending cuts would make sense to the author. Furthermore, spending cuts are viewed by the author as bad because they would take money out of the economy, but tax increases would somehow have no effect, or even a positive impact, if you believe Krugman.
The fact is we have to get to a balanced, sustainable budget. But the theories promoted by the author would make that unattainable. And eventually we will wind up in the same position as the Greeks, where other countries are no longer willing to lend us more money to continue our desired standard of living unless we make the changes they demand. Better for us to get our financial house in order on our own.
Bill, if ever you took the time to understand Monetary Sovereignty, you would be so embarrassed at what you have written.
I’m well aware of the theory (and your assertions that it’s not a theory, but a fact) – but I think it’s baloney. The assumption is that we can print all the money we want, without any repercussions. Its short-sighted, and assumes that we will be a dominant economic power with no inflation worries, regardless of how badly we try to dilute our currency. Inflation eventually takes hold. And the competition for resources is a global one, not limited to a sovereign nation. The theory is only as strong as the relative economic strengh of the nation in question.
Bill, you may be “aware of,” but clearly you do not understand, Monetary Sovereignty, which does not rely on the U.S. being a “dominant economic power,” but rather relies on simple algebra. As for inflation, there has been zero relationship between federal spending and inflation since 1971, when we became Monetarily Sovereign.
Your intuition may tell you otherwise, but the facts can be found at: http://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/
Intuition is a bad substitute for facts.
So if there’s no real burden of debt, and no need for taxpayer repayment of it, then why do we do it? MMT and Monetary Sovereignty is portrayed as quite the panacea, eh? No restraints on spending; in fact, the more the better. And there can be no consequences or negative outcomes. Sounds like the perfect economic model. Unfortunately, i dont think the academic theory matches up to reality. If the equations are accurate, then why did we not see tremendous economic growth the last few years, even though there has been a huge amount of stimulus. I dont have the exact numbers handy, but with the bailouts, stimulus bill, QE 1,2,etc, there’s been several trillion added over the last 4 years. Correct my numbers as necessary, but if we added 50% of our GDP over four years, we should’ve seen explosive economic growth, if your theories were true.
I think the problem is the one academia always runs into, when theory doesn’t match reality. Its great to show an equation and how it should affect the economy, but it doesn’t account for all the realities of actually implementing it. For example, accounting for waste, fraud, corruption, diverting the stimulus to other areas than it was intended, etc. Looks great on paper – not so great in practice.
We were in a recession. To come out of a recession requires additional deficit spending. In fact, we didn’t do enough deficit spending, so we languish between recession and recovery.
Now we worry about the fiscal cliff, which is just another name for deficit reduction. So what is the proposed cure for our economy? Deficit reduction.
If ever one wishes to learn, he must be prepared to look beyond his intuition and his previous beliefs. There is a limit to deficit spending. We would reach it when we have full employment, at which time further deficit spending to begin inflation. At that point we either could increase the value of the dollar (via interest rate increases) or reduce deficit spending.
But we are a long, long way from full employment, and we never will get there with austerity.
Rodger,
I’m open to other ideas, but am far from convinced of your theories. There are some fundamental truths and observations you make, but you include some assertions and conclusions and present them as “facts” that apparently require others to agree with in order to “understand”.
But let’s start with inflation, as you provided excellent information on that, and thats where I see the most problems with your theories. Energy is a large component of inflation, and energy prices obviously can have an impact on other components, such as food, etc. That much I think we agree upon. Now lets take your economic recommendations and play them out. Say our government announced tomorrow a plan to implement the 9 steps you recommend, starting with the elimination of FICA immediately. What would the reaction of the currency markets be? I’d submit that a reasonable expectation would be for the dollar to weaken in response. How much it weakens is up for debate, but it would weaken. Now, the markets response may be “irrational” according to your theory, but whether the response is rational or irrational is irrelevant. What matters is the reality. Since so much of the world trade is done in dollars, any significant weakening of the currency will have a widespread effect. One of the most significant impacts would be on the oil markets. A likely response from other countries would be to switch from the dollar to a different currency for oil trades, in order to try to stabilize the worldwide price (but our costs would still go up because of the currency devaluation). Correct me if I’m wrong, but for your theory to hold up in this scenario, there would have to be little or no inflation that would occur, correct?
Bill, you said, “There are some fundamental truths and observations you make, but you include some assertions and conclusions and present them as “facts” that apparently require others to agree with in order to “understand”.
Then you said, “I’d submit that a reasonable expectation would be for the dollar to weaken in response. How much it weakens is up for debate, but it would weaken. “
See the problem? You are making an assertion, for which you have absolutely no evidence, but you present it as a fact.
Why would the dollar “weaken”? And what do you mean by “weaken”? Are you talking about inflation? Are you saying that a cut in taxes causes inflation? Where did you get that “fact”?
This article is incoherent itself.
No, the article is entirely coherent. What is incoherent and inconsistent and illogical is the insane ravings of the MSM and mainstream economics, which has brainwashed the vast majority over the last 40 years or so into believing up is down and black is white. Listen to older people if you can find one – Marvin Sussman, recently commenting here, has a good site and is a WWII vet.
But yet, he also argues that taking money out of the economy through spending cuts will cause the economy to shrink. Right.
So the minute you get to the point of an economy running at full capacity, any attempts to reduce the deficit would cause a contraction, thereby requiring more stimulus and no deficit reduction.
Non sequitur. When you are getting to full capacity, the tax system will take out progressively more money out of the economy. Social welfare programs like Food Stamps and Unemployment Insurance will be putting less money in. The deficit will shrink all by itself – because the basic economic institutions of the USA – devised by the founding fathers, the civil war, the progressive era, the New Deal and the Great Society – are well thought out and sound. Utterly unlike the EU’s treaties, its ECB & its Euro, the world’s biggest suicide pact.
In other words, we would never see a point where spending cuts would make sense to the author. No, as above. MMT proposes having bigger and better automatic stabilizers, removing the necessity of discretionary spending cuts. I am for many kind of spending cuts. But if they aren’t matched with tax cuts or replaced by other spending, they will hurt the economy. Right now the USA has too high taxes, especially on those who work for a living – the 99% or the 47% – and provide the real wealth for everybody else . Taxes should be appropriate to the size of the government. If you want taxes as high as they are now, we should have a bigger government, more spending. If you want the current size of government, we should cut taxes, because all they are doing now is creating unemployment and destroying wealth.
<i<Furthermore, spending cuts are viewed by the author as bad because they would take money out of the economy, but tax increases would somehow have no effect, or even a positive impact, if you believe Krugman. It depends on who the tax increases are imposed on.Their direct effect would be deflationary, taking money out of the economy, but their might be a good case for some tax increases; depends on the tax. The best place to impose them on is the rich. And big tax hikes would do little to the rich, but shrink the deficit, bolster the value of the dollar, if you want to.
The fact is we have to get to a balanced, sustainable budget. But the theories promoted by the author would make that unattainable. And eventually we will wind up in the same position as the Greeks, where other countries are no longer willing to lend us more money to continue our desired standard of living unless we make the changes they demand. Better for us to get our financial house in order on our own.
No, the fact is we must not and cannot get to this. A balanced sustainable budget is an oxymoron. Surpluses are absolutely unsustainable. Balanced budgets are theoretically sustainable, but not really in practice, really never in a growing economy. What is sustainable is deficit spending, which is why governments have almost always had deficits. We cannot be in the situation of Greece – Greece is not operating as an independent entity, an independent state any more, but just a Eurozone province. What you think of as sustainable government budget is unsustainable, and vice versa.
It really isn’t very complicated. Think in terms of dollar bills or coins. If the government issues fewer than it takes back in taxes, then it will be taking dollars out of the economy, running a surplus. There is only a finite number of dollars already issued, a finite National Debt. So it cannot do this forever. You can’t take one rock out of a finite pile of rocks forever. People who think surpluses are good or sustainable or represent the nation saving money are insane and innumerate. Contrarily, if you want private citizens and firms to be able to have net nominal savings of base money, government debt, which is necessary for a stable, predictable financial system, you are going to have to run government budget deficits. “Getting our financial house in order” on a national level – a very nearly pointless aim – means, tautologically, getting everyone else’s financial house out of order.
Calgacus, I agree that taxes are too high right now. But I disagree that deficits are good and sustainable. The federal debt that we accumulate does have an interest cost, and while the current cost for our deficits are cheap, future deficit borrowing years likely won’t be. Between the growing interest cost, the persistent large deficits, and the potential for inflation, we are not on the right trajectory. I agree that we aren’t in a dire state today, but I also believe its prudent to avoid that situation. If you’re arguing that the size of the debt will (and should) fluctuate inversely to our economic growth rate, then we are probably close to agreement on that. But I do think that needs to keep the interest down to size, otherwise it becomes an increasing drag on the economy. And the arguments that we can just print more money to pay our debts without any consequences to our currency is misguided and mistaken. That’s one thing that I’m glad both Obama and Republicans appear to agree on.
Bill, federal interest is not a drag on the economy. It is a stimulus for the economy, as it adds dollars to the economy. Federal interests payments are part of Federal Spending in the equation:
GDP = Federal Spending + Non-federal Spending – Net Imports.
Increasing Federal Spending for interest, increases GDP.
As for “potential inflation,” federal deficits have not been a cause of inflation since we became Monetarily Sovereign in 1971. See: http://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/
I continue to wonder why all the worry focuses on inflation, which we do not have and can control, vs. recession, which we do have an seem not to be able to control. It’s like a starving man refusing food because he’s afraid of getting high cholesterol some day in the future.
Obama is a corporate man. He’s not progressive. He just won reelection and has nothing to gain by stopping sequester.
Honestly, sequestration would be the most progressive thing that could happen. It would finally reduce military/pentagon spending and leave Social Security&Medicare untouched!! I mean come on, what more could you ask for.
Cutting the benefits of social security and medicare is nothing more than a attempt to use payroll(FICA)tax to pay for all the stuff of the federal govt that suppose to be paid for by the federal income tax.
It’s late, and I’m going to sleep. I’ll explain why and how later….
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Right – Austerity will kill growth. But to support spending Obama has been able to get approval to increase taxes from the level of US$450,000/- onwards. Revenue will be increased to support spending but still some moderation in spending will be required which in simply economic terms is acceptable austerity.
Javid,
“Revenue will be increased to support spending but still some moderation in spending will be required which in simply economic terms is acceptable austerity.”
For a Monetarily Sovereign government, tax revenue does not support spending. If taxes were raised to $100 trillion or lowered to $0, neither event would affect by even $1 the federal government’s ability to pay its bills. (This is not true of monetarily non-sovereign governments like the states, counties and cities.)
There is no “acceptable austerity.” Every cut from the federal deficit cuts GDP. The formula is: GDP = Federal Spending + Non-federal Spending – Net Imports.
Raising taxes cuts Non-federal Spending, and of course, spending reductions reduce Federal Spending. Put the two together and you have austerity, which is economic poison. A little sickens and a lot kills.
Rodger Malcolm Mitchell
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