On Dickishness
It may not have been the most felicitous choice of phrase, but Mark Halperin’s characterization of Barack Obama was not far off the mark, even if he did get suspended for it. The President is a dick, at least as far as his understanding of basic economics goes. Obama’s perverse fixation with deficit reduction uber alles takes him to areas where even George W. Bush and Ronald Reagan dared not to venture. Medicare and Social Security are now on the table. In fact entitlements of all kinds (excluding the myriad of subsidies still present to Wall Street) are all deemed fair game.
To what end? Deficit control and deficit reduction, despite the fact that at present, the US has massive excess capacity including millions of unemployed and underemployed, a negative contribution from net exports, and a stagnant private spending growth horizon. Yet the President marches on, oblivious to the harm his policies would introduce to an already bleeding economy, using the tired analogy between a household and a sovereign government to support his tired arguments. It may have been impolitic, but “dick” is what immediately sprang to mind as one listened incredulously to the President’s press conference, which went from the sublime to the ridiculous.
Discussion of government budget deficits often begins with an analogy to a household’s budget, and the President continues that horrible pattern of misinformation. Obama challenged the view that the government might side-step the debt ceiling constraint by just paying “interest on the debt” and said:
This is the equivalent of me saying, you know what, I will choose to pay my mortgage, but I’m not going to pay my car note. Or I’m going to pay my car note but I’m not going to pay my student loan. Now, a lot of people in really tough situations are having to make those tough decisions. But for the U.S. government to start picking and choosing like that is not going to inspire a lot of confidence.
Let’s state it again: households do not have the power to levy taxes, to issue the currency we use, and to demand that those taxes are paid in the currency it issues. Rather, households are users of the currency issued by the sovereign government. Here the same distinction applies to private businesses, which are also users of the currency. There’s a big difference, as all us on this blog have repeatedly stressed: Users of a currency do face an external constraint in a way that a sovereign issuer of its currency does not.
This key point, which is persistently obscured in these discussions, is that if a government issues a currency that is not backed by any metal or pegged to another currency, then there is no reason why it should be constrained in its ability to “finance” its spending by issuing currency. Unfortunately, this elementary concept seems to have eluded the President and, presumably, the countless members of Congress involved in the debt ceiling negotiations. Typical is this statement from the President:
I do think that the steps that I talked about to deal with job growth and economic growth right now are vitally important to deficit reduction. Just as deficit reduction is important to grow the economy and to create jobs — well, creating jobs and growing the economy also helps reduce the deficit. If we just increased the growth rate by one percentage point, that would drastically bring down the long-term projections of the deficit, because people are paying more into the coffers and fewer people are drawing unemployment insurance. It makes a huge difference.
The President has the causation here totally backward. A growing economy, characterized by rising employment, rising incomes and rising capacity utilization causes the deficit to shrink, not the other way around. Rising prosperity means rising tax revenues and reduced social welfare payments, whereas there is an overwhelming body of evidence to support the opposite – cutting budget deficits when there is slack private spending growth and external deficits will erode growth and destroy net jobs. Even the IMF (in its October 2010 World Economic Outlook) recognized that fiscal consolidations, even though they tend to be accompanied by lower interest rates and lower exchange rates, are more frequently associated with economic contractions. Amazing to think that we’d ever see the day where the President outflanks the IMF.
Expansionary fiscal consolidations are virtually impossible – the initial conditions, as well as the structure of the economy in question, must be right to support a stronger trade improvement, or a more aggressive spending path by domestic firms and households, which largely OFFSETS the impact of decreased government spending. Again, the key is looking at the impact of government spending reductions within the context of what the other two major sectors of the economy – private households and firms , and the external account (exports and imports) – are doing. In fact, if we had a balanced foreign sector (i.e. no trade deficit), there would be no way for the private sector as a whole to save unless the government runs a deficit. Without a government deficit, there would be no private saving. Yes, one individual can spend less than her income, but another would have to spend more than his income. It all has to balance in the end, as any accountant can tell you.
To be fair to the President, most of his Republican counterparts are also “dicks.” Consider the comments of Senate Minority Leader, Mitch McConnell:
What Republicans want is simple: We want to cut spending now, we want to cap runaway spending in the future and we want to save our entitlements and our country from bankruptcy by requiring the nation to balance its budget. We want to finally get our economy growing again at a pace that will lead to significant job growth.
Like the President, McConnell evidently also feels that the US government can run out of dollars or, at the very least, computer keyboards to mark up or down the numbers in our national accounts. This is the only way one could make sense of his nonsensical bankruptcy comments. This perverse inability to distinguish between issuers and users of currencies is a disease which afflicts members of both parties and largely explains the willingness to hack away at what’s left of the American social welfare net (the President unilaterally disarming his party on Medicare before securing a single concession from the GOP). Change you can believe in! And the President wonders why his base is totally dispirited!
Let’s be clear: the government creates ‘money’ whenever it spends; it destroys ‘money’ whenever it taxes. The issue, which the President should be out and front explaining, is whether or not its spending too much or taxing too little. With a rising unemployment rate, and a huge reserve of underemployed and disadvantaged workers, it is the height of insanity to cut spending overall which is what the US President is claiming is an important and urgent policy goal when there is so much idle productive capacity. Yet both the President and his Republican negotiators on the other side of this issue take it as a given that public debt per se is an unalloyed evil that should be eliminated as a long term policy goal. That is only possible if the external surplus is large enough. Otherwise, if you attempt to achieve that stage via fiscal cutbacks the policy strategy will undermine employment and growth. The upshot is that the budget deficit is likely to rise because of the slowing economy will undermine tax revenue.
Yes, it’s true that government deficits are not always good, or that the bigger the deficit, the better. The point the President and his equally misinformed economic advisors continue to ignore is that we have to recognize the macro relations among the sectors, much as a surgeon has to consider the impact of removing an organ from the patient in the overall context of how it will affect the rest of the body’s functioning. Blaming the deficit for our economic woes is akin to blaming the thermometer when it records a temperature from a patient suffering from the flu. They are both forms of quackery. To believe otherwise is to be, well, a “dick.” There’s no other word to describe it.
Also see The Real Dickishness Problem from James Fallows
This article was first posted at New Economic Perspectives.
Actually, disciples of MMT are dicks.
Happy to clear that up.
The problem is that monetary policy is only a viable policy within certain bounds. The economy is well outside those bounds, and the only solution is fiscal policy. Yet for ideological reasons that solution is off the table. The long term prognosis is that this policy is destroying the US and its economy far more effectively that terrorism. I agree with Marshall that deficit spending is essential. Though if Medicare and Social Security are a problem then deal with them appropriately. An increase in retirement age will make that more affordable. As for Medicare strip Congress of private insurance and put them within Medicare. They might be more willing to protect it if they suffer. Also by having all government workers with in Medicare will make a good start towards extending it to all.
Another issue that Marshall has not considered is that because all weapons that the Fed have levelled at asset deflation they have allowed substanial mal investments to scrap through. Yet if there is any more headwind then these will collapse. Creating more losses for the banks and deepening the recession. If they wanted a V shaped recovery they should have kept interest rates higher as this would have accelerated any collapse and allowed fresh investment to stimulate the economy. All that has happened is that they have inflated the bubbles to such an extent that the consumer economy is on life support and nothing is being done to revive them.
There are still a lot of people who see the need to push monetary policy. The thinking is that the Fed should be geared to stabilizing nominal GDP by any means necessary, more so because fiscal policy is off the table. I am not enamoured with these supply side solutions because it is abundantly clear this is a demand-side event. Pushing more supply when it is demand that is deficient creates an even greater imbalance that will lead to unintended consequences. A misallocation of resources to god knows what sector is the known unknown. But there unknown unknowns from this kind of aggressive supply side response.
To my mind, the household spending analogy works for most people and that’s why it is so powerful in causing people to want to brake government spending. No amount of explaining will undo this. i think we are definitely headed to a lower labor/goods demand, higher money/fixed asset supply path and we will just have to see where that leaves us.
I actually think that the maintain full employment and control inflation can be antagonist policies. The Fed should have one task only and that is control of inflation. You cannot control the number of targets that the Fed have to with interest rates alone. Give them inflation targets only.
The role of maintaining full employment is a job of congress. They should get elected only if they are willing to do that. If tax cuts do not work in creating jobs then switch policies. Do not repeat the same mistakes because that is what you are told is the only solution. We can all see from Greece and Ireland that austerity is the idiot solution. Ireland had trade and fiscal surpluses prior to the financial crisis and now they are serious deficit with liabilities that will bankrupt them, yet the GOP want to follow the same policies.
The household spending analogy is wrong but it suits one wing of politics to trash the economy for political gain. As to how to counter it, may be the solution is to describe it in segments? Suggest that world peace was now possible, why not shut the entire defence spending down. The savings would be no more wars so no troops abroad. With no troops abroad there would be no need for no bid defence contracts, which would save the tax payer billions. Then pink slip every army, navy, marine and airforce personel. That would save many billions. Then you would not need military equipment so Boeing would need to lay off most of their staff. Then naval shipbuilders could do the same. Then consider the numbers no longer entitled to government/military healthcare. The overall impact of this would be to eliminate the deficit overnight.
Though what of the financial consequences? All those people laid off would need unemployment benefit to cope. Also they would have no health care. Then they could lose their homes. So the impact of that is to lower the value of homes in your neighbourhood. So event if the cuts do not effect you they will affect everyone around you and that will lower your quality of life because there would be many more foreclosed homes making you poorer overnight. The issue is that the public need to realise that governments can run deficits without any problems. In fact the US economy has barely run a surplus in its entire history since independence.
I do agree with you that the economy is heading for low employment, asset bubble though will the majority of people act like turkeys and vote for Christmas again.