By Fadhel Kaboub
(cross posted from freepress.org)
This year marks the 50th anniversary of the so-called “War on Poverty” that President Lyndon B. Johnson declared when the official poverty rate was at 19%. Five decades later, the poverty rate stands at 15% with 46.5 million people living below the official poverty line, which is about $23,000 for a family of four (2012 Census Data). More than 20 million people earn less than half the poverty line, in other words, they live in extreme poverty in the richest country in the history of the world. The statistics are even more depressing when we consider that the child poverty rate (under age 18) is an alarming 21.8%. Even worse, for children under the age of 5, some states register poverty rates of up to 36%.
By Fadhel Kaboub*
The ongoing political deadlock over the U.S. government deficit and the national debt is slowly digressing into one of the most devastating economic pains that a financially sovereign government can inflict on itself and on its own people. With the exception of the readers of New Economic Perspectives and MMT-oriented blogs (here, here, here, here, here, and here among others), the vast majority of the public suffers from an acute form of deficit disorder, which can be diagnosed in a variety of ways, but most commonly you will notice that the subject is convinced that:
- the government should balance its budget and pay off its debt in the same way that responsible individuals, households, and businesses do;
- government deficits crowd-out private sector investments;
- government deficits cause inflation;
- government deficits promote inefficient and wasteful government programs; and/or
- the national debt is a burden on future generations and a form of taxation without representation.
By Fadhel Kaboub
I was recently asked to testify before the Ohio House of Representative’s Tax Reform Legislative Study Committee. I urged the committee to carefully consider the long-term negative consequences of the regressive tax policy for the State of Ohio and its residents. What follows is the gist of my testimony along with some of the data that I presented to the committee.
Working class families continue to suffer from real income growth stagnation since the 1980s despite a steady rise in productivity (Figure 1). However, in order to continue supporting the growth of the U.S. economy, household consumption (the engine of GDP growth in the U.S.) became increasingly dependent on access to credit (credit card debt, student loans, car loans, home equity lines of credit, subprime loans, reverse mortgage loans, etc.). That is why household debt as a percent of disposable income has peaked at almost 140% in 2007 (Figure 2). The proper response to this problem is an increase in disposable income rather than easier access to credit.
By Fadhel Kaboub
Despite all the heated public debates that we have been witnessing in Egypt since the January 2011 uprisings, very little attention has been given to the root causes of the country’s deepest economic problems. Understandably, as a country moves towards democracy, it must address all the concerns about freedom of expression, religious rights, women’s rights, security and justice sector reforms, anti-corruption laws, political pluralism, elections, and constitutional reform. However, it is equally important to recognize that regardless of the political affiliation of the new government (Muslim Brotherhood, secular, or military), it must craft a long-term policy agenda to address the root causes of Egypt’s economic problems. Failure to do so will be catastrophic not only for the economy, but also for the creation of a secure and stable democratic society.
By Fadhel Kaboub
(Cross-posted from Al-Ahram)
I read Niveen Wahish’s article ‘Less is more’ (Al-Ahram Weekly, 3-9 November) with a great sense of frustration about the prevalence of the conventional wisdom that tax revenues finance government spending and that “borrowing” is inherently destabilising. If Egypt is going to lead the way in a new era in the Middle East, it must abandon the “sound finance” mythology, which is a relic of the gold standard, and embrace a model of true financial sovereignty. A financially sovereign country prints its own currency, collects taxes in that same currency, and most importantly issues government bonds that are only denominated in that same sovereign currency. As such, Egypt can finance all the national priorities that its people demand. A national debt is always manageable under a flexible exchange rate system and an adequate agricultural and industrial policy. Egypt’s most valuable assets are its people and their ingenuity. The country must also harness support from and cooperation with like-minded nations that are interested in fair trade amongst equals rather than neo-colonialist subjugation. The real burden on Egypt’s economy is the odious debt that was incurred under the Mubarak regime. This debt must be repudiated in the same way that Iraq’s and Ecuador’s debt were. Debt cancellation (not forgiveness) is the least that the West can do today to make up for the ills that Mubarak and his Western supporters have done to the people of Egypt.
By Fadhel Kaboub.
(Also featured in the Financial Times)
Sir, The eurozone’s obsession with “sound finance” is the root cause of today’s sovereign debt crisis. Austerity measures are not only incapable of solving the sovereign debt problem, but also a major obstacle to increasing aggregate demand in the eurozone. The Maastricht treaty’s “no bail-out, no exit, no default” clauses essentially amount to a joint economic suicide pact for the eurozone countries.
The eurozone needs a functional finance approach to economic policy, which requires that the European Central Bank, as the monopoly issuer of the currency, acts as a lender of last resort to allow the expansion of aggregate demand through government spending. The ECB’s refusal to use its firepower is what is driving eurozone bond yields to unsustainable levels. The ECB can easily purchase Italian debt to lower yields, but such action would constitute a violation of Article 123 of the European Union treaty. Unfortunately, the likelihood of a swift political solution to amend the EU treaty is highly improbable. Therefore, the most likely and least painful scenario for Italy (Greece, Portugal, Spain etc) is an exit from the eurozone combined with partial default and devaluation of a new national currency.It has been fascinating to watch the entire world turned upside down during the past few weeks over the eurozone’s self-inflicted economic pain – the same pain that so many developing countries have suffered under the Washington consensus austerity measures and sound finance principles.
The takeaway lesson is that financial sovereignty and adequate policy co-ordination between fiscal and monetary authorities are the prerequisites for economic prosperity. In the end, what matters is not the level of the deficit or the national debt, but rather their effects on employment, price stability and economic growth.
Dr. Fadhel Kaboub, Assistant Professor of Economics, Denison University, Granville, OH, US