Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
I am flying today so do not have that much time. But I thought I might share with you a rough rule of thumb I use when it comes to PDF reports that I read. The rule: the larger the file (scaled to page numbers) the worse the report. A large file size (in mbs) usually indicates lots of colour and fancy graphics and usually very little substance. I am sometimes wrong when I apply that rule of thumb but not often. My rule of thumb served me well when I read this report – USA Inc – published by from some self-styled “brains trust”. I have received many E-mails asking me to analyse this Report. I read it and I wish I hadn’t. It was an appalling misuse of time. But moreover it perpetuates the standard conservative lies about the capacity of the US government (and any sovereign government by implication) to pursue appropriate fiscal policy. It gives more fuel to the austerity proponents. So someone has to provide some counter to the the narrative being presented. So here it is … USA Inc – what a lie.
USA Inc. was produced by a company KPCB who have the motto “In search of the next big idea”. I would give up looking if I was them and go back to elementary school and learn some basics before they strut the public stage with their misinformation.
The specific report was prepared by one KPCB’s partners who was a “former financial analyst at Morgan Stanley”. That should tell you something. Morgan Stanley received around $US2 trillion in the so-called backdoor public bailouts in 2007 which were only revealed when Senator Bernie Sanders’ (VT) pushed an amendment to the Wall Street Reform Bill which forced the Federal Reserve to reveal the names of companies that they provided funds to.
They say the Report is “non-partisan” but in reality it is not at all non-partisan because it is driven by the neo-liberal ideology and uses the erroneous government budget constraint framework that defines orthodox mainstream macroeconomics. There is no critical discussion at all in the Report. By construction it is highly partisan in nature.
The Report aims to look:
… at the federal government as if it were a business, with the goal of informing the debate about our nation’s financial situation and outlook. In it, we examine USA Inc.’s income statement and balance sheet …
In a similar vein, the forward is written by George P. Shultz, Paul Volcker, Michael Bloomberg, Richard Ravitch and John Doerr none of which has published anything coherent on macroeconomics.
They claim that the Report describes:
… America’s problems in an imaginative way that should allow anyone to grasp them both intellectually and emotionally. By imagining the federal government as a company, they provide a simple framework for understanding our current situation. They show how deficits are piling up on our income statement as spending outstrips income and how our liabilities far exceed nominal assets on our balance sheet. USA Inc. also considers additional assets – hard to value physical assets and our intangible wealth – our creativity and energy and our tradition of an open, competitive society …
And at that point you realise the whole venture – all 482 glossy pages of it – is a total waste of time. The most informative pages for example include Pages 451 and 452 which carry the text “This page is intentionally left blank” on each.
The US federal government bears no comparison with a private company so the “imaginative way” is pure fantasy and will mislead any readers who are seduced into believing otherwise.
The “simple framework” will not provide the slightest insights into the “current situation” in the US. It will distort the situation by denying the uniqueness of the sovereign government’s choice set. The choice set (which takes into account opportunities and constraints) of the sovereign government is not available to a private entity.
The former is never revenue constrained because it is the monopoly issuer of the currency whereas the latter is always revenue constrained. Their worlds are very different.
We are asked to:
Imagine for a moment that the United States government is a public corporation. Imagine that its management structure, fiscal performance, and budget are all up for review. Now imagine that you’re a shareholder in USA Inc. How do you feel about your investment?
Why would I ever want to imagine something so ridiculous. Why do these people think it is useful to create a construction that is patently false from the inception? The only way you would spend time on this “thought process” as if it might lead to useful insights would be because you didn’t understand basic macroeconomics and the way the monetary system operates in the first place.
In which case, you should not be pumping this stuff out into the public in an attempt to influence public debate. Charlatans ignore their incompetence and proceed to be the expert nonetheless.
A public corporation has to meet a budget to fulfill its spending plans (whether they be for investment or daily working capital needs). They cover the outlays from earnings, borrowing and/or by use of retained earnings. Sometimes they might engage in an asset sale program to revitalise or restructure their company.
The idea of a national government have to “meet” a budget is inapplicable. The government’s budget is special in that it is the product of discretionary decisions made by government (some of which might be codified – these are what the US call non-discretionary entitlements) and cyclical events
Such a government might try to meet a budget target by altering the discretionary components on the spending and revenue sides but ultimately the final outcome depends on private and external sector spending balances, which are not directly controlled by government (although they can be influenced by policy).
This is one of the ironies of the austerity programs. It is highly likely that a nation pursuing fiscal austerity with the aim of reducing their budget deficit will actually worsen it because of the cyclical impacts – the discretionary cuts stifle aggregate demand (spending) which causes economic activity to slow and tax revenue and welfare outlays to rise (as unemployment rises).
It is often the case the the automatic stabiliser component (pushing the deficit up in a declining growth economy) outweighs the discretionary cutbacks (pushing the deficit down but slowing economic growth) with the net effect that the deficit increases. Just look at Ireland as an example.
But as noted before a national government can always spend in its own currency (as long as there are real goods and services available for sale) independent of its revenue side. It doesn’t have to tax, borrow, run down assets to spend.
That is, it is nothing like a corporation.
The other strange part of this analogy is that if a private corporation makes a profit it usually means it is adding value to its shareholders. If a sovereign government runs a surplus it usually means that it is not providing as many public goods as it might should it run a deficit. Given that a surplus also reduces our private purchasing power the net effect is to undermining our welfare.
Further, profits for a company provide it with the capacity to retain earnings which can be used for future capacity building independent of the conditions of the market for loans – thus giving the firm more discretion in its investment decision-making.
For a national government a surplus provides it no enhanced capacity to build infrastructure or fund other essential spending plans. The reason clearly is that as a sovereign government is intrinsically free of revenue constraints its previous budget balance is not a restriction or advantage in framing current (or future) spending decisions.
The only way that past budget positions carry over in time is via their impact on the real economy – so that a sequence of budget surpluses is usually (depending on the external position) associated with declining growth (via the fiscal drag). In that context, future deficits have to be larger than otherwise because there is more real capacity to absorb. The same argument could be made in the context of past deficits which have stimulated growth and allowed available capacity to be more fully utilised. Then there is less need (and room) for non-inflationary deficits in the current period.
But these real constraints or factors are not the sort of constraints the mainstream macroecnomists try to tell us restrict fiscal choices.
The misinformation in the USA Inc Report gets worse as you read it. I will highlight a few of the glaring errors in logic found in the Report because they are consistently used in the public debate by conservatives to attack government involvement in the economy (unless of course one of them is getting a bailout/handout/kickback).
Consider this as a classic example of misconstruction:
… USA Inc … cash flow is deep in the red (by almost $1.3 trillion last year, or -$11,000 per household), and USA Inc.’s net worth is negative and deteriorating. That net worth figure includes the present value of unfunded entitlement liabilities but not hard-to-value assets such as natural resources, the power to tax or mint currency, or what Treasury calls “heritage” or “stewardship assets” like national parks. Nevertheless, the trends are clear, and critical warning signs are evident in nearly every data point we examine.
Can you believe that someone would seriously write that sort of stuff and think they are actually being smart and informative and serving a public purpose?
You get the same sort of misrepresentation from the debt clocks that conservatives love to look at and feel both scared but vindicated. Poor darlings.
When I just consulted the US debt clock it told me that every citizen currently owes $US45,780. That is a plain lie.
No US citizen is liable for the public debt issued by the US government. Go and find a house in your street and knock on the door and ask the residents to produce the contractual documents which say that each resident including all new born children that might be located there owe the US government $US45,780 (and rising).
The mainstream economists claim this is a useful way of thinking because ultimately the government pays back the debt by raising taxes. This is why the debt clock also lists a per taxpayer debt (of $US128,257 and rising). So you might want to restrict your house by house search for relevant contractual documents to the taxpayers that live there.
Either way you will be disappointed.
The US government actually rarely “pays off” its debt anyway although it is paying it off continuously! If you are confused you might like to read my recent blog – Government deficits are the norm – for more discussion on this point.
The US fulfills it obligations on maturing debt by crediting bank accounts in the same way it conducts all its spending. But it usually maintains a growing nominal level of outstanding debt in line with the growth of the economy.
In mainstream macroeconomic texts (and the courses that are based on them) students learn multi-period examples of governments going into debt then having to run a sequence of primary budget surpluses to pay it off. Everything is sweet after about 5 periods but the lessons are very clear – never go into debt because they force up tax rates and they destroy private incentive. And … if that wasn’t bad enough – the debt caused interest rates to rise choking off productive private investment.
All in the land of fairies. By the way, the 3-5 period models are usually because that is the size of the graph that will fit on a PowerPoint slide or on a textbook page. The bar charts below and above the zero line over time usually have nice colours though.
Conclusion: brainwashing propaganda not remotely about the real monetary system.
As an aside, the debt clock site claims it is not associated with any political parties, lobby groups etc but is still secretive about who owns the domain. You can access the registration record via WhoIS and it gives us the following information:
Registrant Name:Registration Private
Registrant Organization:Domains by Proxy, Inc.
Registrant Street2:15111 N. Hayden Rd., Ste 160, PMB 353
Further, I just repeat my often made point that using terminology such as “deteriorating” budget outcomes makes no sense. What is the benchmark? The budget outcome is uninteresting. You have to be concerned about deteriorations in the real economy or the inflation rate but not the direction of the budget balance.
As noted often – if a budget deficit is rising but that delivers full employment and increased prosperity via the extra spending and activity is that a deterioration? You quickly see the point.
Finally, consider the idea expressed in the quotation above that the “power to … mint currency” is a “hard-to-value asset”. The monopoly power to issue currency at will is intrinsic to a fiat monetary system and provides any government in that position with opportunities not enjoyed by any other economic entity.
Such a “power” is hardly an asset to be compared with liabilities. It makes the liabilities relatively uninteresting. It means all liabilities, while legally binding, are easily met. It means that spending is not revenue constrained. It means the balance sheet/profit and loss statement approach of US Inc. is mindless.
Then we meet the ageing population part of the saga:
Underfunded entitlements are among the most severe financial burdens USA Inc. faces. And because some of the most underfunded programs are intended to help the nation’s poorest, the electorate must understand the full dimensions of the challenges.
What a devious way of presenting the argument. We don’t want to hurt the poor so we have to be mindful.
The claim that there are “underfunded entitlements” that will present “severe financial burdens” to the US government is a total lie.
Even if outlays increase for health and pensions as a result of an ageing population the US government is not squeezed for future discretionary spending. To suggest that US government has to make “financial” trade-offs is a lie. All trade-offs when there are underutilised resources are political.
The concept of PAYGO or funding these entitlements is nonsensical to a government that can spend when it chooses.
The US government can and will always be able to purchase anything that is available for sale in US dollars and can always pay their pension obligations as well as purchase other things that are available for sale.
The only issue will be whether there are real resources available to be purchased. But that is not a consequence of any financial constraint.
Running a deficit now does not diminish the capacity of a sovereign government to run a deficit next period or the period after next. If the economy reaches full capacity and non-discretionary government spending pushes the economy beyond the inflation barrier (that is, pushes demand (spending) beyond the capacity of the firms to respond in real terms (increase output) then political choices have to be made. There are no financial constraints involved here.
There is no point that we should be worried about from a monetary perspective. We might not want the recipients to have that standard of living – but that judgement will reflect political considerations. We might not be able to provide that standard of living – from the perspective of available real resources. But again this is not a financial constraint.
Please read my blogs – Democracy, accountability and more intergenerational nonsense and Another intergenerational report – another waste of time – for more discussion on this point.
Another rule of thumb I use when judging these sort of reports is to consider their boxed or highlighted statements. They usually tell you about the quality of the content. Consider this:
Amid the rancor about government’s role in healthcare spending, one fact is undeniable: government spending on healthcare now consumes 8.2% of GDP, compared with just 1.3% fifty years ago.
That might be true (I haven’t checked). But so what? It might mean that Americans are healthier or sicker. It might mean they are a bunch of pussies who need constant medical intervention. It might mean they are being plundered by a rapacious system of private health providers who overcharge, overservice and otherwise rip of the health consumer.
All of these “mights” could require a policy response. But what has any of that to do with the capacity of the US government to fund health spending? Answer: nothing at all.
So why highlight it in such a way and position in the text to generate alarm as if a crisis is pending? Answer: because the lie serves the ideological purpose of the Report.
The next highlighted box was:
Regardless of the emotional debate about entitlements, fiscal reality can’t be ignored – if these programs aren’t reformed, one way or another, USA Inc.’s balance sheet will go from bad to worse.
Balance sheet, bad to worse, nothing relevant there for anyone who really wants to understand the way fiscal policy works and interacts with the non-government sector to influence prosperity. Just ideological guff!
I have to get to the airport now and get back to Newcastle. So my time is up!
Usual cheery day reading this sort of rubbish. My detective novel at present is at least interesting.
That is enough for today!