The US President appeared on the US commercial television show 60 minutes program on March 22. He was talking about about the AIG debacle, the economy, and his first challenges in his new job. His responses to questions about the economy though were positively scary. The most powerful man in the World and he doesn’t understand how the modern monetary economy works. Very scary indeed.
At one stage, 60 Minutes correspondent Steve Kroft asked Barack Obama about the federal economic rescue plan. Here is the interchange. Regular readers of this blog will be launching a collective WTF! as they read it. Stunning ignorance.
KROFT: Is there some limit to the amount of money we can spend?
KROFT: Or print trying to solve this crisis?
OBAMA: There is.
KROFT: And are we getting close to it?
OBAMA: The limit is our ability to finance these expenditures through borrowing. And the United States is fortunate that it has the largest, most stable economic and political system around. And so the dollar is still strong because people are still buying treasury bills. They still think that’s the safest investment out there. If we don’t get a handle on this, and also start looking at our long-term deficit projections, at a certain point, people will stop buying those treasury bills.
First, answer is okay although I doubt the President knows why!. There is a limit – the government can buy whatever there is for sale. As starters, according to the US Bureau of Labor Statistics there are some 8.6 million workers in the US who are underemployed and 12.4 million who do not have a job at all. That is a lot of resources that are idle at present. Lots of public goods could be created by announcing immediately an unconditional job offer to anyone who wants it at the minimum wage. This is the Job Guarantee. You buy unwanted resources (labour) for a fixed wage (which provides dignity and a reasonable standard of living) and shore up incomes in the economy. So there is a lot of resources that are available for sale in the US right now that the US government could easily buy. They have plenty of room to spend is my bet!
Second, there is a limit to how much you can print at any time. The amount of ink and paper you have at your disposal! But what this has to do with anything fiscal is another matter. Nothing much at all. As I have indicated in the past, governments do not spend by “printing money”. Fallacy.
Third, Are we getting close to what? How much ink and paper the US government has? No Barack tuned into the neo-liberal line being pushed by this journalist (who has been added to my bogan register). There is no financial limit on government spending. Categorically no limit. There might be a limit on the amount of debt the US can issue but that bears on interest rate policy and has nothing at all to do with the capacity of the US government to spend.
The stability and size of the economic and political system also has no bearing on whether the sovereign government can spend. As long as they can collect taxes in the currency of issue (thereby creating a demand for the currency) any government can spend.
The link between debt and spending is a neo-liberal construct which reflects their failure to understand how the modern monetary system operates. They also use it for strategic political purposes to scare people away from what they see as the evils of “large government”. Orthodox economic theory cannot tell us anything about the desirable size of a government. Modern monetary theory is clear on this question. The size of government (which we might call the “full employment size”) is determined by the current volume of desired private savings and the productive capacity of the economy when all workers are employed up to their desired hours of work. The former determines private spending while the latter determines how large spending has to be to buy all the products created by the fully employed workforce. That is the optimal size of government.
Should the government want to be bigger than this then it has to squeeze private spending to “free” up capacity for the public sector to spend. But that is a political choice and economic theory of any sort has nothing to say about it, despite the nonsensical rhetoric you see in orthodox text books etc.
Fourth, the statement … “If we don’t get a handle on this, and also start looking at our long-term deficit projections, at a certain point, people will stop buying those treasury bills” is just hot (uninformed) air! I refer readers back to my previous blog on the Size of the deficit.
My next blog will be on the latest US government rescue plan! Redistribution nirvana for the rich is my characterisation of it. Coming tomorrow including a report from Manila!