By Marshall Auerback, a portfolio strategist and hedge fund manager; cross posted from New Deal 2.0
What’s coming in 2011? We asked thought leaders to share their perspectives on the biggest challenges for the year ahead, along with the changes they’d like to see and the hopes they cherish. Marshall Auerback explains how misguided attempts to reduce the deficit kill jobs, squeeze the working and middle classes, and inflate crude oil prices. And a corrupt political system doesn’t help.
The beginning of the year always seems a good time to lay out some broader themes which could develop throughout the year, good and bad, so here goes:
The good news is that the US budget deficit still looks to be large enough to support modest top line growth and sustain and stabilize incomes, even if it’s not large enough to bring the jobs we need. As I’ve argued many times in the past, higher government deficits facilitate private sector deleveraging and continuously add to incomes and savings. It is no coincidence that the financial burdens of households and corporations have continued to fall (and savings rates risen) as government deficits have increased.
Unfortunately, the new Congress appears bent on misguided deficit reduction. By next week, the House of Representatives will have a deficit hysteric majority, with many pledged to a balanced budget amendment. And the world seems to be leaning towards fiscal tightening pretty much everywhere. The unemployment benefits program has been extended, but benefits still expire after 99 weeks, and less in many states. Net state spending continues to decline as state and local governments continue to reduce their deficits.
It is true that state tax collections are up quite nicely these days. But even with the recent improvement many states’ total monthly collections are just getting back to 2007/2008 levels, so they are not in the position to ramp up spending. The commentators who are crowing about the current increase in revenues do not understand the historical significance of the extreme weakness we have seen for two full years. As Philippa Dunne (co-author of the excellent Liscio Report) has pointed out to me, sales taxes began to show signs of trouble in early 2007. Catch-up in the funding of unfunded pension liabilities will also continue to be a drag on demand.
Clearly, much of the emotion surrounding government deficit spending could be rectified if we simply viewed the deficits for what they really are. The budget balance is the difference between total revenue and total outlays. At the federal government level, 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. That’s it. In other words, without any discretionary policy changes, the budget balance will vary over the course of the business cycle. When the economy is weak, tax revenue falls and welfare payments rise, so the budget balance moves towards deficit (or an increasing deficit). When the economy is stronger, tax revenue rises and welfare payments fall and the budget balance becomes increasingly positive. Automatic stabilizers attenuate the amplitude in the business cycle by expanding the budget in a recession and contracting it in a boom (see this for further explanation).
To judge from statements on both the left AND the right, it is clear that very few politicians get this basic accounting point, which increases the odds that these social programs will continue to come under attack in 2011. This has already occurred in the UK over the past few months. There, a Tory-led coalition government has completely drunk the deficit reduction “Kool-Aid”. Instead of the public sector providing employment leadership at a time when the private sector is not yet ready to expand jobs growth, David Cameron’s administration has been cutting jobs and forcing unemployment up (see the UK’s Labour Market Statistics). As the austerity drive deepens, the deflationary impact of these job cuts will undermine private sector employment growth. Not that this will stop the cuts from happening here in the US. This sort of economic vandalism has now metamorphosed into “responsible fiscal action”, if one is to believe the vast majority of the “experts” in the mainstream commentariat.
The attacks on public sector unions reflect another flank in this ruthless pincer movement on middle and working class Americans, as this NYTimes article illustrates. It is fascinating to see how the public narrative in the media has gradually shifted over the past year from Wall Street’s sociopathic practices (which were directly responsible for the creation of the crisis) to the alleged greed of public employee unions and their pension benefits, many of which were the product of agreed wage negotiation packages in which unions were receiving these pension benefits in lieu of increased wage benefits.
During 2008, we were told that the government’s hands were tied and that sanctity of contracts had to be honored. This was when the Federal Reserve authorized 100% payouts to the likes of Goldman Sachs on AIG’s credit default swaps (in effect allowing the Fed to act as an extra budgetary vehicle of the Treasury, which is a violation of the Constitution and shows how patently false the Fed’s claims of independence are). But I don’t seem to recall many Wall Street types going on about the sanctity of contracts when agreements with the UAW were reworked to save GM or now when public employee union pension benefits are under attack. The argument seems to be that the states are suffering from a genuine solvency crisis in which everybody has to make sacrifices, including the “greedy” unions. So why should big financial firms, which would otherwise have been toast but for the munificence of the suffering American taxpayer, be any different? If the attacks outlined in the NYTimes piece reflect a broader trend this year, then it has ominous implications for the country as a whole.
Another worry related to the potential diminution of spending power is the troublesome rise in crude prices. Net demand is not up appreciably, and Saudi production remains relatively low. Peak oil dynamics could well be at work here. In a broader sense, what Paul Krugman describes — “we’re living in a finite world, in which the rapid growth of emerging economies is placing pressure on limited supplies of raw materials, pushing up their prices” — could well prove accurate. Which, in the absence of countervailing support to incomes via fiscal policy or increased private sector activity that increases jobs, means cuts in other areas of discretionary spending. Hardly a healthy trend in a world still constrained by inadequate demand. Crude prices are already up enough to be a substantial tax on US consumers that has probably more than offset whatever aggregate demand might have been added by the latest tax package.
A federal pay freeze has been proposed. The Fed’s zero rate policy and its continuation of “quantitative easing” both serve to reduce net interest income earned by the economy.
Bank regulators continue to impose policies that work against small bank lending, whose wholesale funding costs are substantially higher than their “too big to fail” counterparts. The Dodd-Frank “financial reform” entrenches the dominance of the systemically dangerous institutions at the expense of the 6,000 or so other banks that engage in classic loan intermediation activity — the sort of thing we want our banks to be doing.
Overseas, the euro zone looks set to muddle through with very weak domestic demand. The periodic disruptions to the credit markets have hitherto been mitigated by repeated European Central Bank bond buying of the national debts in the secondary markets, but at the cost of further fiscal austerity being imposed on the periphery countries.
What about the emerging world, which has hitherto been held out as the major repository of global growth? Does China slow as a result of fighting inflation? Or Brazil? Maybe India as well?
Finally, there is the odious problem of political corruption, which manifests itself in many forms, but most recently through the cynical revolving door policy between Wall Street and government. Peter Orszag’s move to Citi after spending months launching broadsides against Social Security from his perch at OMB and then the NYTimes goes beyond cynicism. Nobody expects a former government official to live like a monk after spending time in public service. But the idea that someone would help plan, advocate, and carry out an economic policy that played such a crucial role in the survival of a financial institution and then, less than two years after his administration took office, would take a job that (a) exemplifies the growing disparities the administration says it’s trying to correct and (b) unavoidably call on knowledge and contacts he developed while serving at OMB is sickening in the extreme. That his successor also comes from Citi simply perpetuates the incredulity. All this, under an ostensibly “progressive” Democratic administration.
The revolving door between Wall Street and Washington calls attention to the rotten heart at the core of the American polity today — what James Galbraith has felicitously termed “the predator state”. The state has become too weak and therefore remains another instrument of corporate predation. The revolving door policy (eagerly embraced by this president, much like his predecessors) perpetuates the problem because it enhances the dominance of the so-called “FIRE” (finance, insurance, real estate) sector of the economy. The FIRE sector simply acts as a parasite on the production and consumption core, extracting financial and rent charges that are not technologically or economically necessary costs. Its revenue takes the form of what classical economists called “economic rent,” a broad category that includes interest, monopoly super-profits (price gouging) and land rent, as well as “capital” gains. Its ethos consists largely of denuding the state of any provision of public goods, privatizing the public domain and erecting tollbooths to charge access fees for basic necessities such as health insurance, land sites, home ownership, the communication spectrum (cable and phone rights), patent medicine, water and electricity, and other public utilities, including the use of credit cards or the credit needed to get by. It’s a zero-sum economic activity. One party’s gain (that of Wall Street usually) is another’s loss. It looks like we’ll have much more of the same as we enter into 2011.
“Happy” New Year everybody.
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“The revolving door between Wall Street and Washington calls attention to the rotten heart at the core of the American polity today — what James Galbraith has felicitously termed “the predator state”. The state has become too weak and therefore remains another instrument of corporate predation. The revolving door policy (eagerly embraced by this president, much like his predecessors) perpetuates the problem because it enhances the dominance of the so-called “FIRE” (finance, insurance, real estate) sector of the economy. The FIRE sector simply acts as a parasite on the production and consumption core, extracting financial and rent charges that are not technologically or economically necessary costs. Its revenue takes the form of what classical economists called “economic rent,” a broad category that includes interest, monopoly super-profits (price gouging) and land rent, as well as “capital” gains. Its ethos consists largely of denuding the state of any provision of public goods, privatizing the public domain and erecting tollbooths to charge access fees for basic necessities such as health insurance, land sites, home ownership, the communication spectrum (cable and phone rights), patent medicine, water and electricity, and other public utilities, including the use of credit cards or the credit needed to get by. It’s a zero-sum economic activity. One party’s gain (that of Wall Street usually) is another’s loss. It looks like we’ll have much more of the same as we enter into 2011.
“Happy” New Year everybody.”
——————————————————–
That pretty much sums it all up. Didn’t there used to be a period of time that government officials and workers had to take between accepting a job at a corporation and vice versa?
“The good news is that the US budget deficit still looks to be large enough to support modest top line growth and sustain and stabilize incomes, even if it’s not large enough to bring the jobs we need.”
I don’t believe you are getting the difference between price inflating with debt and price inflating with currency. The solution to too much lower and middle class debt owed to the rich is not more gov’t debt owed to the rich. Plus, why shouldn’t the gov’t have to make both principal and interest payments on the debt instead of just the interest payment like other forms of debt? This makes the gov’t debt seem affordable when it is not. I’m also assuming real aggregate demand is not unlimited.
” …including the use of credit cards or the credit needed to get by.”
Who says credit is needed to get by? Do the rich need credit cards? I’ve read the rich buy their 2 million dollar houses with no mortgage (all cash) while everyone else needs to get a mortgage for most homes that cost $500,000 or less (wealth/income inequality)?
Other then enriching the bankers, why should all new medium of exchange be demand deposits created from debt?
Other then enriching the bankers, why should all new medium of exchange be demand deposits created from debt? Fed Up
They shouldn’t be. If I have capital, say my labor, and you have capital, say a factory that produces widgets, then why do you need a middle man, a bank, to rent you my wages? Why not just pay me in common stock or with store coupons redeemable for those widgets?
Make that “Other than …”.
Austerity is not about forcing responsability. Austerity is about starting to force a global reset of the finance system(aka: A New Global Monetary System). It is well known in both political circles of the current close relationship of public and private debt consumption. If the public spending contracts… It will force the hand of the Federal Reserve to do things it is not supposed to do.
It is also pretty easy to understand what will happen 3 to 5 years from now. The Federal Reserve will expand the very things that they already should not be doing in an attempt to save the current monetary system. This is also being closely watched. Eventhough I do not know exactly when these groups will feel they have enough to get the mainstream “shocked” to get more attention on the FED, but my guess is that it will the the event Mr. Paul has been waiting on for decades..
The author’s argument appears to be conflicted as he want’s more deficit spending and rightfully calls out the predator state. Bernanke has not printed/printed trillions of dollars. Fiscal policies from the FTHB, C4C, ARRA, etc have also cost trillions. Two years into this you have to ask yourself where’d the money go? Is this all we get? More unemployed, more on food stamps, more without health insurance. Wall ST. thriving, US based MNC’s sitting on boatloads of cash, (though they are less liquid now then in 2008 looking at both sides if the balance sheet), and hundreds of thousands if not more jobs being created in China and other developing nations. The author then asks for more of the same?
Trickle down economics never worked and Keynesian type stimulus aren’t working due to globalization, the race to the bottom.US taxpayer based stimulus dollars flowing overseas at hte speed of light. MNC’s are borrowing US taxpayer money at record low interest rates and using those loans to create jobs in China and other developing nations. The US is in a cyclical and structural growth crisis and has been for three decades. Stimulus is unaffective, not enough bang for the buck. Artificially inflating asset prices, houses, equity markets, US debt is a fools errand being played by the same fools that drove this nation off the cliff. Yet that is the plan, there is no Plan B.
Free trade monikers are bullshit. Free trade/Fair trade can not exist between nations with huge disparities in pay, worker safety, environmental controls and currency standards. The US growth crisis will continue as long as this is not recognized.
The US is in a cyclical and structural crisis. Treating the symptoms, injecting the patient with heavy doses of drugs, shocking the corpse with volts of electricity, yields temporary and fleeting results that manifest themselves later as liabilities. The lack of leadership from both parties as they lick the boots of the political donating class and lobbyists ensuresw there will be no solutions coming soon. The older I become, the more appealing anarchy appears. You have to destroy a village in order to save it.
Auerback is insane to suggest deficit spending is a good thing.
It’s really not. Don’t be fooled by the soothing exhortations of the dissemblers.
So what kind of spending do you suggest Jo?
Spending = income. Every time. All day long.
Where there is a deficit there is a surplus somewhere. Think about this yourself, if the deficit is on the govt side the surplus is on the non govt side ( we the people )
Do you think the we the people side needs to go into more deficit so the govt side can be in less deficit?
“Where there is a deficit there is a surplus somewhere. Think about this yourself, if the deficit is on the govt side the surplus is on the non govt side ( we the people )”
I think you need to consider an expansion of that. Does the surplus of the rich = deficit of the gov’t plus deficit of the lower and middle class?
I believe you also need to consider that the “currency printing entity” can run a deficit with currency while other entities can’t but run a deficit with borrowing and/or selling financial assets.
a fact free denial wrapped in an ad hominem attack.
From post’s “As I’ve argued” link: “In my view, the size of the public sector deficits per se are of no economic consequence until they become inflationary.”
So public sector debt is ok until it’s not. The problem is with this attitude is that it allows for abuse.
In 2001 the federal government budget was in surplus, and that was outside of Social Security which was also in surplus!
It was no secret that just 10 years later the ‘Boomers’ would start to retire and draw Social Security benefits. I did not go on a spending spree for the ten years before I retired, I increased my savings. The 10 years leading up to the ‘Boomers’ retirement should have used any surplus to pay down government debt.
So what did our fearless leaders do? They enacted TAX CUT legislation based on some theoretical large surplus.
Then as they found themselves in 2 very expensive wars and looking at the ‘Boomers’ retiring in less than 10 years, what did they do? They did nothing.
They could have raised taxes to pay for those 2 wars but no, they elected to run up deficits. Because government debt was not seen as anathema, it was seen as acceptable! Group think overwhelmed any commonsense logic. Both political parties are responsible for this debt.
The Republicans get most of the credit because they worship at the altar of the tax cut. THIS CURRENT BUNCH NEVER SAW ANY TAX CUT THAT THEY DID NOT LIKE! If there was any justice, then Republicans railing against government debt would be struck dumb!
The Democrats knew or should have known that a large debt would threaten social programs which they had sponsored. They had a budget surplus at the beginning of the Bush’s presidency. When the wars started why didn’t they insist on tax increases? In 2003 Bush offered and they accepted Medicare Part D! (Boys and girls, can you say bribe?)
Our politicians are idiot savants who excel at getting elected.
Throughout all of this, economists and accountants were aiding and abetting, by describing debt as a normal course of government management. We were told repeatedly that government debt is not the same as an individual’s debt. And even individuals had come to view debt as normal.
“They found themselves in two wars”.
Found – that is very very funny! That made my day.
Robert Dudek said: “They found themselves in two wars”. Found – that is very very funny! That made my day.”
I could not find “They found themselves in two wars” in my comment. You seem to be misquoting this:
“Then as they found themselves in 2 very expensive wars and looking at the ‘Boomers’ retiring in less than 10 years, what did they do? ”.
Please don’t misquote me. If you want to paraphrase, you should leave out the quotes.
The “they” is referring to Congress and so “Then as they found themselves in 2 very expensive wars …” is more accurate than to say “Then as they started 2 very expensive wars …”.
The Congress regularly abdicates it’s responsibilities when it comes to war. And I don’t think that is funny.
Just to clarify:
People have reduced their individual debt and corporations have reduce their debt at a slight rate but the government has taken on massive amounts of debt at a far higher rate. How does the equation work that this is a deleveraging of our overall indebtedness?
More debt does NOT equal more wealth. Spending debt sure makes us feel wealthy but nobody with a brain would argue that it is actually a solution to our problems. But I guess it sure feels like a solution for a few years.
Steve
Govt debt IS….. I repeat IS…a non govt asset. There are only two sides to the balance sheet. The govt and non govt side. When one is in deficit or debt the other is in surplus or carrying an asset.
It can be NO OTHER WAY!
WTF???
So it’s bad for banks to mark to fantasy but OK for everyone else?
“Govt debt IS….. I repeat IS…a non govt asset.”
And so is “gov’t currency”?
Accounting identities don’t always tell what is going on in an economy.
The only difference between govt debt and currency is that debt pays interest. There is still “currency” when the debt is issued.
I too would support debt free spending, but its still important to know that govt debt is NOT debt in the way private debt is. Solving our private debt problems by using more private debt IS unsustainable but solving our private debt problems by using public debt IS a workable solution. I would prefer just plain currency but public debt is a reasonable alternative.
I would prefer just plain currency but public debt is a reasonable alternative. Greg
Yes, but public debt confuses people and also delivers an undeserved, risk-free rent to the wealthy.
It’s time to bring back the Greenback (US Notes). However, they should only be legal tender for government debts, not private ones.
Sigh: all mr. Auerback does it bring in some sanity, and promptly several readers freak out.
Auerback’s been Dancing with Mr. Brownstone after hittin’ that Keynesian Jenkem Bong.
Hell, the more I think about it, you guys at New Deal 2.0 aren’t Keynesians after all. You’re Axyl-Roseians…cuz’ don’t nothin’ capture the essence of the addiction to heroin and deficit spending like ole Axyl crooning about “a day in the life” of a Rock-n-Roll Economist doin’ the fandango with The Brown Drug, aka Mr. Brownstone….
Cue the Guns and Roses please:
I used ta do a little but a little wouldn’t do
So the little got more and more
I just keep tryin’ ta get a little better
Said the little better than before
I used ta do a little but a little wouldn’t do
So the little got more and more
I just keep tryin’ ta get a little better
Said the little better than before
We been dancin’ with Mr. Brownstone
He’s been knockin’
He won’t leave me alone
No, no ,no, he won’t leave me alone
Wow, I was going to criticize Auerback for his talk of “peak oil dynamic.” That’s all hogwash, not peak oil, but that peak oil is affecting prices. There is no peak oil dynamic in pricing, at least not yet. A peak oil dynamic would have to affect the supply side of the equation. Yet as Auerback notes, the supply side really isn’t being tested currently. So how can there be an effect? The spike in oil prices is occurring for the same reason it has occurred any time the last 6 years from excess speculation carried out in futures markets by the big financials, like Goldman through their subsidiary J Aron.
As for all the austerian reaction to this piece, it was precisely this type of classical economic thinking that got us into this hocum-filled death spiral.
For the rest, I am in essential agreement with Auerback. I would just suggest that he call what he describes what it is: kleptocracy. We have in this country a two tiered legal and economic system made up of looters and lootees. I commented elsewhere recently that MMT gives a good explanation for how our elites always find the money for themselves, their tax cuts, their wars, and their bailouts. It is only when it comes to the rest of us that the invocation of gold standard era economics occurs,that is constraints that don’t apply to them suddenly get applied to us. Kleptocrats may not know it but they have been practising MMT for years. They have been using it for theft. We could use it to rebuild the country.
It is only when it comes to the rest of us that the invocation of gold standard era economics occurs,that is constraints that don’t apply to them suddenly get applied to us. Hugh
Bingo! Hypocrisy seems to be a defining characteristic of the usury class.
I note that common stock as money requires no fractional reserves, no borrowing hence no usury, and no PMs.
I reckon common stock to be the ideal private money form. The question for me is: What government privileges for the usury class allow corporations to avoid sharing wealth?
Drinking the “Weak” State Kool Aid in 2011
I want to argue for an alternative hypothesis to that of Marshall Auerback when he maintains that “…the state has become too weak and therefore remains another instrument of corporate predation.”
Auerback’s perspective is understandable in the sense that he recognizes historically that the dynamics of the market that materialized under U.S. capitalism yielded enormous concentration of private economic power which caused many (especially in the liberal/left community) to focus on harnessing the State as an instrument of ameliorating gross social inequalities.
But this focus on the supposed ameliorating powers of the state, in my opinion, has been a huge strategic mistake.
What we are faced with today is a fusion of politics and economics, public and private, Big Capital and Big State which has gradually emerged over the last 140 years–a fusion and a consequent establishment of dependency relations with significant segments of the American population–a fusion and dependency which must now be broken and transformed.
In the 1930s, the American working classes were integrated into the then emerging public/private administrative regime. Passage of the Norris-LaGuardia Act, the National Industrial Recovery Act, the National Labor Relations Act (Wagner Act) the Public Contracts Act and the Fair Standards Act, made possible the State administration of labors hours, wages, unionization, hiring, firing, compensation, personal welfare, and contract bargaining by the bureaucratic rules of the federal bureaucracy, the large corporations and the national labor unions–in essence American labor was made dependent on the emerging state-corporate regime.
I would also hypothesize that this centralized bureaucratic state then became the supreme guarantor of the “free market” and the market was enthroned as the principal delivery mechanism to meet the standards and targets set by the State.
Today we face a powerful, centralized territorial state and an equally powerful decentralized. deterritorialized market which tend to collude to enforce a definiton of ourselves as simply consumers or clients rather than democratic citizens.
As in the 1930s, this state/corporate regime in our present financial crisis, is now taking on another segment of the American populace–this time primarily the tax-paying middle class. As Steve Waldman argued, in early 2010, the private financial and governmental sectors have now evolved means of hiding fiscal redistribution(to the banksters)in complex, highly improvised arrangements.
Such massive wealth redistribution transfers(through the State purchase of risky private debt) since 2007(primarily engineered by the U.S.treasury and the Federal Reserve)makes a mockery, in itself, of the “weak” state perspective.
Auerback’s narrative, in my opinion, contributes to constraing the limits of democractic possibility. His perspectiver narrows the argument for democratic reform to the merits and usefulness of state particpation in the economy.
Hopefully in 2011 such narratives can finally be transcended.
Jim,
Why not just call the new State/Corporate system by it’s ancient name – Empire. The country formally known as America is now a colony of the American Empire with it’s previous Democracy replaced by State Capitalism (you seem to try and avoid this term). The military is paid for by the colonial middle class but serves the Empire to acquire resources and markets (by force if necessary) and protect trade routes. The Empirical Military has long ago ceased to be a defense force despite it’s name. A number of years ago Jack Welsh said GE was not an American company but one that did business in America as well as globally.
Perhaps soon we will see the political and economic conclusions of this arrangement.
Empirical? Where did that come from. I suppose I meant Imperial. Too much Holiday cheer.
NC Jim
‘The FIRE sector simply acts as a parasite on the production and consumption core, extracting financial and rent charges that are not technologically or economically necessary costs.’
In the US, the FIRE sector is surely hypertrophied to the point of parasitism.
In that regard, the single largest financial market in volume terms is foreign exchange. It has expanded by factors of thousands beyond what was needed to accommodate trade under Bretton Woods I (1946-1971).
Want to shut down a big chunk of the parasitic FIRE sector? Go back on the gold standard, and sign up as many countries as possible. Then hundreds of highly compensated forex traders will have to get real jobs, doing something economically productive for a change.
Go back on the gold standard, and sign up as many countries as possible. Then hundreds of highly compensated forex traders will have to get real jobs, doing something economically productive for a change. Jim Haygood
Nope. There must not be a return to worshiping shiny metals. The environment destruction alone would be enormous as everyone, including the poor, rushed to mine money.
No, what is needed, imo, is the removal of all government support for the bankers including the Fed (the lender of last resort), legal tender laws for private debts, government deposit insurance, the capital gains tax on potential private money alternatives, etc.
If that were done, then I think we could move on to genuine capitalism, where corporations would be forced to issue their common stock as a private money form.
To Jim Haygood:
No government official wants to go onto a gold standard. It limits their power to hand out goodies on borrowed time. Won’t be a gold standard until the whole effing thing comes crashing down and there’s no other choice.
Stock up on beans, bullets, and PMs. Ugly times a’coming.
We know the name of the beast. It’s Predator Capitalism with its Rent Boy Congress in tow. Now we have to figure out how to kill it.
Its doing a good job of killing itself.
Lets see,a system which requires payers to collect rent from puts the payers in greater and greater debt and when they have trouble paying the debt the system says you cant work anymore!!?? Hmmmmm seems like this system is going to run out of payers.
Austerity vs deficit-spending has replaced inflation v deflation as the GFC topic du jour. But where the first debate is about eventual outcomes, the second is about diagnosis and recommended cure and is therefore more urgent and, hopefully, less academic.
What we need is for Yves to host a slugfest pitting the MMT/higher deficits crew against the Austerians; say Auerback, Wray and Mitchell vs say Shedlock, Schiff and I dunno, Denninger? Yves could throw her 2c in afterward in summary, and I would be interested to hear what people like Steve Keen, Michael Hudson and John Hussman thought.
Hussman seems to think austerity (at least that recommended by Simpson/Bowles) counterproductive but wants any extra deficit spending to be targeted to education, research and infrastructure. I’m with him, and while I am almost violently opposed to the idea of the victims of fraud and greed having to pay it’s bills via austerity, I am bothered too by the (to me) rather vague ‘just spend it anywhere so long as it’s public, she’ll be right, it’s just an accounting identity’ MMT panacea.
I may be reducing the arguments to the point of caricature but I’m no expert. I just want to be clearer in my own mind.
A while ago Mish disagreed with conclusions Yves appeared to draw from a study which showed greater productivity in unionised workforces. Correlation is not causation he cried (though of course his blog carries a lot of graphs where readers are implicitly encouraged to infer causation from the correlations they show).
This stance to me fit right in with his relentless attacks on unions and the pay and pension contracts they have delivered over the years, as if this aspect of state and fed finances was more to blame for what has happened than cratering tax receipts due to the housing collapse which was engineered primarily by FIRE sector fraud, and malinvestment of those receipts they did receive into the same great maw of hallucinated wealth that FIRE fraud enabled. This does not even take into account the pork spent on keeping non-FIRE campaign donors and other special interests happy, let alone the wider long-term drag imposed by de-industrialisation, a process investment advisers such as Schiff and Shedlock must surely have contributed to over the last 40 years with stock tips for companies whose impressive balance sheets were underwritten by cheap foreign workers (no doubt enjoying the sort of frugal benefits that would make Simpson Bowles look Christmas)
No, it’s all the greedy unions’ fault. Oh sure there are abuses and pork galore, it’s the USA after all, but to single them out to me betrays a peculiarly American bias against labor. Similarly Schiff seems to think the only solution is to cut taxes and regulations for the business and investment community, to ‘free up’ funds so that new businesses can bloom and thereby kick-start employment, and ergo growth. Don’t give it to the workers, they’ll only spend it on fripperies!
The only problem there is that there is still so much deleveraging still to occur that any additional cash this sector receives may well go to servicing debt, or to hoarding as a hedge for a potentially rocky road ahead, or indeed to the same damaging (but often enriching in the short term) speculation that caused much of the problem in the first place. How many seconds are most trades held for again – 20 seconds? These are to my mind even more destructive ‘fripperies’ than those the workers (or indeed the unemployed) might spend on, and surely far less useful to the Holy Grail of increased aggregate demand. (It seems weird to me that intelligent people like Schiff think that supply creates demand rather than vice versa)
On the other hand we have the idea that the infusion of government-created dough into ‘the public sector’ will have an automatic stabilising effect. It’s a bit ‘hey presto’ for me, and it is hard to argue with charges that such a move is just more kicking the can down the road, making any eventual comeuppance even more dire than it otherwise would be, particularly if this additional credit creation is performed under the current system, which funnels it through the banks at virtually no cost first, and also if it is simply distributed broadly rather than targeted to infrastructure, greening, education etc.
The elephant in the room in this debate is the obscene inequality of wealth distribution. Wasn’t there a graph here the other day that showed that it has zoomed in the last 10 years and that the top 10% own 90% of assets? The rich, via the FIRE sector, have harvested virtually all the profits from American productivity, beggaring the rest, but it is the rest who are being asked to carry the load, even unless I’m wildly off base under the MMT scenario, which after all creates debt for future generations.
The can doesn’t need to be kicked down the road. Capital does not need to be created. It already exists – one third of the world’s wealth is apparently locked up in offshore locations like the Jerseys or Caymans. Much of it is ill-gotten gains, the proceeds of taking us all to where we now are. If we had an American President more like Roosevelt, Eisenhower or Jackson than Fillmore or Coolidge or god help us George W Bush, we would have at least a chance of righting this historic wrong by utilising the waning but still dominant power of the US Presidency and the state apparatus it controls to recover the people’s wealth and use it to begin work on America 2.0.
But we have Barack Obama; he’s not the president the times need, but he may well be the one we deserve.
Very nicely said.
Please invite R.G. Price to your round table.
http://www.rationalrevolution.net/articles/recession_cause.htm
http://www.rationalrevolution.net/articles/restore_america.htm
Yes, nice comment.
Alas, here it is 2011 and we still haven’t learned to do money correctly.
I’d be all for such a debate, except I’d be afraid that the public sector union busters would get a good look at the MMT policy entrepreneur’s own employment plan that calls for everyone to work for Fedgov at $7.25 an hour and decide they like it.
It will be on Obama’s “bipartisan” desk by March.
Busted.
Great post Glenn. I think Yves should elevate it to a front page post.
Another worry related to the potential diminution of spending power is the troublesome rise in crude prices. Net demand is not up appreciably,… Marshall Auerback
So prices are up but demand isn’t? Isn’t this likely to be speculation because of the current “dearth of investment opportunities”?
…and Saudi production remains relatively low. Peak oil dynamics could well be at work here. Marshall Auerback
Or the counterfeiting cartel and its borrowers are blowing bubbles in essentials to loot the population?
The key question to me is how to do money and banking ethically. What we appear to have is government backed counterfeiting by commercial banks. I pointed this out to Denninger and for that he accused me of not being a libertarian in rather rude terms (but that’s Karl).
He has a point, I think. Is it really anyone’s business how much the banks leverage as long as there is no lender of last resort and the laws against insolvency are strictly enforced?
As for deficit spending, some source of new money is necessary if only to pay the interest on loans. But that money need not be debt-money. The US Treasury could simply spend debt and interest free US Notes into circulation. The Republicans could then no longer create hysteria over the National Debt. We should have never had one.
Auerback is wrong and borderline insane.
He says: “Instead of the public sector providing employment leadership at a time when the private sector is not yet ready to expand jobs growth”
I say: The private sector creates real jobs but is under attack from the public sector, see Obamacare, and no business can make plans in this economic environment of chaos and uncertainty.
Auerback says: “It is fascinating to see how the public narrative in the media has gradually shifted over the past year from Wall Street’s sociopathic practices (which were directly responsible for the creation of the crisis)”
I say: It is this major and completely false narrative of the leftists that, once debunked, reveals how most of our problems are caused by the public sector.
The housing bubble, collapse, and recession were caused by government meddling in the markets. Banks were forced by threat of government fine or prosecution to lower lending standards for a liberal social-engineering, affirmative-action scheme so the “disadvantaged” could buy a house; the government distortion of the markets nearly caused the collapse of the economy – thank you Clinton, Dodd, and Frank.
It is liberal policies that are suppressing job growth because they price the US worker too high to be competitive in the world.
Taxes, regulations, and union influence have raised costs and barriers so high that businesses cannot survive; look at the people voting with their feet to move from high cost places like Michigan to low cost places like Texas; Michigan unemployment is 12.4% while Texas unemployment is only 8.2%.
The greedy, selfish, and short-sighted government employees and unions, liberal Democrats, have bullied people to get themselves unsustainable wages and benefits; the average union stage hand at Lincoln Center gets $290,000 to move chairs around. The union thugs in New York City slowed down snow removal to protest budget cuts and cost a new born baby and an elderly woman their lives.
The way to get the economy growing again is to cut tax rates, reduce regulatory barriers, abolish unions, and make America the most attractive place in the world to do business; we should emulate the Canadians who are lowering corporate taxes considering ours are the highest in the developed world.
Immigration policy should ensure we are getting the best and brightest to come here.
Only the private sector creates real jobs and, unfortunately, we have a left-wing administration and a left-wing media, see Dionne, which hates the private sector.
Nobody in this administration, including Obama, has ever created or built or managed anything useful.
You silly liberals with your ridiculous social engineering schemes dream about confiscating and redistributing wealth but all you do is destroy it; look at what Democrats and their union allies have done to Detroit; once the center of technology in the world, it is now a violent cesspool of dependence and pathology – Obama voters.
The Democrats have become the party of modern liberalism which is defined by authoritarianism, mediocrity, stagnation, group identity, dependence, and false compassion; failure.
Auerback may well be borderline insane, but he’s got plenty of company.