Yves here. This is the second and final post in a series by Michael Hoexter; you can find Part 1 here. I though this one works well as a stand-alone piece and also is accessible to generalist audiences (as in NC readers might find it useful to send it on in part or in whole to colleagues).
Bowles Would Have Us Repeat the Errors of the Euro-Zone
That Bowles is currently lionized in Washington policy circles is particularly striking given the slow-motion economic catastrophe occurring within the Euro-Zone. Bowles’s ignorance or willful disregard of macroeconomic accounting processes and insistence that the US government institute laws that reflect that ignorance, repeats the errors made by the Euro-Zone countries when they signed the Maastricht Treaty in 1992. With a more than adequate understanding of macroeconomic accounting, Wynne Godley predicted in 1992 that the Euro Zone would not withstand a substantial financial crisis because of the budgetary restrictions required by the Treaty. The 3% limits in budget deficits to GDP mandated by the treaty indicated to Godley already at the formation of the Euro-Zone that its founders were woefully ignorant of the stabilizing, supporting and leadership role of government in the economy, especially during times of crisis.
Godley’s fears have been realized as the Euro-Zone and perhaps the European Union itself will either need to break up or need to be entirely re-formed to enable national governments or a unified European government to engage in enough deficit spending to allow countries with trade deficits within the zone to achieve something like full employment. Alternatively they would need to succeed and control their own currencies once again.
Bowles’ and Peterson’s enthusiasm for balanced budgets and reducing public debt are the same type of error that the founders of the European Union made 20 years ago, which with thoughtful engagement with Keynesian macroeconomics the Euro-Zone founders could have avoided at that time. Why would the United States repeat this error, not only with the availability of a correct understanding of macroeconomic accounting in theory but also with the unfolding current real world object lesson in the folly of disregarding macroeconomic monetary rules and institutions? Surely Bowles and Peterson are betting on gross impairments in analytic ability as well as simple reading comprehension in Washington.
Bowles or Keynes: The Choice is Yours
Bowles and his ally Peterson are setting themselves up as a new school of macroeconomics without having published papers, produced supporting empirical analyses or substantial works of macroeconomic theory. They are peddling a macroeconomic accounting method that directly contradicts the work of Keynes, the founder of macroeconomics as a discipline. Keynes’s view that government needs to manage complex economies via both fiscal and monetary policy is not only the consensus view of a vast number of academic economists but is simply the way the government policymakers have consciously and non-consciously structured their policies in the last 80 years. Keynes’s work is not a unified whole, sometimes self-contradictory, and is unfinished but much of what he wrote has been borne out by the performance of the economies of the world since the 1930’s. While there is conflict among Keynesians and there is no pure Keynesianism, anti-Keynesian economics has, in most cases, failed miserably and spectacularly.
While there is much ambivalence about and even hatred towards Keynes, especially on the political Right, the invective thrown at him has not stuck or presented policymakers with an alternative to being guided by his work or the work of his successors. Since the economic crisis of 2007-2008, the expectations set by Keynesian theory have been borne out by the economic facts, with countries that engaged in fiscal stimulus doing better than ones that did not. Furthermore, the countries that have engaged in austerity as counseled by people like Peterson and Bowles have done poorly. Bowles in the abovementioned interview tried to dissociate himself from the wreck that is the current British economy by claiming that they had engaged in austerity too abruptly and too soon. The question of why countries should engage in austerity at all remains an unquestioned assumption.
The economics profession has many subdivisions of Keynesianism or post-Keynesianism and this, I believe, has helped leave an opening for economic charlatans like Bowles and Peterson to insert themselves into the economic policy discussion and inject simple bromides about using business accounting rules into the macroeconomic accounting procedures of government. It has been made to seem by many economists that they represent a range of “flavors” of economics from which policymakers can choose at their own discretion: economists (as with many other social scientists) have not had the courage of their convictions or data to make clear diagnoses and predictions. However this lack of clarity and conviction doesn’t mean that all economic data or analyses are to be dismissed. The complete dismissal of the concept of there being a macroeconomics distinct from business and household accounting assumes that 80 years of economic policy wisdom and data can be dispensed with.
Politicians, most particularly President Obama, are still in the end responsible for choosing to listen to and to lionizing Bowles and Peterson as economic or moral authorities. Following the financial news through any major North American or European newspaper would lead all but the most close-minded ideologues to conclude that Bowles and Peterson’s austerity is a damaging economic policy strategy.
The Company He Keeps
While it is sometimes unfair to judge others by with whom they associate, Bowles’s partner in Obama’s Deficit Commission, former Wyoming Senator Alan Simpson, betrays by his sometimes loony public presentation the deep unseriousness of the deficit cutting campaign. Simpson is an intemperate and irascible man who seems to have unlimited scorn for ordinary Americans. Additionally, he is prone to bleating out unsubstantiated ideologically-charged statements about the state of the US government’s fiscal household. Simpson has shown a loathing for the welfare state which, contrary to his own ideology, has had a role in enabling the period of America’s greatest shared prosperity, 1945-1980: this loathing seems to originate from within the confines of his own psyche. He acts as if he is on a long drawn-out audition to play Scrooge in the Christmas Carol.
The presence of Simpson at the head of Obama’s Deficit Commission gives the lie to both the seriousness of the commission as well as the broader Obama-ian goal of bipartisanship as an end in itself. Simpson acts out the “id” of the Republican Party in its attitudes towards many ordinary Americans’ use of government, a hatred that also might be called self-hatred, as many Republican leaning constituencies are dependent upon government spending as much or more than Democratic constituencies. The bitter emotionality of this set of core beliefs does not heed economic data or for that matter believe in a mind-independent world outside the self. Indulgence in self-aggrandizing or political patron-aggrandizing fantasies about how the economy works is entirely commonplace in this milieu, economic reality “be damned”.
The Beltway press and Democrats lately have indulged this Republican denial of reality, with the latter, in the form of Obama’s desperate bipartisanship, reinforcing this denial by providing “across the aisle” support, the highest form of endorsement. In the end, Democrats and the Beltway press are going to have to decide whether they like truth or they like bipartisanship better, as the latter does not yield, in most cases, a truer view of the world as it now is, particularly a world caught in a debt-deflation/depression.
Bowles Favors Bond-Market Sovereignty over National Sovereignty
Bowles may think of himself as an American patriot and he does represent a slice of American opinion that has become unfortunately all too common, especially with the increasing dominance of the finance, insurance and real estate industries. Bowles expresses in his opinions the common views of neoliberal politicians that government’s finances should be tuned to pleasing the bond markets, a collection of international investors who are looking for safe havens for their savings. Despite the fact that currently bond markets are “well-pleased” with the US government, Bowles, like many of his ilk, threatens, if his advice is not heeded, that bond markets will turn against the US causing interest rates and finance costs to rise.
There are two fallacies upon which Bowles’s threat rests:
1) bond markets seem to prefer to buy the debt of governments like the US or Japan that have a sovereign currency and, additionally, owes and issues debt within its own currency. By contrast they have been avoiding the debt of governments that do not control their own currency (the Euro-Zone countries) and that furthermore have in fact been trying to follow the advice of people like Bowles that they should balance their budgets: this has led to decreased economic performance and made them less attractive investment prospects for bond investors. Thus if public policy should be designed according to what pleases bond markets, it shouldn’t be designed according to Bowles’s (and others’) stylized bond-market boogieman that loves governments that balance their budgets
2) Bond markets are not the primary constituency of national governments, let alone governments that control their own currencies. Monetarily sovereign governments need to spend into their economies according to their interpretation of the public purpose, which indicates a primary loyalty to the citizenry and not to bondholders of either domestic or foreign origin. Collapsing the policy space of government to, supposedly run after the threats of a future credit downgrade, leads to self-defeating efforts by governments and an infinite regress. The credit downgrades of the US government by Moody’s whether they were justified or not, followed upon the games played by Republican lawmakers and entertained too seriously by the Obama Administration. Both sides in the debt limit standoff were inspired by budget balancing mania of the type that Bowles counsels. Government policy must be primarily concerned with the welfare of the public and the welfare of the real national economy with bond issue as a byproduct of those efforts and concerns.
Despite the reinforcement from others that Bowles receives that his opinions are coherent and serious, the incoherence of Bowles’s position should now be pretty obvious to readers: becoming intimidated by his threats of future bond market displeasure leads in many cases to bad public policy and to, perhaps, more of that displeasure, if that is of any importance.
Choosing to put Bowles in the position of Treasury Secretary would then be an indication that the Obama Administration does not recognize its own power and the sovereignty of the US government to make fiscal decisions based primarily on national interest and not on the pecuniary interests of bond investors. To voluntarily tether itself more firmly to phantom ideas about the wishes of wealthy investors would lead to untold and unnecessary suffering.
Spreading Terror in the Halls of Power
The title of this piece recalls the Presidential Daily Brief of August 6, 2001, when President Bush was informed of Bin Laden’s determination to strike within the US. The primary weapon of Bin Laden was terror, which he used to shape US public policy in ways that did much more harm than good. Since 9/11, we now live in a country that is less free and that is scarred not only by the attacks and attempted attacks of Islamic extremist terrorists but by governmental and popular over-reaction to those threats. Bin Laden was also possessed of a grim, methodical determination to do harm and planned his attacks with “malice aforethought”.
Similarly Bowles and Peterson have gained power by spreading fear among lawmakers of a phantom menace, the supposed punishment by bond markets of the US government if it were spend money to stimulate and maintain a growing, and, we hope eventually, an environmentally more sustainable economy. They hope to intimidate lawmakers, perhaps with the passive encouragement of President Obama, to allow them to re-write the rules of macroeconomic accounting, the budgeting process of government. The incoherence and baselessness of their message are in a way aids to their efforts to terrorize lawmakers: it is easier to spread fear if one’s victims do not give themselves permission to think rationally. The “Catch 22,” in which efforts to “please” bond markets displease them, stage-managed by Bowles and Peterson would then be intentional.
Their grim determination and stealthy manner with which they have approached this effort, recalls Bin Laden’s efforts and methodology. They are, in sum, deficit terrorists, who seek to close down government’s freedom of movement to address the real concerns of ordinary people and of the real economy. They are doing untold damage, whether intentional or not, and it is the responsibility of our lawmakers to remove them from positions of influence and it is the responsibility of the press to expose their incompetence to comment seriously on the budgeting process of the US federal government.