Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
Today I continue my theme “When you’ve got friends like this” which focuses on how limiting the so-called progressive policy input has become in the modern debate about deficits and public debt. Today is a continuation of that theme. The earlier blogs – When you’ve got friends like this – Part 0 – Part 1 – Part 2 – Part 3 and Part 4 – serve as background. The theme indicates that what goes for progressive argument these days is really a softer edged neo-liberalism. The main thing I find problematic about these “progressive agendas” is that they are based on faulty understandings of the way the monetary system operates and the opportunities that a sovereign government has to advance well-being. Progressives today seem to be falling for the myth that the financial markets are now the de facto governments of our nations and what they want they should get. It becomes a self-reinforcing perspective and will only deepen the malaise facing the world. Today I focus on the Peoples’ Budget proposal recently released by the Congressional Progressive Caucus (CPC) in the US.
The CPC is a Democrat caucus within the US House of Representatives and claims it promotes:
… a strong, progressive agenda … rooted in four core principles that embody national priorities and are consistent with the values, needs and aspirations of all the American people, not just the powerful and the privileged. They reflect a fundamental belief in government of the people, by the people, and for the people.
The four, core principles of the Progressive Promise:
1. Fighting for economic justice and security for all;
2. Protecting and preserving our civil rights and civil liberties;
3. Promoting global peace and security; and
4. Advancing environmental protection and energy independence
I can agree at the “motherhood” level with these principles. They reflect a collective view of society and the interaction between the economic system and community.
The CPC has just put out a budget document they describe as – Peoples’ Budget – which they are representing as a viable alternative to the idiotic positions that the President and the Republicans are currently proposing.
For those interested in the underlying technical discussion to the People’s Budget you might be interested in the Working Paper commissioned by the Congressional Progressive Caucus from the Economic Policy Institute on April 13, 2011.
There is much in the document that is worth considering. They propose a protection of the “social safety net” (health etc) and a withdrawal of troops from Afghanistan and Iraq with a subsequent scaling back of wasteful defence expenditure.
They propose a national public infrastructure investment which will produce some jobs.
They also aim to attack income inequality.
All of this sounds like a credible position for a progressive caucus to have and aim for.
But then you read statements like:
The CPC budget eliminates the deficit in a way that does not devastate what Americans want preserved, specifically, Medicare, Medicaid, and Social Security. Instead of eroding America’s hardearned retirement plan and social safety net, our budget targets the true drivers of deficits in the next decade: the Bush Tax Cuts, the wars overseas, and the causes and effects of the recent recession. By implementing a fair tax code, by building a resilient American economy, and by bringing our troops home, we achieve a budget surplus of over $30 billion by 2021 and we end up with a debt that is less than 65% of our GDP. This is what sustainability looks like.
When you read the
The Peoples’ Budget aims to increase tax revenue by restoring “fairness to a system that unfairly benefited the richest few while hurting the majority of America”. I am not against altering the degree of progressivity in the tax system but first we have to understand what the role of taxation is.
The ultimate aim at the macroeoconomic level is not to collect “more taxes” to balance a budget but to ensure that aggregate demand is regulated to avoid inflationary growth in nominal spending. Yes, it is better to do this in a fairer way and not hand out billions to the top-end-of-town in the false hope that trickle-down will bring prosperity. It doesn’t and hasn’t.
But if the economy is suffering a major aggregate demand shortfall then not replacing the increased tax revenue overall (in the name of fairness) with expansionary spending measures is a mistake. A progressive agenda has to make sure that the fairness agenda doesn’t undermine the government deficit support of employment.
It gets really scary when you read their proposals for the military:
The CPC budget responsibly ends our wars that are currently paid for by American taxpayer dollars we do not have. We end these wars not simply to save massive amounts of money or because the majority of America is polling in favor to do so, but because these wars are making America less safe, are reducing America’s standing in the world, and are doing nothing to reduce America’s burgeoning energy security crisis. The CPC budget offers a real solution to these fiscal, diplomatic and energy crises, leaving America more secure, both here and abroad. The CPC budget also ensures that our country’s defense spending does not continue to contribute significantly to our current fiscal burden – a trend we reverse by ending the wars and realigning conventional and strategic forces, resulting in $2.3 trillion worth of savings. This is what security looks like.
There are two points here – one on which I can agree and the other which …
I consider it obvious that the “war on terror” has largely failed and has made the World less safe and more difficult to deal with (travel etc). I do not see that it has quelled the terrorist threat (whatever that is, and whoever the terrorists are – I consider the US government to be a terrorist organisation). So I agree with the downgrading of America’s military involvement overseas etc.
But it is frightening to read that a progressive caucus can believe that the US military effort is being “currently paid for by American taxpayer dollars we do not have”. That is neo-liberalism personified.
First, the American taxpayer does not pay for anything – please read my blog – Taxpayers do not fund anything – for more discussion on this point.
Second, the American government has all the US dollars that it could ever want to spend. There is no financial constraint on the US federal government. By falling prey to the conservative argument that the US has run out of money, the CPC is undermining the pursuit of the very core principles that it purports to promote.
All the economists etc which have signed up to the CPC budget are equally implicated because they should understand that such a statement is without foundation – it is a plain denial of the facts. But moreover, it plays into the hands of those who want to cut, cut, cut.
All of this culminates in a plan which “eliminates the deficits and creates a surplus by 2021” and achieves a “Primary budget balance by 2014”. The document is full of graphs and scenarios which show how their plan will reduce the public debt ratio cut government spending, increase taxes, and reduce income flowing to bond holders.
There is no proposal to introduce a Job Guarantee which is the surest way of eliminating unemployment and is a way of putting an anti-poverty floor into the economy.
There is no proposal to engage in wide-spread financial market reform. Instead, the People’s Budget aims to impose a “modest” tax on the speculative destroyers of Wall Street.
There is no proposal for a truly national health safety net – a national public insurance scheme (such as in the UK or Australia). Instead, window dressing remedies are proposed to wrest some of the hold that the private insurance industry has on health costs in the US.
The word “unemployment” was used twice in the whole document in the context of insurance – “Extend and Safeguard Unemployment Insurance”.
There was no estimate of how many jobs would be created by the deficit cutting strategy.
Why is it appropriate from an economic perspective to run a primary surplus by 2014? What assumptions are being made about the external sector (currently in deficit) and the private domestic sector (currently trying to reduce its high level of indebtedness)? Why is a contractionary budget position correct in 2014 when the economy has not been creating enough jobs for at least a decade (see below)?
When I read the technical document I found nothing to justify the budget deficit cuts in terms of viable movements in sectoral balances. Only general references to “fiscal crisis”. What crisis? There is no fiscal crisis in the US. There is a political crisis because the conservatives who created the recession are trying to maintain their position at centre stage. The “progressives” have lost ground because, like the “Peoples’ Budget”, they have chosen to fight the battle on the basis of a series of false premises pertaining to the US fiscal capacity.
These are all political statements with no foundation in an understanding of the way the monetary system operates. At the core of the Peoples’ Budget is the erroneous belief that the US government is running out of money. It is not and once you start from that position all economic logic fails.
What the US economy needs right now is further fiscal stimulus not less. The Peoples’ Budget fails to explain how cutting the deficit – particularly the primary deficit in 3 years will allow growth to occur and employment to significantly increase.
All proposals at present which involve cuts to the deficit are undermining the capacity of the US economy to generate jobs.
I do not consider the “Peoples’ Budget” to be a progressive document nor worth rallying around.
I thought the following analysis was relevant to my view of this “progressive input”. You can get the data I use in this blog from the US Bureau of Labor Statistics (for all labour force data) and the US Bureau of Economic Analysis (for the National Accounts data).
The Employment-Population ratio is sometimes used as a more accurate guide to the underlying state of the labour market because it is a more pure ratio than the unemployment rate.
The latter is computed as total unemployment expressed as a percentage of the labour force. So both the numerator (unemployment) and the denominator (labour force) are sensitive to the business cycle, the latter via the participation rate (which falls in recessions and rises in booms).
So a falling unemployment rate might just be achieved by an exodus of workers from the labour force as a result of them being discouraged by the lack of employment opportunities (this is the basis of the hidden unemployment classification that economists talk about).
The Employment-Population ratio is cleaner because only the numerator (employment) is cyclically sensitive. The underlying population scale is relatively stable. So a rise in this ratio is usually unambiguously good and vice versa.
The following graph shows the US Employment-Population ratio from January 1960 to March 2011.
Clearly, the April 2000 peak of 64.7 per cent was wiped out by the recession that followed in 2001. That was the recession that saw the economy collapse under the fiscal drag created by the Clinton surpluses.
The Employment-Population ratio rose slightly in that recovery (reaching the most recent peak of 63.4 per cent per cent in December 2006). You might think that 1.3 per cent (the difference between the two peaks is not that much). In terms of jobs it amounts to jobs that were not regained (in proportional terms) between these peaks. That is, one way of looking at the 2001 recession which dragged on between March and November.
If employment had have kept pace with the increase in the population between those peaks (that is, the Employment-Population ratio had have stayed at 64.7 per cent) then by December 2006, employment would have been 148,963 thousand rather than 145,970 – that is, nearly 3 million jobs more.
This employment gap becomes more significant in the downturn that followed the financial crisis. If the Employment-Population ratio was at its April 2000 peak (64.7 per cent), then employment in March 2011 would have been 154,687 thousand instead of its actual value 139,864 thousand. That is, nearly 15 million jobs have gone missing over the decade or so.
That is the problem that the US faces and the it started well before the financial crisis. The US economy hasn’t been generating enough jobs since 2000 and the financial crisis exacerbated that decline.
We can also decompose the Employment-Population ratio into private and public sector components. In April 2000, at the peak of the ratio, the private employment-population ratio was 52.3 per cent whereas the public ratio was 12.4 per cent.
By December 2006 (the next weaker peak after the 2001 recession) the private employment-population ratio was 49.9 per cent and the public ratio was 13.5 per cent.
By March 2011, the private employment-population ratio was 45.4 per cent and the public ratio was 13.1 per cent.
The following graph shows you the evolution of the private and public employment-population ratios. The message is clear – the private sector in the US has lost its capacity to produce work (and I am ignoring quality issues here which would further demonstrate the malaise).
So in the period where the economists were pronouncing the “business cycle was dead” and that the US had entered the period of the Great Moderation the US economy was failing in its primary functions – to produce work.
Please read my blog – The Great Moderation myth – for more discussion on this point.
In the period where the neo-liberals were successfully pressuring government to deregulate the labour market, the welfare system and the financial system and reduce the power of the unions etc – claiming that the market-friendly policies would generate unprecedented wealth for all – the US economy was faltering – long before it collapsed under the weight of these poor policy choices.
This is the problem that has to be addressed. The US has become obsessed with redistributing real income to unproductive sectors such as the financial sector which is not a large creator of employment. The policy debate is now totally moribund because the focus is on the wrong thing.
There is not a budget deficit problem. There is a growing long-term problem in the government incentives given to the private sector which have encouraged wasteful and destructive financial speculation at the expense of real wealth production. A progressive proposal that doesn’t attack this malaise head on is missing the point.
Once again, if this document from the Congressional Progressive Caucus in the US. represents the apex of progressive influence in the US legislature then the nation is in for a sorry future.
That is enough for today!