Author Archives: admin

“An Open Letter to President Obama”

Posted on June 10, 2010 | 12 comments

Submitted by Joe Firestone

Dear President Obama:

I’m not entirely sure how to put this, so I guess I’ll just come right out and say it. During the last presidential campaign and in the context of John McCain’s admission that he didn’t understand economics very well, you let us know that you thought you had a very good understanding of it. Well, Mr. President, I’m here to let you know that you don’t understand it, don’t know what you’re doing, and are now preparing to do exactly the wrong things. And, I’ve got lots of evidence for thinking that. What’s my evidence?

To begin with, you’ve been President for close to a year and a half now, and your bailing out of the big banks, toleration of big bonuses in the finance industry, reluctant pursuit of new financial regulatory legislation that will, in fact, regulate, and an economic stimulus package, in combination, have only, at best, stopped the march toward economic deflation temporarily. There appears to be no sustained recovery underway, little new economic activity on Main Street, little prospect for achieving full employment anytime soon, and every prospect that close to 20% of our labor force will have blighted working and economic lives for some years to come.

This last is especially likely when one realizes that 75% of the stimulus has now been spent and that you and other members of your Administration have not only been giving aid and comfort to the deficit terrorists in Washington in statements giving credence to entirely unwarranted concerns over deficits, but have been actively enabling them with your deficit terrorist-stacked National Commission on Fiscal Responsibility and Reform, and with the close relations your Administration has established with the epicenter of deficit terrorism, the Peter G. Peterson Foundation.

In short, your ideas and efforts to transcend the economic crisis so far spell MEDIOCRITY, and your evident intention to now emphasize austerity and fear of inflation in the face of historically unequaled post-war levels of unemployment and under-employment spells FAIL, and the real probability of a double-dip recession even before the November elections, and thereafter in the aftermath of likely Republican victory, two years of disruptive investigations, and a failed one-tern presidency.

The reason why this is happening, Mr. President, is a combination of bad economic ideas about fiscal sustainability and responsibility, solvency, the implications of Government spending for future generations, inflation and hyperinflation, and policies to achieve fiscal sustainability

Bad ideas about the meaning of fiscal sustainability and responsibility
Based on the mission statement of your National Commission on Fiscal Responsibility and Reform you evidently believe that fiscal responsibility is about balancing “. . . the budget, excluding interest payments on the debt by 2015,” and stabilizing “. . . the debt-to-GDP ratio at an acceptable level once the economy recovers.” And you also seem to have in mind moving toward what you think of as “fiscal sustainability” through “. . . changes to address the growth of entitlement spending and the gap between the projected revenues and expenditures of the Federal Government.”

The problem with this is you can’t possibly know what fiscal sustainability and responsibility are about unless you begin to think of them in relation to a clear idea of what they might mean. First, begin with “fiscal.” It pertains to Government spending, and the “fiscal situation” at any point is Government spending and its impact on society as a whole, including the private sector and the international environment. Why? Because isn’t our interest in the value, both positive and negative, produced by Government spending, and isn’t the public purpose of Government to do the best it can to produce positive value and to both minimize negative consequences and completely avoid those consequences that are entirely unacceptable? Second, what about “fiscal sustainability”? Since sustainability is about the capability of an activity to continue on into the future, “fiscal sustainability” is the extent to which patterns of Government spending do not undermine the capability of the Government to continue to spend to achieve its public purposes. And “fiscal responsibility” pertains to Government spending of a particular kind. What kind? Clearly Government spending that achieves public purposes which also maintains or increases fiscal sustainability.

So, Mr. President, just what is the direct connection between balancing “. . . the budget, excluding interest payments on the debt by 2015,” and public purposes. How does this goal help us to achieve full employment, or to reduce inequality. Or to avoid further recessions or even depressions? Why is it “fiscally responsible” to pursue policies that will balance the Federal Budget? What public purposes will be achieved by such a policy? How will such a policy maintain or increase (i.e. sustain) the capability of the Federal Government to continue to spend on public purposes?

The answers to these questions, Mr. President are not obvious to me. On the contrary, I see attempts to follow a balance the budget policy as likely to reduce economic activity substantially over the next 4 years, to leave much of the economy unemployed through this period, and to result in the destruction of a portion of our productive capacity. With less productive capacity, there is also less scope for Government spending to fuel aggregate demand without encountering the spending limit beyond which the Government can’t go without causing inflation. Mr. President, inflation is caused by demand outpacing productive capacity. If you follow an austerity policy that leaves much of our productive capacity idle for four years or more, the result will be the deterioration of that capacity, and the loss of real, not just financial capital. If Government then attempts to ramp up spending in order to increase aggregate demand, the fiscal room to do so will be far less. And while the capacity to spend will unaffected, because there is never a danger of insolvency in a country whose Government is sovereign in its own currency, the capacity to both spend for public purposes and to avoid inflation, which is certainly one of our public purposes, will be reduced. So, in brief an austerity policy will reduce, not increase, fiscal sustainability, because Government will run up against the inflation barrier sooner. In addition, austerity in the face of bad economic times and high unemployment is fiscally irresponsible, since it not only reduces fiscal sustainability, but also will prevent us from achieving full employment, and many other public purposes such as educational reform, developing alternative energy capacities, achieving Medicare for All, renewing our infrastructure, protecting our environment, and many other public purposes that will cost money to accomplish.

The mission of your National Commission also emphasizes stabilizing “. . . the debt-to-GDP ratio at an acceptable level once the economy recovers,” through addressing the growth of entitlement spending. But, once again, what does a particular level of the public debt-to-GDP ratio have to do with “fiscal sustainability” or “fiscal responsibility,” and what exactly is an “acceptable” level of this ratio. How is any level of this ratio related to public purposes? Why does the ratio have to “stabilized” at all? And why does it have to be stabilized by “addressing the growth of entitlement spending”? Once again, insofar as our attempts to stabilize the debt-to-GDP ratio impact negatively on our attempts to achieve full recovery and full employment, they are opposed to important public purposes, so why should we attempt to achieve stabilizing the ratio. Is doing that important to public purposes in itself. I don’t see any connection, and I don’t think you can make that case Mr. President. You certainly haven’t made it so far. And until you do, you won’t be able to persuade people that you’re not acting in opposition to fiscal sustainability and fiscal responsibility on behalf of deficit terrorism and Hooverism, and in opposition to the interests of the American people.

Bad ideas about spending constraints on Governments sovereign in their own currency

In addition, to the mistakes in your ideas on fiscal sustainability and fiscal responsibility, Mr. President, you also seem to have ideas about spending constraints on the United States Government, and other Governments sovereign in their own currency, that do not exist. On a number of occasions now, you have told the American people that the Government is “running out of money,” it needs to fulfill its obligations. Surely, Mr. President, you jest. Hasn’t your Secretary of the Treasury, or Mr, Bernanke told you yet, that the Government of the United States, can always cause non-Government accounts at the Federal Reserve Bank to be marked up by any amount needed to meet obligations? Governments sovereign in their own currency are like scorekeepers at games. They neither have nor don’t have money. Instead, they have the power to mark up or mark down non-Government accounts (or Government accounts), such as Social Security accounts or that matter). This power is not dependent on anything else. It is not dependent on the international markets. It is not dependent on foreign Governments. It is not dependent on commodity backing of their currency. It is a matter of fiat, which is why such currencies are called fiat currencies.

Mr. President, the United States of America can’t go broke. It has no solvency risk. It can always meet its obligations. It doesn’t really fund its expenditures with tax money, or borrowing, and it never needs to do so in order to “fund”, even though it does tax and also borrow money to regulate inflation and establish interest rates. This doesn’t mean that the Government can spend without limit. It can spend so much that it creates inflation or the risk of it. But this is not a solvency issue. It is not running out of money. So, please don’t tell us any more that we are running out of money or respond to policy proposals by asking “How are you gonna pay for it?” Because I know, and so should you, that we can always pay for it. The real issue here is what the impact will be if we do pay for it, whatever “it” happens to be.

Bad ideas about deficits and debt numbers and our children and grandchildren

In many of your statements, Mr. President, you have echoed the view of the deficit terrorists that unless we bring our deficit and debt numbers under control and reduce Government spending on job creation and the recovery, and other very necessary things, we will be bequeath to our children and grandchildren huge debts that they will personally have to repay. Mr. President, that view is ridiculous, and if you believe it, then I have a very big bridge to sell you.

In fiat money systems, like ours, when Government expenditures exceed revenues, a deficit doesn’t have to be reduced by increased tax revenues, or other transactional income, nor does it have to be financed by borrowing. Instead, since money isn’t limited by its relationship to a material commodity, the money necessary to make Government expenditures can just be created at will by the Government. It need not be the product of either increased taxes or debt financing, as it must be in commodity-backed systems.

Whatever Government debts we leave to our children also need not be repaid by them through either further borrowing, or increased taxation. These debts, just like our own, can be managed by our children and grandchildren by creating whatever money they need to pay their obligations when they fall due. Of course, if they want to reduce their well-being, they can raise taxes or borrow money to handle those deficits. But what they do to pay Government obligations, and the precise size of the burden they choose to assume is up to them. It has nothing to do with us, so long as they are wise enough to retain our fiat money system.

As Warren Mosler says: “our children get to consume whatever they can produce.” Unless they choose not to produce it, because they raise taxes and cripple economic productivity, in a vain and misguided attempt to pay down a fiat debt with money they might otherwise use for investment. In short, Mr. President, and contrary to what Peter G. Petersen may have told you, there is no debt burden for our children and grandchildren. That there is, is a myth, a fairy tale, “a deadly innocent fraud, as Mosler says. It is not reality, and we ought not to make it reality by believing it and acting accordingly.

Bad ideas about inflation
Mr. President, your reluctance to incur further deficits in the service of fixing the economy and solving other problems, suggests that you believe that inflation is something we have to be concerned about now; even with close to 20% of our labor force either under- or unemployed, and a substantial risk of a double-dip recession given the failure of the private sector to begin to pick up the spending slack, and the plans of many other nations to implement austerity programs.

Under conditions of a healthy economy and full employment, deficit spending can create “demand pull” inflation by creating too much aggregate demand. However, we have not seen a case of that kind of inflation in modern times in a nation like the United States, sovereign in its own currency with a fiat money system. The possibility of such inflation in a situation like the one we find ourselves in, is purely theoretical. And the theory that demand pull inflation is a serious risk is refuted by the history, or lack of it, of inflation in such systems. It is refuted by the history of the 1990s in this country. It is refuted by the history of Australia since the 1970s where the unemployment rate has been considerably lower than here and social safety net spending has been much higher. It is refuted by the absence of a single modern case of this kind of inflation.

If Government spending created full employment, the price of some commodities might go up, but, on the other hand, the housing market might recover some of what it has lost, and the lives of 30 million under- and unemployed Americans would be greatly improved. So, Mr. President, are you really intending to tell us that not increasing the prices of gold and silver is more important than creating full employment for those 30 million?

Don’t you understand that our real wealth produced at any point is equal to our domestic production, plus what we import, minus what we export? When you make cutting Government spending, more important than increased spending to enable full employment, you are acting against both increasing domestic production and increasing imports. So, you’re acting to reduce our creating more real wealth. Why? Because you believe in a theory about demand pull inflation that has been refuted again and again in modern times? Give us a break. Don’t make a false economic theory more important than our lives and the futures of our children.

Bad ideas about policy proposals for fiscal sustainability

Mr. President, your ideas about fiscal sustainability seem to be restricted to wearing green eye shades, cutting Federal spending, and in this way both reducing deficits and the public debt-to-GDP ratio. I’ve already written about why that’s not increasing fiscal sustainability, and why policy proposals advocating reducing Government spending are bad ones. I am not saying that reducing spending on programs that are not producing value or that are having negative impacts isn’t always a good idea. Cutting such spending gives Government more room to spend on things actually produce value. We need a lot more of that kind of cutting, and perhaps I’ll write another letter, about all the things that could be cut, whose elimination would improve our overall situation. But what we also need is much greater Federal spending on useful measures that will create jobs and add to savings in the non-Government sector.

The most important of these things is a Federal Jobs Guarantee (FJG) program for all Americans who want a job. Such an FJG should be at a wage of $8.00 per hour in counties with the lowest cost of living in America and should be cost-adjusted upwards in proportion to cost of living variations from the lowest cost of living counties. An FJG job would carry normal fringe benefits including vacation time, holidays, and most importantly full eligibility for employees in the Medicare program. Such an FJG program would eliminate unemployment, and at the same time increase the number of Americans with access to health care. Since the wage paid in the FJG would be the minimum wage, plus cost of living adjustments, the program would provide a built-in protection against wage-driven price increases. It would also provide an immediate boost in consumer demand. As the FJG program employed more and more people, and business responded to increased consumption, with increased activity and investment, it would end the recession, and also end most of the poverty we have in America, and it would do so quickly, over a period of months and not years, and would have cost the Government roughly $500 Billion, a fraction of the money you’ve spent on various top-down approaches to stimulating the economy.

In fact, Mr. President, had you established an FJG program, when you came into office in the Winter or Spring of 2009, it is likely that the Great Recession would be history right now, and that the private sector would have begun growing again. And with that growth we would also have seen a shrinking in the FJG program since, as the private sector began to hire again, it would have hired FJG employees, at higher wages than the minimum, to staff up. This points up one of the great features in the FJG program. It’s an automatic stabilizer, a creative way to expand the safety net. When times are bad, it expands, and with it so do Government deficits. But as it boosts demand, and begins to call forth renewed private sector activity and investment, it shrinks, and with it so do Government deficits, until full employment is reached.

Even though the FJG would by itself solve the recession problem, since it would take some time to work, it’s wise to do some things that would have immediate effects. Warren Mosler, the Independent Party candidate for the US Senate, in addition to suggesting the FJG, also favors a Federal Payroll Tax Holiday to immediately boost demand and a $500 per person grant to every State. With the new funds, the States could avoid cuts in employment and key services and could avoid the impending fall in aggregate demand as they implement planned sizable cuts in their payrolls.

Some Final Words

Mr. President, this has been a long open letter, and I’ll close it with some short statements. First, you will hurt, not help fiscal sustainability by pursuing austerity in Federal spending. Second, austerity in these times is not fiscally responsible. It is fiscally irresponsible. Third, real fiscal responsibility means spending what Government needs to spend to fulfill public purposes, and spending in such a way that spending can continue in the future, until public purposes are achieved. There are all kinds of public purposes going begging right now, and you’re proposing that achieving those has to be subjected to austerity constraints because we are running out of money. Fourth, I can’t imagine a more fiscally irresponsible course than the one you appear to be moving towards now. And that fiscally irresponsible course will, make no mistake about it, also hurt fiscal sustainability. While it won’t destroy our solvency, it will destroy part of our productive capacity, and this will give us less room for government spending in the future to both heal our economic problems and avoid inflation while doing it.

So, please Mr. President, don’t do austerity. Don’t assume you know all about economics. Don’t believe we have solvency problems when we have none. Don’t believe we have to worry about inflation, when there is not the slightest chance of it anytime soon. Look at what you’ve done so far and evaluate it honestly. No excuses, please. It can’t be right, because it has not worked. Don’t be fiscally irresponsible and join the other global elites in following an ignorant and mistaken economic policy, likely to drive the world into a double-dip recession, or perhaps even a Great Depression 2.0. Instead, change course right now! Act like our President, an American President. Give us what we need, not what they need. Be loyal to us, not to them. And end this recession before it ruins any more American lives.

(Cross-posted at Fiscal Sustainability All Life Is Problem Solving and Correntewire.com)

12 Comments

Posted in Uncategorized

Tagged Uncategorized

Letter to a Seventh Grader (and also to the Director of the Congressional Budget Office)

Posted on June 9, 2010 | 5 comments

By Randall Wray and Yeva Nersisyan

A few of days ago a Letter to a Seventh Grader written by the Director of the Congressional Budget Office appeared on the CBO’s blog. It is nice to have a responsive public official. Unfortunately, the CBO’s Director does not understand federal budgeting. He seems to believe the US still operates on a gold standard. At best, his letter should be taken as a history of thought lesson, something that a CBO Director might have written to a seventh grader in 1931. There is nothing in the letter that would help anyone to understand government finance in the US today, in the post-Bretton Woods era with a floating exchange rate, non-convertible—sovereign – currency.

So we have decided to correct the CBO’s errors and to provide a letter to a seventh grader that actually addresses the current situation. Here are the questions of the 7th grader, the CBO Director’s responses (in italics) and, then, our (correct) response to the questions.

1. What are the primary causes of the current federal budget deficits?

The current large deficits are the result of a combination of factors. These include an imbalance between tax revenues and the government’s spending that began before the recent economic recession and turmoil in the financial markets, sharply lower revenues and higher spending related to current economic conditions, and the budgetary costs of policies put in place by the government to respond to those conditions.

The government’s budget is an accounting record of the government’s spending and revenues (mostly taxes). When spending exceeds revenues, the budget is in deficit. To a large degree, the government’s budget balance is non-discretionary and simply mirrors what is going on in the rest of the economy. During a recession private sector spending falls and unemployment rises. As the private sector spends less, the government automatically spends more—especially on unemployment benefits and other forms of social assistance. But most importantly, as economic activity declines, tax revenues fall. Falling tax revenues combined with rising social spending – called automatic stabilizers- create a gap between revenues and expenses resulting in a budget deficit. Economic recovery will automatically reduce the government’s deficit. If growth were so robust as to produce a government surplus, this would mean that the nongovernment sector would be running a deficit. By accounting identity, the sum of the government’s balance plus the non-government’s balance is zero. In other words, today’s government budget deficit is equal to the nongovernment sector’s surplus (also called net financial saving).

2. How will budget deficits affect people under the age of 18?

The government runs a budget deficit when it spends more on its programs and activities than it collects in taxes and other revenues. The government needs to borrow to make up the difference. When the federal government borrows large amounts of money, it pushes interest rates higher, and people and businesses generally need to pay more to borrow money for themselves. As a result, they invest less in factories, office buildings, and equipment, and people in the future—including your generation—will have less income than they otherwise would.

Also, the government needs to pay interest on the money it borrows, which means there will be less money available for other things that the government will spend money on in the future. Squeezing other spending affects different people in different ways, depending on their individual situations. For example, many young people benefit from government programs that provide money to families in need of food or medical care or to people who have lost their job, or from the financial support the federal government provides to local schools, or from the grants or loans the government offers to help pay for college education.

The Federal government (Federal Reserve and the Treasury) is the monopoly issuer of U.S. dollars. The dollars that we all use come from the federal government. This means that the government never has or doesn’t have dollars, nor can it run out of dollars. It just creates them at will whenever it needs to spend.

When the government uses its currency issuing capacity in a meaningful way it can do a lot of good for the private sector. It can hire people who are currently unemployed to build bridges, highways, repair the streets, to care for the elderly and so on. It can provide healthcare to people who need it. It can provide education to those who want to get one. Federal budget deficits create a surplus for the nongovernment sector and federal budget debt is a financial asset and net financial wealth for the nongovernment sector. So budget deficits today mean more income, more roads, schools and hospitals (tangible assets), healthier and more highly educated population and more financial assets for the private sector than it would otherwise have.

Today’s young people look forward to jobs, growing labor productivity and higher living standards in the future. The government has an important role to play to ensure that outcome. By itself, a government deficit is neither good nor bad. What really matters is the consequence: if a budget deficit is too small (spending is too low and/or taxes are too high), then the economy operates below capacity and grows too slowly; if the budget deficit is too large then inflation can result as the government takes too many resources away from private use and prices and wages are bid up. A deficit of the proper size allows the economy to operate at full employment of its resources.

3. How is the U.S. government working to reduce budget deficits?

The President created a National Commission on Fiscal Responsibility and Reform to draw up plans to address the deficit problem. Most of the people on the commission are Members of Congress.The commission will consider ways to reduce the budget deficit by 2015 as well as ways to improve the long-term budget outlook. Under current government policies, the gap between the government’s spending and revenues in coming years will be large. Therefore, balancing the budget would require significant changes in spending, taxes, or both. On CBO’s Web site, you can find information about the budget outlook during the next 10 years and over the long term.

More information about the commission can be found on its Web site: Fiscal Commission

Congress also has enacted a new law (called “Pay-As-You-Go”) that typically requires legislation that increases spending or lowers tax revenues to include other measures to offset the costs of those changes.

Targeting deficit reduction is not an appropriate goal for the federal government. Rather, the budget should be the tool used to achieve the public purpose – better education, infrastructure, healthcare – anything that the public decides it wants/needs. At the macro level, if the government reduces its deficits, the nongovernment sector will have less income and less saving. The National Commission on Fiscal Responsibility and Reform created by the President is misguided because it is trying to reduce the budget deficit in a time of massive quantities of unused and underutilized resources. Those on the Commission don’t understand how our modern monetary regime works and if we followed their advice we would probably cause a “double dip” as the economy fell back into deep recession. Note also that their deficit-cutting proposals most likely would not reduce deficits in any case because a slowing economy sets off the automatic stabilizers—tax revenue would fall and social spending would rise.

4. What can people, and especially school-aged children, do to help curb budget deficits?

The most important thing that school-aged children can do to help reduce future deficits is to study hard and acquire the best possible education. This will help you and your classmates get better jobs when you grow up, which will help the economy grow. In turn, a stronger economy will produce higher tax receipts for the government, which will lower the deficit.When young people get jobs, they should be sure to save some of the money they earn.Through a fun and important bit of math called compounding, savings of small amounts can grow over time into significant amounts. For the economy as a whole, the more people save, the more money is available for businesses to invest in factories, office buildings, and equipment. For individuals and families, more savings provide a financial cushion in times of economic difficulty. In particular, more savings can help people pay large medical expenses or save their home in case they lose their job or become ill, thus helping them avoid needing government assistance.

People of all ages can also help to reduce the deficit by learning how the government spends money and from whom the government collects money. Understanding the current budget is essential for choosing intelligently among different ways to change programs and policies in order to reduce deficits.

Again, cutting the budget deficit is not a legitimate goal—for government or for people. The best thing that a young person can do is to study hard, do well in school, and prepare herself for a long, healthy, and productive life. The best thing for the government to do is to support young people in those pursuits. Unfortunately, those who are trying to reduce the budget deficit will rely mostly on spending cuts that especially hurt young people. Since health, education, and social welfare spending (including Social Security) account for a very large part of government spending (at all levels), those are usually the first programs to be cut by those trying to “balance the budget”. Not only does that mean trouble today, but it has long-term impacts for generations to come. Some projections show that the current generation of school-age children will be the first one that will actually be less educated than their parent’s generation. Rather than cutting back on education, the federal government should be increasing its support for those in school.

5. If I am to convey one key message to my school regarding the federal budget deficit, what would it be?

The prospect of budget deficits for many years in the future is a serious problem for our country. Ultimately, people in the United States will have to bring into balance the amount of services they expect the government to provide, particularly in the form of benefits for older Americans, and the amount of taxes they are willing to send to the government to finance those services. Because it takes a long time to implement major policy changes, deciding what those changes will be is an urgent task for our citizens and for our policymakers.

Do not listen to all the nonsense about the ill effects of budget deficits coming out of Washington. The federal government cannot “run out of money” because it is the issuer of our currency. It can make all payments as they come due. It can never go bankrupt in its own currency. It can afford to spend on the necessary scale to end this recession and to put the economy on track to robust growth. It can afford to create as many jobs as necessary to ensure that anyone who wants to work will be able to make a positive contribution to our economy. It can afford to support programs to protect and restore our natural environment. And it can and must spend more to support our schools.

5 Comments

Posted in Uncategorized

Tagged Uncategorized

Moody’s Business

Posted on June 5, 2010 | 1 comment

If you did not have time to watch the FCIC hearings last Wednesday, we strongly encourage you to read the following testimony. It describes in great details the changes in the business culture of Moody’s and the means to achieve these changes. The testimony also clearly shows that when wrong-doing/fraud is present it is sometimes very hard to catch it given the complexity of the transactions so “Please keep that in mind when people suggest to you that the acts of explicit wrong-doing have been relatively rare.”

Here is an excerpt:

“In conclusion, I have tried to show that Moody’s managers deliberately engineered a change to its culture intended to ensure that rating analysis never jeopardized market share and revenue. They accomplished this both by rewarding those who collaborated and punishing those who resisted. In addition to intimidating analysts who did not embrace the new values, they also emboldened bankers to resist Moody’s analysts if doing so was good for Moody’s business. Finally, I have tried to provide you with an example of the extent to which the new culture corrupted the rating process. The adjusted European CLO Rating Factor Table appears to have been adopted for the sole purpose of preserving Moody’s European CLO market share despite the fact that it might have resulted in Moody’s assigning ratings that were wrong by as much as one and a half to two notches. As I indicated to Moody’s outside counsel in the summer of 2008, every single investor in a Moody’s rated European CLO may have a claim against Moody’s for damages associated with the fact that their CLO investments were not priced correctly.”

Hat tip: Eric Tymoigne

1 Comment

Posted in Uncategorized

Tagged Uncategorized

Why Women Will Lose on Abortion – and the Price We Should Extract for Doing So

Posted on June 1, 2010 | 4 comments

By June Carbone*

As the Supreme Court considered Roe v. Wade, my generation debated abortion. For many college-aged women, it was a rallying cry. We heard tales of deaths in back alley rooms. We struggled with the mixed messages of the early sexual revolution – good girls don’t, but how good are co-eds supposed to be? We were mystified by the advice on contraception. The pill was rumored to cause cancer, diaphragms were not completely reliable, men supposedly didn’t like condoms, and we learned to be wary of what might be in the drinks at late night parties. Few women of that era did not have at least a restless night or two contemplating the prospect of an unplanned pregnancy and what it might mean for the children we would have. Many of us came to the conclusion that the decision to have or not have a child was a profoundly moral decision and one we were not ready to entrust to anyone but ourselves.

Today, women’s lives are different. Over the course of the last thirty years, I have often thought about contraception and almost never about abortion. The difference between the two is why the fight to insure health care coverage of abortion is likely to be a losing issue, and why we should make contraceptive coverage the new rallying cry in the fight to preserve reproductive rights.

For most women, contraception is the daily decision, abortion the fallback we hope never to use. For those on the other side of the sexual revolution, contraception is part of the rite of passage to adulthood and an integral part of married, even more than unmarried, life. The changes in contraceptive effectiveness from my college years are subtle, but important. Where before the pill was the great innovation, today it is the availability of long-term injectibles you don’t have to think about. IUD’s have become safer; condoms more important for preventing disease. And for the not entirely intended or sometimes unconsented encounter, the morning after pill is the first line of defense. Unintended pregnancies and abortions dropped significantly for the college educated in the nineties and more effective contraception was the biggest reason. Yet, effective contraception can be expensive; an IUD can cost as much as an abortion and many health plans don’t cover them. Today, unintended pregnancy is a marker of race and class; unintended pregnancy rates for college grads dropped in the nineties by twenty percent while rising for the least educated women by 29%.

These changes in unintended pregnancies change the meaning of abortion. Those of us who are pro-choice appreciate the fact that it is legal and available, but we rarely think about using it for ourselves or our daughters. Since the publication of my book with Naomi Cahn, Red Families v. Blue Families, many women have shared their stories with us and most of those stories are about a single, difficult decision over the course of a lifetime – the wanted pregnancy that threatened the mother’s life, the unintended pregnancy at the worst possible moment, the hereditary disease that would give the affected fetus a short, painful existence. In the face of these decisions, cost – and health care coverage — was never mentioned.

The sad story underlying the abortion issue in the U.S. is the women who have abortion coverage now are the ones who can afford an abortion without medical coverage. Taking away or expanding that coverage will not make a difference in the decisions they make, and they will not take to the streets to preserve health care coverage of an expense they hope never to incur.

We should be worried, however, that the most effective contraceptives may be unaffordable for the women who need them most. After all, taxpayer dollars already pay for 40% of all births in the U.S. because of the incredibly high rate of unintended pregnancy among the women eligible for Medicaid assistance. It is time to make universal contraceptive coverage at least as important as the effort to deny women coverage of abortion. After all, even the new Miss USA agrees with us. During the interview portion of the pageant, the winner, Rima Fakih, was asked whether she believed birth control should be covered by health insurance, and she said yes, pointing to its high cost. She emphasized that “birth control is just like every other medication,” and that it’s amazing that it is not covered by insurance even though Viagra prescriptions are. Most of us know where our Congressman stands on abortion rights; let us make sure we are equally aware of where our representatives’ position on contraceptive coverage.

*CoAuthor of RED FAMILIES v BLUE FAMILIES: Legal Polarization and the Creation of Culture (Oxford 03/10)

4 Comments

Posted in Uncategorized

Tagged Uncategorized

THE GREAT DEPRESSION AND THE REVOLUTION OF 2017

Posted on May 24, 2010 | 30 comments

L. RANDALL WRAY

WASHINGTON, 7 NOVEMBER 2017*. Yesterday Speaker of the House Dennis Kucinich was sworn in as President, replacing President Jeb Bush, who had fled to Riyadh, Saudi Arabia, aboard Air Force One seeking asylum in his father’s well guarded compound on the grounds of the Bin Laden family’s palace. Vice President Dick Cheney, who has been in a coma since August after suffering his fifteenth heart attack, was declared incompetent. President Kucinich immediately announced a wide-ranging package of policies designed to bring an end to the Great Depression, which began with the global financial crisis of 2007. He called for calm and pleaded with leaders of the Revolutionary Tea Party Army that has encircled Washington to call off the attack that had been planned for today, the 100^th anniversary of the Bolshevik revolution. Commandant Dick Armey said he is willing to meet for a discussion of a ceasefire so long as his militia can take their weapons home.

President Kucinich apparently ordered the Marines to invade Goldman Sachs headquarters in Manhattan early this morning. While there were some reports of small arms fire, most of the 6000 employees were reportedly removed without struggle and are on their way to various jails and prisons in the greater New York area. CEO Timothy Geithner was captured at La Guardia, attempting to board a private jet said to be headed for Riyadh. An anonymous source claimed that Geithner complained that President Bush had left him behind after promising protection. President Kucinich announced that Geithner would be charged with fraud, racketeering, and tax evasion. The case dates back to 2012 but had been put on hold when former President Sarah Palin ordered the attorney general’s office to stop its investigation of the Treasury Secretary. President Kucinich said that Goldman, the last remaining bank in America, would be nationalized. He assured depositors that the bank would reopen next Monday under management of a team of presidential appointees led by William Black. All insured deposits will be protected, but it is believed that other claims will not be honored. FBI agents have reportedly moved to seize all assets of current and former Goldman employees. Warrants for the arrest of former Treasury Secretaries Paulson, Rubin, and Summers were also issued.

President Kucinich’s package of policies includes universal and comprehensive debt cancellation. Under the plan, all private debts will be declared null and void. The implications are not immediately clear since delinquency rates have already reached 95% on most categories of debt. Several economists said that the new President was only validating reality, but others argued that it gave legal protection to squatters who have refused to leave their foreclosed homes over the past decade. The global movement for the “Year of Jubilee” had been pushing for such debt relief since the crisis began.

The policy proposals, which have been dubbed “New Deal 2.0”, also include a universal job guarantee that would provide work and wages for the nation’s estimated 75 million unemployed. The plan seems to follow a proposal that then-Representative Kucinich had introduced into the House in 2011. Funding for the program would be provided by Washington, but projects would be created and managed at the local level. At the time, Kucinich had argued that the program would “take workers as they are and where they are”, providing a living wage to participants and useful public services and infrastructure to their communities. When asked how the government would pay for the program, Representative Kucinich had said at the time “by crediting bank accounts, of course—that’s the only way a sovereign government ever spends.” However, his bill had failed to get out of committee; it was revealed that large campaign contributions were subsequently made by hedge fund manager Pete Peterson to all committee members who had opposed the legislation—and although he was never accused of wrong-doing, it was long suspected that there might have been a connection.

President Kucinich also announced a new “Marshall Plan” for war-ravaged Europe, which has descended into near anarchy since the EU collapsed in late 2010. He called on the Italian Red Brigade army to end its siege of Berlin. He promised to begin an airlift of food for Europe’s starving millions, to be followed by industrial products to help European nations to begin to produce for domestic consumption. He called for an end to fiscal austerity and argued that since each nation had adopted its own currency with the collapse of the euro, each now had the ability to “spend by crediting bank accounts.” Hence, “whatever is technologically feasible is financially feasible.”

Wall Street rallied on the news, with Nasdaq reaching a new high of nearly 250 and the Dow hitting 1150—the highest levels seen since the Great Crash of October 2011. The dollar also rose on the news, to $52 per Chinese RMB. Optimism spread to Japanese markets, with the yen remaining close to 132 per dollar.

In his statement, President Kucinich said that the long “nightmare” was coming to an end. He struck a conciliatory tone when he responded to a question about the actions of the administration of President Obama in the early years of the Great Depression, which many believe to have set the stage for the Great Crash. “Look, President Obama as well as his successors followed the advice of economists—who continually called for more fiscal austerity, much like the misguided physicians used to bleed patients to death. They were, and still are, clueless. I promise you that I will ban all economists from my administration. I will not seek, nor will I follow, advice from economists.” After a decade of suffering over the course of the second Great Depression, the nation breathed a collective sigh of relief.

The President pointed to the experiences of China, India and Botswana, the only nations to escape the Great Depression. He recalled that just a decade ago, US GDP and the standard of living of the average American were many times higher than those in any of these nations. Indeed, Botswana was widely derided for its policies, which had generated hyperinflation. Yet, each of these countries had adopted a job guarantee and had developed programs that achieved full employment with wage and price stability. And while unemployment rose dramatically all around the globe, these three nations enjoyed full employment and rising living standards—indeed, all three have surpassed the US median real household income level. President Kucinich said that Botswana has offered to send advisors to help get America’s fiscal and monetary policy back on track. He proclaimed that the days of misguided fiscal austerity are over, and promised to “spend whatever it takes to get our nation’s workers and factories operating at full capacity.”

In related news, a handful of economists have declared their support for President Kucinich’s policies. Among them is former Fed Chairman Alan Greenspan, who had recanted his belief in free market economics early in the depression. Over the years he has moved ever further to the left as he embraced reforms ranging from socialized medicine to abolition of private ownership of the means of production. While some economists have dismissed Greenspan’s public statements as the rants of “a senile old man” others have noted that the statements have become remarkably cogent in contrast to the testimonies he used to provide as Chairman. An early disciple of Ayn Rand, Greenspan’s recent testimonies now include obscure quotes from Marx, Lenin, and Rosa Luxemburg. He has also been calling for the elimination of the Fed, arguing that monetary policy and fiscal policy should be consolidated in the Treasury Department.

*Disclaimer: Some of the events reported here have not been fact-checked**.

**Disclaimer: Actually, none of the events reported here has yet occurred, although some are quite likely.

30 Comments

Posted in L. Randall Wray, Uncategorized

Tagged L. Randall Wray

“What Greece’s Bailout Means for U.S. Markets”

Posted on May 24, 2010 | 3 comments

Watch the latest business video at video.foxbusiness.com

3 Comments

Posted in Marshall Auerback, Uncategorized

Tagged Marshall Auerback

Repeat After Me: The USA Does NOT Have a ‘Greece Problem’

Posted on May 14, 2010 | 11 comments

By Marshall Auerback

To paraphrase Shakespeare, things are indeed rotten in the State of Denmark (and Germany, France, Italy, Greece, Spain, Portugal, and almost everywhere else in the euro zone). An entire continent appears determined to commit collective hara kiri whilst the rest of the world is encouraged to draw precisely the wrong kinds of lessons from Europe’s self-imposed economic meltdown. So-called serious policy makers continue to legitimize the continent’s fully-fledged embrace of austerity on the allegedly respectable grounds of “fiscal sustainability.”

The latest to pronounce on this matter is the Governor of the Bank of England, Mervyn King. This is a particularly sad, as the BOE – the Old Lady of Threadneedle Street – has actually played a uniquely constructive role amongst central banks in the area of financial services reform proposals. King, and his associate, Andrew Haldane, Executive Director for Financial Stability at the Bank of England, have been outspoken critics of “too big to fail” banks, and the asymmetric nature of banker compensation (“heads I win, tails the taxpayer loses”). This stands in marked contrast to America’s feckless triumvirate of Tim Geithner, Lawrence Summers, and Ben Bernanke, none of whom appears to have encountered a banker’s bonus that they didn’t like.

But when it comes to matters of “fiscal sustainability” King sounds no better than a court jester (or, at the very least, a member of President Obama’s National Commission on Fiscal Responsibility and Reform). In an interview with The Telegraph, the Bank of England Governor suggests that the US and UK – both sovereign issuers of their own currency – must deal with the challenges posed by their own fiscal deficits, lest a Greece scenario be far behind:

“It is absolutely vital, absolutely vital, for governments to get on top of this problem. We cannot afford to allow concerns about sovereign debt to spread into a wider crisis dealing with sovereign debt. Dealing with a banking crisis was bad enough. This would be worse.”

“A wider crisis dealing with sovereign debt”? Anybody’s internal BS detector ought to be flashing red when a policy maker makes sweeping statements like this. The Bank of England Governor substantially undermines his own credibility by failing to make 3 key distinctions:

There is a fundamental difference between debt held by the government and debt held in the non-government sector. All debt is not created equal. Private debt has to be serviced using the currency that the state issues.
Likewise, deficit critics, such as King, obfuscate reality when they fail to highlight the differences between the monetary arrangements of sovereign and non-sovereign nations, the latter facing a constraint comparable to private debt.
Related to point 2, there is a fundamental difference between public debt held in the currency of the sovereign government holding the debt and public debt held in a foreign currency. A government can never go insolvent in its own currency. If it is insolvent as a consequence of holdings of foreign debt then it should default and renegotiate the debt in its own currency. In those cases, the debtor has the power not the creditor.

Functionally, the euro dilemma is somewhat akin to the Latin American dilemma, such as countries like Argentina regularly experienced. The nations of the European Monetary Union have given up their monetary sovereignty by giving up their national currencies, and adopting a supranational one. By divorcing fiscal and monetary authorities, they have relinquished their public sector’s capacity to provide high levels of employment and output. Non-sovereign countries are limited in their ability to spend by taxation and bond revenues and this applies perfectly well to Greece, Portugal and even countries like Germany and France. Deficit spending in effect requires borrowing in a “foreign currency”, according to the dictates of private markets and the nation states are externally constrained.

King implicitly recognizes this fact, as he acknowledges the central design flaw at the heart of the European Monetary Union – “within the Euro Area it’s become very clear that there is a need for a fiscal union to make the Monetary Union work.”

This is undoubtedly correct: To eliminate this structural problem, the countries of the EMU must either leave the euro zone, or establish a supranational fiscal entity which can fulfill the role of a sovereign government to deficit spend and fill a declining private sector output gap. Otherwise, the euro zone nations remain trapped – forced to forgo spending to repay debt and service their interest payments via a market based system of finance.

But King then inexplicably extrapolates the problems of the euro zone which stem from this uniquely Euro design flaw and exploits it to support a neo-liberal philosophy fundamentally antithetical to fiscal freedom and full employment.

The Bank of England Governor – and others of his ilk – are misguided and disingenuous when they seek to draw broader conclusions from this uniquely euro zone related crisis. Think about Japan – they have had years of deflationary environments with rising public debt obligations and relatively large deficits to GDP. Have they defaulted? Have they even once struggled to pay the interest and settlement on maturity? Of course not, even when they experienced debt downgrades from the major ratings agencies throughout the 1990s.

Retaining the current bifurcated monetary/fiscal structure of the euro zone does leave the individual countries within the EMU in the death throes of debt deflation, barring a relaxation of the self-imposed fiscal constraints, or a substantial fall in the value of the euro (which will facilitate growth via the export sector, at the cost of significantly damaging America’s own export sector). This week’s €750bn rescue package will buy time, but will not address the insolvency at the core of the problem, and may well exacerbate it, given that the funding is predicated on the maintenance of a harsh austerity regime.

José Luis Rodríguez Zapatero, Spain’s Socialist prime minister, angered his trade union allies but was cheered by financial markets on Wednesday when he announced a surprise 5 per cent cut in civil service pay to accelerate cuts to the budget deficit.

The austerity drive – echoing moves by Ireland and Greece – followed intense pressure from Spain’s European neighbors, the International Monetary Fund on the spurious grounds that such cuts would establish “credibility” with the markets. Well, that wasn’t exactly a winning formula for success when tried before in East Asia during the 1997/98 financial crisis, and it is unlikely to be so again this time.

Indeed, in the current context, the European authorities are simply trying to localize the income deflation in the “PIIGS” through strong orchestrated IMF-style fiscal austerity, while seeking to prevent a strong downward spiral of the euro. But the contradiction in this policy is that a deflation in the “PIIGS” will simply spread to the other members of the euro zone with an effect essentially analogous to that of a competitive devaluation internationally.

The European Union is the largest economic bloc in the world right now. This is why it is so critical that Europeans get out of the EMU straightjacket and allow government deficit spending to do its job. Anything else will entail a deflationary trap, no matter how the euro zone’s policy makers initially try to localize the deflation. And the deflation is almost certain to spread outward, if sovereign states such as the US or UK absorb the wrong lessons from Greece, as Mr., King and his fellow deficit-phobes in the US are aggressively advocating.

There are two direct contagion vectors off the fiscal retrenchment being imposed on the periphery countries of the euro zone.

First, to the banking systems of the periphery and the core nations, as private loan defaults spread on domestic private income deflation induced by the fiscal retrenchment. Second, to the core nations that export to the PIIGS and run export led growth strategies. So 30-40% of Germany’s exports go to Greece, Italy, Ireland, Portugal and Spain directly, another 30% to the rest of Europe.

These are far from trivial feedback loops, and of course, the third contagion vector is to rest of world growth as domestic private income deflation combined with a maxi euro devaluation means exporters to the euro zone, and competitors with euro zone firms in global tradable product markets, are going to see top line revenue growth dry up before year end.

Let’s repeat this for the 100^th time: the US government, the Japanese Government, or the UK government, amongst others, do NOT face a Greek style constraint – they can just credit bank accounts for interest and repayment in the same fashion as if they were buying some helmets for the military or some pencils for a government school. True, individual American states do face a fiscal crisis (much like the EMU nations) as users of the dollar, which is why some 48 out of 50 now face fiscal crises (a problem that could easily be alleviated were the US Federal Government to undertake a comprehensive system of revenue sharing on a per capita basis with the various individual states). But, if any “lesson” is to be learned from Greece, Ireland, or any other euro zone nation, it is not the one that Mr. King is seeking to impart. Rather, it is the futility of imposing arbitrary limits on fiscal policy devoid of economic context. Unfortunately, few are recognizing the latter point. The prevailing “lesson” being drawn from the Greek experience, therefore, will almost certainly lead the US, and the UK, to the same miserable economic outcome along with higher deficits in the process. As they say in Europe, “Finanzkapital uber alles”.

11 Comments

Posted in Uncategorized

Tagged Uncategorized

Let’s Deport Poor People! A Modest Proposal for Latvia’s Unemployment Problem (with apologies to Jonathan Swift)

Posted on May 12, 2010 | 9 comments

By Marshall Auerback

In 1729, Jonathan Swift wrote an essay — “A Modest Proposal” — suggesting that the impoverished Irish ease their economic troubles by selling children as food for rich gentlemen and ladies. In that spirit, we would like to assist all governments who claim to be broke and therefore cannot deal with the persistent problem of unemployment. Latvia clearly shows the way.

On June 2009, the newly appointed Latvian Prime Minister, Valdis Dombrovskis made a national public radio address and said that his country had to accept major cuts in the budget because they would allow the country to receive the next installment of its IMF/European Union bail-out loans. He said the country was faced with looming “national bankruptcy” and then proceeded to ensure the validity of that claim, by implementing the economic equivalent of carpet bombing, in effect turning the Baltic republic into an industrial wasteland via the most virulent form of neo-liberal economics.

Having broken free from the chains of the former Soviet Empire, Latvia promptly surrendered its currency sovereignty by pegging its currency against the Euro. What this means it that it has to use monetary policy to manage the peg and the domestic economy has to shrink if there is are downward pressures on the local currency emerging in the foreign exchange rates. So instead of allowing the currency to make the adjustments necessary, the Latvian government handled the “implied depreciation” by devastating the domestic economy (public sector pay has been cut by 40 per cent over the last year, whilst the economy has contracted by almost a third).

9 Comments

Posted in Uncategorized

Tagged Uncategorized

Euro-Bankers to Greece: The Wealthy Won’t Pay their Taxes, So Labor Must Do So

Posted on May 11, 2010 | 16 comments

By Michael Hudson

The “Greek bailout” should have been called what it is: a TARP for German and other European bankers and global currency speculators. The money is being provided by other governments (mainly the German Treasury, cutting back its domestic spending) into a kind of escrow account for the Greek government to pay foreign bondholders who bought up these securities at plunging prices over the past few weeks. They will make a killing, as will buyers of hundreds of billions of dollars of credit-default swaps on the Greek government bonds, speculators in euro-swaps and other casino-capitalist gamblers. (Parties on the losing side of these swaps now will need to be bailed out as well, and so on ad infinitum.)

This windfall is to be paid by taxpayers – ultimately those of Greece (in effect labor, because the wealthy have been untaxed) – to reimburse Euro-governments, the IMF and even the U.S. Treasury for its commitment to predatory finance. The payment to bondholders is to be used as an excuse to slash Greek public services, pensions and other government spending. It will be a model for other countries to impose similar economic austerity as governments run up budget deficits in the face of falling tax collections from the financial sector being enriched by the translation of junk economics into international policy. So the bankers for their part will have little trouble meeting their bonus forecasts this year. And by the time the whole system collapses, they will have spent the money on hard assets of their own.

Financial lobbyists are using the Greek crisis as an object lesson to warn about the need to cut back public spending on Social Security and Medicare. This is the opposite of what the Greek demonstrators are demanding: to reverse the global tax shift off property and finance onto labor, and to give labor’s financial claims for retirement pensions priority over claims by the banks to get fully paid on hundreds of billions of dollars of recklessly bad loans recently reduced to junk status.

Bank lobbyists know that the financial game is over. They are playing for the short run. The financial sector’s aim is to take as much bailout money as it can and run, with large enough annual bonuses to lord it over the rest of society after the Clean Slate finally arrives. Less public spending on social programs will leave more bailout money to pay the banks for their exponentially rising bad debts that cannot possibly be paid in the end. It is inevitable that loans and bonds will default in the usual convulsion of bankruptcy.

Greek labor is not yet so pessimistic as to give up the fight. What it recognizes (that its American counterparts do not) is that somebody will control the government. If labor – the demos – loses its spirit, power will be relinquished to foreign creditors to dictate public policy by default. And the more the bankers’ interest is served, the worse and more debt-burdened the economy will become. Their gain is bought at the price of domestic austerity. Scheduled payouts by Greek pension funds and government social spending programs must be to replenish German and other European bank capital.

This worldview already has been delivered to Europe’s northernmost periphery, where it has elicited a fiscal masochism that banks hope to see in Greece. Having fallen on their swords, Baltic governments would be jealous and even resentful to see Greece rescue its economy where they themselves failed to repudiate arrogant creditor demands. “Seen from the eastern rim of the European Union, the looming austerity drive in crisis-afflicted Greece reads like old news,” writes Nina Kolyako. “For almost two years, the Baltic states of Lithuania, Latvia and Estonia have brought in repeated draconian measures, slashing public spending and hiking taxes to try to dig themselves out of a hole. ‘We learned the lessons very painfully, heavily and effectively, that you need to look after the fiscal situation very carefully,’ Lithuanian Prime Minister Andrius Kubilius told AFP in a recent interview. ‘We understood very clearly that fiscal consolidation was the only way for us to survive.'”

Capitulating in a classic Stockholm syndrome (literally to Swedish banks in this case), Lithuania’s government dutifully tightened the screws so much that GDP plunged by over 17 percent. A similar plunge occurred in Latvia. The Baltics have slashed public-sector employment and wages, imposing poverty rather than the Western European levels of prosperity (and progressive taxation to foster a middle class) that was promised after the Baltics achieved their independence from Russia in 1991.

After Latvia’s parliament imposed austerity in December 2008, popular protest in January brought down the government (as a similar protest did in Iceland). But the result was merely another neoliberal “occupation regime” run on behalf of foreign banking interests.

So what is unfolding is a Social War on a global scale – not the class war envisioned in the 19^th century, but a war of finance against entire economies, against industry, real estate and governments as well as against labor. It is happening in the usual slow motion in which great historical transitions occur. But as in military conflicts, each battle seems frenetic and spurs wild zigzagging on the world’s stock and bond exchanges and currency markets.

All this is great news for computer program traders. The average commitment of funds lasts only a few seconds these days as financial markets are buffeted up and down by vast credit waves blown by the storms sweeping today’s financially overheating planet.

The coming economic dystopia

The Greek crisis shows how far the “European idea” has shifted from 1957 when the six-member European Economic Community (EEC) was formed. At U.S. prodding, Britain and Scandinavia created the rival seven-member European Free Trade Association (EFTA). Even so, the promise of Euroland – at least before Maastricht and Lisbon – was to elevate labor to middle-class prosperity, not to impose IMF-type austerity programs of the sort that devastated Third World countries. The message to indebted economies is stark: “Drop dead.” And they are obediently committing economic hara kiri (emulating Japan in the 1985 Plaza Accords) to endorse the Washington Consensus – the class war of finance against labor and industry.

Political, social, fiscal and economic power is being transferred to the EU bureaucracy and its financial controllers in the European Central Bank (ECB) and the IMF, whose austerity plans and related anti-labor programs direct governments to sell off the public domain, land and subsoil wealth, public enterprises, and to commit future tax revenues to pay creditor nations. This policy already has been imposed on “New Europe” (the post-Soviet economies and Iceland) since autumn 2008. It is now to be imposed on the PIIGS (Portugal, Ireland, Italy, Greece and Spain). No wonder there are riots!

For observers who missed Iceland and Latvia last year, Greece is the newest and so far the largest battlefield. At least Iceland and the Baltics have the option of re-denominating loans in their own currency, writing down their foreign debts at will and taxing property to recapture for the government the revenue that has been pledged to foreign bankers. But Greece is locked into a European currency union, run by unelected financial officials who have inverted the historical meaning of democracy. Instead of the economy’s most important sector – finance – being subject to electoral politics, central banks (the designated lobbyists for commercial and investment bankers) have been made independent of political checks and balances.

In truly Orwellian fashion, right-wingers in Europe and the United States (such as Fed Chairman Ben Bernanke) call this the “hallmark of democracy.” It actually is the stamp of oligarchy, stripping away control over the economy’s credit allocation – and hence, forward planning – while giving high finance a stranglehold over public spending programs.

Iceland, Latvia and now Greece are the opening shots in the resulting global campaign to roll back the great democratic reform program of the 19^th century and the Progressive Era: taxation of land and the “unearned increment” of price gains for real estate, stocks and bonds, and subordination of the financial sector to the needs of economic growth under democratic direction. This doctrine was still being followed by the post-1945 era of progressive taxation that saw the 20^th century’s greatest rise in living standards and economic growth. But most countries have reversed the fiscal trend since 1980. Tax collectors have “freed” income from public obligation only to see it pledged to banks for higher loans to bid up property prices.

Houses, office buildings and entire companies are worth whatever banks will lend. So populations (and corporate raiders) have responded to the pro-financial tax shift by borrowing to buy houses (and companies) before prices recede even further out of reach. And taxes on labor now are about to be jacked up to pay off the public debts resulting from the asset-price inflation and financial wreckage that property tax cuts have helped cause. This is the cause of national debts. Governments have run into debt as a result of un-taxing the wealthy in general, not just real estate.

Following Western governments in shifting the fiscal burden off property and finance onto labor over the past few decades, Greece’s government is politically unable or unwilling to tax the wealthy, or even well-to-do professionals. But neoliberals blame it and other debtor governments for not selling off enough public land and enterprises to make up the gap. Tax-deductible interest charges make privatizations on credit tax-exempt, so governments will lose the user fees they formerly received – while populations pay higher “tollbooth” charges for hitherto public services.

Just as the U.S. Government has done, it has issued bonds to finance the deficit resulting from these tax cuts. The buyers of these bonds (mainly German banks) are demanding that Greek labor (and now German taxpayers as well) should bear the burden of tax shortfalls. German and other European banks and bondholders are to be repaid at the social cost of drastic cutbacks in pensions and social spending – and if possible, by more privatization sell-offs at distress prices.

The riots in Greece have erupted because labor understands what most journalistic reporting shies away from confronting. Growth in real wages has slowed (and has stopped cold in the United States since about 1979). Home ownership has been achieved at the cost of new buyers taking on a lifetime of mortgage debt. And the post-Soviet economies won their political freedom from Russia, only to find themselves insolvent today, dependent on IMF and EU direction of their economies to obtain the loans to pay their foreign bankers that have loaded down their housing, public enterprises, industry and families with debt.

Bondholders and financial speculators have ganged up to demand EU, IMF and US support for them to take their gains before the financial game crashes. The grab can be done most quickly by shrinking economies under IMF-style austerity plans. Unemployment is to rise while driving economies even further into debt – not only public debt as shrinking markets lead to falling tax revenue, but also foreign debt as import dependency increases.

Creditors are to be paid by letting them appropriate the economic surplus, in the form of debt service at the expense of new capital investment, infrastructure spending, public social spending and rising living standards. Economically, the Greek uprising is a revolt against the policy of sacrificing prosperity to pay foreign creditors in this way.

At the political level the fight is to save Greece from being turned into an anti-state. The classical definition of a “state” or government is the ability to levy taxes and issue money. But Greece has relinquished its fiscal authority to the EU and IMF, which are telling it to violate what political theorists list as the Prime Directive of any government: to act in the long-term national interest. The Greek government is being directed to act on behalf of bank capital, and indeed, that of foreign countries to engage in asset stripping, not to promote long-term growth.

At issue is whether nations will be run by creditors or by popular aims to reap the benefits of economic growth. An oligarchic push for IMF-EU loans to bail out foreign banks and bond speculators at the expense of Greek labor (the intended taxpayers of the future) aims at making labor rather than finance capital take the loss of government arrears resulting from un-taxing wealth. The aim is to enable foreign banks to avoid having to pay the price for acting as enablers in draining the domestic market. Government policy is to be taken out of the hands of voters and subordinated to the IMF and EU acting as instruments of international finance.

This creates a state of affairs in which neither Greece nor the EC are “states” or “governments” in the traditional political sense. The EU and IMF bureaucracy is not elected. And at the point where their foreign-dictated financial plan succeeds, the economy’s capital will be stripped and social democracy will collapse.

On Sunday, May 9, German voters expressed their anger at the government’s role in bailing out German bankers (euphemized as bailing out “Greece”) at the expense of German taxpayers. The European Central Bank [ECB] is not creating free euro-money but is billing national governments). The Social Democrats overtook Chancellor Angela Merkel’s Christian Democratic Union party in North Rhine-Westphalia. Winning only a bit over a third of the vote – a bit less than the Social Democrats (and down over 10 percentage points from the last election, of which 4 points were lost just in the last week when the bailout package was promoted by Ms. Merkel) – the CDU lost its majority in Germany’s upper house.

Many German voters may have wondered whether taxing the poor to pay the rich to engage in usury was really as “Christian” as the party claimed to represent. Or maybe they were concerned that Germany’s tax collector is to pay nearly $30 billion as its share in the bailout of bankers – not all of whom are beloved in Germany, even when they are German. And some no doubt saw the game as a financial deception by the banking sector’s compliant politicians.

The deception

Europe’s financial lobbyists used the crisis as an opportunity to promote a broad series of bailouts. For Swedish and Austrian banks, the EU approved a €60bn extension of the balance-of-payments facility already put in place to help Hungary, Romania and Latvia keep current on their debts to Austrian and Swedish banks respectively. To circumvent the Eurozone’s no-bailout principle, this special bailout law is based on Article 122.2 of the EU treaty permitting loans to governments in “exceptional circumstances.”

If we give Ms. Merkel credit for understanding the economics at work, then we must accuse her of lying through her teeth. The Baltic debt problem is chronic and structural, not “exceptional.” Ms. Merkel also must know that she is being deceptive in pretending to help Latvia by extending loans that the EU limits explicitly to support the lat’s exchange rate, not for domestic development. The foreign exchange is to cover the cost of Latvians paying mortgages in euros to Swedish banks, and of Latvian consumers buying food and manufactures that EU governments subsidize while leaving the Baltics in a state of economic and financial dependency.

Latvia thus is being victimized, not helped. The aim is to give Swedish banks a little more time to keep collecting payments on loans that are going to go bad in due course. Foreign exchange spent in facilitating private debt service to foreign banks becomes a national debt, to be paid by Latvian taxpayers. This EU loan thus is an exercise in naked neo-colonialism.

Will the belated shift of German voters to back the Social Democrat red-green coalition with the Green and Left parties do much to stem matters? Probably not. Greek President Papandreou acquiesced in the cave-in despite being head of the Socialist International. So the question is whether Greece really is checkmated, destined to see its public spending, pensions, health care, schooling and living standards rolled back in the way that the Baltics have experienced. They have been an experiment in neoliberal central planning. If they are an example of what the future is to bring, the world will soon see a wave of Greek emigration, Baltic-style.

That evidently is what stock markets around the world anticipated when they soared on Monday morning at the news of Europe’s trillion-dollar bailout. What really was bailed out is the principle that economies should be stripped so that finance capital may rule. But the fight surely is not yet over. It will escalate for the remainder of the 2010s, because it is nothing less than an attempt to roll back the history of the 19^th and 20^th century’s struggle to replace the power of vested property and financial interests with principles of progressive taxation and public enterprise.

Is this where Western civilization really is supposed to be leading? Confronted by parliaments controlled by aristocracies, the 19^th-century reformers sought to take them over on behalf of democracy. Classical political economy was a reform program to tax away the “free lunch” of land rents, monopoly rents and financial interest extraction. John Maynard Keynes celebrated this program in his gentle term, “euthanasia of the rentiers.”

But the vested interests have fought back. Calling social democracy and public regulation “the road to serfdom,” They are trying to set Europe’s economies on the road to debt peonage. Making an end-run around national elected governments to impose the Washington Consensus, IMF and EU institutions have gained fiscal and economic control over governments and their tax policies to cut taxes on wealth – and borrow from it to finance the resulting fiscal deficits.

America’s Tea Partiers and anti-tax rebels have given up the fight to reform governments. Squeezed by debt from which they see no escape, they demand lower taxes – and are willing to see the highest brackets become the major beneficiaries in an even more regressive tax shift. Faced with the corruption of Congress by lobbyists acting on behalf of the vested interests, they reject government itself and seek safety in local gated communities. They see Congress and parliaments throughout the world losing autonomy to the IMF, the EU and other Washington Consensus organizations seeking to impose austerity and shift the tax burden onto labor and industry, off property and off predatory finance.

The only way to prevent a regressive tax shift and debt squeeze is gain control of governments on behalf of the spirit of classical economic and Progressive Era reforms. At least that is what Greek labor is rioting for. Someone must control government, and if democratic forces withdraw from the fight, the financial sector will tighten its grip.

Last week is still only the beginning of how this drama will play out. The response by the post-Soviet economies, which have retained their own currencies, is to come this summer and autumn.

*** A truncated version of this piece appeared at www.counterpunch.org earlier today

16 Comments

Posted in Uncategorized

Tagged Uncategorized

“Yes, Virginia. There is a Difference Between Greece and the US”

Posted on May 7, 2010 | 6 comments

By Marshall Auerback*

If we learn the wrong lessons from Greece, our social safety net may wind up in tatters.

Many market analysts, commentators and economists claim to be having a hard time finding a metric in which the US is in better financial shape than Greece. Ken Rogoff, for example, recently warned that a Greek default would usher in a series of sovereign defaults, and suggested recently on NPR that the crisis also had implications for the US. The historian Niall Ferguson made a similar claim a few months ago in the Financial Times. The cries of the deficit hawks grow louder: Repent all ye fiscal profligates, before the “day of reckoning” comes.

Let’s dial down the Biblical hysteria a wee bit while there’s still time for rational debate. The market’s recent response to the intensifying pressures in the euro zone suggests that investors are beginning to differentiate between countries that are sovereign issuers of currency, such as the US or Japan, and non-sovereign issuers, such as Greece or any other nations in the euro zone. The US dollar is rising in value, notwithstanding the federal deficit, while debt distress in the so-called “PIIGS” countries, especially Greece, are intensifying, thereby driving down the euro to fresh 12 month lows against the dollar.

The relative performance of various currencies against the US dollar is highly instructive in this regard. Over the past 3 months, the Australian, New Zealand and Canadian dollars have all registered gains of some 4% against the greenback. The worst performer? Not surprisingly, the euro, down 6.3% over that period. Whether consciously or not, the markets are demonstrating that they understand the distinctions between users of currencies (who face an external funding constraint), and those nations that face no constraint in their deficit spending activities because they are creators of currency.

That the US has the reserve currency is an irrelevant consideration here. The key distinction remains user vs. creator. The euro zone nations are part of the former; Canada, Australia, the UK, Japan and the US are representatives of the latter.

Using “PIIGS” countries as analogues to the US or the UK, as Rogoff, Ferguson and countless other commentators do, is wrong. Their faulty analysis comes as a result of the deficit critics’ failure to distinguish between the monetary arrangements of sovereign and non-sovereign nations. Any sovereign government (none within the EMU enjoy that status any longer) can deal with a collapse in revenue and an increase in outlays from a financial perspective without invoking the sort of deadlocks that are now crippling the EMU zone. That is why, for example, the Japanese yen is not in freefall against the dollar, despite having a public debt to GDP ratio in excess of 200%, almost 2.5 times that of the US. In fact, over the past few days the yen has actually appreciated against the dollar. Now why would that be, if the lesson we were supposed to learn was the evils of “unsustainable” government deficit spending?

Fiscal sustainability has no relevance in a system where there are no operational constraints on the ability of a government to spend. US Social Security checks will not bounce. Nor will the Canadian or Japanese equivalents. Similarly, their bonds will always be able to pay out interest.

Note that this doesn’t mean that there are no real resource constraints on government spending. Let’s be clear: anyone who advances the use of fiscal policy as an effective counter-stabilization tool is always careful to point out that these interventions can come at a cost. That cost could well be inflation if, as a result of the fiscal expansion, we reach full employment, resource constraints begin to appear, but the government continues to spend. But if the economy recovers, tax revenues will increase and safety net spending will fall. In the US, that means we will likely be back to “normal,” with deficits around 2-4% depending on the state of the economy, which is where we’ve been for the past 30 years aside from 1998-2001.

Why won’t these deficits be inflationary? As Professor Scott Fullwiler noted in a recent email correspondence with me, once the recovery is underway and the economy gets to a significantly higher capacity utilization where price pressures could emerge, the deficit will be declining substantially. It will also be at least a partially offset by a fall in discretionary spending on social welfare. It’s axiomatic that the faster the economy grows, the smaller the deficit becomes, unless the government continues to spend recklessly–which we certainly do not advocate.

And by the time we get to a point where we might have inflation, the deficit is back to 2-3%, which again is where we’ve been for the past 30 years, while average inflation has been about 2%. Note: inflation does not equal default. You and I could well buy credit default swaps on any country in the world, but we are unable to collect if any of the relevant countries register a positive rate of inflation — even a double digit rate of inflation — because inflation is not tantamount to default. Nor do the ratings agencies recognize default in this manner. Default is defined as a failure to perform a task or fulfill an obligation, especially failure to meet a financial obligation. Inflation is not incorporated into the definition when it comes to questions of national insolvency.

By contrast, the talk of Greek default is prevalent across the markets, and that is a reasonable concern in the context of the euro zone. The default option is considered a foregone conclusion, even allowing for the massive 110 billion euro bailout, which was designed to inspire “shock and awe” among investors but instead has simply engendered shock. If Greece costs 110 billion euros to bail out, how much next time for Spain, Italy, or even France?

If the markets have concerns about national solvency, they won’t extend credit. And that is the problem facing all of the euro zone countries. Greece, Portugal, Italy, France, and Germany are all users of the euro-not issuers. In that respect, they are more like any American state or municipality, all of which are users of the US federal government’s dollar.

And deficits per se will not create the conditions for default in the US. If the US continues to run net export deficits (all the more likely given the ongoing fall in the value of the euro), and the private domestic sector is to net save, the US government has to net spend–that is, run deficits. That is a basic accounting identity, nothing more, nothing less. If the US government tries under these circumstances to run surpluses, it will first of all force the private domestic sector into deficits (and increasing debt) and ultimately fail because the latter will eventually seek to increase their saving ratio again.

And the same logic applies for Greece. The call is for the IMF/EU package to reduce its budget deficit as a percentage of GDP from the current 13.6% to 8.1% in 2011. How will they achieve that? Trying to engineer a reduction in the deficit via austerity programs (or freezes or whatever else one might like to call them) at a time when private spending is still insufficient to maintain adequate real GDP growth is a recipe for disaster. It will increase the deficit.

Consider Ireland as Exhibit A in this regard. Ireland began cutting back deficit spending in 2008, when its banking crisis began to spread and its budget deficit as a percentage of GDP was 7.3%. The economy promptly contracted by 10% and, surprise, surprise, the deficit exploded to 14.3% of GDP. We would wager heavy odds that a similar fate lies in store for Greece, given the EU’s inability to understand or recognize basic financial balances and the interrelationships among the various sectors of the economy. Neither a government, nor the IMF, can predict with any certainty what the outcome will be–ultimately private saving desires will drive the outcome, as Bill Mitchell has noted repeatedly.

Why do we have huge budget deficits across the globe? It’s not because our officials have all suddenly become Soviet-style apparatchiks. It is largely because the slower global economy has led to lower revenues (less income=less taxes paid, since most tax revenue is based on income, and lower tax brackets) and higher spending on the social safety net. Gutting this social safety net because we extrapolate the wrong lessons from the euro zone’s particular (and self-imposed) predicament constitutes the height of economic ignorance. It also reflects a transparently political agenda, which the US would be ill advised to embrace. The rescue packages, the IMF intervention and all the talk about orderly defaults cannot overcome the EMU’s fundamental design flaw. Let neo-liberalism die with the euro.

*This post originally appeared on ND 2.0