I read an article in the Financial Times earlier this week (September 23, 2023) -…
In Washington D.C. next Wednesday (April 28, 2010) there will be two separate events where the focus will be on fiscal sustainability. The first event sponsored by a billionaire former Wall Street mogul under the aegis of the Peter G. Peterson Foundation (PGPF) promises to bring the Top leaders to Washington. It will feature a big cast well-known US entities (former central bank bosses; former treasury officials and more). It will be well-publicised and a glossy affair – full of self-importance. It will categorically fail to address any meaningful notion of fiscal sustainability. Instead it will be rehearse a mish-mash of neo-liberal and religious-moral constructions dressed up as economic reasoning. It will provide a disservice to the citizens of the US and beyond. The other event will be smaller and run on a shoe-string. The grass roots The Fiscal Sustainability Teach-In and Counter-Conference is open to all and will actually involve researchers who understand how the monetary system operates. Like all grass roots movements it requires support. I hope you can provide support commensurate with your circumstances.
The Press release accompanying the Peterson event says that the meeting:
… will convene a broad range of senior officials, policy-makers, elected leaders, and experts at the first-ever “2010 Fiscal Summit: America’s Crisis and A Way Forward” to launch a national bipartisan dialogue on America’s fiscal challenges. The Fiscal Summit will bring together hundreds of stakeholders from across the political spectrum with diverse ideas on how to address critical fiscal issues while continuing to meet the priorities of the American people.
The appeal to diversity is a farce. If you go through the list of participants listed as speakers and identify each name with their public statements over the years and their published output you will soon realise that the diversity involves degrees of deficit terrorism.
When you explore the PGPF issues page you read that their conceptualisation of fiscal sustainability is about a fear of the US federal government “running sizeable deficits” which will continue into the future and the “mounting debt” will “put our nation on an unsustainable path”. They claim that this situation (on-going deficits):
… is the so called “structural deficit”. Absent meaningful entitlement reforms and spending constraints, future tax burdens will have to more than double for the country to get by. Budget controls, program evaluation, spending constraints, and tax reform must be implemented to free up resources to address new priorities and meet new needs. With trade deficits now at twice the previous record levels, and with our low national and personal savings rates, America also has become dangerously dependent on foreign capital.
They consider the solution to this problem to be “deceptively simple: we should pay for current spending and programs with current taxes, not debt. That would avoid passing on the bill to future taxpayers. Each generation must have the flexibility to set their own priorities according to the opportunities and needs of their time”.
Once you read statements like that you realise that the PGPF has no idea of what fiscal sustainability is when applied to a nation that issues its own currency and floats it on foreign exchange markets.
You can gauge how far right the public debate has moved in the last decades by the fact that the term “structural deficit” is now being seen as something bad. I have written about this concept previously.
It is amazing that a simple concept is now so demonised.
The federal budget balance is the difference between total federal revenue and total federal outlays. So if total revenue is greater than outlays, the budget is in surplus and vice versa. It is a simple matter of accounting with no theory involved. However, the budget balance is used by all and sundry to indicate the fiscal stance of the government.
It might be thought that if the budget is in surplus that the fiscal impact of government is contractionary (withdrawing net spending) and if the budget is in deficit we say the fiscal impact expansionary (adding net spending). It also might be thought that a rising deficit (falling surplus) is often considered to be reflecting an expansionary policy stance and vice versa.
But a rising deficit may, in fact, indicate a contractionary fiscal stance – which, in turn, creates such income losses that the automatic stabilisers start driving the budget back towards (or into) deficit.
So the complication is that we cannot conclude that changes in the budget balance reflect discretionary policy changes. The reason for this uncertainty clearly relates to the operation of the automatic stabilisers. Please read my blog – Structural deficits – the great con job! – for more discussion on this point.
To provide a cyclically-neutral measure of the fiscal balance some benchmark is required. The Full Employment or High Employment Budget concept was developed to provide this measure of the discretionary fiscal position. More recently, this concept has become known as the Structural Balance.
As I have noted previously, the change in nomenclature is not insignificant because it occurred over the period that neo-liberal governments began to abandon their commitments to maintaining full employment and instead decided to use unemployment as a policy tool to discipline inflation. So the Non-Accelerating Inflation Rate of Unemployment (the NAIRU) became the mainstream definition of full employment even though it might mean the unemployment rate was around 5, 6, 8 per cent or even higher.
The Full Employment Budget Balance was a hypothetical construct of the budget balance that would be realised if the economy was operating at potential or full employment. In other words, calibrating the budget position (and the underlying budget parameters) against some fixed point (full capacity) eliminated the cyclical component – the swings in activity around full employment.
So a full employment budget would be balanced if total outlays and total revenue were equal when the economy was operating at total capacity. If the budget was in surplus at full capacity, then we would conclude that the discretionary structure of the budget was contractionary and vice versa if the budget was in deficit at full capacity.
While the measurement issues are another matter (that is, how to compute the unobserved full employment point in the economy) the modern notion of the structural balance utilises various dodgy NAIRU concepts in the measurement process. This always means that the estimates of the discretionary fiscal position area always biased upwards (to be more expansionary than they actually are) and so there is always contractionary bias in fiscal policy.
The result is that modern depictions of the structural deficit systematically understate the degree of discretionary contraction coming from fiscal policy.
The other important consideration is that the budget balance does not stand in glorious isolation from other sectoral balances as I have explained often.
Please read my blogs – Stock-flow consistent macro models – Barnaby, better to walk before we run – Norway and sectoral balances – The OECD is at it again! – for more discussion on the sectoral balances.
The three sectoral balances that are derived from the National Accounts are:
- The private domestic balance (I – S) – positive if in deficit, negative if in surplus.
- The Budget Deficit (G – T) – negative if in surplus, positive if in deficit.
- The Current Account balance (X – M) – positive if in surplus, negative if in deficit.
These balances are usually expressed as a per cent of GDP but that doesn’t alter the accounting rules that they sum to zero, it just means the balance to GDP ratios sum to zero.
If we added (I – S) + (X – M) we get the non-government sector balance. The rule is that a government deficit (surplus) exactly equals ($-for-$) the non-government surplus (deficit).
So what does this mean for the characterisation of a positive structural deficit as being unsustainable? Well it must mean that the PGPF thinks a permanent non-government deficit must be sustainable.
A permanent non-government deficit means that the sum of the external account and the private domestic balance would be negative. If you look at how the balances are constructed then you will realise that where a nation runs an external deficit then for the non-government balance to be negative, the private domestic sector must also be running deficits (that is, spending more than they earn).
Most countries currently run external deficits. This means that if the government sector is in surplus the private domestic sector has to be in deficit.
That means a state of increasing private domestic indebtedness which is clearly unsustainable. This behavioural pattern has defined the last period and has led the world into the crisis.
These private domestic deficits can help maintain spending for a time but the increasing indebtedness ultimately unwinds and households and firms (whoever is carrying the debt) start to reduce their spending growth to try to manage the debt exposure. The consequence is a widening spending gap which pushes the economy into recession and, ultimately, pushes the budget into deficit via the automatic stabilisers.
The typical situation is that the private domestic sector seeks to save overall. If a nation is running an external deficit, and the private domestic sector desires to save overall, then the government sector has to run structural deficits if GDP growth is not to be impaired and the nation lapse into recession.
It is obvious that if the nation runs an external surplus then depending on the relative magnitudes of the external balance and private domestic balance, the government could run a public surplus while maintaining strong economic growth. That is the situation for Norway as an example.
In this case an increasing desire to save by the private domestic sector in the face of fiscal drag coming from the budget surplus can be offset by a rising external surplus with growth unimpaired. So the decline in domestic spending is compensated for by a rise in net export income.
That would be a sustainable situation although the nation would be losing materially via the external surpluses and thus constraining its material standard of living below what otherwise might be the case should it be able to enjoy external deficits.
So in just focusing on the budget position and ignoring the other relationships that are interlinked to it via the income generating process, the likes of the PGPF misrepresent the debate and draw erroneous conclusions.
If you reflect back on their statement of fiscal sustainability you will see how confused it is when dealing with the three sectors. They want to reduce the external deficit and increase the private domestic surplus while moving the structural deficit into surplus. Unless they could achieve a fundamental transformation of the US economy – turning it into a net exporter of significant scale – their ambitions are impossible to achieve.
That impossibility should be exposed in the public debate.
Further, the notion that “America … has become dangerously dependent on foreign capital” clearly does not relate to the public balance at all. The US government is sovereign in its own currency and can spend what it likes in US dollars. No foreign capital is required.
This concept is also backwards when applied to the trade flows. The foreigners who wish to accumulate financial assets denominated in US dollars are, are in fact, dependent on the American purchases of imported goods and services not the other way around. The only reason that the foreigners would want to net ship more real resources to the US than the US sends back on ships is to accumulate US dollar-denominated financial assets. The US consumers and firms are “financing” that foreign desire.
So if these sorts of misperceptions are going to be central at the PGPF fiscal sustainability meeting next week in Washington D.C. you can conclude that nothing meaningful will emerge. They will have a plethora of high profile guests including a former President but not one word will be worth listening to.
The problem though is that the PGPF has significant resources which enables them to effectively prosecute their ideological position with impunity. By deploying their huge resource base in staging these events they can effectively “crowd out” democratic debate in the US and elsewhere.
Their marketing efforts are also well-resourced. As an example of how they are misleading the public you only have to examine their glossy State of the Union’s Finances – A citizens’ guide 2009.
It opens with a letter to “Our Fellow Americans” signed by Peter G. Peterson and David Walker (the CEO of the PGPF and former United States Comptroller General). Walker is a vociferous deficit terrorist.
In that letter you read reference to the crisis in the mortgage-sub-prime markets and then they say:
We cannot afford to let the same thing happen with our nation’s finances …
Well the two situations are not comparable. The former crisis was about private sector insolvency – debt holders not being able to pay their debts. These debt holders were households and firms who use the currency issued by the US government. As users of the currency they are always financial constrained and have to fund their spending. If they reach a position where their nominal income can no longer service their nominal contractual obligations then they are forced to default. That was the basis of the financial crisis.
But the US government is the currency issuer. As a sovereign government it is never revenue constrained because it is the monopoly issuer of that currency. It faces no solvency risk at all. It will always be able to service its debt obligations and repay the principle upon maturity.
There is simply no valid analogy that can be drawn between the private sector and the government sector budgets and their respective financial obligations.
Then you read on:
The facts are clear and compelling – the federal government’s financial condition is worse than advertised, and we are on an imprudent, irresponsible and immoral path. Washington policy makers are mortgaging the future of our country, children and grandchildren while, at the same time, reducing the level of investments in their future. We are also becoming increasing reliant on foreign lenders to finance our nations’ debt.
There are no facts presented in that statement. The only compelling fact that emerges from that diatribe is that the two signatories fail to understand (or don’t want to tell the truth about) how the monetary system operates and are on a moral crusade (disguised as an economic case).
Not the words – an “immoral path”. When you question a deficit terrorist and force them to abandon their faulty economic logic (because it doesn’t stand up to scrutiny) they ultimately resort to these religious type statements which give their true agenda away.
They simply have some puritanical view that government spending is immoral unless of course it is bailing out their failed enterprises or otherwise smoothing the way for them to make more wealth at the expense of everyone else.
Once they play the morality card – they have lost all economic credibility.
Further on in the Citizen’s Guide, after they present a graph that alleges that the US federal debt will reach 350 per cent of GDP by 2050 (noting it peaked at 122 per cent during WWII and is typically below 50 per cent), they say:
Arguably, we are already getting a taste of what that future will be like. Since the middle of 2007, problems in the U.S. housing sector have illustrated what happens when lenders lose confidence in borrowers. The economic difficulties of smaller countries like Iceland and Hungary show what happens when no one wants to lend a nation money. If our ability to manage our nation’s fiscal affairs is called into question, we are likely to face even more severe economic challenges, including sharply higher interest rates, further downward pressure on the dollar, higher prices for oil, food and other necessities, and greater unemployment.
Once again you see them blurring the household-government distinction and using the household budget analogy to make inferences about the viability of public budgets.
I just repeat the US government doesn’t require anyone to lend them money! Ultimately, if the US government failed to place any of its debt into the bond markets then the central bank could buy it all. Preferably, they would question the need to issue debt at all. But there is no question that the US government will ever run out of US dollars. They have an infinite supply of them. No foreign entity supplies US dollars to the US government.
The Citizen’s Guide then moves into the demographic change debate:
Known demographic trends and skyrocketing health care costs are the crux of the problem. Most of the 77 million post-World War II baby boomers (representing one fourth of the U.S. population) are still working, but some are beginning to retire. As boomers retire, federal spending for Social Security and especially Medicare, given rapidly rising health care costs, will grow dramatically. As they do, younger workers – our children and grandchildren – will ultimately have to foot the bills.
As populations age, it is likely that the real resource usage will shift from provision of baby health centres to aged care units. Productivity growth will make that transition more efficient. Social programs encouraging better diets and fitness regimes will also reduce the need for health care somewhat.
But these shifts in resource allocation are hardly new and will be mediated via the political process.
As I have indicated often – these questions are not of a financial nature. The US government will always be able to buy health care resources for its citizens should there be products and services available. They will always be able to pay monthly pensions to an increasing number of recipients.
Both transactions involve the stroke of a keyboard key which transfers funds from one account (government) to another account (non-government). There is no financial constraint involved.
So the only questions are the real ones – Will there be enough real resources available? How will they be distributed? These questions have nothing to do with fiscal solvency.
I could continue to find terminal faults with every paragraph in the Citizen’s Guide. It is a deplorable document designed to mislead and advance an agenda that is different to that stated.
The Fiscal Sustainability Teach-In and Counter-Conference
The other fiscal sustainability event in Washington D.C. next Wednesday (April 28, 2010) that is being staged is The Fiscal Sustainability Teach-In and Counter-Conference. The details of venues and other relevant arrangements are available at the home page and will be augmented as further information comes to hand.
This is a grass roots activity – evolving out of the efforts of committed citizens who realise that the PGPF elitist vision does not constitute a valid representation of what the future challenges facing our societies will be. They realise that something has to be done. But like most citizens they needed help from researchers who do understand what is going on.
Bringing the energy of the grass roots activists and the know-how of the Modern Monetary Theory (MMT) proponents together will increase the scope of both groups. It is only a small step but as Australian singer Paul Kelly told us From little things big things grow
The song is about how resistance and union builds momentum which eventually becomes unstoppable.
So the alternative fiscal sustainability event will be the first grass roots effort to promote MMT. The day has been chosen to rival the sham PGPF conference exploring the same topic.
If you are near to Washington DC and have the means it would be great to meet you next week.
You will also note that I have included a fund raising widget on my right side-bar. Any help for the organisers will be very appreciated. Just click the image and open your bank accounts! The fund-raising home page is HERE
At present they really need some financial support. It is a shoe-string, community-driven event being organised by committed volunteers who are motivated by the fact that they care and realise something is wrong with the dominance of conservative, free-market think tanks like the PGPF in the public debate.
What I hope comes out of the Teach-In is a range of educational materials that can be spread via the Internet to offset some of the lies that the PGPF propaganda machine puts out effortlessly each day.
How to turn a demographic group off
The Australian federal opposition leader Tony Abbott has had what has been described as a “Sarah Palin” moment today when he hinted that the conservatives would propose scrapping the unemployment benefit for under-30s to force them to move to remote areas in the nation to search for work (Source).
Apparently mining industry leaders have proposed that no income support be provided for unemployed people up to the age of 30 because the desperation would then force them to travel to the other side of the continent to work.
The Opposition leader was quoted on ABC news as saying:
There has got to be a system that encourages people to take up work where that work is available.
Last time I looked that system was the labour market. An employer makes a job offer at a wage attractive enough to entice workers (which should include significant disamenity allowances for dangerous jobs thousands of kms from civilisation – as in the mining sector of Australia) and the workers react.
I know the mainstream argument is that the presence of an income support payment provides a disincentive for workers to accept wage offers. But the evidence is also clear from the research literature that the fundamental constraint on people’s labour supply is a lack of jobs.
It also turns out that the economy is failing to provide enough work overall for our youth.
The following graph shows the underemployment rate (%) (red line); the unemployment rate (%) (green line) and the total labour underutilisation rate (%) (blue line) for 15-24 year olds in Australia, the latter being the sum of the other two measures of labour wastage. The data shown is from February 2008, which was the low-point unemployment rate in the last cycle to February 2010. The data is available from the Australian Bureau of Statistics.
So over 25 per cent of 15-24 year olds are without work or without enough work. That is, Australia is choosing to waste more than a 1/4 of its youth labour resources. And the only thing that the opposition leader can come up with is to punish this group even further by cutting the pittance they receive in income support to “save the taxpayer funds”. Ridiculous.
The mining industry will never offer enough jobs to absorb all the under-30s that are currently without work or without enough work. If there are un-filled vacancies in that industry they will be very small relative to the numbers without enough work.
You do not introduce policy that discriminates against a broad age-group, which is already the most disadvantaged in terms of lack of policy support, to solve a minor problem.
Further, the policy would be highly discriminatory against lower income people who are unable to enjoy the support of parents etc.
What Tony Abbott should be advocating is a Job Guarantee to make sure everyone has work at a minimum wage as a national benchmark. Then industry has to better those conditions to attract labour.
One imagines that the political damage to the opposition will be enormous. The older segments of the population are typically conservative but the younger voters have shown they have rejected conservative values (at the last election). This move will reinforce that anti-market sentiment.
The scary part of the story is that the Prime Minister’s only response was that the:
What we have … from Mr Abbott is once again policy making on the run … I just think it’s time Mr Abbott had some sort of work on these sorts of questions.
You would have expected a Labor Prime Minister to say something like … “in a civilised society we do not force people to starve through lack of income when the economic system fails to produce enough jobs”. And “given that we are politically gutless and have failed to introduce a Job Guarantee to ensure everyone who wants a job can work then the least thing that government should be doing is ensuring those people we have forced into unemployment have some income to live on.”
That is enough for today!