Public Briefing: Erskine Bowles Determined to Reduce Private Sector Income, Stifle US Economy

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).

Michael Hoexter is a policy analyst and marketing consultant on green issues, climate change, clean and renewable energy, and energy efficiency. Originally published at New Economic Perspectives.

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.

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  1. jake chase

    Bond markets are primarily vehicles for speculation. An overwhelming majority of bond investors are banks. An end run around these phantom bond vigelantes requires only that the Government spend without borrowing money, something it should begin doing as quickly as possible. It is ridculous to worry about the needs of superfluous capital. Keynes understood all this eighty years ago and only propaganda interferes with efforts to explain it today.

    1. MarkS

      The real issue here is about money creation and juicing up the economy. Since its no longer feasible to over-leverage the banking industry, we’ve come to the fork in the road where we either inflate the hell out of the currency- taxing savings, OR we let the walking dead go bankrupt, freeing up assets for the young and energetic. We all know what the oligarchy wants: Prevent liquidation, protect my assets, screw the young…
      I believe that Michael Hoexter is unfairly demonizing Erskin Bowles. The two eternal economic issues in America are about competent administration of the banking industry to prevent excessive leverage, and the distribution of profits and assets to support a broad and robust economy. Sadly we have had poor performance on both counts for the last 40 years. Blowing up another bubble via government debt is not viable in the long run. I don’t believe that Jake Chase can provide a single example where such a national policy has been successful for more than about 25 years without serious economic damage. Lord knows, the US will be suffering for several decades to resolve the transgressions of the past… All of course, to keep the aged (the wealthy) comfortable.

      1. banger

        The pro-Keynesian argument, at this time, is not to create gov’t spending to fuel a bubble but to make public investment that will pay dividends as suggested by H. Woody Brock. This is the argument everyone deliberately misses even Obama. If I spend $1,000 to buy a tool that will turn around and give me a return of $1,500 it is better than if I buy a $1,000 worth of gunpowder to blow up my annoying neighbor’s house. Spending is not good in itself but spending on a portfolio of investments some speculative (like scientific research), some more pragmatic and conservative (infrastructure) makes perfect sense in times like this. But the austerity people aren’t interested in economic well-being, they have a political agenda. Austerity will create a dramatic shift in political power throughout the world towards the ruling elites who have enjoyed, in this country in particular, ever expanding benefits and privileges (they are largely immune to criminal prosecution of any kind) without a worry that economic stagnation will ruin their party (I can explain why but it lies beyond the scope of this comment).

        1. Carol Sterritt

          Yep, if the austerity crowd really wanted austerity, they would immediately stop the War on Some Drugs. How does it help the people of rural California, where the employment rate is still fifteen percent, to have the Gestapo raiding homes, arresting people, and filling up the prisons (Which are already crowded to overflow inside the state.)

          If the austerity crowd really wanted to put the brakes on spending, they would admit that Nine Eleven was something the Elite concocted, and that we don’t need to take our shoes off at the airports, or have scanners viewing our underwear. A gazillion bucks would be saved outright, were they to admit that Nine Eleven was nothing more than a ruse to put the nation into lock down mode.

        2. readerOfTeaLeaves

          But the austerity people aren’t interested in economic well-being, they have a political agenda. Austerity will create a dramatic shift in political power throughout the world towards the ruling elites who have enjoyed, in this country in particular, ever expanding benefits and privileges

          Great point; austerity is more a power grab than a rational economic policy.
          To bad too few in the media seem to grasp this fact.

          The Deficit Bullies have become tiresome.
          I’ve begun to wonder what they’d try to use to control the narrative, and the policy process, if they didn’t have “The Deficit” to use as their bludgeon. They’d be ideologically naked without it.

          They increasingly look like Deficit Thugs, or to use an old Clockwork Orange analogy, “Deficit Droogs”.

    2. banger

      The austerity mavens are not, in my view, motivated by a desire to fix the economic system in order to create a more prosperous future. They believe that the world economic system is not, in the long run, sustainable because of climate change, resource shortages and so on. This means that the oligarchs have agreed consciously and unconsciously that their interest lies in preserving the political status-quo and emphasizing control and security. By bringing in austerity now they are able to freeze political power and control things before the people wise up and rebel, which they eventually would in one way or another as the Arab Spring showed. Austerity will make the U.S. and Euro public even more docile than they are by keeping privation and poverty in front of their faces at all times. In this situation workers will be desperate for work and will do whatever they have to keep their work even if it means cutting their neighbor’s throat. I believe we are seeing this happen–particularly in the U.S. where the prime driver for people voting Republican is that they (the Republicans) provide an enemy called “them” or “those people” in all its guises as a scapegoat.

  2. Gil Gamesh

    Good point. Austerians are terrorists, and should be removed (from office, or from the country, or better, the planet). Just kidding. 1st Amendment la de da. So, office.

    It is truly stunning, and quite sad, that US elites comprising the investor class, real leeches on society, will continue to implement their pernicious privatization, anti-labor, anti-democratic programs, all to the detriment and misery of the vast majority of Americans. We are Greece, after all. And with a sovereign currency. Pathetic.

    1. Carol Sterritt

      If I were made King of the USA (Actually Queen) I would work very hard to have a return, with penalties of the seven trillion bucks the Big Financial Firms plundered via Bernanke’s giveaways.

      I would also work very hard to restore the ability of people to grow hemp. And to grow marijuana. Everyone could be fully employed if this were to happen.

      A guy who lived on the Lakota reservation at Pine Ridge, he had a small hemp farm. He signed off on contracts with a Canadian business. He started to hire the local Rez residents to help him. This was a big “win” for the people in that area, which happens to be the poorest “per capita” area in the USA. But the Bush government, and then the Obama government, allowed him to be arrested for growing hemp! He had to cease and desist his business and its strategies of keeping the locals employed. It took all his money to stay out of jail.

  3. Hugh

    Obama has been anything but passive. He is a true believer in balanced budgets. Bowles was much more responsible than the nearly senile Simpson for the Cat Food Commission chairmen’s recommendations. And it was Obama who put the Cat Food Commission together by Executive Order and made Bowles and Simpson its chairmen.

    Similarly, this is not an error. This is a major kleptocratic initiative to loot the safety net and the middle class.

    1. Carol Sterritt

      You are very correct in every word you type. Thank you. The USA is indeed a kleptocracy. But most people I know are all, “But as a woman, I have to vote for Obama so women can have choice. And I just don’t understand economic matters.”

    2. CB

      Obama is a neoliberal and, you’re right, an economic moron. He does have a certain talent for office politics.

      1. readerOfTeaLeaves

        So are you suggesting that Romney, aka Mr Tax Haven, is some kind of economic genius?

        (Rhetorical question.)

        1. CB

          Did I? I don’t see that I mentioned Romney:

          “Obama is a neoliberal and, you’re right, an economic moron. He does have a certain talent for office politics.”

          Where in that did I mention Romney?

  4. TK21

    “perhaps with the passive encouragement of President Obama”

    Signing an executive order establishing a deficit commission headed by Bowles and Simpson is a “passive” act of “encouragement”?

  5. Tom

    Let the right person, or the right number of persons, suggest a plausible, but utterly impossible idea, and shortly millions of people will acclaim its truth.
    At the present moment there is a popular obsession that everybody is dishonest, particularly those holding public office. To be an office holder, runs the popular belief, is to be a tax-eater, a tax-eater is a politician, and a politician is a grafter.
    Unfortunately some men are dishonest, and some of them get into office, where they betray the interest of the public. They should be brought to light as fast as possible, and summarily punished. But the fact of individual dishonesty should not be made an excuse for impeaching the human race.
    The greatest enemy of good government is not knavery, but ignorance. Where the knave filches from us one dollar, the fool costs us a thousand. No law should be ignored by the executive, nor misinterpreted or modified by the judiciary; it should be either enforced or repealed.
    But to honestly enforce a law based upon a false principle will result not in good but harm. Honesty and efficiency in public office are desirable in and of themselves; but until directed by intelligence and understanding they can accomplish little.
    Party chiefs promise, if elected by the people, to “drive the rascals out”. Then what? A dishonest pilot at the wheel is safer for the ship than an honest man who knows not the channel.
    The “letting down”, or “slowing up,” of business, the closing of banks. The growing unemployment, the high cost of living are not due to official grafting, scandalous though it has been, but to our unsound revenue system.
    The first man who asked Congress for a special privilege, that is, the first man who confessed to our law making body that he could not conduct his affairs unless a special law was passed to protect him from the competition of another man who could operate without such protection, set in motion an evil train of effects.
    Every man’s product is a raw material to the man who buys it. If government interferes with private business to the extent of enabling one man to charge more than the market rate for his product, it to that extent handicaps the man who buys that product and sooner or later the victim seeks similar relief from government.
    The second special privilege lays a burden upon other consumers, who in turn seek relief. When the last man who commands sufficient political influence to secure a privilege has been favored, the first privilege-seeker finds that his raw materials have been raised in price, and in order that he may conduct his business at a profit he must have a greater privilege. When the second round of privileges has been distributed, the first man applies for a third; and so on without end.
    If that were all of the story, if privileges could be distributed forever, it might be endured, except for two things. First, there are large numbers of people to whom these privileges are useless. Second, our higher scale of prices handicaps us in outside markets.
    The result of this special privilege policy was inevitable from the beginning. Only the country’s exceptional resources, and the remarkable era of science and invention through which we are passing have enabled us to carry the burden this long.
    The answer to our dilemma is not to be found in granting more special privileges, but in repealing as rapidly as may be those already in force. Every privilege taken from one man cheapens the raw materials of others. When all special laws have been repealed, all citizens will stand on a footing of equality, each engaged in the business for which he is best fitted.
    Another blast from the past- article published in 1924 unknown

    1. Gerard Pierce

      “At the present moment there is a popular obsession that everybody is dishonest, particularly those holding public office.”

      When someone is elected to Congress and one or two terms later suddenly joins the ranks of the millionaires, it’s reasonable to conclude that they did not pile up that money by being frugal with their government paycheck.

      Read Gore Vidal’s historical novel “1876”. One hundred years after the revolution, the cost of a West Point appointment was about $5000.

      At that time, the railroads owned governments at all levels, and British ner-do-well remittance men owned most of the cattle industry.

      I still haven’t been able to figure out how we got rid of the crooks of that time, but I would make a guess that the “panics” (depressions in today’s terminology) drove many of the crooks bankrupt and woke up the common people.

      The Big Freeze-up of 1887 ran the Brits out of the cattle industry. After 90% of the cows froze and died, the Brits had enough and moved on to other economic opportunities.

      And by the way, the founding fathers are supposed to have believed that everyone was dishonest. That was the logic behind the balance of power in government. One set of crooks was supposed to keep another set of crooks from getting too greedy.

      Apparently it never occurred to the founding fathers that the crooks would all get together to skin the average man.

      1. Paul P

        Until 60 Minutes exposed that congressmembers were exempt from inside trading–and were making inside trades–mum was the word in Congress. Congress had an opportunity when it passed the Stock Act to pass a permanent ban on ex-members lobbing the Congress. No, No, No. Can’t do that. Vote the right way and you get a high paid lobby job when you leave office. That’s why there are so many lobbists.

        Hedge funds, knowing the value of knowledge, pay ex-Congressional staffers to troll Congress in search of inside information. It’s all a party on the Hill.

  6. Chauncey Gardiner

    Thank you for a very timely post. On Yahoo Finance “Breakout” this morning, we were treated to this: …”Big Banks Blast Washington: Fix the Fiscal Cliff Now!
    The Financial Services Forum sent a letter to the White House and Congress warning we face grave consequences if the fiscal cliff is not addressed.”…

    The chutzpah of these people is really quite incredible. After receiving literally trillions of dollars from the American people to bail them out of their incredibly poor underwriting practices, massive frauds and speculation, we are now evidently being treated to their latest round of extortion threats. IMO, this is all just part and parcel of the contemplated next phase of a carefully planned and orchestrated long-term scheme to concentrate wealth and disenfranchise the vast majority of people of this country.

    The plug should have been pulled on these people long ago, and the criminals incarcerated.

    1. Ms G

      An appropriate countermove at this point would be a letter to Congress and the President explaining that “fiscal cliff” is a klepto-myth, and the various other aspects of the Simpson Bowles gutting plan that involve Cat Food for the 99%.

      Any potential interest at OWS Alt Banking Group. I’ll be happy to help.

  7. Carol Sterritt

    I don’t particularly care for either Bowles or Keynes. The fact of the matter, much of the land mass of the USA is perfectly suited for growing hemp and/or marijuana. My neighborhood is a hot bed of marijuana growing. Through this industry, the state and local governments were receiving vast amunts of revenue. It is very true that Obama – especially through his appointments — is a supporter of Bowles. Remember how Ahnold Schwartzennegger asked Geithner for a damn LOAN of 20 billions of dollars, so the state of California could help its communities keep teachers, fire fighters, project mgrs, social workers, auditors, etc working. Geithner said, “No, that would hurt the government by adding to the deficit.” Then the government went on to spend some 255 billions of Dollars over the next 13 months on things like “modernizing the military” and giving weapons systems to the UAE states and to Israal. Mr Geithner, do you really think that War isn’t hurting our economy?

    But the people of California had a wild card. They had legalized medical marijuana and this new industry started to help everyone. It employed people that normally are not employed, as their marijuana use keeps them from being hired. It allowed people to grow marijuana on their side yard and back yard plots of land. But Obama sent in his troops. Why don’t people wake up and realize how hideous this is!

    1. SayWhat?


      I agree with you and am with you all the way, but you DO have a rather overt pro-weed agenda going on there, don’t ya? Just sayin’. Cheers, and more power, but I doubt that we’ll see it in our lifetimes for sure. Not that that doesn’t make it a worthwhile cause anyway.

      1. Susan the other

        Legalize recreational drugs. Legalize them. Standardize them. Sell them. Tax them. Most people don’t realize that eating is drugging. Foods are drugs for all intents and purposes. It stands to reason that drugs are food. Especially since our food supply is now so poisonous. Drugs are better than food.

  8. Susan the other

    The intersections are interesting. The military is black-budgeted by big banks and corporations closely connected to big banks. So where does the national interest lie? In destroying small capital, of course. And the nexus between macro economics and big private credit is the small private debt holders’ burden. When it is high we are deep shit just like the EU today because people must tighten an already tight belt. So the public (as in public interest as in national interest), which is the accumulation of all small private interests (ergo macro), budget must always conflict with the private (big) banksters. So the solution? First, redefine big “private” finance as political entities – or as they are gingerly saying: systemically important. Gag me please.

    The sovereign goes into debt in the national interest (that’s all the little people in case you didn’t know) because that debt can be endured over a long period of time. Small private debt (neither fish nor fowl, today’s homeowners et. al.) go under fast without any laws to protect them. Which is nothing less than a stealth collapse of the entire economy. Fine with me. It is totally rotten.

    No amount of damages imposed on today’s “financiers” could ever pay for destroying an entire generation. Shoot the politicians and the banksters in the dark of night and bury them in a mass, unmarked, grave.

    The EU nations going under are like small private debtors. They have no sovereignty. If the Maastrict treaty wanted to be valid it would have codified debt stops. So why didn’t it? The whole thing is a joke.

    The best comic relief we can hope for is Obama or Romney saying, I was just kidding. Just kidding.

  9. BagHolder

    > 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.

    GDP’s of nations grew fine under a gold standard, thank you.
    And financial crises were actually less frequent under a gold standard than under fiat currencies.

    In fact the evidence is overwhelming that when governments manage complex economies, it is detrimental to growth. Hoexter and mainstream economists are woefully ignorant of history.

    1. The Rage

      No, it did not. Most of that was industrial revolution created among some gold inflation.

      Once the gold inflation ended along with the industrial revolution, the pathway to the global great contraction was set. The Gold Standard was done. It couldn’t keep up with demand anymore and its “liquidation” was destroying capitalism.

      The Gold Standard was a Rothschilds London Investment houses scam. It also created far to much inequality in the system seen by the poor GDP per capita. Bankers would love going back to it now. They would just bankrupt their current organizations, rebuild under the gold standard and make more “real” profit than ever. They would never admit this, because it would destroy them. Capital has figured out they can pillage without it.

      The US never has liked the Gold Standard. Jefferson hated it. Adam Smith hated it as well from overseas.

    2. Yves Smith Post author

      You are completely wrong re both growth and the frequency of crises under the gold standard (1870-the early 1930s).

      1. We had the Long Depression and the Great Depression, and a lot of “panics”, far more frequent than in the post GD era

      2. Growth was not so hot despite the spread of transformative technologies (electricity and the internal combustion engine).

  10. JGordon

    I have noticed time and again that NC tends to post articles that fall into the false choice of either Austerity or Keynes. But in fact both policy agendas are equally destructive to economies, albeit in different ways.

    Anyway, “System D”:

    Most of the people in the world aren’t even employed by the official economy that NC and other mainstream economics outlets are always going on about. Think about that: you all are obsessing over a minority (or at best parity) of the economic activity in the world as if the rest of it doesn’t even exist. Kind of puts things in perspective, doesn’t it?

    1. YankeeFrank

      I call bull on both your points. Number one, Keynesian stimulus, especially if we don’t sell debt when printing the money, is crucial and constructive at a time of recession/depression. We print money and put it to use building things we need, employing people and stoking demand in the economy. If we don’t sell debt to “offset” that spending there is NO downside.

      Secondly, yes the black/grey markets are huge. But they are much larger outside of western economies than they are within. The vast majority of the American people live within the “legit” economy, all of their income, savings and spending is done within that system, and they pay taxes on that legitimate income. So to pretend this legit economy is of secondary, or primary but only just, importance is false. These are monumentally important issues, and austerity as the opposite of fiscal stimulus — these ARE the alternatives. To pretend there are other options we just haven’t discovered yet, or whatever, is to make a wish and pray, which is not an answer to such an important problem. The lack of seriousness, and the glibness of your assertions remind me of the silly and irrational statements regularly made by that nasty piece of work Alan Simpson.

      1. JGordon

        I call bull on your call of bull. Here you are in America with 1 trillion (with a t) dollar deficits every goddamned year for the past 4 years, and yet when I look around me the lives of the people are see are many times worse than they were 4 years ago.

        You precious Keynsianism is a complete failure. What’s more, I am absolutely certain that if we’d had austerity for these past 4 years instead, the lives of the people I know would be just as miserable. In other words, you are stuck in a false paradigm, and you don’t even have the ability to see outside of it. I’ve given you some clues, but you’ve ignored them. So you’re just going to have to live with the consequences.

        1. Aquifer

          So, is the problem that gov’t spent a lot of money or that it was spent in the wrong places – on war and WS …

    2. bluntobj


      This statement:

      “anti-Keynesian economics has, in most cases, failed miserably and spectacularly.”

      What a convenient way to present a false choice, that there are no other ways. Which economics? What cases? What failures?

      Also this:

      “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.”

      The same economists and government policymakers that have created the country we live in today, stripped of value and productivity, living under the control of politicians and plutocrats (often the same entity), and rapidly sliding down a bottomless hole of debt and devaluation?

      Limited choice plus “everyone does it!” Yay!

      Keynesianism is re-arranging the deck chairs, as Austerity types play their insturments. Neither of these activites matter, because they are all still on the Titanic.

      Destruction must occur, and there aren’t enough lifeboats. Government has told the poor folks in steerage that they will be ok, stay belowdecks, and here’s some food stamps / disability / social security payments. Guess who runs then for the lifeboats?

      My colorful little analogy is quite apropo for what is currently happening. Perhaps our time might be better spent personally opting out from the Keynesian/Austerity madness? In whatever form a person can, of course, wether that be refusing to invest in rigged markets, buying PM’s, tools, building skills, building community, growing food, etc. In short, it’s hard work to opt-out. It’s much easier to think that you’ll be bailed out, that the transfer payment check will always come, that politicians care about you.

      Solutions start with the personal; energies expended to change the plutocrat’s positions are not productive.

      1. readerOfTeaLeaves

        Agree that some of the engagement with the deficit bullies is using one’s time and energy unwisely.

        But someone has to do it.

        However, a good use of your time and energy is here at NC on the posts, and also probably now at, which given this post is the kind of catalyst for new economic paradigms that is urgently needed.

        With respect to the Deficit Bullies: they are caught in a Doom Loop perpetuated by fear and grandiosity.

        The rest of us don’t need to get caught up in that trap.
        But to escape it, we need new economic thinking.

  11. Malmo

    The stakes here are as serious as they can be. I’m am just so diheartened to hear Obama parrot much of the Bowle’s commission’s talking points. I’m not even sure a strict Keynesian approach is good enough at this point in time, but it will at least buy some time and stop the bleeding for tens of millions of dear souls.

    I like Michael Hudson’s approach here. I think his is the only sustaniable remedy that has a realsitic chance in our complex economic world. It falls far short of some of the apocolyptic memes various commentators are fronting for (Karl Denninger’s ridiculous stop all deficit spending meme for instance), which to my mind is a good thing.

    1. The Rage

      Denninger is the definition of a rentier.

      He probably has all his investments forward for contraction and has for awhile. Those investments are struggling. If the economy goes above trend growth for awhile, Karl is wiped out for good.

      Stopping all deficit spending now will just trigger another recession. Frankly, I think a government pullback and allowing businesses to completely run things would be good for rebuilding the labor movement. It will provide them clear cut data who is the “problem”. Then it is 1895 and strikes, riots and demonstrations all over the place. The final confrontation.

      I doubt Karl wants that either, but he is willing to risk it. I am willing to risk labor not turning into another nazism………which could happen in the wrong hands.

  12. The Rage

    You also have to remember, Keynes goes far beyond deficit spending, matter of fact, that was Keynes small point.

    Keynes key point is wage inflation push model that died in the 70’s.

    In this regard, the Austrians got what they wanted in the late 70’s even though the neo-classical rejected their deflation games.

    Not working out for either.

    1. Yves Smith Post author

      Keynesians are actually neoclassical economists. I discuss that at length in ECONNED. I’m a little bothered that the post is so kind to them, they are actually a big part of the problem.

      “Keynesians” (the followers of Paul Samuelson) were most assuredly not in conformity with a lot of Keynes’ doctrines. Keynes disputed the treatment of the first, John Hicks, at the time (Samuelson basically followed Hicks’ effort to reconcile Keynes with neoclassical economics, when Keynes was fundamentally opposed to it). Hicks later (much later) recanted what he had done.

      Keynes would NEVER have approved of what produced the 1970s inflation, running deficits when the economy was strong. That was Johnson’s call, because he was unwilling to raise taxes to fund the Vietnam war, which was already plenty unpopular.

      1. Aquifer

        Could I ask for a point of clarification, or as i would refer to it in debate parlance, a “definition of terms” ….

        If “Keynesians” aren’t really followers of Keynes but neoclassical economists of the Samuelson tribe, then what does one call real followers of Keynes – and how do us lay folk know who the author of stuff like this is referring to when they talk about “Keynesians”?

        I would rally like to know because i am trying to post about this locally in the e version of my local paper in layman’s terms (which are all i can muster) and it would help to know if i am talking out of the right orifice …

      2. Michael Hoexter

        I was making a simplified argument here that I think is true: Bowles and Peterson want to ignore and contradict Keynes without understanding him. There are economists who also misunderstand or simplify Keynes but they don’t make the mistake of ignoring him. In the process of misinterpreting Keynes, some of them, like Krugman, actually pay attention to aspects of economic reality. Bowles and Peterson don’t….

      3. Malmo

        Sorry about the confusion here. When I say “Keynesians” I’m meaning those who strictly adhere to what Keynes actually taught himself and not neo-Keynesian nonsense. Like Adam Smith, Keynes real message has been distorted by too many folks with questionable agendas.

      4. charles 2

        Indeed Yves, but that begs the question “what is a strong economy” ? When one believes that the perpetual growth path of the economy is 2.5% per year (see for instance ), it means that growth rates associated to “strong” will be around 4%. The problem is that the US barely touched that level in the last 20 years, and touched it only with deficit spending ! It is a Catch 22. It is this inflated level of growth expectation that prevents the set-up of a contracyclic policy.

  13. Malmo

    Stopping all deficit spending now will trigger a catastrophic DEPRESSION. It has to be the silliest proposal I’ve heard from anyone. WE need some form of debt forgiveness on the consumer end (the 99 percenters). Thus we need major structural changes to how we as an econmoy operate going forward. But first things first. The Simpson’s and Bowles’ of the world need to be discredited and marginalized in whatever way possible. This article is a start. Debt forgiveness needs to follow closely behind.

  14. Jim

    “…anti-Keynesian economics has, in most cases, failed miserably and spectacularly.’

    But if one considers for a moment the cultural message of Keynesian thinking it is possible to hypothesize the likelihood that in the future, Keynesian economics will also fail miserably and spectacularly—because in its labeling of thriftiness as a pathology economically–it appears to be endorsing an absence of limits—culturally.

    Assume for a moment that culture shapes the economy—and that the purpose of any culture is to maintain a distance between desire and its object.

    Keynes appeared to believe that Victorian culture and the Puritan instinct, in particular, was in large part, responsible for the propensity to save. Keynes seemed to intuitively argue that thriftiness was largely a psychological incapacity to enjoy the present. Consequently Keynes appeared quite critical of what may be the inevitable role of culture—to contain certain human desires.

    Flash forward 80 years and we now seem to be living in a culture in which there are minimal limits on human desire. But we are simultaneously experiencing another systemic economic/financial crisis which may be a powerful indication of a still unresolved and accelerating cultural crisis as well.

    If that cultural crisis centers around the tendency of our most powerful private and public institutions to endorse a cultural ethic which places a minimal distance between human desire and its object then Keynesian economic thinking may be profound endorsement of the cultural status quo.

    1. Aquifer

      I think I see(?) where you are going with this and i tend to agree in the sense that if our hedonistic culture is screwing us up and Keynes as you read him tends to foster such behavior economically – then maybe we oughta rethink this – is that what you are saying?

      So, rethinking a bit – it seems to me that if we incorporate, i mean really incorporate, as in infuse, the idea of ecological sustainability into our thinking such that our economy is rightfully considered, and actually treated as, a subset of and subordinate to, the reality of the planet, could we not still recognize the value of Keynes concept that the best treatment for a starving economy is a good meal and not a fast? Or is that just too silly a metaphor?

  15. The Dork of Cork

    Very negative french transport data (Q2) published yesterday.

    Even Paris Basin RATP (metro , local city rail , tramways , bus) is showing declines in Q2

    A -1.3 % fall of passengers in Q2

    French rail also shows a decline of -0.4 %

    In a energy crisis this should not happen……thats a monetary breakdown.

    Time to go back to the Franc me thinks.

  16. The Dork of Cork

    Sorry -2.3 % in Paris
    – 1.3 % countrywide.

    Its over – even Paris cannot use its transport capital stock to the max now.
    If they don’t credit peoples accounts with base money its over – all the human and material capital stock will not so slowly be written off.

  17. SayWhat?

    WHAT(!) in the world is an Erskine Bowles ANYWAY, and WHY in the world does he matter? Old men go senile and die (QUICKLY if we’re all lucky), that’s what they do. Maybe THIS ONE should just follow the plan?

    1. Malmo

      Bowles was a leftover from the 1990’s DLC lost weekend. Why in god’s green earth he gets the air time he does is beyond me.

      1. different clue

        Because he and Simpson sell the concept of shrinking Social Security in order to allow the Bush’s Base class to keep all our SS Trust Fund PREpayments which we have been paying ever since 1983 . . . instead of having to disgorge their ill gotten tax cuts (our stolen SS Trust Fund money) and go back to Clinton or even Eisenhower tax rates going forward. That’s why he gets the airtime. Because the rich people who own and operate the Class Enemy Occupation FedRegime want to keep the taxmoney they stole and steal going forward. OUR taxmoney. Our PREpayed SS Trustfund money.

  18. Paul Tioxon

    Deficit terrorism is politics by other means, by any means, any means necessary. People are moved by their feelings and the appeal to the heart is what is most effective in the nation state. Who Mr. Hoexter hopes to move, isn’t the masses but the classes, it would seem by his title of policy analyst. Most specifically, a president in his 2nd term, unconstrained by donors, presumably Obama, is the target of this briefing. As a marketing consultant, Mr. Hoexter should be well aware that the easiest people to sell are the ones who have already been sold. President Obama has indulged in Keynesian stimulus to such a degree that even the hard hearted Obama denouncers here can see that it is a useful control in comparison to Eurozone austerity policies.

    In that case, selling Obama on what worked should be easier than repudiating what he actually did, to his credit and that of his advisers, in his first administration. Austerity would be not just a repudiation, but pointless exercise in unilateral action, since no republican would join in with any more than they have in voting in favor of stimulus money. The sequestration is a perfect example of republicans, once getting what they claimed to be at first a victory over run away federal spending, now want to completely reverse. What was once a mini Grand Bargain is now, a fiscal cliff.

    Mr. Hoexter is correct in that there is no policy alternative for republicans to point to, they can not even keep their own commitments to spending reduction. The problem with President Obama’s 2nd term may be not so much the wrong policy choice, but the correct dosage of what he knows will work. It was revealed that Larry Summers made a pre-emptive policy decision on the scale of the stimulus and only presented an attenuated budget of around $800B, about half of what should have been presented to the president for HIS, not Summers political decision making. Summers calculated that the real number, approx $1.8TRILLION, would be DOA in Congress and started briefing the president with much pretty to close with what we wound up with. The scale of spending and the policy were correct, but more should have been presented, to be chopped down in the negotiation process, if need be, not before it saw light of day outside of the West Wing.

    Obama needs to go back to the well that can’t run dry, but this time, he needs to draw enough for all of the thirsty, dehydrated and near dead citizens who can’t wait for bond markets or corporate CEOs to start hiring and investing again. It may be time to stop attacking Obama as a war criminal here, at NC, and nag him as an ally who seems to understand the efficacy of Keynesian stimulus spending as an economic stabilizer that he once used, and kept America from looking like the rioting streets of Europe.

  19. Jim

    Acquifer at 8:21P.M.:

    The progressive community has largely not thought through the nature of the cultural crisis our country is facing.

    Many on this blog seem to believe that simply mobilizing fiscal and monetary policy in a Post-Keynesian/MMT direction will solve our problems.

    But if Big Government is as corrupt as Big Capital than simply mobilizing the power of a corrupt State through fiat spending may not work economically and is,I believe, a potential catastrophe culturally.

    Keynes began suggesting his strategies of economic management at a time when the certainties of Victorian culture were breaking down because of the experience of World War I. He saw Depressions as the consequence of the sin of not spending enough and in this sense he was trying to remoralize capitalism.

    But 80 years later not simply Big Capital but also Big State is in crisis because of the institutional corruption that extends to both realms.

    My guess is that any contemporary remoralization will require a new doctrine of limits to be articulated culturally–a role which appears quite foreign to much progressive thinking.

    1. Another Gordon

      Absolutely right. Too many see the economy as a puppet which will dance to their tune if only they can pull the fiscal and monetary strings in Washington in the correct sequence.

      Markets work properly when – and only when – the incentives that drive them are aligned with socially useful outcomes. As long as they are not, as long as fraudclosure etc goes unpunished, markets will go to the dark side and the economy will falter.

  20. F Libertarians!

    “Bowles and Peterson are betting on gross impairments in analytic ability”

    there’s a lot of “gross impairments in analytical ability nowadays expecially among voters.

  21. different clue

    Mr. Hoexter seems to think that Bowles does not understand the damage that rigorously applied Bowlesian Economics would cause to the American body political-economic. I myself agree with the commenters upthread who say, in one way or another, that Bowles understands CLEARly and exACTly the damage which Bowlesian Economics would cause. I agree with those commenters that Bowles wants austerity policies/ austerity budgets preCISEly to engiNEER and creATE this damage deLIBerately and ON PURPOSE with Well Informed Malice Aforethought.

    The Bowlesian long game is the deliberate deep bankruptcy of America’s government(s) and society in order to place America under IMF supervision so as to Yeltsinize America. “Yeltzinise”? Yes. The Bowles plan is designed to bankrupt America just like the Soviet Union was bankrupted so as to sell off every single public asset worth buying to the private upper class who have trillions of dollars carefully hidden overseas. They will then “bring the money back home” to buy up sold-off public assets at pennies on the benjamin. The Bowles Plan is to bankrupt and Yeltsinize America into selling all the National Forests and National Parks, all the Interstate Highways, all the books in the Library of Congress, all the portraits in the National Gallery,and all the marble blocks in the Washington Monument to private buyers and collectors.

    1. different clue

      Oh, and . . . all the TVA dams and all the TVA water too. Along with all the dams on the Colorado and Columbia River Systems besides.

      1. Tom

        I do agree that privatization is the sole goal – By doing this – just buying what was already built and paid for by the people of this country. People will perceive that taxes went down and be blind to the fact that their expenses (the cost of living and doing business) went up.
        The plutocrats will no longer have to compare against the efficiencies of the government in major blocks of infrastructure, health care, retirement. They can just capture the profits of any american having to make a living, to eat, to shit. This process is already occurring under the mantra that Government (our government is we the people) is the problem (that every citizen is the problem?). How short our memories are.
        As Simon Patten, the first economics professor at the nation’s first business school (the Wharton School) explained, public infrastructure investment is a “fourth factor of production.” It takes its return not in the form of profits, but in the degree to which it lowers the economy’s cost of doing business and living. Public investment does not need to generate profits or pay high salaries, bonuses and stock options, or operate via offshore banking centers.
        Yes, we will get our rewards for this skewed and propagandized view.
        We had to struggle with the old enemies of peace–business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering.
        They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob.
        Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me–and I welcome their hatred.”
        Election eve speech at Madison Square Garden (October 31, 1936)
        Franklin Delano Roosevelt

        The overwhelming influence of great private monopolies in both legislatures and courts cannot continue if we are to maintain popular government. If we fail to regulate grants of public powers properly, invasion of private rights by those powers will be our proper and certain reward.

        1. different clue

          (I tried leaving a reply but before I could click submit, a banner-flag advertisement self-appeared on the screen and rendered submission impossible. I am too frustrated to retype my full reply).

          Well . . . you remember and I remember. Others remember.
          Those who remember can try to lengthen and restore the memory of those around them. It may work on some people. Perhaps snappy words and phrases like “yeltsinization” and “Plan Haiti for America” can help restore missing minds to their own former presence.

          MSM is a phrase everyone knows by now. Would an expanded version . . . MSGM . . . take hold? It stands for Main Stream GoverMedia. How about the phrase CEO? Why not repurpose it to stand for Class Enemy Occupation? And CFP stands for Corporate Fascist Pig, as in Corporate Fascist Pig MSM. Or MSGM, if that catches on.

          CEO CFP MSM (or maybe MSGM).

          Mankind is beginning its Long Death March through the Valley of Selection. Who will complete the march and who will fall out along the way?

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