Yves here. Some readers have objected to the use of the word “hyper inflation” with respect to the US housing market pre-crash. While they have a point, I regard this as artistic license. While it is clearly true that housing prices increases less than the well over 100% per annum considered to be a minimum threshold for “hyper-inflation,” the runup in most major markets in the US was way outside historical norms, which Yale economics professor Robert Shiller has stated is a mere average 0.5% real increase over the 100 years prior to the bubble era.
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. Jointly published at New Economic Perspectives
Howard Dean was attacked by the Democratic Leadership Council (DLC) for the high crime of opposing the second President Bush’s disastrous invasion of Iraq. While I strongly support the candidacy of Representative Keith Ellison to chair the Democratic National Committee (DNC), I am not arguing that Dean is not a progressive voice that needs to be part of the leadership team transforming the Democratic Party.
I write to urge him to learn the foundation of the economics of sovereign currencies. I urge his progressive supporters to encourage him to undertake this study. It is vital to his success and his input to transforming the Democratic Party.
Dean has one enormous blind spot – his assumption that federal deficits are evil and that the answer is to continue to wage vigorously the long war – the repeated assaults on the working class through austerity. I have been writing a series of columns about the fact that the Democratic Party must learn from the election that it has to stop this long war. I have explained why austerity produces immoral results because it is economically self-destructive and politically suicidal.
I researched Dean’s statements about austerity to try to understand why a man who opposed the DLC would be so enthusiastic about inflicting austerity on the working class. I found part of the answer. Dean was Vermont’s governor. Dean explained to a conservative “Squawk Box” host why he supported austerity based on his experience as a governor.
There’s a balance sheet that has to be met here and every Governor knows that, both Republicans and Democrats. And you got to do that when you’re the President.
The first sentence is correct. The second sentence is false. States do not have sovereign currencies. The United States has a sovereign currency. A nation with a sovereign currency is nothing like a state when it comes to fiscal policy – or a household. I cannot explain why Dean does not understand the difference and has apparently never read an economic explanation of the difference. But we can fill that gap. Again, I urge his supporters who have the ability to bring serious policy matters to his attention to intervene. Dean is flat out wrong because he does not understand sovereign currencies. The consequences of his error are terrible. They would lock the Democratic Party into the continuing the long war on the working class through austerity. That is a prescription for disaster for the Nation and the Democratic Party.
Progressive Democrats enlisted in the New Democrats’ austerity wars because they seemed to be politically attractive. The political narrative was as simple as it was false. The austerity creation myth was told first by Bob Woodward in the course of writing his sycophantic ode to Greenspan as the all-knowing “Maestro” of the economy. Bill Clinton, as President-Elect, was given an economics lecture by Alan Greenspan. The economics lecture – from an Ayn Rand groupie – was (shock) that austerity was good and New Deal stimulus was evil. Bill’s genius was taking the “Maestro’s” words as revealed truth and turning his back on the New Deal. Bill embraced austerity. The economy grew. Bill ran a budget surplus – the holy grail of austerity. Bill was followed by Bush under whose administration economic growth slowed and the federal deficits reemerged. There was a Great Recession.
The creation myth was clear. The newly virtuous New Democrats (after instruction in economics by Saint Greenspan) embraced austerity and all was good. The vile Republicans, hypocrites all, had renounced the true faith of austerity and they produced mountains of evil debt that caused poor economic growth.
Dean pushed this narrative in his Squawk Talk appearance. When asked to explain the specific Bush policies that he claimed were to blame for poor growth continuing under President Obama, Dean went immediately and exclusively to Bush’s increases in the federal “debt” to answer the question. “The biggest ones are the deficits that were run up…. The deficits were enormous.”
The New Democrats’ narrative, which Dean parroted, is false. One of the definitive refutations of the Greenspan (and Robert Rubin) as Genius myth was by the economists Michael Meeropol and Carlos F. Liard-Muriente in 2007. Their refutation was inherently incomplete because it was “too early” – the collapse of the housing bubble in 2007, the 2008 financial crisis and the Great Recession were vital facts that helped reduce the myth to the level of farce. These facts were unavailable to academic authors publishing in 2007. The authors discuss the enormous role that the stock bubble played in the Clinton expansion, but they do not discuss the housing bubble’s contribution.
Any tale that begins with Alan Greenspan providing Bill Clinton with the secret to economic success is justly laughable today. Clinton was our luckiest president when it came to economics. His expansion was largely produced by the high tech stock bubble. When it collapsed, the housing bubble, explicitly encouraged by Greenspan as a means of avoiding a severe recession, took up much of the slack. Bush eventually inherited from Clinton a moderate recession that led inevitably to moderately increased (not “enormous”) federal deficits. The housing bubble then hyper-inflated, bringing the economy rapidly out of the moderate recession. The hyper-inflation, of the housing bubble, however, was driven by the three most destructive epidemics of financial fraud in history and it caused a global financial crisis and the Great Recession. A great recession leads inevitably to a very large increase in the federal budget deficit.
Greenspan, Bob Rubin, and Bill Clinton were lucky in their timing – for a time. The historical record in the U.S. demonstrates that periods of material federal budget surpluses are followed with only modest lags by depressions and, now, the Great Recession. Fortunately, such periods of running material budget surpluses have been unusual in our history. As my colleagues have explained in detail, the U.S., which is extremely likely to run balance of trade deficits, should typically run budget deficits.
We all understand how attractive the myth of the virtuous and frugal Dems producing great economic results under Clinton while the profligate Republicans produced federal deficits and poor economic growth was to Democratic politicians. But the Dems should not spread myths no matter how politically attractive they are. The catastrophic consequences of President Obama and Hillary Clinton coming to believe such myths were shown when, as I have just described in several columns, they promised to lead the long war against the working class that is austerity.
If people like Dean focused on the origins of the Clinton creation myth they would run from its lies. The original actual creation myth is found in the book of Woodward. The brilliant Greenspan converted the young Bill Clinton by exposing him to the one true faith (theoclassical economics) and successfully calling on Clinton to renounce the devil (FDR) and all his work (the New Deal) and to sit at the (far) right hand of Ayn Rand. The result was economic nirvana. Politically, that’s a terrible creation myth for Democrats to tell around the campfire – or to voters. Economically, it’s a lie, indeed, a farce.