I read an article in the Financial Times earlier this week (September 23, 2023) -…
The capacity of prominent people in economics to attempt to airbrush history and forget what they said and did in the past continues to amaze me. It always has. The problem for them though is that there is a public record. Yet, the mainstream media seems to ignore that public record as they give these characters continued coverage without noting the contradictions and about turns that have been going on. The issue is the past keeps catching up with these characters but they just maintain their authority in the public debate as they freely morph between contradictory and inconsistent positions, without ever having to provide any sort of accounting for those shifts. It would clearly help if the media held these people to account because then the public would realise that some of the things that they had said in the past, which led, because they had positions of power, to devastating policy impacts on workers and their families, were false all along and should never re-enter the policy debate.
The Former Director of the Office of Management and Budget
Recently, Peter R. Orszag, an American, who used to be the Director of the Office of Management and Budget (2009-10) and more recently has been back in Wall Street (no surprise – the US revolving doors tendency) wrote a piece for Bloomberg Opinion (March 3, 2021) – Congress’s Infrastructure Plan Must Put Climate First.
Now the Op Ed juxtaposed the views about which issue was more important to address – “addressing climate change or containing fiscal risks.”
Because it probably won’t be possible to accomplish both, climate mitigation must come first.
He argued that the spending associated with the “recovery plan will include trillions of dollars of investment in infrastructure, clean energy and other things”.
He anticipated that a debate would be about what revenue offsets would be required or spending cuts elsewhere.
He noted a recent paper written by himself, Robert Rubin and Joseph Stiglitz – Fiscal resiliency in a deeply uncertain world: The role of semiautonomous discretion – which rejects:
… fiscal anchors – simple limits on deficits or debt as a share of GDP that governments adopt to check their spending and borrowing-that have historically guided fiscal policy and believe any attempts to modify such targets for the current period of low interest rates are likely to fail.
Okay, sounds fine.
Instead they propose making the budget respond more automatically to economic distress …
Okay, sounds fine.
In his Bloomberg article, Orzag explains that “budget projections are subject to substantial uncertainty”.
Modern Monetary Theory (MMT) economists have always made this point – the fiscal position of a government at any point in time is driven by two things:
1. The discretionary policy settings that the government has control over – programs, tax structure etc.
2. The spending behaviour of the non-government sector, which the government has some but not certain control over.
The point we have always made is that the fiscal position should just ‘float’ at whatever state is required to maintain full employment and well being in an environmentally sustainable world.
The actual numbers are irrelevant as long as those goals are being met.
And then we have the climate issue.
Orzag notes that:
Yet sacrificing climate investments at the altar of budget neutrality would be a grave mistake … The window for making bold investments to cut the risk of catastrophic climate change remains open, but it won’t stay open forever …
It is clear that arguments about the usual worrying about deficits “would shift the debate to offsets, rather than the need for ambitious new investment”.
Just as all these mindless debates about fiscal neutrality do.
And, in the past, they have meant that millions of workers have been forced to endure unemployment because the politicians have been berated by economists into keeping deficits well below the levels necessary to ensure full employment.
And Orzag and Rubin have been among those economists in the past that have created that disastrous outcome for workers.
Take the paper they wrote in 2004 and delivered to the Annual Meetings of Economists in 2004 in San Diego – Sustained Budget Deficits: Longer-Run U.S. Economic Performance and the Risk of Financial and Fiscal Disarray.
In that paper there was no story about damaging debates about ‘offsets’ or the way in which these debates could derail legitimate policy purposes.
There was no recognition that calling for drastic fiscal cutbacks would inflict massive costs on society that would ruin the lives of millions.
Quite the contrary.
Then they were claiming that:
1. “The U.S. federal budget is on an unsustainable path” because a few numbers would increase (deficit and debt) a bit.
2. “The scale of the nation’s projected budgetary imbalances is now so large that the risk of severe adverse consequences must be taken very seriously …”
3. “Conventional analyses of sustained budget deficits demonstrate the negative effects of deficits on long-term economic growth.”
4. It was all there – the usual mainstream guff – rising interest rates crowding out private investment, increased reliance on foreigners to ‘fund’ deficits.
5. But that wasn’t enough for them then. They went on “The adverse consequences of sustained large budget deficits may well be far larger and occur more suddenly than traditional analysis suggests, however.”
6. Why? Because apparently “market expectations” would turn against the government which would undermine the government’s capacity to fund itself and the dollar would be sold off with massive inflationary consequences, partly because of the collapse of the US dollar as investors sold it off.
And so it went.
The full mainstream nightmare.
So why haven’t the journalists asked Orzag why he was prepared to allow millions of workers to be forced to unnecessarily endure unemployment when he now sees no case can be made for fiscal cuts.
Why is all the “conventional analysis of budget deficits” which he considered was categorical back then now redundant?
Why are investors happy to hoover up government debt at rates faster than the government can issue it, when in 2004 Rubin and Orzag were claiming the deficits (which were much smaller then) would drive investors to dump the US dollar and the US government and flee to xxx (where is never specified by these characters)?
Then move on to Australia’s former Treasurer
Peter Costello was the Treasurer in the conservative government between 1996 and 2007.
In that time, he oversaw 10 out of 11 years in fiscal surplus.
The biggest contractionary fiscal swing under his tenure occurred in the financial year 1999-2000 (a shift of 1.4 per cent of GDP).
A sharp slowdown in the economy followed that contraction and the fiscal balance was in deficit two years later (2001-02) – the only deficit that Conservative government recorded in the 11 years in office.
The Australian economy only returned to growth after that because the Communist Chinese government ran large fiscal deficits themselves as part of their urban and regional development strategy. That spurred demand in our mining sector.
He also oversaw a rise in the household debt ratio from 85.8 per cent of disposable income to 162 per cent.
During his period as Treasurer the household saving ratio fell from 7 per cent to 1.7 per cent and was often negative in the latter years of his tenure.
The three results are obviously related even though the media rarely make the connection.
The only way he was able to record those fiscal surpluses was because growth was maintained by the massive credit binge by households fuelled by the predatory behaviour of the financial markets, which the then government had further deregulated and reduced any notion of oversight of.
While Costello raved on about reducing national debt what he was really doing was destroying non-government wealth and setting the economy up for failure as a result of the deflationary impacts of excessive household debt.
The GFC saw that unfold and GDP growth has struggled ever since.
That was Costello’s legacy.
I wrote about why we should ignore the likes of Costello in this blog post – Listening to past Treasurers is a dangerous past-time (January 28, 2016).
Now he is raving on about deficits again but this time with a different spin, apparently forgetting his previous line.
At a Business Summit in Sydney this week, Costello claimed that “ultra-low interest rates risk creating the next financial crisis if central banks keep borrowing costs at record lows for longer than necessary” (Source).
He also called to “remove extreme forms of stimulus”.
His justification for austerity this time was:
Because if we don’t have an exit strategy, we will be building up the next financial crisis, and you know what the next financial crisis will be? It will be asset bubbles.
Now go back to when he was Treasurer.
On April 12, 2007, he gave an interview to the ABC TV Lateline program – Interview with Tony Jones, Lateline.
He was asked the question which included “expansionary fiscal policy tends to crowd out private activity, it puts upward pressure on prices which in turn put upward pressure on interest rates. Will that be your guiding philosophy in this Budget?”
Well that is quite right. If you so spend that you have to borrow, you start crowding out the private sector. There is only a limited pool of savings in Australia. If the Government comes in and it says, “Well, we’ll borrow a couple of billion,” the private sector is already out there as we know borrowing tens of billions, then the government is coming into the market competing for those savings driving interest rates up.
This was a point he made often during his tenure as Treasurer.
Okay, we know that crowding out is a ruse.
There is no finite pool of savings. Government deficits add to the savings pool because they stimulate national income.
Government fiscal deficits generate non-government surpluses (flows) that accumulate to the non-government sector’s net acquisition of financial assets (a stock).
Since there are more savings (as a result of higher income levels arising from the deficits) and greater financial wealth, it is not true that government is competing with private sector borrowers for a limited supply of saving (a flow) to place government bonds into wealth portfolios that are fixed in size.
Both savings and portfolios expand as government deficits grow.
Additionally,commercial bank lending is not reserve constrained.
Loans create deposits and any credit-worthy borrower can access funds for investment plans irrespective of the conduct of fiscal policy by the government.
It is also the case that investment spending is typically weak when the economy is not growing robustly, so there tends to be a ‘crowding in’ impact arising from fiscal deficits in downturns-as the deficits attenuate recessionary pressures and encourage the recovery of investment.
Further, as we have seen, the central bank department of government sets the overnight interest rate.
It can keep that low no matter how big the government deficits are.
What all this means is that there is no reason to expect fiscal deficits to push up interest rates – since interest rates (at least at the short end of the maturity structure) are policy-determined.
For these and other reasons, the crowding out argument against fiscal deficits is not based on a coherent understanding of operational realities or of the empirical data.
The notion that government bonds compete for a fixed supply of saving must be rejected.
Now the point of that bit of MMT reasoning is to highlight the sheer hypocrisy of Costello’s current observations and to ask why the media has not been questioning him about the underlying economic model he carries around in his head.
What am I referring to?
Well, he is now railing against “ultra-low interest rates” at a time that Australia has fiscal policy delivering “extreme forms of stimulus”.
See the problem.
When he was Treasurer he inflicted unemployment and lost wages onto hundreds of thousands of workers through his fiscal austerity obsessions and left the household sector drowing in debt.
Among his many justifications was that the fiscal deficits, if maintained, would drive up interest rates.
Now he is seemingly incapable of remembering all that.
Has he abandoned the ‘crowding out’ views?
If not, then how does he explain the coincidence of near zero interest rates for as long as the RBA sets them and the massive fiscal deficits?
Well, of course, the answer is that he just used the mainstream economics nonsense as authority to justify his ideological desire to reduce the size of government, destroy the trade unions (his particular penchant) and redistribute national income to profits.
And, finally, the RBA governor certainly rejects Costello’s latest claims about an imminent financial collapse.
He told the same Business Summit, that there was no sign that inflation would rise any time soon such that the RBA would increase interest rates to suppress it.
He considered that inflation would likely remain below the 2-3 per cent inflation targetting bands that the RBA deploys to guide monetary policy settings at least until 2024.
And more importantly, he considered the only way that the inflation rate would rise in any material sense would be for wages growth to rise of the floor.
For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market …
The RBA governor also said that “the unemployment rate would need to fall from the current 6.4 per cent to about 4 per cent, and possibly even lower, before wages rose above 3 per cent and the central bank could raise interest rates.” (Source).
And then you think of government Projections – which have the unemployment rate still at 5.5 per cent in 2023-24, you have to wonder whether Peter Costello has any grip on the situation.
So it is interesting – the Conservative government is doing everything it can to keep wages growth flat – with new industrial relations legislation a part of that strategy.
And, it is claiming (along with its cheer squad like the former Treasurer) that fiscal policy must be wound back sharply.
Yet, without the wages growth, the economy will tank, given the extreme levels of household debt. if fiscal support is withdrawn.
They can’t have it both ways.
And that is the dilemma or contradiction of neoliberalism.
It creates conditions with are mutually inconsistent.
I think it is interesting to document the way the past catches up with these guys and exposes them.
That is enough for today!
(c) Copyright 2021 William Mitchell. All Rights Reserved.