As a service to humanity, I decided to rip off the title for today’s blog from an article that was published on Monday (February 7, 2011) in the Washington Times – Destructive economic myths. My blog is highly rated by Google so if some innocent bystanders happen to go searching for that article they might also bring up my blog, get confused, click my link instead of the Washington Times and learn some facts that will help them oppose the political nonsense that both sides of politics in the US is engaged in at present – as the vote to change the debt ceiling approaches (March 1, 2011). I might be too late but it is worth a try*. Anyway, the austerity push is being justified by recourse to the same misinformation and lies that was used to deregulate the world economy (particularly the financial system) which led to the financial and then economic crisis that still endures. Talk about destructive economic myths!
The article was written by a character affiliated with the awful and dangerous right-wing Cato Institute which is based in Washington. They are a $US25 million odd a year outfit (revenue) and have a lot of “scholars” pushing out Austrian School lies into all the major media outlets. I think Modern Monetary Theory (MMT) proponents need to expand their revenue base somewhat to catch up – like very somewhat! Any thoughts?
Anyway I must admit to being thoroughly confused today. I am used to reading about deficits black holes and mountains of debt that we are about to fall down or off depending which and will drown or enslave our children and their children. The terminology makes a bit of sense in economic terms – that is, the imagery is consistent with concept – deficits are about flows and so the idea of a flow pouring is okay (hole in bucket!) and outstanding debt obligations are a stock so a mountain sounds okay.
I am not thinking that there is any common-sense in the arguments that use this imagery – just that there is some consistency in term and concept.
But the confusion hit me when I read in a Washington Times article (February 9, 2011) – Deficit diggers now vow to fill hole – that:
While Democrats and Republicans say they are ready to begin filling in the nation’s deep borrowing hole, budget hawks remain skeptical of lawmakers’ ability to fulfill their vow, given that many of them did the digging in the first place.
So is the borrowing hole a mountain or what? The article added further confusion by claiming that US gross federal debt has “mushroomed since 1981.
It also thought it was making a telling point when it said that “with Democrats at the helm … ‘between 2008 and 2010 we had the single worst Congress on spending – period'”. Surprise surprise … ever looked out the window over to south-east suburbs of Washington lately … there is plenty of Go Go but even more unemployment and poverty. Given the scale of the crisis, if we didn’t have the single highest period of spending then I would have been surprised, notwithstanding that the article doesn’t differentiate between nominal and real spending.
Almost every year is a record year in nominal terms!
The article quoted the president of the Committee for a Responsible Federal Budget, which is a “non-partisan organisation” (don’t you just love that term – they are rabid neo-liberals and allow no alternative view in their published output but are non-partisan) that is seemingly always on the verge of an hysterical outburst about something to do with government. Anyway the quote is very amusing:
… the coming debate over raising the debt limit will offer party leaders another shot at convincing voters that “we can’t have tax cuts and spending increases because the math does not work …
How come there are so many right-wing think tanks in the US? I guess it is better to confine them to one location so they leave the rest of us alone although Australia has a few of our own.
But is this another example of the failure of public education in the US (due to inadequate government spending) – the “math does not work”. I went to a state school in Melbourne, Victoria (my home town) and learned by maths quite well. But I also learned that when we are talking about tax cuts and spending increases for a sovereign government mathematics doesn’t come into it.
Distribution issues aside (not that they are unimportant) the US government can always lower taxes and increase spending if it wanted to and the budget would add up to what it was. The maths would be impeccable.
Whether it would want to do that is another question and has to be considered in the context of the other spending aggregates (private domestic and net exports) and the state of capacity utilisation at the time.
At present, the US has massive excess capacity including millions unemployed and underemployed, a negative contribution from net exports and a stagnant private spending growth horizon. It would look to me that increasing spending and/or lowering taxes would be a good policy option in that context.
I favour stimulus via public spending increases at present because I think the Government needs to restore services that have been cut (even if the spending is some per capita demogrant to the states) and directly provide jobs to millions of unemployed. They could integrate a refurbishment of their declining public infrastructure with the direct job creation.
Cutting taxes is unlikely to be targetted enough to achieve a public infrastructure/public employment focus. But either way, the US government has no mathematical constraint – or rather it should not have.
But the point is that I didn’t see one mention of aggregate demand (spending) in the article or how demand was tracking aggregate supply (the output potential of the economy). That is a basic starting point for any reasonable macroeconomic analysis but is usually absent from these austerity rants.
So I knew what I was in for when I read the other Washington Times article – Destructive economic myths. The author Richard W. Rahn is a serial offender when it comes to spreading anti-government propaganda. He invented this curve which claims that the smaller is government the stronger the growth. The reasoning is seriously adrift and I might analyse the papers that have been written by others to support the “curve”. They tell a dismal story of wasted lives – locked up in university offices – typing up lying and distorting articles – in the hope of a promotion! It is a sad state. But I wonder why China is growing at rates that make the advanced nations red with envy?
Anyway the opening paragraph of the “Destructive economic myths article sets the scene:
Wildly inaccurate statements from news commentators, financial analysts, politicians and even administration officials have most people believing that if Congress does not increase the debt limit in March, the U.S. government will default on its debt obligations, thus ending the government‘s ability to borrow. Nonsense.
Yes it is nonsense.
The true statement is that if the US Congress does not increase the debt limit in March then the US economy will slow down, unemployment will likely rise, poverty rates will rise, and the opportunity to put in place an ambitious public infrastructure-led revival will be gone. Further even more young Americans will join the ranks of those who will never prosper and many of them will turn to crime, drugs and suicide. More families will breakdown and the strains on the health system will increase.
But Rahn thinks otherwise. What do you call a myth that is a myth? Rahn starts of with the Household-Government budget analogy myth although he thinks it is a useful approach.
He introduces a person (household) who has nominal mortgate commitments and other expenses “including $2,000 per month traveling to sporting events and going to expensive restaurants” who finds they are over-spending relative to income. They have two choices – “default on … mortgage and ruin … credit rating or cut back on sporting events and expensive restaurants.”
I love the inherent dishonesty of this example. The choice of discretionary spending is not an accident. Sporting events and “expensive” restaurants. Not too many people would consider cutting back there to be a hardship. But when the analogy is extended to the sovereign US government you appreciate the crookedness of the choice. He wants us to believe that the government is indulging in largely unnecessary “sporting event” spending and wasting money on “expensive restaurants” (luxuries).
Of-course, the household is financially constrained and has to “fund” its spending either by earning income, running down prior saving, borrowing or selling previously accumulated assets. Bonnie and Clyde found another way but it is not to be recommended.
Further, it is obvious that when a household is overspending and can no longer “fund” that excess by non-income sources then it has to cut is spending – that is clear. Interestingly, it was this type of example that led Keynes to argue that workers do care about money wages rather than real wages which was one of the elements he debated with the neo-classical economists during the Great Depression.
The mainstream textbook model believes that workers only worry about real wages. But Keynes and others argued that given our debt obligations are all written in nominal terms (so many dollars per week/month or whatever) then if our real wage is cut (by prices rising faster than wages) then we can still maintain our debt obligations (that is, keep our house) while trimming discretionary expenditure.
So far so good.
Rahn then applies this logic to the US government budget and that is his first “destructive economic myth” although he is blind to it.
The U.S. government is in exactly the same position. If the debt ceiling is not raised, government officials will have a choice to default on the interest payments (less than 10 percent of the government‘s total income) or cut spending … the Full Faith and Credit Act (S.163) … would require the Treasury to make interest payments on U.S. government debt its first priority if the debt ceiling is not raised. This legislation would require the federal government to reduce spending on other activities and/or sell assets, as any business or family would need to do when faced with a similar problem.
There are two points. First, under current government legislation this is true. If the US government is bound by the debt ceiling and further legislation enforces a proration of existing revenue by debt then other spending then the government can cut elsewhere.
But this would not be for the same reason “as any business or family would need to do when faced with a similar problem”. The financial constraint faced by a business or family is intrinsic to their status in the monetary system. They use the currency that the US government issues as a monopoly provider. They are always financially constrained.
Rahn should admit that the US government has chosen to be voluntarily constrained. The constraint is not intrinsic to the status of the US government as the issuer of the currency. That status confers sovereignty on the Government and means they are never revenue constrained intrinsically. The fact that they choose to be so is a nonsense which could be changed by appropriate legislation.
By creating these voluntary constraints the US Congress is denying its government the capacity to defend the interests of its citizens in a range of ways which I will come back to later.
Rahn’s thinks the second myth is that:
The big-government crowd claims huge hardships would result from the mandatory spending reductions. Again, nonsense. Spending would only have to be reduced to roughly the 2006 level to avoid an ongoing deficit. The government receives a little more than $70 billion a day, or more than $2.5 trillion a year. Much of what the government spends is downright destructive and should be stopped ...
So why is there a deficit in the first place?
Does Rahn think that the deficit is a thing from outer space that is not integrated into the economy?
Does Rahn think that you can take the deficit away and that there will be no negative consequences?
Those questions have to be answered first. Where does this “downright destructive” spending go? Well we know it is going into a range of services which will be cut. We know it is employing people either directly or indirectly via multiplier effects.
I would never say I was happy with the composition of any fiscal position. I would severely cut military spending in the US right now. But I would make sure that overall aggregate demand was expanded at the same time given the massive excess capacity that is being carried at present.
So you might run a line that government spending is poorly prioritised but you still have to face up to the fact that spending equals income – and when you are running external deficits (which subtract from domestic demand) and the private sector is not wanting to ramp up their spending then the only other source of demand stimulus is public spending (wasteful or not).
We have to differentiate levels and composition. Hacking away at the level of public spending to address compositional concerns is no way to go unless you also want to damage the overall level of real output and employment.
That is the biggest lie – that cutting public spending will somehow stimulate growth. It will not in the present situation.
Rahn’s thinks the next myth is that:
… if the government reduces its spending, that will cost jobs. This myth is being promulgated by many Democrats and their allies in the media. The fact is that the percentage of adults in the labor force has fallen to its lowest level in three decades even as the government has grown by a quarter in relative size in the past three years. If government spending could bring about full employment, the socialist countries would have been great successes rather than basket cases. Remember, the money government spends on “creating” jobs comes from either taxing or borrowing – both of which take money and jobs out of the more productive private sector – thus reducing the total number of jobs.
It is hard to know where to start with this sort of tripe. First, spending whether public or private creates a demand for labour which means it creates jobs. Cutting spending destroys jobs. Cutting public spending and not replacing it with private spending will destroy jobs.
Second, the trends in the participation rate (percentage of adults in the labor force) is a supply-side phenomenon and do not tell you about the demand for labour. It is nonsensical to think you can conflate supply trends with demand trends.
Third, the socialist countries did maintain full employment as did the non-socialist nations during the period from 1945 to 1975 (or thereabouts). It was done by public spending supplementing private spending in the latter group of nations. The fact that the socialist nations came unstuck says nothing about their capacity to create full employment.
Fourth, Rahn has it backwards. The “money” we use to pay taxes and buy public debt comes from government spending not the other way around. Without government spending we cannot pay our taxes at the current level.
The reality is that if the US government starts cutting along the lines advocated by the Republicans (15.4 per cent) there will be many jobs lost overall – both in the public and private sector. It is a lie to argue otherwise.
Rahn finishes by quoting Ronald Reagan:
Government is the problem, not the solution.
Reagan was a B-grade actor unless I am mistaken.
Government is a problem in many areas of life – censorship, prohibition of drugs, military invasions, spying on us, lying to us, and more. I agree. I am a libertarian.
But unlike the Cato-type libertarians I also realise that in a fiat monetary system the government has a special place as the monopoly issuer of the currency we use. In its fiscal operations, the government becomes the solution to ensuring we all have access to work and income security.
I advocate no government interference in a range of social activities. But I advocate very strong public guidance of the expenditure system to ensure aggregate demand doesn’t fail (fall below the level required to create work for all) as it is now.
The Austrian School libertarians cannot understand that distinction because they are besotted with all the destructive economic myths that neo-liberal economists promote which include:
(a) Just like a household, governments have to live within their means. They falsely claim that budget deficits have to be repaid and this implies higher taxes in the future. So our children and their children will be forced to carry the burden of our profligacy.
(b) Neo-liberals further argue government borrowing (to “fund” the deficits) competes for scarce available funds and drives up interest rates, which reduces private investment – the so-called “crowding out” hypothesis. They also assert that governments waste resources because they are not subject to market discipline and so the use of scarce resources by the public sector at the expense of the private sector leads to what economists call sub-optimal outcomes.
(c) The final part of the scaremongering narrative is that the deficits push too much money into the economy which leads to inflation.
So the Armageddon predictions are of governments creating hyperinflation, defaulting on their debt obligations and imposing punitive taxation regimes on future generations. These are the destructive economic myths. Rahn and his Cato mob perpetuate them daily. Pity there jobs are not dependent on the national unemployment rate. Like they lose their jobs if the national unemployment rate rises!
On this theme, I found this analysis – House GOP Plan Cuts Non-Security Discretionary Programs 15 Percent Through End of Fiscal Year – by the Center on Budget and Policy Priorities (CBPP) to be very helpful and, for a change, analytical and reasoned. It suggests that none of the (massive) cuts (15.4 per cent overall) that are being proposed by the US Republicans at present have anything to do with bailout or stimulus spending. That is, the Republicans are lying when they say they are only proposing cuts to non-security discretionary spending which would take:
… this category of spending back to pre-stimulus , pre-bailout 2008 levels …
If you examine where they plan to make the cuts (see CBPP Table) you start to understand how the US is about to be trashed even further. A Japanese-style lost decade here we come! Courtesy of lying, self-aggrandising politicians who swear by God but do the devil’s work.
In the New York Times article (February 7, 2011) – A Terrible Divide – you get a feel for what the impact of the proposed cuts would be:
In the real world, schools and libraries are being closed and other educational services are being curtailed. Police officers are being fired. Access to health services for poor families is being restricted … basic public services that one would expect in an advanced country like the United States …
These are core elements of a sophisticated society.
A society can never become rich by impoverishing the poor and depriving them of access to the resources that the rest of us have – health care, education, information, etc.
America has had a couple of revolutions (well one and a civil war). Americans have guns. You simply cannot demolish the hopes and aspirations of millions of people and not expect some revolt.
I thought the conclusion of this article was apposite:
We have not faced up to the scale of the economic crisis that still confronts the United States … Standards of living for the people on the wrong side of the economic divide are being ratcheted lower and will remain that way for many years to come. Forget the fairy tales being spun by politicians in both parties — that somehow they can impose service cuts that are drastic enough to bring federal and local budgets into balance while at the same time developing economic growth strong enough to support a robust middle class. It would take a Bernie Madoff to do that …
The U.S. cannot cut its way out of this crisis. Instead of trying to figure out how to keep 4-year-olds out of pre-kindergarten classes, or how to withhold life-saving treatments from Medicaid recipients, or how to cheat the elderly out of their Social Security, the nation’s leaders should be trying seriously to figure out what to do about the future of the American work force.
Pretty depressing really. Let’s hope my crafty Google ploy works and readers learn that you cannot cut spending and expect there to be growth. It doesn’t work like that – ever.
But as one of my US mates wrote today – Rahn is setting himself up to be a prospective Nobel Prize winner. His ideas certainly qualify him for that award!
* American readers – this is my attempt at humour – stay calm.
That is enough for today!