I read an article in the UK Guardian over the weekend (July 14, 2012) – Scranton, Pennsylvania: where even the mayor is on minimum wage – which told a sorry tale of municipal bankruptcy in the US. There was an earlier story in the UK Daily Mail (June 26, 2012) – Camden, city of ruins: Depressing images of once-thriving metropolis reduced to decaying, crime-ridden rubble – that traversed similar terrain, except carried a number of graphic shorts of urban decay in the face of persistent recession. What these articles tell me is that the US Federal system has failed its people. The rigid balanced budget rules at the State level and the ideologically-driven unwillingness of the Federal government to use its currency powers to redress the damage caused by the application of those rules at the State level have combined to create wastelands across the urban landscape in the US. The damage that is being caused each day will haunt that nation for years to come. Meanwhile, the ideologues are trumpeting a new book about 4 per cent solutions that claim large-scale government cutbacks are needed to re-create the US as a great nation. From afar, one can only conclude that the US glory days (whatever they were) are passing – probably more quickly than they care to acknowledge.
A recurring theme in the press and one that I get several E-mails about a month is that a national government has “more space to net spend” if its past history of deficits and debt are lower than otherwise. This is also related to the acceptance by many so-called progressive economists that national government budgets should be balanced over the course of the business cycle – that is, it is fine to go into deficit when there is a downturn but the government should pay it back via surpluses when the economy is strong. Neither proposition has merit but serve as powerful buttresses for the continuation of the neo-liberal attack on government fiscal freedom and full employment. Government deficits have not caused the crisis. Growth is lagging because spending is lagging. If the non-government sector cannot sustain aggregate spending to ensure unemployment drops then there is only one sector left in town folks!
Last week (June 6, 2012), the US Bureau of Labor Statistics released the Employment Situation Summary – for June 2012, which revealed that the US economy had added 80,000 net jobs in the last month, well below the quantity that economists had been estimating. The US national unemployment rate was unchanged at 8.2 percent. The BLS said that the “Nonfarm payroll employment continued to edge up” but the commentators labelled the result “soft”. The US policy makers continues to ignore the plight of the unemployed. The data shows that June 2012 is the 41st consecutive month that the national unemployment rate has exceeded 8 per cent, which is the longest period of above 8 per cent unemployment in the history of the data series (from January 1948). The danger now is that the economy will fall prey to the political debate leading up to the November election and resulting policy responses will truly push the economy over the cliff into recession. The US economy is precariously poised at present and some fiscal commitment to supporting growth is urgently needed.
The Sydney Morning Herald’s economics editor Ross Gittins wrote an article today (June 20, 2012) – This is no Sunday school: prosperity comes with pain – where he argued that the real world is not like his Sunday School (where all was forgiven) and that “discord and suffering are the price we pay for getting richer”. He might have also qualified that statement by saying that some get richer while others endure discord and suffering. I thought about that because I have been reading a number of related reports on the concept of the working poor – workers who for various reasons (pay, hours of work, job stability) live below the poverty line. I usually focus on the pain that unemployment brings but the working poor, many of whom are full-time workers, are also a highly disadvantaged cohort. It is not enough to just create growth that creates full employment. The policy framework also has to take responsibility for making sure that no-one who works is in poverty. A rising proportion of workers classified as working poor indicates according to metrics I use a failed state. The US is one such state.
I have not much time to write a blog today but the latest US labour market data provides fertile ground for some analysis. The latest Employment Situation Release from the US Bureau of Labor Statistics (published June 1, 2012) covering May 2012 has been called a “bleak jobs report” ((Source) by commentators. I expect a few Op Ed columns from the likes of Robert Barro and John Taylor to name a few who will be saying “see, there have been no gains from fiscal policy stimulus” – ad nauseum. The reality is that the data tells us how effective fiscal policy was in staving of a depression and also that the US government has been pressured into a premature withdrawal of fiscal support and the government contribution to real GDP growth is now negative – hence a slowing economy and poor labour market outcome. While the neo-liberals are hanging onto the notion that governments can do little about the crisis but reduce their net spending the reality is completely the opposite – sovereign, currency-issuing governments such as the US government have total control over domestic policy and the only thing missing is the willingness to use that capacity.
I have been studying the Great Depression intensely lately to gauge the similarities in conservative narratives at that time in relation to what we have to put up with now. Several so-called conservative historians have in the recent crisis endeavoured to reinvent history. The problem for conservatives is that the lessons of history are firmly supportive of the view that when non-government spending growth lapses, growth can be engendered with an increased contribution from government net spending. It is a proposition that is glaringly obvious in concept and stands the test of time. The conservatives hate that reality. So instead, they have only one recourse to attempting to match the facts with their erroneous theories about fiscal policy. They have to reconstruct the facts – a process that includes leaving important facts out and focusing on irrelevant correlations; fabricating facts; using definitions that no-one else would consider reasonable and then blurring the definition – and more. It is really quite pitiful.
Last week (May 4, 2012), the US Bureau of Labor Statistics released its latest – Employment Situation Summary – for April 2012. The data revealed that employment growth in the US is now slowing but remains positive (payroll data) although the household survey data (which uses a broader concept of employment) revealed a fall in total employment. More indicative of the state of the US labour market was the decline in the participation rate as workers once again gave up looking for jobs that were not there! While the official unemployment rate fell by 0.1 percentage points to 8.1 per cent in April, the reality is that the labour supply contraction disguises the true picture. If we added the workers who dropped out of the labour force back into the unemployment numbers then the unemployment rate would have risen to 8.4 per cent. The US economy is thus at another turning point. Private spending growth does not appear capable at present of filling the gap left by a declining public spending contribution. Unless the government provides a renewed stimulus it is likely the US economy will head backwards and unemployment will rise.
The US Bureau of Economic Analysis released the first-quarter 2012 National Accounts data for the US last week (April 27, 2012) – see the News Release which showed that the US economy has slowed in the last three months, largely due to a decline in the government contribution. Annualised Real GDP growth was 2.2 per cent down from 3 per cent in the December 2011 quarter. The economy is now growing under trend and the signs are not good. If the politicians actually get around to imposing austerity then the US economy will join the UK in its race to the bottom with the other competitor being the Eurozone. The latest news from the Eurozone is that Spain will become the epicentre of the crisis in the coming weeks/months. Greece is yesterday’s news and the continuing deterioration of the Spanish economy – one considerably larger in importance than Greece – is focusing minds. The problem is that the reaction of the Euro elites is to inflict more austerity onto Spain which will – as night follows day – cause the situation to worsen. But still we read from leading US government officials that budget deficits are like cancer and will destroy countries “from within”. The only thing I can say about that astounding demonstration of ignorance is that I cannot think of a situation where cancer is good. But generally, budget deficits generate benefits to the nation that is enjoying them.
Another relatively short blog coming up today – it is still holidays here and very sunny. There was an interesting Bloomberg article the other day (April 5, 2011) – Don’t Worry About Deficit That Will Heal Itself – which although containing some conceptual flaws arrives at the correct conclusion. That governments would be far better pursuing real goals – such as ensuring there is adequate infrastructure investment, putting into place appropriate climate change initiatives and maintaining high levels of bio-security – that becoming obsessed with fiscal horizons that they have very little control over. Further, in attempting to control these horizons, governments tend to err on too much austerity (for example, the UK and the Eurozone), which not only undermines growth but also thwarts their deficit reduction goals (via the automatic stabilisers). The lesson to be drawn from all of this is that – Governments should not worry about deficits.
I was examining the latest US Federal Reserve Flow of Funds data the other day. This data comes out on a quarterly basis with the latest publication being March 8, 2012. Other related data from the US Treasury (noted below) fills out the picture. The data reveals some interesting trends in terms of US federal government debt issuance over the last 12 months. It shows that the dominant majority of federal debt issued in 2011 was purchased by the US Federal Reserve. Some conservative commentators have expressed horror about this trend. As a proponent of Modern Monetary Theory (MMT) I simply note that the trend demonstrates the nearly infinite capacity of the US government to spend.