Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
… who needs enemies. I am forming the view that many so-called progressive economic think tanks and media outlets in the US are in fact nothing of the sort. Tonight’s blog is Part 1 in a series I will write but the series really started in November 2009 when I wrote about The enemies from within. Today I read two position pieces from self-proclaimed progressive writers which could have easily been written by any neo-liberal commentator. True, the rhetoric was guarded and there was talk about needing to worry about getting growth started again – but the message was clear – the US has dangerously high deficits and unsustainable debt levels and an exit plan is urgently required to take the fiscal position of the government bank into balance. Very sad.
The American Prospect describes itself as:
At the dawn of a new progressive era and a time of economic transformation for the United States and the world, The American Prospect will strengthen the capacity of activists, engaged citizens, and public officials to pursue new policies and new possibilities for social justice. The Prospect was founded in 1990 … as an authoritative magazine of liberal ideas, committed to a just society, an enriched democracy, and effective liberal politics … The magazine’s founding purpose was to demonstrate that progressive ideas could animate a majority politics; to restore to intellectual and political respectability the case for social investment; to energize civic democracy and give voice to the disenfranchised; and to counteract the growing influence of conservative media.
I hope your feeling optimistic after reading that – “progressive ideas” to “animate a majority politics”; “to energize civic democracy”; “give voice to the disenfranchised” and to “counteract the growing influence of conservative media”. That is heady stuff which should warm the cockles of any well-intentioned “progressive”.
My question: what the hell is a progressive these days if a major self-styled publication is advancing the case against budget deficits designed to improve employment outcomes?
For that is exactly what one of the lead articles in the current edition (January 6, 2010) is about. The story by Tim Fernholz entitled – Dems Versus the Deficit, carries the subtitle What’s the progressive approach to deficit reduction, anyway?
Fernholtz actually discusses another Op-Ed article, which was written by former Clinton hack John Podesta and Michael Ettlinger and was published on January 4, 2010 in the Financial Times under the title – A 10-year plan to close the budget deficit.
Podesta now runs the so-called Centre For American Progress and Ettlinger is second-in-command. George Soros is one of its benefactors.
Podesta is one of the power men in Democrat politics and lists his skills as “Federal budget and tax policy, government information, privacy, Patriot Act, civil liberties, security and terrorism, national intelligence issues, regulatory reform, telecommunications security and regulatory policy, environmental issues, technology, federal powers, the judiciary”.
Ettlinger lists his skills as “Taxes, economics, employment, cities and metropolitan policy, budget and fiscal policy, social security, state economic development”
This is what the CAP says about itself:
The Center for American Progress is a think tank dedicated to improving the lives of Americans through ideas and action. We combine bold policy ideas with a modern communications platform to help shape the national debate, expose the hollowness of conservative governing philosophy, and challenge the media to cover the issues that truly matter.
They have strange notions like “Restoring America’s global leadership to make America more secure and build a better world” which doesn’t resonate well does it, when one considers that global leadership for the Americans is usually backed with an invasion force and some solid armaments.
On their About us Page I counted the word “progressive” (or plural forms) 18 times and that doesn’t include the title graphic which also mentions how progressive they are. So ladies and gentlemen we better consider these characters as serious progressives. Not!
With that sort of background, one would be think the writers would go out of their way to mount a strong argument that sought to defray the central propositions of the deficit terrorists who parrot their nonsense on a daily basis at all levels of debate (politicians, business interests, media, academics etc).
You would be very wrong.
Fernholtz starts by noting that:
With the economy stumbling towards recovery — we’ll know more after this week’s unemployment numbers are released — deficit worriers and those with a political ax to grind are complaining about the budget shortfall and the accompanying national debt, and placing blame on President Barack Obama and the Democratic Congress.
Well we now know the US labour force numbers for December. They were bad, if not terrible. The US Bureau of Labor Statistics shows that in December 2009, a further 85,000 jobs were lost in the US taking the 2009 total to 4.164 million. In 2008 the economy lost in net terms 3.1 million jobs.
The BLs say that “Employment fell in construction, manufacturing, and wholesale trade, while temporary help services and health care added jobs”. So underemployment will have risen and broad labour underutilisation (the BLS U6 measure) rose to 17.3 per cent.
Over the decade from 2000 to the end of 2009 the US economy only added net 378 thousand jobs which is virtually no jobs in an economy of this size.
The unemployment rate was 10 per cent in December 2009 and the only reason it didn’t rise sharply is because the participation rate fell as more people have given up looking for work (that is not there).
So the US is desperately in need of continued Federal budget support and will require this for many years to come.
… though, the American public’s priority continues to be job growth; they also remain confident Democrats are better equipped to handle jobs (and deficit reduction) than the Republicans.
So you see the sneaking agenda of “deficit reduction” is there. The same sort of claim is being aired elsewhere. The Australian Labor Government also claims they can manage a conservative budget stance in a more socially reasonable way than the Liberals (former government). But trying to find light between their two positions is difficult at the best of times.
But moreover since when has the progressive agenda consisted of worrying about deficit reduction as a policy aim? Placing a focus on some specific targetted deficit outcome will almost always lead a policy maker astray in a modern monetary economy. It is not a progressive position.
Fernholtz says that the Democratic Blue Dogs are joining forces with the Republicans to use the “budget deficits as an excuse to go after progressive improvements to social insurance and infrastructure of all kinds.”
The Blue Dog Coalition are conservative Democrats who have a primary aim to advance fiscal conservatism. They are also socially conservative although that plays out in more subtle ways than does their opposition to spending bills and their promotion of tax cuts.
The existence of this group always raises the question in my mind: Why does a so-called progressive party tolerate membership of conservatives who seek to undermine the progressive agenda? The answer is fairly obvious and relates to the topic of this post.
But then Fernholtz sets what he thinks is the smart “progressive sail”:
Progressives also need to worry that increasingly large debt interest payments, which reach hundreds of billions of dollars, could threaten their budget priorities.
At that point he introduces the second article noted above by Podesta and Ettlinger. So I will skip over to that article and back to see how the progressives are meant to interpret it courtesy of Fernholtz.
Podesta and Ettlinger open by saying that Barack Obama has played a “leading role” in “saving of an economy on the brink of a second Great Depression”. They refer to the “$787bn American Recovery and Reinvestment Act”, the “most aggressive stimulus package in history”.
They also hint that the recovery is now well underway but of-course wrongly anticipated the December employment figures, which show that there is now a very real danger of a double-dip as the lost incomes from unemployment erode saving and start dragging private spending even lower than it has been in 2009.
But for Podesta and Ettlinger the “worst appears to have passed” and the focus is shifting to “the federal budget’s red ink”, which many are using to undermine “reforms critical to rebuilding a strong economy – most recently the Senate’s healthcare bill”.
While they say that the current budget deficit of around 10 per cent of GDP is “necessary and appropriate” because “they accelerate recovery” and should not be suddenly cut as the conservatives are demanding – because “a sudden drop in economic demand driven by dramatic cuts in the fiscal stimulus would derail recovery and hinder job creation in a still fragile economy”, they then say:
The deadlier threat lies in the long-term debt outlook. The deficit is projected to drop in the next few years, but never below 4 per cent of GDP; in 2014, the shortfall is expected to be at least $700bn. After hitting a low in the middle of the decade, it will rise for the rest of the decade and beyond. The mere anticipation of such a large, sustained deficit poses risks to financial markets and the economy, and undermines US standing. Markets, and the world, will worry about buying our debt, question investments in the US, and act with caution in fear of higher interest rates. When those deficits come to fruition, public expenditure will be siphoned from necessary services and investment into the abyss of rising interest payments on a growing debt. The debt might also leave the US unable to borrow further in the case of another crisis.
In that paragraph you will see no reference to rising poverty (poorest children in the advanced world); rising inequality; urban decay and rising crime; rising drug and alcohol abuse; sluggish output and income growth; and … persistently high unemployment and underemployment which drives some of the earlier pathologies.
Addressing these issues is the core agenda for a progressive. Proving sustained solutions to these problems is what makes a nation great and improves its standing in the World.
Last time I checked the “abyss of rising interest payments” was in actual fact income streams for people who had voluntarily chosen to park some of their accumulated financial assets into public bonds. Why are those incomes an abyss – something bad? That is conservative talk.
A truly progressive position challenges the whole notion of a government, which issues its own currency under monopoly conditions in a fiat monetary system, borrowing in the first place. It is clear that the US federal government does not need to borrow a cent.
A progressive would want to bring that out into the public debate and push the logic of it.
But recognising that the debt arrangements have a long-standing in US government relations and will take a great effort to undermine, a progressive, who understood modern monetary theory (MMT) – that is, understands how the fiat monetary system actually operates – its opportunities and constraints – would also challenge all the conservative humbug which Podesta and Ettlinger are now, themselves, perpetuating.
What risks are there to financial markets of a federal deficit or the debt that (voluntarily) accompanies it? The financial markets get a risk-free annuity that they use to price other investment assets and pension funds use to balance risk in their portfolios.
When in the recent history have the financial markets refused to buy US government debt? Prior to 1971, the currency was convertible, and the federal government was constrained financially.
So it was even tougher on the government to manage a huge debt portfolio of the level it sustained after the Second World War. That level of debt did not destabilise financial markets nor did it stop the US government from running its broader socio-economic program (and from prosecuting a few unnecessary military invasions).
Further, the foreign debt holders (these amorphous “Markets, and the world”) who have been converting their trade positions against the US into holdings of US financial assets (including government debt) are well-placed to invest in the US with the US dollar assets they hold.
But moreover, if the deficits are actually driving strong growth and sustainable saving strategies by the US private sector, then its investment profile will be attractive. The alternative is a badly functioning economy being throttled by an artificial retrenchment of the deficit.
Finally, the question of what government can do with its spending (which includes interest service payments) really cannot be answered in isolation of the real position of the economy. It is true that if the US government reaches full employment – and it is a long way off that – then nominal spending growth will come up against the real constraint embodied in the real capacity of the economy to absorb it with production increases. Then something has to give or inflation becomes the issue.
At that point, the US government will have to decide what the public and private command over the real resources should be (that is a political decision). Interest payments on public debt then compete with other spending including private spending.
But the crucial point is that if the US achieves that sort of growth then the debt levels will be falling anyway and the interest payments will be also falling.
This raises the other progressive point – by running a low interest rate policy the government can reduce its interest payments anyway. This generalises into a discussion of the relative merits of fiscal and monetary policy. The conservatives (neo-liberals etc) are obsessed with monetary policy as the principle counter-stabilisation policy tool.
This obsession has led governments around the world to pursue austere fiscal positions which have undermined the capacity of their governments to advance living standards. Why didn’t these authors note that rather than blindly falling into line, lock-step, with the conservative mantra.
This also relates to their presumption that deficits raise interest rates! They do not. The central bank raises interest rates because it thinks they are effective tools to discipline inflation expectations. However, the evidence is very clear that inflation targetting countries have done no better on that front than non-inflation targetting nations.
Podesta and Ettlinger though continue on the conservative line:
The scale of the deficit problem, and the risks it confers to sustainable economic growth, warrants the creation of a long-term plan to solve it. This means devising a path back to a balanced budget. Given the time necessary for the economy to reach full strength, and the uncertainties regarding war costs and the impact of health reform, our goal should be a budget in balance by 2020.
This is nonsense. No truly progressive person who understood what this means would say this.
First, they don’t seem to realise that the federal budget outcome in a modern monetary economy is endogenous and determined, ultimately by the non-government saving desires. While the government can try to reduce its deficit by cutting net spending if this runs, for example, against the desires of the private domestic sector to increase their saving ratio (assuming, say a current account deficit) then the government’s aspirations will be thwarted.
The fiscal drag will combine with the spending withdrawal of the private domestic sector (and the leakage from net exports) and the economy will contract further pushing the deficit back up via the automatic stabilisers.
So trying to pretend that a goal like a balanced budget by 2020 is something that policy can attain directly is to perpetuate a conservative myth of the worst kind.
It is impossible for a government in a fiat monetary system to guarantee a budget deficit outcome if it is working against the behaviour of the non-government sector.
Further, what this statement is saying is that unless they have a plan to generate significant current account surpluses (which will not happen in the next decade in the US), then these so-called “progressives” want the private domestic sector in the US overall to be dis-saving and becoming increasingly indebted.
The average extent of this private domestic sector deficit position would mirror the average current account deficit at 2020 (if a budget balance was achieved).
So the so-called “progressives” want to return to the unsustainable growth path where the American private sector accumulates ever increasing levels of debt. That is total idiocy and reflects the fact that these characters, despite their alleged “skills” in budget analysis (see above) do not understand the way the monetary system and the aggregate relationships between the government and non-government sector work.
It gets worse though. Podesta and Ettlinger, warming to their task, say:
Such a distant goal will not be credible, however, unless today’s policymakers set intermediate targets. One should be to achieve primary fiscal balance – when government spending on current programmes equals revenues – by 2014. Overall there would still be a deficit, because we would still be paying interest on past debt, but it would be a huge step forward.
The primary fiscal balance they refer to the non-interest servicing component of the budget outcome. So it would be balanced when spending equals taxation receipts and so the deficit is just the interest payments on past debt.
They want to achieve this by 2014! Why 2014? Do they expect the US economy will be back to full employment by then and the private sector will have resumed strong spending growth so there will be a reduced need for net public spending? My reading of the data is that the US economy won’t be anywhere remotely near that position.
Further, the private sector has a lot of balance sheet repair to accomplish yet and that process will take years. Demand for credit by households is falling in recognition that they are pursuing this repair job. The last thing the government would want is to start squeezing the household sector for liquidity (by contracting net spending) as they try to save.
But Podesta and Ettlinger are blind to this. For them:
This target is simple, clear and easy to measure. Reaching primary balance would also mean US debt would cease to rise as a share of the economy – a critical milestone in returning to full health … In addition to hitting primary balance in 2014 and full balance by 2020, two other measures are critical to get us back on fiscal track: specifying year-by-year steps towards those goals; and formulating a scheme to help Congress discipline its budgeting process. The former is straightforward; the latter, less so. Congress should start by passing strict pay-as-you-go provisions, which existed before the Bush administration and Congress allowed them to expire in 2002. The second step is to give the pay-as-you-go process teeth. That will include ensuring tax levels and loopholes, as well as spending, are included in rules that automatically adjust the budget in the event of excess deficit levels.
That is about as far away from a progressive position as anyone could get. The imposition of fiscal rules is the archtype tool that the conservatives propose to straitjacket their national governments. Please read my blog – Fiscal rules going mad … – for more discussion on this point.
The concept of fiscal rules is in denial of the endogeneity of the public budget outcome. The government can specify year-by-year targets until the cows come home but will only be able to achieve them if by some coincidence those targets match the saving preferences of the non-government sector.
At present, if you read all the data coming out of the US at present, those saving preferences are strongly upward. There is also no foreseeable dynamic to reduce the net export drain. So trying to withdraw government net spending is tantamount to pushing the US economy further over the cliff.
And as I noted above will cause the budget deficit to increase anyway.
Further, what are “excess deficit levels”? This is nothing more than conservative talk and it has no meaning to someone who understands the way the monetary system operates.
The deficit level is whatever it is. The real question is what is the state of the labour market? Or, how strongly is the US economy growing and is that growth environmentally sustainable? Or, what regional policies are in place to ensure this growth is being geographically spread to generate jobs in all the places people live? Or, _ _ _ _ (fill in the missing blanks).
The only time the budget deficit could be considered excessive is if the economy was pushing past full employment and the private sector provided a mandate (at an election) to reduce the public command on resources and maintain the private demand. Then I would agree that in political terms the deficit should be cut to avoid inflation.
The US economy is so far from that situation that such debates have no relevance.
So then we turn to Fernholz, who as I noted is writing in the “progressive” American Prospect magazine. I was expecting, therefore, to see a full-frontal assault on the conservative ravings of Podesta and Ettlinger.
Along the lines say of – How dare these characters, who clearly don’t understand how our modern monetary economies operate, hold themselves out as progressives, but, instead, merely act as conservative mouthpieces of the worst kind. That sort of attack would have been appropriate given the self-styled charter of the magazine (see above).
Well, I was wrong! It got worse. I guess he thought that “progressives” don’t read the Financial Times and so he would do his bit to spread the conservative word but dress it up as if it was progressive..
Fernholz seeks to promote the Podesta and Ettlinger article to his readers as something that is compelling and worthy of their attention. He says:
Podesta and Ettlinger’s is an aggressive approach, and one the Obama administration is unlikely to embrace — to reach a primary balance in 2014 would require reducing the deficit by roughly 4 percent of GDP, which is larger than all current non-defense discretionary spending.
Fernholz then says that “(r)unning a relatively large deficit now is economic common sense as the public sector makes up for reduced private investment; we’ve seen the beneficial results in recent GDP growth and declining unemployment”.
What is he talking about? Sure enough unemployment fell by 77 thousand in December (15,340 thousand in November to 15,267 thousand in December) but the Labour Force also fell by 661 thousand in the same month as discouraged workers stopped looking for work (Source). So no joy there.
Further the BLS measure of U6 rose from 17.2 per cent in November to 17.3 per cent in December (Source). So no joy there.
It is not even clear that the situation is stabilised yet and the risk of a double-dip recession has been avoided. A progressive position would be to continually reminding the public of this massive real damage into the public debate and informing them of how the modern monetary system provides opportunities to the federal government to militate against the damage.
A progressive would not be trying to massage the “declining unemployment” driven by participation drops as being something positive.
With the decline in employment in December, if the labour force had not have declined, then unemployment would have rocketed up in that month. That is the fact. That should be the thing a progressive should be broadcasting into the wider debate.
Anyway, Fernholz, again trying to mollify the discussion a bit to make his position seem mature and responsible yet reasonable too, says:
The usual warning signs that come with dangerously large deficits — rising inflation and interest rates — have not appeared, affirming Democrats’ policy choices. Nonetheless, it’s also clear that our long-term fiscal path is unsustainable thanks to rising debt.
First, when has the US in modern times had a dangerously large deficit? The fact that there has been no inflation has nothing to do with the “Democrats’ policy choices” – that claim is just the voice of an apologist.
The lack of inflation reflects the massive output gap that exists in the US at present and in part has persisted for much longer than it should have exactly because the Democrats have made poor policy choices by not achieving the maximum employment bonus per dollar of net spending.
They have also pandered to the Wall Street bullies and handed over billions of public money to the characters who got the world into this mess in the first place.
Second, the fact interest rates haven’t risen is no mystery and nothing to do with the “Democrats’ policy choices”. There is some implicit notion that the “financial markets” set interest rates but haven’t yet exercised their option to push them up.
The reality is that the Federal Reserve sets the rate (exogenously) and has chosen to drop it and hold it at near zero levels because the economy is in such bad shape.
Third, what exactly – in accounting terms, economic terms, social terms, whatever terms that are acceptable reflections of the operations of the monetary system – is an unsustainable long-term fiscal path? That is just a piece of conservative jargon that has no content in and of itself.
If he means solvency risk then there is none.
If he means, interest spending will rise to levels that are unsustainable then please refer back to my earlier discussion. He is just mimicking Podesta and Ettlinger in this regard and doesn’t know why their position is what is unsustainable. Why doesn’t Fernholz relate this to the real aggregates and the projections of non-government saving?
The gap in understanding between what a budget deficit actually does and its dynamics and what is being expressed in these articles in almost infinite.
Then Fernholz decides its time for so-called “progressives” to lead the charge in reducing the deficit:
The left has traditionally been leery of deficit-reduction initiatives because they often target progressive programs designed to increase equality. At its most cynical, deficit reduction is simply an excuse to target the poor and under-resourced … But over the past year there has been a growing consensus among left-leaning policy experts that progressives need to be more aggressive in framing their approach to deficits and the national debt, which has resonated in liberal Washington. This was highlighted in September by a joint conference on the topic hosted by the Center for American Progress and the Center on Budget and Policy Priorities.
So these “progressive organisations” are doing the work for the conservatives. The only thing that could be driving this “growing consensus” is ignorance of how the monetary system operates.
The conservatives want to reduce the deficit because they hate government’s command on economic resources. Their ideology then predisposes them to argue in this way – other than when they have their hands out for billion-dollar payouts and salvage operations for failed companies they own or large military contracts to wreak havoc on disadvantaged citizens around the world.
Their problem is in not understanding the relationship between the national accounting balances, they cannot see that the budget outcome is endogenous – as I explain above. So they do not comprehend that the government will face a rising budget deficit if it tries to contract the fiscal position at a time when net exports are dragging local spending and the private domestic sector is trying to increase its saving ratio.
They also don’t understand what a balanced budget means – as I explain above.
But these so-called “progressives” who argue more or less the same way think they are being “responsible” rather than “ideological”. So their crime is pure ignorance. That is, they don’t have an ideological reason for arguing in this way.
Fernholz demonstrates this in the most inelegant manner by claiming that “most progressive economists, support balanced budgets when the economy is strong”. The correct statement is that progressives who think like this are misguided and progressive wannabes who think like this are just neo-liberals who think it is a nice career move to call themselves progressive – presumably to get somewhere in the Democrat political machine.
Fernholz finally leaves the worst for last by quoting Ettlinger:
“There’s no substantive reason to be running deficits during a period of economic growth unless there’s something, some unique spending requirement, like a war or some other crisis,” Ettlinger says. “If we’re in a period of strong economic growth in 2014, why should we be running a deficit?”
Really! Well I can think of several reasons Mr Ettlinger – all relating to an understanding of the way the monetary system operates; and all, specifically, relating to the desire of the non-government sector to save and the likelihood that your nation will continue to run current account deficits.
Strong economic growth with a current account deficit and a government in surplus can only occur – for a time – if the private sector runs increasing deficits which means … increasingly raising its debt levels.
That is not a progressive position. Ettlinger doesn’t have a clue.
That is enough for today!
Digression: Wages and employment in the 1930s
Prompted by questions from the “commentariat”, I have been investigating the issue of wages and employment in the US during the Great Depression. I may write about it tomorrow but I think the findings of this research will be of interest to most.