A one-term presidency is in order

Today is a national holiday in Australia (more about which later). In the lead up to the US President’s State of the Union speech tomorrow came news that he was planning to freeze public spending from next year to get the budget back on track. I wondered what track that might be. Governments all around the world are now being pressured by conservative lobbies to engage in a renewed period of fiscal austerity even though the respective labour markets are disaster zones. History has a habit of repeating itself. The US government did exactly this in 1937 and the unemployment worsened. Japan did it in 1997 with the same outcome. The UK government is likely to do it in 2010 with totally predictable results – their economy will falter. What the US government is now in danger of repeating is taking its economy down the fast track to a double-dip recession. It is plain stupidity and the “freeze” doesn’t reflect the reality they are in.

The US President is now becoming known for his oratory and little else (other than appointing Wall Street cronies to key economic positions). Under the New Era of Responsibility – The 2010 Budget headline at the US Office of Management and Budget home page you read this:

A budget is more than simply numbers on a page. It is a measure of how well we are living up to our obligations to ourselves and one another.

For a macroeconomist, and by that I mean someone who understands the way the monetary system operates (as in Modern Monetary Theory (MMT)) rather than some dolt who rehearses the ideological brainwashing they rote-learned from Mankiw, the US OMB is fast becoming the scariest home page on the Internet.

I visit this site regularly to read all the latest analysis and documents – always telling myself that I shouldn’t do it … but I still click and read.

Anyway this quote resonates in the context of the AAP report today (also picked up by various news reports) that the US President plans to “freeze a part of govt spending for 3 years beginning in 2011”. For more detail, you can read the The Wall Street Journal story today – Budget Freeze in the Works. See also the Chicago Tribune story.

The AAP report said that (I cannot link to this as it will disappear soon of the news wire):

Facing voter anger over mounting budget deficits, President Barack Obama will ask Congress to freeze spending for some domestic programs for three years beginning in 2011, administration officials said Monday. Separately, Obama unveiled plans to help a middle class “under assault” pay its bills, save for retirement and care for kids and aging parents.

This sort of response has been brewing for sometime given the increasing volume of attacks on the current US budget position – mostly centred on the size of the deficit – which is an easy figure to chant … relentlessly … everytime you get in front of a microphone, loud-hailer or other communication device.

The politics of the announcement is that it will be a “a relatively small portion of the federal budget” but the “Pentagon, veterans programs, foreign aid and the Homeland Security Department would be exempt from the freeze”.

The cuts will be accompanied by some other positive proposals which are being dressed up as being middle-class friendly – which I found ironic given that the defence budget is spared completely.

However, the US Present admitted the proposals will not “create jobs, but he said they could “re-establish some of the security that’s slipped away.”

If you read the latest (January 25, 2010) Press Briefing from Obama’s press secretary Robert Gibbs you realise how slippery the whole deal is.

He was asked several times about what the President was going to do about jobs given that the Massachussetts outcome was partly to do with a rising voter backlash about the lack of employment policies.

Some of the interactions:

Q But, for example, when he talks about jobs creation, as you mentioned, getting the private sector to hire — are those likely to be ideas that we haven’t heard yet? Or is he going to be — you know, give more detail or just a push to the green jobs —

MR. GIBBS: Well, no, I think there will be a series of things that the President will talk about … [including] … ensuring that government is doing the same thing … [acting like a household and getting spending balanced] … and getting ourselves back on a path to fiscal responsibility in the medium and the long term.

The implication is that the US Government now officially believes they were “off a path” of fiscal responsibility.

Again he was asked about jobs:

Q … I want to follow up on jobs. One of the themes that Scott Brown ran on was that the Obama administration was spending too much money and not doing enough to create jobs. Whether that was true or not, why then would your first initiative be — since that election, the new initiative — spend more government money, with things that may not really create more jobs?

MR. GIBBS: Well, Ed, the initiatives that the President is focused on aren’t necessarily married up to a special elections political timeline.

Q But will they create jobs?

MR. GIBBS: I think there are a series of proposals that the President has made that will continue to create an atmosphere that allows the private sector to hire more; that addresses the anxiety that middle class families in this country feel each and every day, their anger and frustration about a safe and secure retirement; that with having to work harder and longer, that there — have a tax cut that will help on their child care expenses. I think all of that goes to the type of economic anxiety that people felt in this country last week, last year.

So the answer he could have more easily given was – No, the US government will not see that jobs are created. With investment still flat, consumers trying to increase their saving ratio and net exports making a negative contribution to growth – the US government still believes the persistently high unemployment is something the private sector has to deal with.

Again he was asked about jobs in this case how many the stimulus package had created:

Q … but how many — will you at some point be able to say how many jobs have been created, period?

MR. GIBBS: Well, as you know — as you know — well, I would simply point you to the reports that are gotten in by grant recipients that — again, grant recipients that have to file paperwork about the employment impact of the money that they get.

Look, we’re going to get new GDP numbers on Friday. And I think we saw, as a result of the Recovery Act, at the end of last quarter, the first positive economic growth in four quarters. Our hope is that you’ll see another strong number on Friday. We’ve never in this country — let me just not say that, because the economists might come back with a month for me. But there’s no doubt that it is — it’s hard to create jobs in this country without positive economic growth, that without strong economic growth, strong job growth is next to impossible.

In a recession you should not wait for economic growth before you intervene to create employment. By then it is too late – long-term unemployment has risen and the more likely it is that the unemployed workers will experience skill atrophy.

Further the related costs of unemployment rises – the increased poverty becomes entrenched; family breakdown acceleratesl; crime rates rise; alcohol and substance abuse rises; physical and mental ill health worsens. All of the costs are real and require further public attention.

The neo-liberals are myopic – ultimately neglect of public purpose generates more costs than dealing with the issues in the first place. This was very starkly seen during Thatcher’s period in government where the breakdown of public infrastructure (sewers, etc) ended up costing much more to replace than maintaining them as required.

In that context, the US government could have offered jobs to anyone who wanted them at a living wage to undertake a myriad of productive activities which would have arrested a significant part of the damage that long-term unemployment brings and would have added value to local communities in the form of public infrastructure development and personal care services etc.

Waiting for growth is a nonsensical paradigm. It is the government’s responsibility to push ahead of the growth to ensure it returns as quickly as possible.

To refresh my memory, I had a look at the US National Accounts data. A relevant question is how large has the US government sector become. If you listen to the daily rantings of the conservative commentators (including those on the Democrat side – the so-called Blue Dogs – you might get the impression that the government sector had grown significantly.

The following graph shows the ratios of the individual aggregate demand components to real GDP growth (percent) in the US since March 2003. The data is sourced from the US Bureau of Economic Analysis. The Investment ratio (I/Y), the Net Exports to GDP ratio (NX/Y)and Government spending to GDP ratio (G/Y) are shown on the left-hand axis, while the Consumption ratio (C/Y) is shown on the right-hand side. So don’t be duped by the different scales.

In March 2003, the C/Y was 69.7 per cent, the I/Y was 15.6 per cent, NX/Y was -5.0 per cent and G/Y was 9.4 per cent. At the onset of the crisis, the changes became stark. C/Y fell by 0.5 of a percentage point (this is a large shift) between September 2007 and September 2008. The Investment ratio had been declining earlier than this – which is symptomatic of an economy maintaining growth via consumption fuelled by increasing indebtedness.

The I/Y peaked at 17.6 per cent in March 2006 and then plunged to its low of 11.3 in June 2009. As you will see in the next graph, this plunge drove the aggregate demand failure.

The recession has also reduced the leakage from net exports because imports fell faster than exports.

However, have a look at the change in the Government spending ratio – that is, government spending as a percentage of real GDP – which is the command over real goods and services that is being made by public spending. In March 2003 it was 9.4 per cent (and it wasn’t much less than about 10 years earlier as well). It peaked at 12.4 per cent in September 2008 at the height of the crisis when investment was heading south and consumption was still in decline. A year later it was at 11.4 per cent.

What do I see in that? Certainly not a government sector out of control about to socialise all known production! I see a modest take-up in the slack left by a dramatic decline in the investment ratio and a rising desire by the household sector in the US to increase their saving as unemployment started to sky-rocket.

I think those who scream about the runaway size of government in the US should just go to the BEA statistics page – graph a few series, read a bit of literature (which might be a struggle), have a cup of tea and settle down.

The rhetoric that is around doesn’t match the reality. This is a very sick economy. There are 10 per cent of people unemployment which rises to 17 per cent if you include those who have given up looking. Have you seen the latest participation rate graphs?

The following graph shows the contributions of the individual aggregate demand components to real GDP growth (annual in percentage points) in the US since September 2006. The data is sourced from the US Bureau of Economic Analysis. Note the vertical axis has percentage points for the individual components and annual percentage growth for the real GDP series.

The dramatic decline in the contribution of private investment spending to real GDP growth is shown (red columns) and explains, in part, why the US went so deeply into recession. It was clearly exacerbated by the sharp contraction in the contribution of consumption in the third quarter 2008. No-one was going to invest with consumers desperately cutting back and trying to raise the saving ratio.

If you examine the graph you can see why I think the US budget deficit has been too small (quite apart from the obvious rise in unemployment). The positive and growing percentage point contribution from government spending to overall real GDP growth was fairly weak in 2008. It tapered off in December quarter 2008 and actually dragged growth back in the March quarter 2009. By June the contribution jumped and helped offset some of the GDP growth losses arising from the dramatic contraction in investment.

The reason why net exports is shown to be providing a positive contribution to growth relates to the fact that while US exports fell significantly during the peak of the crisis, the collapse in domestic demand choked off import spending by a greater amount.

Conclusion

I have no problems in changing the composition of the government’s net position which would also include eliminating wasteful spending (for example, all forms of corporate welfare). It is clear that the government should be spending effectively to ensure that every dollar advances welfare. So close scrutiny of programs especially when there is a plethora of new initiatives is sensible and to be encouraged.

But anything that reduces the net position of the US government at this point in time is vandalism.

Bowing to the conservative calls for “fiscal consolidation” at a time when unemployment is still very high and will continue to exert a massive deflationary force on the overall economy is the best way to ensure a double-dip recession occurs. History is full of examples where governments have lost nerve in the face of massive campaigns by conservatives – and plunged their economies back in recession. Japan in 1997 is a classic recent case.

The UK in 2010 will likely be another case. The US is now seemingly setting itself up to although I note the cuts are not planned until 2011. The point I would make is the same as above – it is still a very sick economy and that suggests the budget deficit has been too constrained by several percentage points of GDP already. It is hard to make a case that it should be reduced when you adopt that perspective.

Anyway back to where we started – the US President:

A budget is more than simply numbers on a page. It is a measure of how well we are living up to our obligations to ourselves and one another.

Most commentators focus only on the numbers on the page and think that a bigger number is necessarily worse than a smaller number. The numbers on the page are largely irrelevant and distract us from more pertinent data – like the rate of labour underutilisation.

In modern monetary theory (MMT) you won’t read about big or small deficits. You will read about budget positions that are supporting aggregate demand and rising to reflect the falling spending by the non-government sector.

In this context, there is no such thing as a “big” budget number. You have to ask in relation to what? A budget position might be excessive which means it is oversupporting aggregate demand for a given split between private and public real resource usage. That is clearly the danger in increasing any of the spending components.

But that is not the context that most commentators use the terms big and small.

The second part of the statement is the relevant one. What are the obligations of government as expressed through its net spending position?

That is clear – to promote environmentally sustainable full employment with decent wages and conditions and ensure inflation doesn’t erode nominal returns (whether they be wages or whatever).

As a basic minimum the government should use its budget position to ensure that there are enough jobs. At a time when private spending is still very fragile, trying to engineer a cut in spending is the last thing the US economy requires.

It is clear to me that the unemployed in the US have been abandoned by their government. I think a one-term presidency is in order.

Why am I working today?

Yes, today is January 26 – our national day – Australia Day. The indigenous people call it Invasion Day and more recently it is being referred to as Bogan Day. For US readers, a bogan is a redneck.

This article in today’s Sydney Morning Herald resonates – Since when did dumb-arsed nationalism become compulsory?, although I would discourage the writer to continue with his carnivourous ways.

But this article in the ABC’s The Drum – Blue singlet patriotism gets a little off-colour was my favourite.

The rising redneck nationalism is a relatively recent phenomenon in Australia and was really whipped up by the previous conservative government that used nationalism to drive divisions within our society, For example, the previous government made it an art form to distinguish between “true blue aussies” and “queue jumpers”, the latter being mostly made up of refugees who were fleeing their lands that our armies had actually helped to invade and destroy.

There venal approach extended to detaining refugees in prisons indefinitely – children as well. Some children have grown up in these prisons out in the desert or elsewhere. The current government – a so-called progressive regime – has continued the policy – with some fine-tuning to make it appear less brutal.

While I hate the concept of the Australian of the Year, this year’s choice a mental health expert commenting about the detention centres said that “you could almost describe them as factories for producing mental illness and mental disorder” (Source). But I also note he has now backed off and claims he is not criticising government policy. Well you cannot expect much leadership from the Australian of the Year.

The previous government also attacked the unemployed and other groups who were reliant on income support (for example, young single mothers) and invented a vile nomenclature to describe these so-called un-Australian values – “dole bludgers”; “job snobs”; “cruisers” etc. These were people who were victims of the ridiculous macroeconomic policies that the government was pursuing which prevented the economy from providing enough work for all.

They also whipped up anti-muslim fever in the public debate which culminated in the so-called Cronulla riots which is a day of eternal shame in this nation.

The previous prime minister kept defining behaviours and attitudes as Un-Australian – which included many progressive things that would have diversified and enriched our society.

But the neo-liberals saw promoting “bogan patriotism” was an essential part of the strategy to retrench the public sector and re-educate us that individualism was the future and collectivism (meaning the Welfare State) was a drain on our freedom. They thus redefined our innate desire to be part of something bigger than our own selfish drives into this sickening nationalism.

Australia Day become one of the centrepieces of this push and suddenly flags were everywhere and stickers and the rest of it were emblazoned on cars etc. You frequently see these days cars with stickers on them such as “English spoken here, if you don’t like it leave” or “If You Don’t Love It – Leave” and worse.

And the “patriotism” combined with severe disadvantage in some areas as a result of persistent unemployment has now started to have unintended consequences – like the targetting of Indian students by gangs – one was murdered the other day.

It is another example of the neo-liberals not getting it. Successive federal governments have severely cut university funding here and force higher educational institutions to sell education abroad – to South-East Asians, Indians, Chinese etc. This is now a major export for the nation but has severely compromised educational standards – consumer sovereignty after all.

But now, the Indian market is in severe jeopardy because of the racist violence against the students who come here to learn. Right now they are learning that this is an unsafe and ugly place to be if you don’t wear a T-shirt “THIS IS AUSTRALIA. WE EAT MEAT, DRINK BEER, AND SPEAK F-CKIN’ ENGLISH!”

As the Drum author notes:

… overall it’s a great pity, as I am very fond of my country. I like the people in it, I like the frank, robust way they speak. I like the inimitable, flat, overcooked air of our childhood summers and the impetuous, heart-on-sleeve way in which neighbours rush to assist others in times of natural disaster. But the last thing I’m going to do on Australia Day is wave a flag or get some sort of idiotic boxing Kangaroo tattooed to my calf. Because the very idea of national pride has been soiled by the t-shirt wearers who disguise hate in the name of allegiance. And I don’t know if we’ll ever get it back.

So for me … I choose to treat today’s holiday as a normal work day and thus avoid getting caught up in the bogan nationalism.

Our friend Sean Carmody has an interesting perspective on Australia Day too.