By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Cross posted from New Economic Perspectives
In July 2011, President Obama and Speaker Boehner reached an agreement in principle on a deal crafted to inflict $4 trillion in austerity by raising taxes modestly, slashing social spending, and beginning to unravel the safety net. The deal would have been a disaster for America. Unemployment was 9.1%. The deal would have thrown us back into a recession and caused unemployment to surge. Recessions and increased unemployment cause tax revenues to fall and increase demand for social services (e.g., for unemployment compensation) – they produce large deficits. Austerity kills jobs and frequently increases deficits. The Eurozone is the latest demonstration of this fact.
We should, therefore, all be celebrating the failure of the July 2011 austerity deal. We almost committed an act of economic self-mutilation of tragic proportions. Instead, because of the failure to adopt austerity in July 2011 we followed an economic policy based on modest stimulus. As predicted by most economists (including my UMKC colleagues) that policy produced modest growth and modest reductions in unemployment. The recovery produced the sharpest reduction in budgetary deficits in modern U.S. history. The Eurozone’s leaders’ austerity policies forced many nations back into recession. Austerity was most draconian in the periphery where it produced Great Depression levels of unemployment, particularly for young adults. The dominant media meme about the “fiscal cliff” is that it is an insane austerity program that would force the U.S. back into a gratuitous recession and cause large increases in unemployment. Logically, that should cause the media to recognize that the far more severe austerity blows that Obama and Boehner sought to inflict on the U.S. in July 2011 at a time when our economic recovery was much weaker than it is today would have been disastrous and that we should be overjoyed that the deal fell apart.
The media, however, constantly warns us of the need not to repeat the “failure” to reach the July 2011 deal. They show no sign of recognizing the logical incoherence in simultaneously warning that the fiscal cliff’s austerity must be avoided lest it force the nation back into recession and that it is urgent that we adopt austerity. Media reports virtually never explain that if the July 2011 austerity deal had been finalized the results would have been catastrophic.
The media is similarly incoherent when discussing (more precisely, ignoring) another key aspect of the fiscal cliff – its origins. The “fiscal cliff” is not really a cliff, but it is definitely an economically illiterate and self-destructive austerity program. That is the first key analytical aspect of the origins of the fiscal cliff – it was known to be an economically illiterate and self-destructive austerity program when it was adopted. The obvious question, which the general media studiously ignores, is why the parties agreed to the “fiscal cliff” deal when it was obvious that it would cause catastrophic damage to our economy and people. The “fiscal cliff” (austerity) deal is the deal that did not fail – it was the bipartisan deal that became law in August 2011.
It is revealing that no one in the media even attempts anymore to defend the bipartisan fiscal cliff (austerity) deal. The media normally have a romantic crush on anything bipartisan, no matter how much it harms the nation. The fiscal cliff austerity deal is so obviously stupid that even the media almost universally criticize it. This should prompt three obvious questions.
1. What idiot designed the fiscal cliff (austerity) deal?
2. Why did both parties support it?
3. Why did the media not denounce the deal before it was adopted?
The answers are:
1. President Obama took the lead in crafting the “fiscal cliff.” He did so with terrible counsel provided by Treasury Secretary Geithner and William Daley, Obama’s chief of staff (Wall Street’s leading representative within the administration and, like Geithner, a strong opponent of stimulus and a strong proponent of austerity).
2. Both parties “knew” that austerity was essential.
3. The media “knew” that austerity was essential.
Obama is the person in the world who benefitted most from the failure of the July 2011 austerity deal he reached in principle with Boehner. If the austerity deal had been finalized the nation would have be forced back into recession. Unemployment was 9.1% in July 2011. It would have risen sharply above 10% and it would have gone up every month in 2012 as the election approached. Obama would have been crushed by Governor Romney. The irony is that Obama tried five times in 2011 to inflict austerity on America. Had he succeeded, he would have caused grave damage to our nation. Had he succeeded in inflicting austerity he would have also destroyed his re-election chances, given the Republicans control of the U.S. Senate, slashed public services when they were most needed, and begun the process of destroying the safety net. He would have gone down in history as a grotesque failure.
Obama’s first major effort to inflict austerity on the nation in 2011 was his July austerity deal in principle with Boehner. Their shared goal was a $4 trillion austerity program with mild increases in tax revenues and fierce cuts to social programs and the safety net.
Obama’s second effort to inflict austerity was the creation of the “fiscal cliff” austerity deal in August 2011. The premise of the August deal was that austerity needed to be inflicted on America.
DEBT-CEILING DEAL: PRESIDENT OBAMA SIGNS BILL AS NEXT FIGHT LOOMS
By DEVIN DWYER and SUNLEN MILLER
Aug. 2, 2011—
U.S. Averts First-Ever Default but Economic Impact Still Uncertain
“It’s an important first step to ensuring that as a nation we live within our means, yet it also allows us to keep making key investments in things like education and research that lead to new jobs and assures that we’re not cutting too abruptly while the economy’s still fragile,” Obama said in a statement from the White House Rose Garden before signing the bill.
“I’ve said it before, I’ll say it again,” Obama said. “We can’t balance the budget on the backs of the very people who have borne the brunt of this recession. Everyone has to chip in. It’s only fair. That’s the principle I’ll be fighting for in the next phase.”
I know that these statements by Obama strike many Americans as sensible, but they betray a basic misunderstanding of economics and explain why he embraces austerity. We are a nation with a sovereign currency. Our national government is nothing like a household. “Balancing the budget” (“live within our means”) in response to the Great Recession is austerity. Austerity is a disastrous policy in such circumstances because it causes nations to fall back into recession or depression.
The issue is not “fair[ness]” through joint sacrifice. If “everyone” “chip[s] in” through austerity it still produces a gratuitous recession or depression. That is not “fair” – it is insane – there is no such thing as a “fair” recession. “Fighting” for “fair” austerity so that everyone suffers equally through a “fair” recession is impossible because recessions cause increased unemployment, which is inherently unfair. But the more essential point is that it is insane to cause recessions through austerity. That’s the principle for which we fight at UMKC. The economic crises we face are jobs and homes.
Similarly, you do not “cut” federal spending when the economy is operating well before full capacity because of a Great Recession. Obama’s stated policy was to cut federal spending in 2011, but not “too abruptly.” Cutting overall spending in response to a Great Recession causes gratuitous recessions, even if you make “key investments.”
Obama intended the prospect of the fiscal cliff’s dramatic mandatory cuts in social programs to extort progressive Congressional Democrats into agreeing to inflict severe austerity by voting in favor of what Obama hoped would be massive cuts in social programs and the safety net adopted by the Congressional “super committee” created by the same bipartisan austerity deal that created the “fiscal cliff.” Obama encouraged the “super committee” to inflict massive spending cuts and tax increases (super-sized austerity).
Obama’s fourth effort occurred during the super committee negotiations. Some members of Congress opposed the imposition of the “fiscal cliff” austerity provisions and sought to remove, delay, or reduce them. Obama intervened to block any effort to avoid or reduce the austerity inflicted by the “fiscal cliff.”
President Obama called the Democratic and Republican chairmen of Congress’s special deficit reduction supercommittee Friday and urged them to reach a deal….
But he also carried another message: Congress should not undo the painful consequences for failing to reach a deal that were agreed to when the supercommittee was created in the August debt deal.
But the so-called sequester could not be undone without a sign-off from Obama, and he made clear Friday that he would not agree.
“The sequester was agreed to by both parties to ensure there was a meaningful enforcement mechanism to force a result from the Committee,” the White House said in a statement. “Congress must not shirk its responsibilities. The American people deserve to have their leaders come together and make the tough choices necessary to live within our means, just as American families do every day in these tough economic times.”
He urged them to strike a deal that would cut both entitlements and raise revenues.
Yes, President Obama “urged” the infliction of severe austerity through cuts in the safety net, massive cuts in social programs, and deliberately created and used the “fiscal cliff’s” self-destructive austerity threat to extort these betrayals of the American people. His surrogates (Erskine Bowles and Alan Simpson – the co-chairs of Obama’s austerity commission) pushed the “super committee” to “go big” and inflict $4 trillion in austerity. (Simpson predicted that the markets would “tank” absent such an austerity deal.)
Obama urged austerity under the “logic” that a national government with a sovereign currency is “just” like a household – the most basic and common economic error in this field. The President of the United States thinks that the U.S. government is “just” like a household and should try to balance the budget (“live within our means”) through austerity in response to the Great Recession. He also thinks we should seize the political opportunity, even if it had nothing to do with the budget deficit, to begin to unravel the safety net. It is this sad record that led me (and many others) to warn before the election that Obama’s effort to secure a “Grand Bargain” constituted a “Great Betrayal” motivated by his desire to create his legacy. Obama’s self-portrait is that he was willing to agree to sacrifice his Party’s greatest accomplishments (the safety net) in order to secure a bipartisan agreement imposing austerity. The actual sacrifices, however, will be made by the elderly, the poor, and the working class, the victims of his betrayal. If Obama succeeds in producing another recession through austerity you can add the nation to the list of sacrificial victims.
When the super committee failed to reach a bipartisan austerity deal in November 2011, members of Congress sought to pass legislation removing the fiscal cliff’s austerity provisions. Obama’s fifth effort to inflict austerity occurred when he threatened to veto any reduction in fiscal cliff austerity.
Nov 21, 2011 4:52pm
OBAMA THREATENS VETO ON BID TO AVOID AUTOMATIC CUTS AS SUPERCOMMITTEE FAILS
President Obama said today he will veto any efforts to get rid of the automatic spending cuts that will be triggered by the supercommittee’s failure to reach a bipartisan solution to deficit reduction.
“There will be no easy off-ramps on this one. We need to keep the pressure up to compromise, not turn off the pressure,” the president said this evening. “The only way these spending cuts will not take place is if Congress gets back to work and agrees on a balanced plan to reduce the deficit by at least $1.2 trillion.”
Fortunately for the nation (and Obama), fate conspired to cause four of Obama’s efforts to inflict austerity to fail while the fifth (the “fiscal cliff”) does not begin to kick in until 2013. For opposite reasons, the Tea Party and progressive Democrats have interacted in a manner that blocked Obama’s efforts to inflict austerity on the nation. (The Tea Party loves austerity, but hates even modest tax increases for the wealthy.)
Obama was not an outlier in repeatedly seeking to inflict austerity on the nation in 2011: “about 100 members of Congress from both parties are urging the [super committee] to go big on the reductions, to the tune of $4 trillion.”
The general media did not warn about the insanity of inflicting the “fiscal cliff” austerity program on the nation. Instead, it fed the hysteria about the deficit and urged even greater austerity. The New York Times exemplifies the general response. The title of their article about the August 2011 austerity deal that created the “fiscal cliff” set the pro-austerity tone.
The thrust of the article was that the proponents of the August 2011 bipartisan austerity deal had to defend it against charges that it imposed too little austerity. The article also claimed that while economists were divided on the issue, most economists favored austerity. Our national debt was about to cause interest rates to surge, causing a disastrous feedback loop.
August 2, 2011
SPENDING CUTS SEEN AS STEP, NOT AS CURE
Proponents of the deal counter that it is an important first step, constrained by the political realities of divided government.
“Is this the deal I would have preferred? No,” Mr. Obama said Sunday in announcing the agreement. “But this compromise does make a serious down payment on the deficit reduction we need, and gives each party a strong incentive to get a balanced plan done before the end of the year.”
The problem facing the nation has been clear for some time. The Congressional Budget Office estimates that the federal debt is likely to exceed 100 percent of the nation’s annual economic output by 2021, largely because of the rising cost of Medicare, Medicaid and Social Security.
Americans will face higher taxes, particularly as investors begin to demand higher interest rates. Economists disagree about the amount of debt a nation can safely carry relative to the size of its economy, but there is widespread concern that 100 percent is too much, and that the weight of debt would begin to suppress economic activity.
All of this was economically illiterate. Interest rates fell, as my colleagues and economists like Paul Krugman predicted. Inflicting austerity in response to a Great Recession is a superb strategy for increasing unemployment, the deficit, inequality, and debt because it reduces already inadequate private and public sector demand and causes recessions and depressions. Even the modest stimulus policy the U.S. followed despite Obama’s and Boehner’s best efforts to inflict austerity, proved vastly superior to the Eurozone’s austerity policy that forced the Eurozone into recession and much of the periphery into Great Depression levels of unemployment. The U.S. budget deficit has fallen at the fastest rate in modern history due to the success of even the greatly inadequate stimulus program that Obama adopted before he turned against stimulus under Geithner and Daley’s influence. America’s problem is jobs, not the deficit.
Beware of anyone who uses phrases like “down payment” when it comes to the federal deficit for they have no meaning and are designed to mislead. Reducing social spending in response to the Great Recession is austerity – not a “down payment on … deficit reduction.” Indeed, it is likely to increase the deficit by causing a recession.
Geithner also spoke in favor of the August deal, and he completed the pro-austerity mantra by invoking what Paul Krugman has aptly dubbed the “confidence fairy.”
“You’re going to see this basic underlying growth we’ve see in the United States improve over time because people will be more confident we can live within our means,” [Geithner] said. “With more confidence we can get our arms around this long term. We will have more room to do the things we need to strengthen investment jobs now.”
The confidence fairy stubbornly refuses to appear, but Geithner’s faith in fairies abides.
Note Obama’s explanation for why he approved the August 2011 austerity program. He was delighted that the “fiscal cliff” provision imposed “a strong incentive” on Democrats to agree to inflict severe cuts in social programs and the safety net. Obama issued a formal statement embracing (1) austerity, (2) the “fiscal cliff” as a device to force Congress to inflict austerity, and (3) the claim that the federal government is just like a household and should balance its budget (“live within our means”).
“The sequester was agreed to by both parties to ensure there was a meaningful enforcement mechanism to force a result from the Committee,” the White House said in a statement. ‘Congress must not shirk its responsibilities. The American people deserve to have their leaders come together and make the tough choices necessary to live within our means, just as American families do every day in these tough economic times.” –
ews.go.com/Politics/debt-ceiling-deal-president-obama-signs-bill-fight-looms/story?id=14213050″>Washington Post
Austerity is not a “tough choice.” It is a vicious, self-destructive policy that is the result of equal parts ignorance and inhuman indifference to the senseless suffering it causes. Obama and the nation have been saved from austerity by luck, the Tea Party’s extremism, and progressive Democrats’ refusal to be bullied or panicked by Obama’s and the general media’s hysterical and false claims about deficits and the safety net. Obama’s pitch for austerity and unraveling the safety net cannot withstand even cursory review. His “logic” is:
1. We must act urgently to avoid the “fiscal cliff” because it would inflict austerity and force the nation back into a gratuitous recession, and therefore,
2. We must urgently adopt a budget deal that inflicts even greater austerity and begins to destroy the safety net
As our Senator, Claire McCaskill, said recently: “whiplash!”
I propose that we all celebrate the failure of the July 2011 Obama/Boehner deal to inflict austerity on the nation and the failure of Obama’s effort to use the “fiscal cliff” to extort progressive members of Congress into supporting austerity and the unraveling of the safety net. I also propose that we send Obama on an inspection tour of Ireland, Portugal, Spain, Italy, and Greece. This visit would not involve meeting heads of state. Obama should visit each of these nations and talk with the people. We would never have to defend the nation from another effort by him to engage in the self-mutilation of our economy and people. Absent such an awakening by Obama, progressives will need to step up and save Obama from Obama, America from austerity, and the safety net from Wall Street at least one more time.
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It is like a nightmare. When you think danger has passed, it returns, in force.
Oh, what horrific horrors of austerity the US will suffer when Uncle Sam can only run annual deficits of around a trillion dollars a year–after we go over the “fiscal cliff”. Truly mind-boggling insane that we would wantonly limit ourselves to only borrowing a trillion a year from the Fed. What short-sighted insane neanderthalls we are.
Now, who wants to lay odds on whether or not the Debt Target will be raised again to allow for those miniscule, austerity-inflicting trillion-dollar deficits that the horrific, austerity-laden fiscal cliff will limit us to?
Is hyper-diaper inflation coming, do you think?
Should I rush out and buy a wheelbarrow, before I need a wheelbarrow to carry the cash to buy one?
No.
Luckily the US government can just print all the money it needs to fund it’s operations! Like magic. People here on NC believe in magic a lot, so they’ll go along with that logic.
Of course, the rest of the world will have somewhat different ideas, and I’m sure the NC posters here will be shocked, *shocked* that is, when Iraq, Libya and Russia suddenly stop supplying us with that 2/3 of fossil fuel energy we have to import and China stops sending us all that cheap plastic garbage in exchange for all those digital ones and zeroes we’re magicking up out of thin air.
Likewise they will be thrilled that we are funding Imperialist America and it’s World Sovereign Cop on magik money.
And if that is not enough – keep the financial sector producing derivative WMDs. Yobs!
Then, just to make sure we have an economy that is totally disfunctional – support a health care industry that eats the economy like cancer.
I’m getting bored with hearing Keynesian claptrap about “stimulus” spending (for about 30 years now) when the country would probably be better off if we just shut down about 50% of the “economy”.
Yes
Or deflation – when the Fed announces it has 4 or 5 trillion in long term treasuries for sale one of these years.
Or deflation-inflation when they have to fix that.
Or maybe inflation-deflation could happen somehow. The economy can be unpredictable and hard to understand at times. (math models can fail!)
Having a financial setup where the government has to pretend to borrow its own currency, now that’s horrific.
Agree with virtually every word. However, had Obama wrecked the economy (and enriched Wall St) he would not have ‘gone down in history as a catastrophic failure.’ Conformist scholarship and media discourse would have ensured that.
Nothing much to add to this post. Mr. Black says it all. Perhaps the most absurd inversion of Obama and his economic illiterates is the idea that interest rates go up because “investors” demand it. Investors have no choice but to accept interest rates orchestrated by the Fed. All anyone needs to watch is the Treasury Bill auctions. Does Obama think all these people flooding into TBills are “demanding” rates of .02%? Does he think purchasers of Ten Year Notes are “demanding” 1.7% for taking on a ten year risk of increased rates?
Historians tell us Herbert Hoover was an economic illiterate. Next to BHO, Hoover was a cross between Veblen and Keynes. We have just reelected a self aggrandizing demagogue who talks like Huey Long and acts like Andrew Mellon. Unfortunately, he is what you get in an age of 24-7 electronic propaganda.
It isn’t ignorance; it’s part of the plan. See: Are you enjoying the “good cop, bad cop,” kabuki theater of the absurd? at: http://rodgermmitchell.wordpress.com/2012/12/18/are-you-enjoying-the-good-cop-bad-cop-kabuki-theater-of-the-absurd/
Mr Black points out that our national government (budget) is not like a household budget – It is an absolute fact that gets ignored and I fully agree with Mr Black.
I would like to add that not all businesses are alike. A business that makes widgets is far different than the Financial services business. Making widgets is the process in which wealth is created via labor and capital. The financial service business imposes debt and does not create wealth but, rather extracts it. What was the term yesterday, maximize extractive value?
Just want to point out that although the sovereign can operate at high debt levels to get the economy going again – it must be sure that the money spent into the economy is directed toward the widget sector and not the speculative (make money from money) sector. It needs to be directed toward encouraging demand for real goods, it needs to be trickle-up, directed toward the bottom.
I would imagine if you graphed each person’s income at 1/100 inch intervals, you would have a graph 50 miles long with a line visually close to one axis (income) until the last mile when it shoots up out of sight. – It ain’t trickling down and the volume of money under the income line that gets spent back into the economy is not enough to sustain demand.
Good article. I have tried to post a longish comment but can’t seem to get it through…
Had he succeeded in inflicting austerity he would have also destroyed his re-election chances, given the Republicans control of the U.S. Senate, slashed public services when they were most needed, and begun the process of destroying the safety net. He would have gone down in history as a grotesque failure.
Part I
No, oddly enough O-Betrayal would not have destroyed his chances for re-election. Mr. Black has documented in excellent and (his usual) minute incontrovertible detail the steps this slick piece O-scum has taken to fleece the safety net and social programs; the elderly and the nation. We lived through it. We were there for every step Mr. Black details. Yet we voted for this toxic disease called O-sterity all over again. A-n-y-w-a-y. We willingly fell all over ourselves to ignore any facts; to embrace fear, to embrace extra-judicial assassinations and the murder of innocents – including infants, to embrace torture, to embrace millions of homeless citizens, to embrace an indifferent and corrupt judicial system, to embrace patently disastrous Crony Capitalism, to embrace goblin stories about the dreaded other side as if anything could be worse than what we already had right in our own White House.
We have chosen the super-market over the constitution, the gas pump over the planet. We have chosen what few creature comforts we have left over the very concept of fairness and decency. We chose Obama not simply over principal but over any principal. We made it clear Obama would have won under ANY circumstances.
What the fu*k do we expect in return?
Robosigned thank you notes from the Obama ’12 campaign.
Only the people who actually voted for Obama can be said to have made that choice. And I wonder how many of the people who voted for Obama did so out of fear that Romney would be dangerously worse? And how many of those people were basing that fear on just how much worse Bush was than what Gore could ever have been? And how many of those people remember how the third partyists kept telling everyone that Bush and Gore were the same? And after seeing how wrong the third partyists were in 2000, how many of those people were ever going to trust a third partyist this time?
( As someone who voted for Rocky Anderson, I am just fishing around for explanations as to why so few others did likewise. What happened to all the Hillary Primary Voters of 2008? Weren’t they supposed to be a political Chernobyl of molten radioactive political hatred? Weren’t they going to vote against Obama to the best of their abilities and to the very last of their number? Why didn’t they? What happened?)
“I wonder how many of the people who voted for Obama did so out of fear that Romney would be dangerously worse?”
My bet? At least 80%.
And how many know that voting in this “democratic” (small d) system is a fool’s errand? Uhm, maybe the total of those who voted for “third” parties.
We are a single coutry in which it was proven yet again that you do not need to fool all of the people all of the time or some of the people all of the time or all of the people some of the time as long as you fool enough of the people enough of the time.
Also, at this point it doesn’t matter since the world ended yesterday sometime and just hasn’t quite caught up to all of us…yet.
Or as Bob Uri says, “To the folks who support the Democratic Party without apparently knowing what their policies are, good luck with that Social Security thing and all. To everyone else, we didn’t ask for this, but it’s coming our way anyhow.”
http://www.counterpunch.org/2012/12/21/democrats-social-security-and-the-fiscal-cliff/
Opps, Rob Urie, not Bob Uri
I had a paragraph starting out with, “Nate Silver could have been counting chicken bones thrown on the ground…”, and no matter what I do (such as, N-A-T-E S-I-L-V-E-R) it keeps getting put off into digital never never land when I hit submit. Is there something particularly unwholesome about that name?
I’m having a heck of a time getting my second part to display. I hope my multiple “Submits” are not going to suddenly appear all over the place.
Why hasn’t anyone asked the “O” why he’s continuing the Empire building on the credit card? Doesn’t that qualify with living within ones means? Oh, he isn’t one of the common taxpayers of this country, nor are the 1%/business conglomerates.
As with any “household budget,” you have to hide a lot of the gun purchases from the rest of the family, and hide all of the money you are using to kill the neighbor you stole money from while calling it a loan.
Correction to: “Obama’s effort to secure a “Grand Bargain” constituted a ‘Great Betrayal’ motivated by his desire to create his legacy. Obama’s self-portrait is that he was willing to agree to sacrifice his Party’s greatest accomplishments (the safety net) in order to secure a bipartisan agreement imposing austerity. The actual sacrifices, however, will be made by the elderly, the poor, and the working class, the victims of his betrayal.”
please replace: “motivated by his desire to create his legacy” with “because he hates…the elderly, the poor, and the working class, the victims of his betrayal.”
This is a common mistake made by liberal commentators.
You are so right. He really loathes Romney’s “47 Percent”. The paradox is that they adore and trust him—-go figure!
Prof. Black,
While I agree with everything you’ve laid out so far, as a liberal Democrat, why should I not support going over the current “fiscal cliff”? As Krugman pointed out, it’s just about the best deal a liberal could want: expiration of Bush tax cuts, increase in dividend and capital gains tax rates, with large cuts in military spending, and comparatively less cuts in social spending (esp. compared to what Obama really wants to push through).
I fully agree with you that the ideal policy would have no fiscal cliff at all but rather the reverse: massive fiscal (not just monetary) stimulus. But unfortunately, we fight this war with the politicians we have, not the politicians we wish we had, and with that, I think the fiscal cliff is the best we liberals can hope for right now.
Even if Congress doesn’t fix the most odious parts of the cliff early next year (e.g. cut taxes for <250k, etc) I'd rather that austerity is borne on the backs of our bloated and inefficient military (I'm looking at you, F35) and its corporate welfare recipients than on the poor or the elderly.
Keynesian stimulus surely would be better than austerity; Bill Black’s analysis is correct in terms of this choice. But surely we should step outside this box and look at the economic crisis more holistically.
Keynesianism worked in 1950s and 1960s because of a confluence of conditions that can’t be repeated. We don’t have the industrial base we had then and capitalism has no more markets to conquer and therefore can’t expand. Yes, unions were much stronger than they are now, but there is cause and effect — capitalists could tolerate higher wages then because their profits were going up even faster thanks to demand and expansion. When that was no longer the case in the 1970s, Chicago School and Austrian School economics was waiting to be pulled off the shelf, an ideology for changed times.
The real problem is that the contradictions and instability of capitalism are mounting. There is no way for industrialists and financiers to earn ever bigger profits other than imposing austerity on the rest of us, and with a dearth of good investment opportunities, the massive piles of money accumulated are diverted into increasingly risky speculation. What happens when a system that is based on endless growth can no longer grow because there are no more places to grow? What happens when the environment is destroyed because private capitalists don’t have to pay the costs of environmental destruction?
I wouldn’t at all rule out the possibility that there could be another bubble or two, or that there might be a short-term boomlet ahead, but maybe we should face the fact that governments and business can’t find a solution for the crisis is because the system doesn’t work. Or rather it does work, in precisely the manner we are experiencing.
Wages are falling (or stagnant) in the “advanced” countries. But are they falling world-wide? Or (again world-wide) are profits are lower than they were 50 years ago? Rather than being in decline, it’s more like capitalism has decided to abandon the high-wage countries and go someplace cheaper.
Beyond celebration of irony, I see little cause for it at all. Celebrting the 2011 failure to cut our throats when Obama has the knife as well as the whole Democratic party and the Main Stream Media about two millimeters away from our throats right this minute, 2012/2013, strikes me as an odd celebration indeed.
I was also confused by this ironic celebration. The two corporate parties are preparing to cut our hearts out and hoist them to the Gods of Capital any day now. We are still scheduled to be placed on the sacrificial platform….
I just had the Epiphany that we go to alter once a year now and they take another body part each year.
Nothing brings about revolution faster than folks going hungry, friend.
Or going without cannabis (I might be too optimistic here).
Professor Black overlooks the following:
Federal Reserve Economic Data (FRED) reports Total Credit Market Debt Owed (i.e., total US debt) in the 3rd quarter of 2012, totals $55.3 trillion dollars—consisting of: 1) debt outstanding domestic nonfinancial sectors ($39.3 trillion dollars); 2) debt outstanding domestic financial sectors ($13.8 trillion dollars; and 3) debt outstanding foreign financial sector ($2.3 trillion dollars). Third quarter 2012; seasonally adjusted, annual US GDP is $15.8 trillion dollars. Total-US-debt-to-GDP equals 350%. Putting this in perspective, total-US-debt-to-GDP is 260% at the start of the Great Depression in 1929, and decreases to a low of 130%, by 1952. The US has hit a debt wall and increasing either government or private debt will only make the eventual US economic devastation exponentially worse, when it comes.
Structural reform—i.e., clearing bad debt, to reset and begin anew because these bad decisions have already been made, and prosecuting fraud, to restore basic trust in the system—is needed. Not just more money covering up the ongoing worldwide 2008 credit crisis—and thus saving the wrongdoers from bankruptcy. By continually throwing good money after bad—thereby giving money to the wrong people—the US stunts its economic growth, thus jeopardizing its position as a world power.
To learn more, please read:
“WORLD-MARKET-STATE vs. DEMOCRACY: Why We Should Go Over the Fiscal Cliff.”
There is no comparison between households and a sovereign government. There is a comparison between a business and a sovereign government when government or business invest money wisely, the wealth increases and we can prove business owners are richer because they show it on their balance sheet. But, where is the government’s balance sheet?
There is a greater comparison between a bank and a sovereign government because, in our nation’s case, banks do most of the printing of our new money. When we borrow money from a bank, they show that they have an asset and we have a debt (and a purchased asset on our balance sheet) and they also show that they have a debt to the Federal Reserve against their loan to us. Again, banks show their asset (as well as their debt) on its balance sheet.
When the government borrows from the Federal Reserve (they pay no interest, because it is a creature of our Treasury) but, they do show a debt owed against the amount borrowed and the Fed shows the loan as an asset on its balance sheet. When the government spends the borrowed money on anything in the economy that helps the people generally the debt is covered by the value of the change in people’s economic lives. It is an asset to the nation that offsets its debts.
Problem is that the government is not allowed to show the money value of all the good they do anywhere in the accounting systems of the government, so the people and our representatives can easily pretend there is none. And, they are doing so right now. When the government puts money into services that in any way benefit the people it always covers the amount borrowed, protecting against hyper-inflation.
In the case of government research it is multiplied so dramatically that if more credit money isn’t made available from the government the whole people of the country will run a bit short of actual dollars with which to play with. When that happens the efficiency of the productive powers of the people decline, leading to unemployment which causes loss of value of our money, inflation. The same is true with education financing. The more we spend the greater the return will be. Just like a wise investment in one’s business multiplies the money spent, so does the spending of a nation when spending does not go for gambling, drugs, interest payments and especially killing people in other nations. We suffer from our debt only if we borrow the money from anyone but ourselves (as Japan borrows from its people through its Postal-Banking System, Japan’s people hold the nations debt and make all the money from the government interest expense) or if we pretend that government spending is good for nothing of any value.
The Right would love us to swallow that idea. It is now fairly well known that the private sector is actually net less efficient in banking, medical services, transportation, infrastructure, etc.) We need to value all the sectors of our nation, government and private, or we develop a warped mind on economic matters. All of the present talk about our debt is about a government accounting system which fails to report the money value of it’s spending. We need to see the balance sheet on the government and not just the private sector. We need to see what the dollar value of government borrowing is. When we are shown these figures, we will be astonished to find that the net value to the general population of government borrowed money is MANY TIMES the money actually borrowed!
I’m a big fan of Mr. Black’s, and thanks to Yves for hosting his work. That said, I’d like to see him reconsider one point. It’s hard for me to take seriously the $4T austerity deal this piece addresses first. I think Obama never had the least intention of putting it into practice, although the arguments of his friendliness toward austerity are persuasive.
The only way I found the 7-2011 proposal intelligible was as a pure feint, designed entirely to magnify the Republican intransigence on taxes. It was all to generate facile arguments for the public face of the campaign, things like “those loons won’t take a 20-1 deal,” and so forth. The article correctly points out that Obama would have suffered most (politically) from its enaction. Moreover, the fact that Boehner still reportedly nurses bitterness from the “surprising” inclusion of tax increases near the end suggest to me that they were withheld with malice aforethought.
Obama didn’t want it then, and doesn’t want it now. As politically weakened as the Republicans are today, it’s hard to believe that they wouldn’t jump on the 7-2011 deal in an instant. Were it to be reoffered. But that’s the point- it hasn’t.
So agreeing on subsequent points, I would just request Professor Black reexamine the credibility of that first proposal and whether to frame the discussion more in terms of strategy than ideology. Perhaps partially because he’s already nailed the latter. Thanks.
Why do you give Obama credit? Has Obama done something to warrant this kind of faith? I’ve never seen anything to suggest Obama cares about policy outcomes as much as process. His speechs constantly underscore the notion that Obama believes “compromise” is an inherent good and a goal.
This is a man who sent 80,000 more soldiers to Afghanistan to win or some nonsense. When you discuss Obama, remember this. Campaign promises aside. It was stupid and cruel. It was one of those inside the Obama White House stories, but the article had a bit of a throw away line about how Administration officials were shocked and dismayed how killing one person on the other side of the world would lead to people joining the fight against America in Pakistan and Afghanistan. Certainly, there is unbridled hubris at work, but I’ve seen nothing to suggest they have plans beyond what would make them popular with Chris Matthews at the cocktail party tomorrow.
NTG: I think you’re misinterpreting my point. I’m only crediting Obama in this instance as much as Black does in the piece. You and I are in agreement that Obama is excessively lent to indiscriminate compromise. Where we may disagree is that I (and Black, apparently) do not think he is stupid. Quite simply, Obama is well aware that a massive austerity bill would be massively contractionary, and that his electoral prospects would be wedded above all else to US short term economic performance.
Your point, “I’ve never seen anything to suggest Obama cares about policy outcomes as much as process,” is well put and again we agree. That’s what I was trying to get at with, “…frame the discussion more in terms of strategy than ideology.” So while I have no doubt that he will adopt a counterproductive and ill advised austerity programme out of this misdirected instinct for maintaining the political center (irrespective of how the center has shifted over his own lifetime), the question is the magnitude.
I do think he would adopt the current ~$2.5T package being negotiated, particularly if the debt ceiling is lifted near term. This includes roughly $900B in actual cuts, the remainder coming in tax increases and interest savings. Contrast that with the $3+T in actual cuts in 7-2011 proposal. Both would be economically deleterious, but one would have been catastrophic, and I only give Obama credit to the extent that I think he recognized that even at the time he levelled the proposal. I’m happy to engage on the other points you raise, but are we still in disagreement on THIS point, and if so, why specifically?
BB: Your link appears broken. I tried it several times. Other sources, please?
Sorry,
http://www.zcommunications.org/fiscal-cliff-the-well-orchestrated-dance-by-jack-rasmus
The above link should work. The one below would work if you copied what is visible. Unfortunately, I made a slight mistake (a hyphen) when pasting the url into the href=”WRONG-MY-BAD” attribute of the link markup. Again, problem solved above.
Thanks for the followup! In that article, Mr. Rasmus raises some very fair issues, especially with respect to military spending.
On the $4T target, I’m having difficulty finding Mr. Rasmus to be too persuasive. The article devotes most of its space to imagining (credibly, I’ll grant) different budgetary routes by which the number could be achieved. The part which actually substantiates the magnitude of the deal is, what? Paul Ryan’s proposals? That actually weakens the claim, in my opionion. Obama’s budget? Well, where? I couldn’t find it. Here’s the link, you might have better luck.
http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/budget.pdf
On the campaign trail, Obama did indeed claim the $4T number, but the only calculus that came close to justifying this figure included decreased outlays that were already scheduled, principally from scheduled drawdowns and eventually withdrawal from Iraq and Afghanistan. If that’s how a sum total $4T reduction in expenditures is achieved, fine I’ll grant the figure, but that’s not how the discussion is currently framed, neither by Black, nor Rasmus, nor anyone outside the White House communications department.
(This bit’s about defense sector and economy so feel free to skip it since it’s off topic.) On that point, I’m still undecided as to whether it is weaponized Keynesianism that Republicans can’t resist or Obama’s general hawkishness. It’s a problem for which I haven’t found an easy answer because it’s such a persistent and superficially stimulatory intervention in the economy. Were, say, Kucinich or Paul to access the presidency and successfully cut military expenditures without transferring those expenditures to other industries, it would have a pretty seriously depressive short term effect on the economy. Long term it would be great, as all that engineering and logistical talent is resituated throughout the economy in other opportunities. But that could only happen if the near term effects are not so harsh that the political backlash reinstates and possibly reinforces the current military transfer regime. Sorry for the digression, it just got me thinking.
I love this site for both the content and the discussions it generates, even if I usually find myself in disagreement with much of the sentiment. It’s always a delight to feel my mind being changed on a topic, so thanks again.
@Ano,
Great reply. You’re right, for the most part the 4t figure is simply speculative, but it is the number Obama and the Republicans refer to time and again. My own opinion, and it’s only that, opinion, is that Obama will go for more pain rather than less in his second term.
On the military spending and what would happen short/long term if you nipped it, I think you’re spot on. However, I don’t think there is much risk of that happening and certainly not suddenly.
Obama’s going after the 4T relentlessly.
http://www.zcommunications.org/fiscal-cliff-the-well-orchestrated-dance-by-jack-rasmus
I’ll bet you 20 dead children the Shadow Greek Prime Minister slash closet fascist Obama is finished.
White House petition to end corporate welfare here: http://wh.gov/Qa6f