The third great US “reds under the bed” scare

As an outsider, I am always perplexed by American attitudes. Some of the great writers have come from the US so their schooling system must have something going for it. Some of the great musicians have come from the US so there is creativity there. I could go on. But then you think back to the 1950s, when a whole nation was whipped up in the great propaganda traditions that would have made the Reich’s Ministry of Propaganda under Joseph Goebbels proud. Except this was America, alleged land of the free, unless you happen to take that seriously and find out that in fact the place is a repressive society bound to torture people and use martial force to suppress minority viewpoints. I refer here, specifically, of-course, to the McCarthy purges. Remember the Nazis hated the communists too. But today I read a speech from a governor of one US state who has identified a continuing red menace that will eat up the freedom of all US citizens and is the work of a sneaky but determined group of left-wing zealots (with Chinese overtones). If it wasn’t so serious it would be comical and all we would have to do is send the men in the white coats out to the governor’s office to take him away for treatment. The problem is that this is the third great US “reds under the bed” scare and like the previous scares this one is damaging millions.

McCarthy’s was a drunk who died from his personal excesses. But in the course of his career his personal excesses spilled over into his political life and destroyed the lives of thousands and led to the wrongful imprisonment of many.

The on-line Webster’s Dictionary defines McCarthyism as:

1. the practice of making accusations of disloyalty, especially of pro-Communist activity, in many instances unsupported by proof or based on slight, doubtful, or irrelevant evidence.
2. the practice of making unfair allegations or using unfair investigative techniques, especially in order to restrict dissent or political criticism.

He described his rabid activities as “Americanism with its sleeves rolled” which either says he was self-deluded or he confronted his nation with an ugly image of its own failings. Probably a bit of both. McCarthyism was the second “red scare” in US history (the first being in the 1920s just after the fall of Tsarist Russia).

So fast track to February 12, 2011 and to a speech by the Governor of Indiana one Mitch Daniels which was entitled – Debt Is the New “Red Menace”. The audience at the aptly named Conservative Political Action Conference Ronald Reagan Centennial Dinner got what they wanted – a rabid attack on common sense by a very ignorant and hysterical speaker.

This is the third red scare and is as off-skew as the previous two historical scares in US history. Again, a series of accusations totally unsupported by proof. The problem is that this descent into “red scaremongering”, which we are currently referring to as deficit terrorism, is also causing hurt to millions of American citizens who themselves seem incapable of drawing a line between the dots and seeing what is truly going on.

Once again the US is being disgraced by mindless behaviour from its elected officials and the media that provide them with uncritical exposure.

To condition the discussion, I offer the following two graphs. The first is taken from a December 2010 edition of the Bureau of Labor Statistics Issues in Labor Statistics which focused on “Sizing up the 2007-09 recession: comparing two key labor market indicators with earlier downturns”.

It shows the “Change in the unemployment rate for persons age 16 and older, by number of months from start of recession”. The shaded areas are the NBER recession dating periods. If you need any reminder of the historical significance of the current crisis then this graph should be sufficient. All related aggregates (budget deficits, real GDP losses, public debt movements) will be similarly at historical highs or lows depending on the measure.

The second graph is again from the US Bureau of Labor Statistics and compares the evolution of the unemployment rate in Indiana with the overall national US unemployment rate (seasonally adjusted) from January 2005 to December 2010. It can be argued that when representing the human scale of the unemployment tragedy one should use unseasonally adjusted data (raw counts estimated from the survey). I will write a separate blog on that issue another day.

But either way the story is very clear. Disaster. If I was the governor of that state (Indiana) I would hardly be claiming any virtue for my policy approach given the track record demonstrated by the data.

Anyway apparently this is all lost of the self-aggrandising Indiana governor (how could anyone elect someone like this) who started with some self-praise for his regional culture:

We Hoosiers hold to some quaint notions. Some might say we “cling” to them, though not out of fear or ignorance. We believe in paying our bills. We have kept our state in the black throughout the recent unpleasantness, while cutting rather than raising taxes, by practicing an old tribal ritual – we spend less money than we take in.

We believe it wrong ever to take a dollar from a free citizen without a very necessary public purpose, because each such taking diminishes the freedom to spend that dollar as its owner would prefer. When we do find it necessary, we feel a profound duty to use that dollar as carefully and effectively as possible, else we should never have taken it at all.

Yes, very quaint. Downright backward if you ask me and totally out of fear and/or ignorance. And by spending less money than they take in the state has a worse record recession record in terms of unemployment.

But there are some points we agree on here.

First, I agree that taking a dollar from a private citizen reduces their capacity of spend that dollar. That is the very important function of taxation – to ensure that the state can manage total spending and keep it in line with what is required for full employment but not push nominal growth beyond the inflation barrier.

Second, I also agree that public spending should be to further “public purpose”. One of the great economic and social tragedies is unemployment – which is a curious pathology only suffered by human monetary systems which are mismanaged. Non-monetary systems never have intentionally unemployed resources. So in a state with above national average unemployment, when that national average, itself, is a disaster of historical proportions, sends a strong message to me that public purpose requires a strong government commitment to job creation.

That should be a primary focus of public spending.

A point of departure is in the implication that the taxation comes before spending and permits that spending. Taxation and public spending are not related in that way despite the institutional structures in the US (and supporting rhetoric) that makes it looks to be that way. The US government strictly speaking does not need taxation revenue to spend (if that became a problem it could alter the rules that force it to behave like that.

There is no operational requirement intrinsic to the monetary system that forces the US to “raise revenue” in order to spend. The US government is sovereign in its own currency and as such is never revenue constrained. It is the monopoly issuer of the currency when all is said and done.

So even if the spending was being wasted (for example, on military excesses in Afghanistan) it might still be necessary to raise taxes to ensure the economy remains inflation free. The debate might be then whether the US government(s) were spending properly to advance public welfare rather than the legitimacy of the taxes.

Please read my blog – Functional finance and modern monetary theory – for more discussion on this point.

Anyway, the Governor then claimed that he was pushing new legislation – his proposal:

… for an automatic refund of tax dollars beyond a specified level of state reserves. We say that anytime budgets are balanced and an ample savings account has been set aside, government should just stop collecting taxes. Better to leave that money in the pockets of those who earned it, than to let it burn a hole, as it always does, in the pockets of government.

I would be questioning why the state should balance its budget – before imposing even harsher fiscal rules which leave the government of each state incapable of dealing with cyclical events of the magnitude of the current crisis.

While he claims that the “government works for the benefit of private life, and not the other way around” (which I agree with) the imposition of fiscal rules such as he is proposing mean that government is incapable of achieving that aim and, in fact, becomes a vehicle which undermines private benefit.

Mass unemployment such as we are seeing around the world now is directly due to the “state” failing to work for the benefit of private life. When private means are incapable of resolving the crisis (that is, there is a collapse of private spending and there is no dynamic present to shock that spending) then public spending has to step in.

Please read my blog – What causes mass unemployment? – for more discussion on this point.

Only the state can push-start a very recessed economy and restore private confidence.

The problem is that the Governor clearly doesn’t understand what causes recessions. He thinks that by the state placing its “trust in average people … We are confident in their ability to decide wisely for themselves, on the important matters of their lives”.

The nature of a macroeconomic event such as a recession is that it is beyond the capacity of any individual to redress. The mainstream economists have never really grasped the notion of a fallacy of composition and the power of macroeconomic constraints. Please read my blog – Fiscal austerity – the newest fallacy of composition – for more discussion on this point.

An individual unemployed worker is powerless to improve his/her own employment prospects when total spending is deficient. In those cases there is not enough jobs to go around. Trust in the individual is fine at a higher level of discourse but if you think trusting the individuals to dig an economy out of a severe recession is wise then you better rethink.

Recessions have a habit of persisting because once the adjustments are made by firms (reducing output and hiring) they establish a new “equilibrium” where they are selling all they produce. While they might want to sell more they currently become “satisfied” because their output and profit intentions are being realised albeit at appallingly high unemployment levels.

In an unemployment equilibrium – which the capitalist system is prone to falling into – there is only one way out. The government has to introduce a spending impulse to kick-start spending, which send signals to producers that they need to hire more workers and produce more. The rising incomes then multiply as confidence returns. The only question is the size of the government stimulus. Too little and the economy limps forward maintaining some rate of growth but insufficient to eat into the pool of unemployment created in the downturn.

The Governor then claimed that the November mid-term elections “carried an instruction” – he elaborated:

In our nation, in our time, the friends of freedom have an assignment, as great as those of the 1860s, or the 1940s, or the long twilight of the Cold War. As in those days, the American project is menaced by a survival-level threat. We face an enemy, lethal to liberty, and even more implacable than those America has defeated before. We cannot deter it; there is no countervailing danger we can pose. We cannot negotiate with it, any more than with an iceberg or a Great White.

I refer, of course, to the debts our nation has amassed for itself over decades of indulgence. It is the new Red Menace, this time consisting of ink. We can debate its origins endlessly and search for villains on ideological grounds, but the reality is pure arithmetic. No enterprise, small or large, public or private, can remain self-governing, let alone successful, so deeply in hock to others as we are about to be.

So we have the third great US reds under the bed scare campaign which in this manifestation is simply deficit terrorism.

I actually liked his reference to “this time consisting of ink”. McCarthy was constantly scared of communists lurking in dark alleys about to unleash unknowing damage to the free world. But the public debt accounting is just book entries. Even if the communist-scare had have been real, it is impossible to put any real dimension to the public debt “scare”.

What is the “pure arithmetic”? The US government maintains a stupid voluntary rule that it has to issue public debt to match its net spending (spending above revenue). It could easily not issue that debt and, indeed, that would be preferable. But the fact that is has issued the debt is innocuous from their perspective. It just means they have an additional line or two in their accounts – for example, interest payments.

Those payments are in no way different to any spending line entry. $US1 billion on tanks; $US1 billion on interest servicing – same accounting.

From the perspective of the non-government holders of the debt, the interest payments are risk-free income flows and the debt holdings risk-free wealth. Like any nominal wealth manifestation, inflation can erode the real equivalent. That is not intrinsic of public debt. But yields reflect the expectation of that happening.

I always thought that those who champion “private well-being” would applaud safe income sources and risk-free wealth accumulation. But not the Governor and that is because he is confused.

The source of the confusion is clear when he conflates “enterprises” with government. This is the erroneous household budget/government budget analogy which is flawed at its most elemental level. Households/firms are financially constrained because they use the currency issued by the government. As the monopoly issuer of the currency, the government is never financially constrained (in operational terms). There is no legitimate comparison between the two sectors (non-government and government) in this regard.

The non-government sector overall cannot continuously accumulate debt. The government sector could if it wanted to.

The Governor, apparently in fear of the red ink asks the following:

Need I illustrate? Surely the consequences, to prosperity, world influence, and personal freedom itself are as clear to this audience as to any one could appear before.

Yes, please illustrate. The only consequences to US prosperity etc are negative if the public debate is mislead into focusing on meaningless financial ratios and being diverted from real concerns – such as unemployment, increased poverty etc. They are the things that matter not the public debt to GDP ratio.

Please read my blogs – Fiscal sustainability 101 – Part 1 – Fiscal sustainability 101 – Part 2 – Fiscal sustainability 101 – Part 3 – for a more detailed illustration of why these things matter.

The Governor then asked:

Do I exaggerate? I’d love to be shown that I do. Any who think so please see me in the hallway afterward, and bring your third grade math books.

If a foreign power advanced an army to the border of our land, everyone in this room would drop everything and look for a way to help. We would set aside all other agendas and disputes as secondary, and go to the ramparts until the threat was repelled. That is what those of us here, and every possible ally we can persuade to join us, are now called to do. It is our generational assignment. It is the mission of our era. Forgive the pun when I call it our “raison debt.”

Unfortunately, I wasn’t available that night to see him in the hallway to tell him that rather than exaggerate the correct description might be plain and simply lying. I guess he wanted the “third grade math books” because he was struggling to add things up in the local shop and was tripping his (private) budget each time he went to the shops. Yes, the Governor is a private citizen and is financially constrained.

No, there is not a third grade maths book available that will show (or convince) the Governor that far from exaggerating (which implies one is on the right track but just pushing it a bit), the real problem is that he isn’t remotely demonstrating an understanding of the opportunities afforded the US government by the fiat monetary system that it operates.

He then lurched into some bizarre militaristic discussion that the US “history has devised a leftward ratchet” and that the US government is falling prey to these evil lefties by moving towards being a “leviathan state they have always sought”.

He claims the “health care travesty now on the books will engulf private markets”. No, it will actually help extend health care to millions of Americans that the private system has failed.

Trying to stay calm (a bit) the Governor said:

Fortunately, these folks remain few. They are vastly outnumbered by Americans who sense the presence of the enemy, but are awaiting the call for volunteers, and a credible battle plan for saving our Republic. That call must come from this room, and rooms like it.

The only enemy is ignorance which is forcing millions of Americans to be without work and which is steadily pushing the same Americans and their (helpless) children into poverty and a future of compromised freedom. You cannot have freedom in a capitalist system if you are poor and involuntarily without work. For me, having access to the distribution system through work is the starting point for individual freedom given the capitalist organisation of production.

Of-course in saying that, I am clearly aware that work in a capitalist system is the exemplar of coercion and the chimera of freedom. I am fully up on all those debates. But unemployment is worse under all circumstances and provides no freedom to explore choice outside of the coercive capitalist labour process.

The rest of the speech is about how Americans should increasingly “tune in to Rush or Glenn or Laura or Sean” and mobilise to destroy the big government. Happy listening.

Conclusion

I have been studying some US polling about future challenges including the attitudes of Americans to budget deficits etc over the last few days. The results are interesting and I will write a blog about my research into this soon.

But as a preview a significant number of those polled (at least 20 per cent) admit to not knowing much about deficits, yet more than 70 per cent of the same sample think they are a problem.

When asked about the problems – loss of services, unemployment etc rank highly.

The results do not support the Indiana governor’s fears that a red menace is about to deprive all Americans of their freedom.

That is enough for today!