November 8, 2013 § Leave a comment
To put things crudely, there are two ways to get the increase in total spending that we call “economic growth.” One way is for government to spend. The other is for banks to lend. Leaving aside short-term adjustments like increased net exports or financial innovation, that’s basically all there is. Governments and banks are the two entities with the power to create something from nothing. If total spending power is to grow, one or the other of these two great financial motors–public deficits or private loans–has to be in action.
For ordinary people, public budget deficits, despite their bad reputation, are much better than private loans. Deficits put money in private pockets. Private households get more cash. They own that cash free and clear, and they can spend it as they like. If they wish, they can also convert it into interest-earning government bonds or they can repay their debts. This is called an increase in “net financial wealth.” Ordinary people benefit, but there is nothing in it for banks.
And this, in the simplest terms, explains the deficit phobia of Wall Street, the corporate media and the right-wing economists. Bankers don’t like budget deficits because they compete with bank loans as a source of growth. When a bank makes a loan, cash balances in private hands also go up. But now the cash is not owned free and clear. There is a contractual obligation to pay interest and to repay principal. If the enterprise defaults, there may be an asset left over–a house or factory or company–that will then become the property of the bank. It’s easy to see why bankers love private credit but hate public deficits.
All of this should be painfully obvious, but it is deeply obscure. It is obscure because legions of Wall Streeters–led notably in our time by Peter Peterson and his front man, former comptroller general David Walker, and including the Robert Rubin wing of the Democratic Party and numerous “bipartisan” enterprises like the Concord Coalition and the Committee for a Responsible Federal Budget–have labored mightily to confuse the issues. These spirits never uttered a single word of warning about the financial crisis, which originated on Wall Street under the noses of their bag men. But they constantly warn, quite falsely, that the government is a “super subprime” “Ponzi scheme,” which it is not.
We also hear, from the same people, about the impending “bankruptcy” of Social Security, Medicare–even the United States itself. Or of the burden that public debts will “impose on our grandchildren.” Or about “unfunded liabilities” supposedly facing us all. All of this forms part of one of the great misinformation campaigns of all time.
The misinformation is rooted in what many consider to be plain common sense. It may seem like homely wisdom, especially, to say that “just like the family, the government can’t live beyond its means.” But it’s not. In these matters the public and private sectors differ on a very basic point. Your family needs income in order to pay its debts. Your government does not.
Private borrowers can and do default. They go bankrupt (a protection civilized societies afford them instead of debtors’ prisons). Or if they have a mortgage, in most states they can simply walk away from their house if they can no longer continue to make payments on it.
With government, the risk of nonpayment does not exist. Government spends money (and pays interest) simply by typing numbers into a computer. Unlike private debtors, government does not need to have cash on hand. As the inspired amateur economist Warren Mosler likes to say, the person who writes Social Security checks at the Treasury does not have the phone number of the tax collector at the IRS. If you choose to pay taxes in cash, the government will give you a receipt–and shred the bills. Since it is the source of money, government can’t run out.
It’s true that government can spend imprudently. Too much spending, net of taxes, may lead to inflation, often via currency depreciation–though with the world in recession, that’s not an immediate risk. Wasteful spending–on unnecessary military adventures, say–burns real resources. But no government can ever be forced to default on debts in a currency it controls. Public defaults happen only when governments don’t control the currency in which they owe debts–as Argentina owed dollars or as Greece now (it hasn’t defaulted yet) owes euros. But for true sovereigns, bankruptcy is an irrelevant concept. When Obama says, even offhand, that the United States is “out of money,” he’s talking nonsense–dangerous nonsense. One wonders if he believes it.
Nor is public debt a burden on future generations. It does not have to be repaid, and in practice it will never be repaid. Personal debts are generally settled during the lifetime of the debtor or at death, because one person cannot easily encumber another. But public debt does not ever have to be repaid. Governments do not die–except in war or revolution, and when that happens, their debts are generally moot anyway.
So the public debt simply increases from one year to the next. In the entire history of the United States it has done so, with budget deficits and increased public debt on all but about six very short occasions–with each surplus followed by a recession. read more
PHOTOGRAPH: Michael Wolf
January 11, 2013 § Leave a comment
The war in Iraq was not fought principally for economic reasons, but it raised the growth rate by a point or so in 2003. And then in 2004, they actually quite deliberately increased public spending as much as possible—they understood that they didn’t have enough public spending to keep the economy going. And basically the President said to the Congress, “I’ll sign any appropriations bill you send me. Spend away.” And they did. And they squeaked through that election. Behind all of this was the deregulation of the real estate sector, de-supervision, which was designed to put money through the economy on whatever terms possible. That is a real wrecking of the future. It gives you growth in the short term, but everything is set to melt down in a few years. They tried, of course, to push the meltdown past the passage of power to the next administration, and they almost succeeded.
With the Obama administration there was a vast failure to look at the crisis in a realistic way—to assess what it actually was. When you look at the period of, and immediately following, the crisis, the new administration bought into the view that this was a temporary event, and that there would be—at some point—a return to the normal growth path. They didn’t assess the possibility that this wasn’t true—that we’d reached a turning point and we were not going back to that path. And therefore, they created expectations that they could not meet. What they did was vastly too small, and they treated the financial sector as though it were going to behave in the future the way it had behaved in the past—namely, making loans that support economic expansion. But in the environment that we were in—which was basically a debt-deflationary environment—the financial sector makes money not by promoting growth, but by promoting contraction: by shorting things, driving down prices, selling off assets, liquidating, and foreclosing.
So by keeping the financial sector alive, the administration basically kept alive a panoply of institutions which had at one point been constructive but were now purely destructive. And as a result, the notion that the government was going to be the saving force lost steam. It lost credibility because they didn’t take the full spectrum of measures that were required. And because they hadn’t made clear to people from the beginning what they were actually facing, they opened up the window to every quack in the business who had a magical solution—and that includes the Grover Norquists and it includes the Paul Ryans. Plus, you’re faced with large budget deficits—which people attribute more importance to than they actually have—that can easily be turned into an argument supporting cutting government.
The reality is that most operating businesses, if they could rely more on Social Security and less on their own contributions to retirement, more on public health insurance and less on employer contributions, they’d be much better off. For most of basic American business, the more you have insurance schemes handled by the public sector, the better off you are. But there are parts of the plutocracy that have always regarded this as a threat in principle to private insurance companies. It’s the threat of a good example. The government runs an insurance company—it’s basically an office building full of bureaucrats and computers. They don’t have fancy salaries or fancy perks. They’re doing this pretty well on a civil servant’s income, and without lots and lots of people to try and separate the healthy from the sick. They just enroll everybody. And guess what? It’s a very functional system. But there are some parts of the plutocracy that just don’t care what happens to the broader population, and for whom, as I say, the fact that the government runs very efficient, comprehensive insurance programs is politically offensive. read more
PHOTOGRAPH: Yato Tamotsu