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The Myths About Government Debt and Deficit as Told By Carmen Reinhart and Kenneth Rogoff

Posted on July 17, 2010 by admin | 25 comments

Yeva Nersisyan

In every culture there are a set of myths that are used to bring up future generations. In the US parents tell their children that if they don’t behave the bogeyman will get them. In many other countries it is a “Sack man” who carries naughty children away in a big sack. The myths are numerous and differ from culture to culture but the purpose is to get children to conform to the parental authority. As children trust their parents this is usually fairly easily accomplished. Although we would like to think that once we become adults we are not fed similar half-truths and outright lies, unfortunately it is not the case. One would think that as adults who have the capacity to reason and think critically we could spot those lies and myths. But what to do, if the people whose authority we trust, the so-called scientists and experts in the field are the ones feeding us the myths?

Major crises can be useful in helping people to rethink the way they once thought about the world. During the Great Depression, we abandoned the idea that free markets could work without government intervention. Gradually, as the postwar economy avoided major crises, precisely due to state intervention, people got comfortable thinking that the economy has become inherently stable and that state intervention is no longer necessary. Economists were at the forefront of propagating this myth. We were also led to believe that fiscal policy was neither useful nor necessary. But perhaps the biggest myth that we were all taught is that the government should balance its budget just like a household does, that persistent budget deficits are unsustainable and will lead to stagnant growth and even to sovereign defaults. Thanks to this myth, propagated by professional economists, with nearly 10% of the US labor force unemployed and another 7% underemployed, the public debate is now focused on the false issue of deficits and debt.

A case in point is a recent book by Carmen Reinhart and Kenneth Rogoff, “This Time is Different” that has become a bestseller, making them the ultimate authorities on the issues of debt, default and crises. It has been used by conservatives and progressives alike to argue for lowering government deficits and debt in the midst of the current Great Recession. The media as well as academia have fawned all over this book, to the point where one begs the question whether they have actually taken the pain (it is painful!) to read the book (see here for more on this). This is not particularly surprising, however, considering that orthodox economists don’t have a theory to explain the financial crisis (since their models always excluded the possibility of one). Hence they have been desperate to embrace the “analysis” found in the book just like a drowning person holds on to a straw. A most recent example of the fluff surrounding the book can be found in the NYT by the Economix section writer Catherine Rampell, a deficit hawk herself. Rampell suggests that the book somewhat makes up for the shortcomings of economists, that being the failure to foresee the current crisis. I decided to check out the publications of Reinhart and Rogoff prior to the crises with the hope to find papers that foresaw the current debacle. The closest Ken Rogoff got was to argue that global imbalances were unsustainable. Unless you believe that the current crisis was the result of global imbalances (a strange and flawed but not uncommon proposition) then Rogoff can safely be classified among those economists who were so blinded by their own models that failed to see what was going on under their noses. A similar story can be told about Reinhart.

Reinhart and Rogoff might be commended on the amount of work they have put into assembling the huge database (it covers eight centuries and sixty-six countries, although the focus of the book is crises and defaults since 1800). Rather than closely studying the details of particular crises to gain an understanding of causes and consequences in order to make more general statements, their method is to aggregate particular measures and ratios across countries and over the long sweep of history to obtain data presented in “simple tables and figures” to “open new vistas for policy analysis and research.” Indeed, their book is nothing more than a large database of questionable value. The authors argue in favor of empirical investigations rather than fancy models. I agree with that. But simply having a large amount of data without much meaningful explanation is not very useful. Economic analysis and theorizing doesn’t necessarily have to be mathematical. One can use the narrative approach to explain economic events. Indeed, the narrative approach is in some cases the only way to capture the complexity of the world around us. And while Rogoff and Reinhart have rejected the mathematical modeling, they haven’t offered an alternative in the form of a narrative either. They simply have failed to do much explaining at all.

The crux of the book is that each time people think that “this time is different”, that crises cannot occur anymore or that they happen to other people in other places. True. This is exactly what Hyman Minsky was arguing more than 40 years ago. Reinhart and Rogoff don’t really explain why this perception leads to crises. Minsky, on the other hand, had an analysis of investment and of position taking in assets which led him to conclude that when people get comfortable in the existing situation they tend to overextend their balance sheets and lower the cushions of safety, which inevitably leads to fragility. A fragile financial system is then subject to a crash like the one we experienced in 2007.

The book is mostly on crises driven by government debt. Rogoff and Reinhart claim to have identified 250 sovereign external defaults and 70 defaults on domestic public debt. The problem with their “analysis”, however, is that over the past 800 years (and even over the past two centuries that are the focus of the book), institutions, approaches to monetary and fiscal policy, and exchange rate regimes have changed. For example, before the Great Depression the US was on a Gold Standard, then there was the Bretton Woods regime and finally in the last 40 years the US dollar has been a non-convertible currency. From reading the book it seems that this is not important at all. In reality the monetary regime a country operates on has major implications for government solvency. Aggregating data over different monetary regimes and different countries cannot yield any meaningful conclusions about sovereign debt and crises. It is only useful if the goal is to merely validate one’s preconceived myth about government debt being similar to private debt.

A sovereign government that operates on a non-convertible currency regime spends by issuing its own currency and as it’s the monopoly issuer of that currency, there are no financial constraints on its ability to spend. See here, here and here for more. It doesn’t need to tax or issue bonds to spend. It makes any payments that come due, including interest rate payments on its “debt” and payments of principal by crediting bank accounts meaning that operationally they are not constrained on how much they can spend. Governments operating with a non-convertible fiat currency cannot be forced to default on sovereign debt. They can choose to do so but that’s ultimately a political decision, not an economic/operational one. As far as I can tell Rogoff and Reinhart haven’t identified a single case of government default on domestic-currency denominated debt with a floating exchange rate system.

The need to balance the budget over some time period determined by the movements of celestial objects is a myth. When a country operates on a fiat monetary regime, debt and deficit limits and even bond issues for that matter are self-imposed, i.e. there are no financial constraints inherent in the fiat system that exist under a gold-standard or fixed exchange rate regime. But that superstition is seen as necessary because if everyone realizes that government is not actually financially constrained then it might spend “out of control” taking too large a percent of the nation’s resources. See here for more.

When the Great Depression hit governments didn’t know how to counteract the crisis, to solve the problem of unemployment. Further they were constrained by the Gold Standard (which the U.S. finally abandoned in 1933). Today we know exactly what to do to solve the issue of underutilization of labor resources. But unfortunately we are constrained by myths. I wonder what the economists, who propagate these myths, would say if they were in the ranks of the unemployed. Would they say that Congress should not extend unemployment benefits because it will further contribute to the deficit? Would they say that more stimulus is unsustainable? I suggest we leave them unemployed for a while. They will have more free time to do some Modern Monetary Theory reading and more “economic incentives” (i.e. lack of income to support themselves and their families) to rethink their position. Professional economists are a major impediment on the way to using our economic system for the benefit of us all. And Reinhart and Rogoff are no exception.

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Europe’s Fiscal Dystopia: The “New Austerity” Road to Neoserfdom

Posted on June 25, 2010 by admin | 20 comments

By Michael Hudson

Europe is committing fiscal suicide – and will have little trouble finding allies at this weekend’s G-20 meetings in Toronto. Despite the deepening Great Recession threatening to bring on outright depression, European Central Bank (ECB) president Jean-Claude Trichet and Prime Ministers from Britain’s David Cameron to Greece’s George Papandreou (president of the Socialist International) and Canada’s host, Conservative Premier Stephen Harper, are calling for cutbacks in public spending.

The United States is playing an ambiguous role. The Obama Administration is all for slashing Social Security and pensions, euphemized as “balancing the budget.” Wall Street is demanding “realistic” write-downs of state and local pensions in keeping with the “ability to pay” (that is, to pay without taxing real estate, finance or the upper income brackets). These local pensions have been left unfunded so that communities can cut real estate taxes, enabling site-rental values to be pledged to the banks of interest. Without a debt write-down (by mortgage bankers or bondholders), there is no way that any mathematical model can come up with a means of paying these pensions. To enable workers to live “freely” after their working days are over would require either (1) that bondholders not be paid (“unthinkable”) or (2) that property taxes be raised, forcing even more homes into negative equity and leading to even more walkaways and bank losses on their junk mortgages. Given the fact that the banks are writing national economic policy these days, it doesn’t look good for people expecting a leisure society to materialize any time soon.

The problem for U.S. officials is that Europe’s sudden passion for slashing public pensions and other social spending will shrink European economies, slowing U.S. export growth. U.S. officials are urging Europe not to wage its fiscal war against labor quite yet. Best to coordinate with the United States after a modicum of recovery.

Saturday and Sunday will see the six-month mark in a carefully orchestrated financial war against the “real” economy. The buildup began here in the United States. On February 18, President Obama stacked his White House Deficit Commission (formally the National Commission on Fiscal Responsibility and Reform) with the same brand of neoliberal ideologues who comprised the notorious 1982 Greenspan Commission on Social Security “reform.”

The pro-financial, anti-labor and anti-government restructurings since 1980 have given the word “reform” a bad name. The commission is headed by former Republican Wyoming Senator Alan Simpson (who explained derisively that Social Security is for the “lesser people”) and Clinton neoliberal Erskine Bowles, who led the fight for the Balanced Budget Act of 1997. Also on the committee are bluedog Democrat Max Baucus of Montana (the pro-Wall Street Finance Committee chairman). The result is an Obama anti-change dream: bipartisan advocacy for balanced budgets, which means in practice to stop running budget deficits – the deficits that Keynes explained were necessary to fuel economic recovery by providing liquidity and purchasing power.

A balanced budget in an economic downturn means shrinkage for the private sector. Coming as the Western economies move into a debt deflation, the policy means shrinking markets for goods and services – all to support banking claims on the “real” economy.

The exercise in managing public perceptions to imagine that all this is a good thing was escalated in April with the manufactured Greek crisis. Newspapers throughout the world breathlessly discovered that Greece was not taxing the wealthy classes. They joined in a chorus to demand that workers be taxed more to make up for the tax shift off wealth. It was their version of the Obama Plan (that is, old-time Rubinomics).

On June 3, the World Bank reiterated the New Austerity doctrine, as if it were a new discovery: The way to prosperity is via austerity. “Rich counties can help developing economies grow faster by rapidly cutting government spending or raising taxes.” The New Fiscal Conservatism aims to corral all countries to scale back social spending in order to “stabilize” economies by a balanced budget. This is to be achieved by impoverishing labor, slashing wages, reducing social spending and rolling back the clock to the good old class war as it flourished before the Progressive Era.

The rationale is the discredited “crowding out” theory: Budget deficits mean more borrowing, which bids up interest rates. Lower interest rates are supposed to help countries – or would, if borrowing was for productive capital formation. But this is not how financial markets operate in today’s world. Lower interest rates simply make it cheaper and easier for corporate raiders or speculators to capitalize a given flow of earnings at a higher multiple, loading the economy down with even more debt!

Alan Greenspan parroted the World Bank announcement almost word for word in a June 18 Wall Street Journal op-ed. Running deficits is supposed to increase interest rates. It looks like the stage is being set for a big interest-rate jump – and corresponding stock and bond market crash as the “sucker’s rally” comes to an abrupt end in months to come.

The idea is to create an artificial financial crisis, to come in and “save” it by imposing on Europe and North America “Greek-style” cutbacks in social security and pensions. For the United States, state and local pensions in particular are to be cut back by “emergency” measures to “free” government budgets.

All this is quite an inversion of the social philosophy that most voters hold. This is the political problem inherent in the neoliberal worldview. It is diametrically opposed to the original liberalism of Adam Smith and his successors. The idea of a free market in the 19^th century was one free from predatory rentier financial and property claims. Today, a “free market” (Alan Greenspan and Ayn Rand style) is a market free for predators. The world is being treated to a travesty of liberalism and free markets.

This shows the usual ignorance of how interest really are set – a blind spot which is a precondition for being approved for the post of central banker these days. Ignored is the fact that central banks determine interest rates. Under the ECB rules, national central banks can no longer do this. Yet that is precisely what central banks were created to do. As a result, European governments are obliged to borrow at rates determined by financial markets.

This financial stranglehold threatens either to break up Europe or to plunge it into the same kind of poverty that the EU is imposing on the Baltics. Latvia is the prime example. Despite a plunge of over 20% in its GDP, its government is running a budget surplus, in the hope of lowering wage rates. Public-sector wages have been driven down by over 30%, and the government expresses the hope for yet further cuts – spreading to the private sector. Spending on hospitals, ambulance care and schooling has been drastically cut back.

What is missing from this argument? The cost of labor can be lowered by a classical restoration of progressive taxes and a tax shift back onto property – land and rentier income. Instead, the cost of living is to be raised, by shifting the tax burden further onto labor and off real estate and finance. The idea is for the economic surplus to be pledged for debt service.

In England, Ambrose Evans-Pritchard has described a “euro mutiny” against regressive fiscal policy. But it is more than that. Beyond merely shrinking the economy, the neoliberal aim is to change the shape of the trajectory along which Western civilization has been moving for the past two centuries. It is nothing less than to roll back Social Security and pensions for labor, health care, education and other public spending, to dismantle the social welfare state, the Progressive Era and even classical liberalism.

So we are witnessing a policy long in the planning, now being unleashed in a full-court press. The rentier interests, the vested interests that a century of Progressive Era, New Deal and kindred reforms sought to subordinate to the economy at large, are fighting back. And they are in control, with their own representatives in power – ironically, as Social Democrats and Labour party leaders, from President Obama here to President Papandreou in Greece and President Jose Luis Rodriguez Zapatero in Spain.

Having bided their time for the past few years the global predatory class is now making its move to “free” economies from the social philosophy long thought to have been built into the economic system irreversibly: Social Security and old-age pensions so that labor didn’t have to be paid higher wages to save for its own retirement; public education and health care to raise labor productivity; basic infrastructure spending to lower the costs of doing business; anti-monopoly price regulation to prevent prices from rising above the necessary costs of production; and central banking to stabilize economies by monetizing government deficits rather than forcing the economy to rely on commercial bank credit under conditions where property and income are collateralized to pay the interest-bearing debts culminating in forfeitures as the logical culmination of the Miracle of Compound Interest.

This is the Junk Economics that financial lobbyists are trying to sell to voters: “Prosperity requires austerity.” “An independent central bank is the hallmark of democracy.” “Governments are just like families: they have to balance the budget.” “It is all the result of aging populations, not debt overload.” These are the oxymorons to which the world will be treated during the coming week in Toronto.

It is the rhetoric of fiscal and financial class war. The problem is that there is not enough economic surpluses available to pay the financial sector on its bad loans while also paying pensions and social security. Something has to give. The commission is to provide a cover story for a revived Rubinomics, this time aimed not at the former Soviet Union but here at home. Its aim is to scale back Social Security while reviving George Bush’s aborted privatization plan to send FICA paycheck withholding into the stock market – that is, into the hands of money managers to stick into an array of junk financial packages designed to skim off labor’s savings.

So Mr. Obama is hypocritical in warning Europe not to go too far too fast to shrink its economy and squeeze out a rising army of the unemployed. His idea at home is to do the same thing. The strategy is to panic voters about the federal debt – panic them enough to oppose spending on the social programs designed to help them. The fiscal crisis is being blamed on demographic mathematics of an aging population – not on the exponentially soaring private debt overhead, junk loans and massive financial fraud that the government is bailing out.

What really is causing the financial and fiscal squeeze, of course, is the fact that that government funding is now needed to compensate the financial sector for what promises to be year after year of losses as loans go bad in economies that are all loaned up and sinking into negative equity.

When politicians let the financial sector run the show, their natural preference is to turn the economy into a grab bag. And they usually come out ahead. That’s what the words “foreclosure,” “forfeiture” and “liquidate” mean – along with “sound money,” “business confidence” and the usual consequences, “debt deflation” and “debt peonage.”

Somebody must take a loss on the economy’s bad loans – and bankers want the economy to take the loss, to “save the financial system.” From the financial sector’s vantage point, the economy is to be managed to preserve bank liquidity, rather than the financial system run to serve the economy. Government social spending (on everything apart from bank bailouts and financial subsidies) and disposable personal income are to be cut back to keep the debt overhead from being written down. Corporate cash flow is to be used to pay creditors, not employ more labor and make long-term capital investment.

The economy is to be sacrificed to subsidize the fantasy that debts can be paid, if only banks can be “made whole” to begin lending again – that is, to resume loading the economy down with even more debt, causing yet more intrusive debt deflation.

This is not the familiar old 19^th-century class war of industrial employers against labor, although that is part of what is happening. It is above all a war of the financial sector against the “real” economy: industry as well as labor.

The underlying reality is indeed that pensions cannot be paid – at least, not paid out of financial gains. For the past fifty years the Western economies have indulged the fantasy of paying retirees out of purely financial gains (M-M’ as Marxists would put it), not out of an expanding economy (M-C-M’, employing labor to produce more output). The myth was that finance would take the form of productive loans to increase capital formation and hiring. The reality is that finance takes the form of debt – and gambling. Its gains therefore were made from the economy at large. They were extractive, not productive. Wealth at the rentier top of the economic pyramid shrank the base below. So something has to give. The question is, what form will the “give” take? And who will do the giving – and be the recipients?

The Greek government has been unwilling to tax the rich. So labor must make up the fiscal gap, by permitting its socialist government to cut back pensions, health care, education and other social spending – all to bail out the financial sector from an exponential growth that is impossible to realize in practice. The economy is being sacrificed to an impossible dream. Yet instead of blaming the problem on the exponential growth in bank claims that cannot be paid, bank lobbyists – and the G-20 politicians dependent on their campaign funding – are promoting the myth that the problem is demographic: an aging population expecting Social Security and employer pensions. Instead of paying these, governments are being told to use their taxing and credit-creating power to bail out the financial sector’s claims for payment.

Latvia has been held out as the poster child for what the EU is recommending for Greece and the other PIIGS: Slashing public spending on education and health has reduced public-sector wages by 30 percent, and they are still falling. Property prices have fallen by 70 percent – and homeowners and their extended family of co-signers are liable for the negative equity, plunging them into a life of debt peonage if they do not take the hint and emigrate.

The bizarre pretense for government budget cutbacks in the face of a post-bubble economic downturn is that it will help to rebuild “confidence.” It is as if fiscal self-destruction can instill confidence rather than prompting investors to flee the euro. The logic seems to be the familiar old class war, rolling back the clock to the hard-line tax philosophy of a bygone era – rolling back Social Security and public pensions, rolling back public spending on education and other basic needs, and above all, increasing unemployment to drive down wage levels. This was made explicit by Latvia’s central bank – which EU central bankers hold up as a “model” of economic shrinkage for other countries to follow.

It is a self-destructive logic. Exacerbating the economic downturn will reduce tax revenues, making budget deficits even worse in a declining spiral. Latvia’s experience shows that the response to economic shrinkage is emigration of skilled labor and capital flight. Europe’s policy of planned economic shrinkage in fact controverts the prime assumption of political and economic textbooks: the axiom that voters act in their self-interest, and that economies choose to grow, not to destroy themselves. Today, European democracies – and even the Social Democratic, Socialist and labour Parties – are running for office on a fiscal and financial policy platform that opposes the interests of most voters, and even industry.

The explanation, of course, is that today’s economic planning is not being done by elected representatives. Planning authority has been relinquished to the hands of “independent” central banks, which in turn act as the lobbyists for commercial banks selling their product – debt. From the central bank’s vantage point, the “economic problem” is how to keep commercial banks and other financial institutions solvent in a post-bubble economy. How can they get paid for debts that are beyond the ability of many people to pay, in an environment of rising defaults?

The answer is that creditors can get paid only at the economy’s expense. The remaining economic surplus must go to them, not to capital investment, employment or social spending.

This is the problem with the financial view. It is short-term – and predatory. Given a choice between operating the banks to promote the economy, or running the economy to benefit the banks, bankers always will choose the latter alternative. And so will the politicians they support.

Governments need huge sums to bail out the banks from their bad loans. But they cannot borrow more, because of the debt squeeze. So the bad-debt loss must be passed onto labor and industry. The cover story is that government bailouts will permit the banks to start lending again, to reflate the Bubble Economy’s Ponzi-borrowing. But there is already too much negative equity and there is no leeway left to restart the bubble. Economies are all “loaned up.” Real estate rents, corporate cash flow and public taxing power cannot support further borrowing – no matter how much wealth the government gives to banks. Asset prices have plunged into negative equity territory. Debt deflation is shrinking markets, corporate profits and cash flow. The Miracle of Compound Interest dynamic has culminated in defaults, reflecting the inability of debtors to sustain the exponential rise in carrying charges that “financial solvency” requires.

If the financial sector can be rescued only by cutting back social spending on Social Security, health care and education, bolstered by more privatization sell-offs, is it worth the price? To sacrifice the economy in this way would violate most peoples’ social values of equity and fairness rooted deep in Enlightenment philosophy.

That is the political problem: How can bankers persuade voters to approve this under a democratic system? It is necessary to orchestrate and manage their perceptions. Their poverty must be portrayed as desirable – as a step toward future prosperity.

A half-century of failed IMF austerity plans imposed on hapless Third World debtors should have dispelled forever the idea that the way to prosperity is via austerity. The ground has been paved for this attitude by a generation of purging the academic curriculum of knowledge that there ever was an alternative economic philosophy to that sponsored by the rentier Counter-Enlightenment. Classical value and price theory reflected John Locke’s labor theory of property: A person’s wealth should be what he or she creates with their own labor and enterprise, not by insider dealing or special privilege.

This is why I say that Europe is dying. If its trajectory is not changed, the EU must succumb to a financial coup d’êtat rolling back the past three centuries of Enlightenment social philosophy. The question is whether a break-up is now the only way to recover its social democratic ideals from the banks that have taken over its central planning organs.

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U.S. Senate Candidate Warren Mosler Explains Why The US Government is Not Revenue Constrained

Posted on June 23, 2010 by admin | 7 comments

Watch the latest business video at video.foxbusiness.com

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A Pledge to Protect Social Security and Medicare

Posted on June 22, 2010 by admin | 10 comments

By Stephanie Kelton

It happens every few years. The Trustees of the Social Security Administration release a report projecting gloom and doom for the system’s “finances,” and the so-called reformers crawl out of the woodwork touting various schemes to “save” the system from bankruptcy.

For those that don’t understand how our monetary system works, the latest report is particularly alarming. The loss of millions of jobs has meant that fewer workers are paying into the system, and the Trustees have concluded that the Trust Fund will only be able to cover the emerging shortfall until 2037. After that, the Trust Fund will be exhausted, and payroll taxes will only be able cover about 75% of promised benefits. For those that want to destroy Social Security, this is welcome news.

But not everyone wants to run for the exits, handing the “problem” over to Wall Street’s financiers (i.e. privatizing the system), who will rake in billions of dollars in fees and commissions in exchange for creating and managing our new “personal savings accounts” (more on this here). For example, Sen. Herb Kohl, Chairman of the Senate Special Committee on Aging, has said that “modest changes can be made over time” to keep the system solvent.

The minor “tweaks” being considered by the Senate Committee include various schemes to keep costs down and revenues up. To reduce the costs of running the program, the Committee suggested that Congress could gradually increase the retirement age or reduce the annual cost-of-living adjustment. To boost revenues, the Committee suggested that Congress could raise the payroll tax or eliminate the income cap so that wages above $106,800 become subject to the payroll tax.

According to Sen. Kohl, D-Wis., reform is a foregone conclusion. “Modest changes,” he told the Associated Press, “can be done and will be done.” To soften the blow, he insisted that the reforms “are not draconian.”

The problem, as we have argued many times on this blog, is that the federal government is not revenue constrained. It can afford the promises is has made to current and future retirees. It cannot, as Alan Greenspan admitted, “go broke” as long as the payments are denominated in US dollars. This means that Social Security (and Medicare) face NO FINANCIAL CRISIS today or in the future.

Sen. Kohl’s heart may be in the right place, but he doesn’t understand how the monetary system operates. As a result, millions of Americans could be forced to suffer undue hardship in the years ahead – delaying their retirement, paying higher taxes and receiving fewer benefits.

We call on those in Congress (as well as those seeking Congressional office) to affirm their commitment to protecting and preserving Social Security by signing the following pledge:

“I pledge to vote against any piece of legislation that would reduce current or future benefits under Social Security or Medicare, whether through reduced compensation, reduced coverage or a change in eligibility requirements.”

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“An Open Letter to President Obama”

Posted on June 10, 2010 by admin | 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)

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

Posted on June 9, 2010 by admin | 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.

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Moody’s Business

Posted on June 5, 2010 by admin | 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

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

Posted on June 1, 2010 by admin | 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)

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

Posted on May 14, 2010 by admin | 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”.

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

Posted on May 12, 2010 by admin | 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).