The New Populism Needs to Get This Straight

By Joe Firestone

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(Cross-posted from New Economic Perspectives.)

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