By Michael Hoexter, a policy analyst and marketing consultant on green issues, climate change, clean and renewable energy, and energy efficiency. Originally published at New Economic Perspectives.
Lambert here: “Deficit hysterics,” like “deficit scolds” is far too kind; it leaves open the possibility that we are dealing with good faith actors and honest disagreements.
The austerity push by politicians, political operatives, and pundits of the last 5 years is the height of economic, political, and social perversity and stupidity. Yet, as it still resonates in the halls of power, in the White House and Congress, and in many parts of the media, it still requires explanation and clarification. Besides inspiring the reduced level of government funding we are now seeing in the US and elsewhere, the deficit hysteria campaign is threatening to undermine what remains of the American social safety net that helped form and support the American middle class over the past 70 years. In addition, now and in the future, we will need a government able to use the full range of fiscal (i.e. financial) tools to combat climate change, tools which the austerity campaign seeks to lame or sequester for the benefit of a small financial elite. In the latest turn, deficit hysterics are trying to incite intergenerational warfare between the young and the old, accusing the latter of taking more than their share of public financial resources which the young will need later in life.
Within the past couple of years, I have tried to explain in a compact and vivid way the austerity campaign, which remains now as then a perverse, unrealistic and destructive set of economic opinions and policy recommendations. Recently, a view of the austerity drive has come into focus, which maybe has occurred to others as well. Here is my exposition of this sharper perspective upon what remains a dangerous movement among the political and economic elite to strangle and reverse social progress.
Quick Overview of Deficit Hysteria
During the Global Financial Crisis of 2007-2009, just when the economies of the developed world most required and benefitted from increased government spending, a frenzy of hysteria was whipped up which claimed that the instrument of government and government spending was a failed or failing instrument. The interventions of governments had just prevented the world economy and the failing private financial system from plunging into total chaos and, immediately following, a seemingly new class of pundits and political leaders cropped up castigating government and government spending.
The word used over and over again in this new deficit hysteria campaign was “debt”, not differentiating between the debts of private individuals and corporations on the one hand and national currency-issuing governments on the other. Of course, private individuals, corporations and non-currency-issuing governments (local, regional, and Eurozone governments) can run into trouble (become insolvent) with debts while currency-issuing governments (US, UK, Japan, Norway, Canada, Australia, etc.) are never a solvency risk in debts denominated in their own freely floating currency. Deficit hysteria was and is, superficially, an undifferentiated “debt hysteria”.
This public debt hysteria overlooks, or attempts to persuade people to overlook, that monetarily sovereign governments or currency-issuing institutions like the European Central Bank (ECB), could, as mentioned above, sustain practically any level of public debt if it is denominated in their own currency, i.e. the one they issued and control. Those nations like Argentina or Greece that historically got into trouble with debt were those that didn’t control their own currency, i.e. were not monetarily sovereign by either choice (hitching their currency to a foreign currency) or by design (giving up the national currency for a supra-national currency like the Euro). Public debt hysteria has, applied to monetary sovereign nations with freely floating currencies, no factual basis: Japan is currently growing at approximately 1.9 % GDP/year with public debt levels over 200% of their GDP, growing faster than, for instance, low debt Germany (not a monetary sovereign but a beneficiary of the Euro to date) at approximately 0.7% GDP/year.
No monetarily sovereign government (US, Canada, UK, Norway, Switzerland, Australia, Japan, etc.) borrows their own currency from other countries when they spend on deficit or issue bonds. However, they might offer, by statute or otherwise, secure, interest-bearing debt instruments (bonds) for investors and trading partners to place their money in, when the government spends more than it taxes as well as offer these bonds for sale in other circumstances. The money denominated in the national currency spent by a monetarily-sovereign government comes from the monetary sovereign, not from the domestic or foreign bond-buyer that secondarily purchases a bond from that government’s central bank or treasury, under certain legally-defined but not economically-determined budget conditions. In other words, the US dollar, Japanese yen or British pound doesn’t come from a Chinese, Canadian, Norwegian, or domestic bond buyer.
The above discussion overlooks the question whether public debt (bond) issuance should be statutorily required for deficit spending, i.e. should the amount of public debt (public bond issuance) be used as an accounting mechanism or liquidity-control mechanism (by tying up cash in a bond) levered to government spending over the amount of taxes collected. A monetary sovereign is always on any day, capable of paying back the total bond principle and interest for all outstanding bonds but the process of issuing the bonds and then paying them back over time has become a core component of the financial architecture of the private banking and savings systems. While a growing economy requires more government spending and government services as required by macroeconomic accounting identities, the issuance of bonds, if it assumed to act as a restraint on government spending, is not at all an effective nor task-specific tool for this, in many cases questionable, goal.
An orderly change in the process of legal and political accounting for deficit spending might detach deficit spending from bond (public debt instrument) sales, thereby clarifying what are two separate economic functions of government in a growing capitalist economy. Deficit spending is, in a world capitalist economy that requires economic growth as a condition of existence, an absolutely essential function for a majority of currency issuing governments. To link this to the notion of “debt”, although in this case public debts that carry with them no solvency risk, has led to a great deal of political confusion and in the case of deficit hysteria, malignant, destructive political mischief.
So-called deficit spending, a not very descriptive term which I have called the “net contribution” of government to growth, is not a “Left-Right” issue if both Left and Right are agreeing to, in their own ways, continue to endorse or support a growing capitalist economy (or a monetary economy of some other description that encourages private savings). Contrary to popular and political wisdom of the moment, balancing a national government budget or targeting budget surpluses are not “good” and deficit spending is not “bad”. In fact, the reverse is true: for most nations under most circumstances, national government budget balancing or budget surpluses are literally toxic for the economy while deficit spending is under many circumstances “good” for the economy. The conventional wisdom that issues from various neoclassically trained pundits of the Right or much of what passes for a “Left” nowadays, has, what is supposed to be sound, fiscal advice for monetarily sovereign governments, entirely inverted. If capitalist economies are to grow, governments are literally compelled to spend on deficit to provide enough liquidity for the economy as well as provide the public services that benefit a complex economy and civilization; political and economic predators have exploited the link to bond sales and increasing “debt” repayment obligations to muddy the political and financial waters.
In any case, the deficit/public debt hysteria campaign, even with the statutory requirement to issue bonds in the amount of budget deficits, is founded on a fundamental category error about the nature of public debt and how governments with their own floating currencies finance themselves, as well as upon a fundamental misconception about how economic growth and concomitant permanent growth in the amount of circulating or saved currency can even take place. The social catastrophe is that significant sectors of the political class in Europe and the US, who can significantly influence the trajectories of national economies and the fates of hundreds of millions of people, have been captured to some degree or completely by deficit/public debt hysteria. In test cases of the effects of austerity, the British government has increased unemployment, decreased wages, increased hunger and degraded social services by pursuing austerity and the US government has, as recognized by both the current and the outgoing chairs of the Federal Reserve, reduced economic growth and placed a drag on the economy by pursuing deficit hysteria-inspired austerity. More of the same is promised in the wake of more deficit hysteria-inspired policy. As long as deficit hysteria reigns in the national government, the chances of sustained recoveries with significant job growth are deemed by neutral observers to be very slim. Swimming against and denying the facts, the austerity campaign has exploited the confused nature of mainstream neoclassical economics and economic policy advice as applied to government finance to sow economic chaos and destruction.
By contrast, with the current financial and fiscal structure of the Eurozone, there is actual real worry regarding the debts of some Eurozone nations as the euro has a fatal design flaw which was noted by Wynne Godley, one of the most important and overlooked macroeconomists of the latter half of the 20th Century, 20 years ago at the Eurozone’s founding. Individual Eurozone countries are not monetarily sovereign: they must like private individuals, corporations and regional governments use a currency they do not issue, and borrow euros from others via bond sales. If they do not collect enough tax revenues they can become insolvent, defaulting on these bonds. To resolve this crisis, Europe must either split once again into individual countries or zones where the fiscal (spending) authority controls the currency, or unify spending and economic policy at the European level, becoming in essence the United States of Europe. Deficit hysterics impressionistically or calculatingly overgeneralize the effects of the Eurozone’s flawed currency, attempting to stampede policymakers in the UK, the US and elsewhere into greater fiscal austerity, causing gratuitous social misery and endangering our collective future.
Epicenter of Deficit Hysteria: Wall Street
While a number of right-wing billionaires outside the financial industry, including the Koch Brothers, and other anti-Keynesian, anti-New Deal right-wing political operatives have contributed heavily to the deficit scare, the nucleus of the deficit hysteria campaign in the US has emerged from Wall Street and the political pressure groups and think tanks that some financial tycoons have financed. Most prominently, the Wall Street billionaire Pete Peterson on the Republican side and the former Secretary of the Treasury under Clinton, Robert Rubin from Citibank on the Democratic side have both been pushing the line through various front groups, acolytes, and paid pundits over the last 20 years that there is a long-term deficit and public debt problem in the United States.
As outlined above, the deficit hysteric account of government spending and macroeconomics more generally is financial and economic fiction packaged as fact. These wealthy and powerful men have spun off think tanks and mentored disciples to (mindlessly) parrot their thinking that there is a combination of an “entitlement” problem and a debt problem for the U.S. government, due to social spending on the rising number of retirees relative to working age population. Unlike their far right-wing allies from outside finance, identified only with the Republican Party or rightward, the financial industry deficit hysterics have been able to straddle both major US political parties.
On the one hand, the cover story for why these extremely wealthy men would be concerned about the pittances paid to retirees is that they (claim to) “know money” and can “do the math”, which, it is supposed, is part of the skill-set of a “finance guy”. However, before the deficit hysteric scare reached its fever pitch, Congress and the Congressional Budget Office had already “done the math” and allowed for much of the growth in retirement spending by raising Social Security taxes, which is the current accounting mechanism (actually an inflation-dampening mechanism) for federal spending on retirement. Even this method of accounting by Congress and the CBO is somewhat superfluous in that, the only constraint on what one would pay retirees or how one would care for them are the amount of real resources (labor and material) which one would devote to them as opposed to devoted to goods and services delivered to the under-65 population. In other words there is no financial constraint for the federal government issuing a fiat currency to limit the dollar amounts of old-age pensions, just real constraints mediated by politics and the differing opinions that people have about where real resources should be directed. As to using a Social Security tax as an accounting mechanism, it may be a good idea to dampen the inflationary pull of federal spending in the economy by flexible linkage with some form of taxation, preferably not via a regressive payroll tax, but an exact balance of taxation and spending is not required nor, in most situations in the accounts of a monetarily sovereign nation state, desirable.
Projected increases in Medicare spending have mostly to do with the for-profit American healthcare system being the most expensive in the world; deficit hysterics have no solutions to health care cost inflation, as their solutions inevitably “deal in” the inefficient private health insurance industry.
Wall Street has a deep interest-based antagonism to Social Security and other direct public provision of financial help to the population that “disintermediates” them and the private insurance industry (cuts them out) of the role as lenders and providers of private insurance products. The business of Wall Street, i.e. the financial sector, is either managing real risk-related constraints symbolized by monetary amounts, enabling individuals, new enterprises or existing enterprises to take on new risks for potential common financial benefit, or imposing often arbitrary financial constraints upon households, corporations and governments and then collecting fees and interest from dealing with or managing those arbitrary or even superfluous financial constraints.
One of the “allies” of the business of the financial sector is market volatility itself, which creates financial risk that then needs to be managed. The unquestioning worship of markets within the finance sector, business commentary and most sectors of academic economics is in part conditioned by the central, income-generating role of financial markets’ own volatility in generating income for financial intermediaries. The mystical veil around markets serves the interests of the now over-powerful and over-wealthy finance-sector patrons of various social institutions, including academic economics. The ideology and current business model of the finance sector, eager to grow beyond its current, already expansive, bounds, is then to ensconce people, businesses, governments and academic economics within the self-reinforcing world of market volatility, market worship and private debt dependence, so as to collect more management fees and interest and exert political-economic control over their business, which means, if they are not held in check, control over almost the entire economy and society.
The already bloated and over-powerful financial sector then has a business interest in increasing the scope of the following financial instruments: private debt issuance, parceling tradable shares (equity) of assets from which fees can be collected for their “management” and in injecting volatility via markets into existing financial instruments, thereby increasing opportunities for industry profit via arbitrage, increasing consumer risk and therefore fees and dependence upon their “expertise”. It also has an interest in curtailing the scope of direct provision of financial and social insurance products to the public by fiat-currency issuing governments.
In terms of provision of basic needs and basic financial security, the inevitabilities of life, a monetarily sovereign government can offer a superior product, which if applied to an economically efficient extent would substantially shrink the market for the riskier products of Wall Street and the FIRE sector. There will always be a tension and competition between risk-driven and basic need-driven financial products but under the current neoliberal orthodoxy the former is considered morally and economically superior to the latter, a proposition which is not well supported by either reasoned moral argument or macro-economic reality.