Bill Black: Obama Loved Austerity and the New Democrats Remain Addicted to It

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

I know the Republicans are complete hypocrites about federal deficits and debt. I know their dishonesty and faux deficit and debt hysteria, when a Democrat is president, harms the Nation and the world through the infliction of self-destructive austerity. Austerity’s primary victims are the working class and government social programs for the poor and working class. That means that the Democrats should never mimic the Republicans’ dishonesty, hysteria, and willingness to inflict austerity on the people of America and the world.

Cui Bono?

Unfortunately, the New Democrats embraced the economic malpractice of austerity with the passion of a convert. Michael Meeropol, an economist whose work I respect greatly, has rightly chastised me for failing to explain that fiscal austerity produces enormous winners, not just losers, and that this fact helps explain why the economic malpractice of austerity is so common. Austerity is a policy that aids the wealthy and harms the non-wealthy. One of the greatest triumphs of the wealthy is to get vast numbers of the non-wealthy to fail to understand this point.   The New Democrats’ passionate support for austerity reflects the interests of its primary donors – Wall Street elites.

Austerity produces higher unemployment rates. It can cause deflation. It leads to cuts in public employment and funding for social programs. High unemployment allows CEOs to force lower wages and creates a political climate in which CEOs are able to get legislation and rule changes embracing “labor flexibility.” That phrase is a euphemism for making it easier for firms to fire workers without. CEOs use high unemployment to induce an international race to the bottom on worker protections and wages under the pretext that doing so is essential for U.S. firms to maintain “global competitiveness.”

Deflation is a superb situation for (net) creditors. They get repaid in a currency that is gaining value. Deflation reduces interest rates, so the market value of existing long-term fixed rate debt instruments (bonds) can increase substantially.

Federal fiscal austerity could be implemented through tax increases, including tax increases on the wealthy and corporations. But this would harm rather than aid the wealthy so it increasingly rare to see it done because it would harm legislators’ wealthy patrons (donors).

President Obama Embraced the New Democrats’ Desire to Inflict Austerity

President Obama famously told Congressional New Democrats that they represented his views. Obama reluctantly agreed to a stimulus program that was considerably less than half of what economists knew was needed. Even that inadequate stimulus spurred our (inadequate) recovery from the Great Recession and, unlike the eurozone’s austerity policies that through many nations into Great Depression levels of unemployment, the U.S. growth rate soon surged and unemployment rates fell.

Obama’s reaction to the meaningful success of (inadequate) stimulus was to abandon it and join the Republicans’ condemnation of stimulus. In his January 27, 2010 State of the Union address he complained that when he took office he inherited “a government deeply in debt.” The implication, which is false, is that the U.S. would be better off if there were no federal debt or at least dramatically less federal debt. The U.S. would be worse off in either circumstance, for the alternatives – not winning World War II or having longer, deeper recessions – were very bad and the U.S. national debt causes no serious problems for our people or the people of the world.

Obama knew that was true. In the same address he explained.

Because of the steps we took, there are about two million Americans working right now who would otherwise be unemployed.  (Applause.)  Two hundred thousand work in construction and clean energy; 300,000 are teachers and other education workers.  Tens of thousands are cops, firefighters, correctional officers, first responders.  (Applause.)  And we’re on track to add another one and a half million jobs to this total by the end of the year.

The plan that has made all of this possible, from the tax cuts to the jobs, is the Recovery Act.  (Applause.)  That’s right -– the Recovery Act, also known as the stimulus bill.  (Applause.)  Economists on the left and the right say this bill has helped save jobs and avert disaster.

Obama then admitted that recent U.S. expansions had been based on bubbles and scams.

We can’t afford another so-called economic “expansion” like the one from the last decade –- what some call the “lost decade” -– where jobs grew more slowly than during any prior expansion; where the income of the average American household declined while the cost of health care and tuition reached record highs; where prosperity was built on a housing bubble and financial speculation.

The politics of how Obama phrased this point are clear – he only wanted to talk about the last decade during which President Bush held power. But Obama’s logic actually covered the last two decades and included both of President Clinton’s terms in which the supposed economic expansion “was built on a housing [and high tech] bubble and financial speculation.” “Speculation” is Obama’s euphemism for elite financial fraud such as the Enron-era frauds (which grew large under Clinton but collapsed under Bush) and the three great epidemics of mortgage fraud by elite bankers that hyper-inflated the bubble and drove the financial crisis and the Great Recession. Obama’s address repeated two of the New Democrats’ most destructive financial memes.

We need to make sure consumers and middle-class families have the information they need to make financial decisions.  (Applause.)  We can’t allow financial institutions, including those that take your deposits, to take risks that threaten the whole economy.

No, financial education of the 320 million of Americans up to the level of the Wall Street predators that prey on them is a preposterous answer that echoes the dishonesty of Milton Friedman’s “Freedom to Choose” nostrums. We can never provide a Wall Street level of financial expertise to 320 million Americans, indeed, we cannot do so for one million Americans. “Financial education” is the excuse New Democrats give for not regulating and prosecuting the Wall Street elites who run the frauds that devastate the global economy. It puts the blame on the consumer and the small investor – if only you had educated yourself properly your pension fund would not have been defrauded by the cartel that rigged LIBOR. Education has never worked and will never work against elite financial fraud – or VW or Takata’s frauds in the automobile industry. Education about fish will not protect you from being defrauded by the common practice of selling filets of cheap fish that purport to be filets of expensive fish.

The crisis had nothing to do with “financial institutions” deciding “to take risks that threaten the whole economy.” Humans take risks, not “institutions.” Humans are, overwhelmingly risk averse. The critical person who makes decisions about what financial institutions will do is the CEO. CEOs frequently prefer what George Akerlof and Paul Romer aptly described in their 1993 article “Looting: The Economic Underworld of Bankruptcy for Profit” as a “sure thing” rather than a “risk.” Fraud, particularly accounting frauds that loot the bank they control, is a “sure thing.” The behavior of bank CEOs who caused the massive losses that drove the crisis is not consistent with them being honest, rational gamblers. It is consistent with the “recipe” for accounting control fraud. Indeed, the bank CEOs used the same recipe in largely the same manner that their savings and loan predecessors had made infamous in the 1980s. Akerlof and Romer said the fraud option would become highly preferable when the risk of prosecution appeared low. Under Obama, the risk of elite bankers being prosecuted for leading the three epidemics of mortgage fraud that drove the crisis became nil.

The supposed economic successes of the Clinton years (and austerity) have been exposed as fictional. The Clinton expansion was driven by the two largest bubbles in world history and the four greatest epidemics of elite financial fraud in history. The first of these epidemics was the Enron-era frauds. The other three epidemics of mortgage fraud began under Clinton, but blew up on Bush’s watch. Bush’s “wrecking crew” was even worse than Clinton’s assault on effective regulation, so you should not feel sympathy for Bush. The lost two decades have extended during Obama two terms of office. Significant wage gains only began in the U.S. in 2016. In particular, blacks and Latinos have suffered catastrophic wealth losses due to the fraud-driven financial crisis and the predatory for-profit schools. Black and Latino households’ wealth losses have not been regained under the Obama recovery. The top one-ten- thousandth of one-percent have been the massive winners in income and wealth under Obama.

Obama next flaunted his New Democrat colors, saying we needed to create trade deals to increase the number of U.S. jobs. He portrayed the deals as unambiguously good for workers and jobs – with no losers. He proposed nothing to help the millions of U.S. workers that could lose their existing jobs under the trade deals.

The 2010 presidential address was already a nightmare at that point, but it was at this juncture that Obama decided to channel his inner New Democrat dogmas and become a champion for the glories of austerity. He went on at length, so I will reproduce the relevant passages to provide the context. His signature metaphor and simile were not simply economically illiterate; they were knowingly false and exceptionally harmful to the American people, particularly the working class. That means they Obama’s austerity plans were also a betrayal of the working class by the New Democrats, who had radically changed a party that once defined itself as the champion of the working class. The consequences for the Democratic Party would soon prove horrific. I’ll comment after each paragraph of Obama’s address on the joys of austerity.

Now, even as health care reform would reduce our deficit, it’s not enough to dig us out of a massive fiscal hole in which we find ourselves.  It’s a challenge that makes all others that much harder to solve, and one that’s been subject to a lot of political posturing.  So let me start the discussion of government spending by setting the record straight.

Obama had just asked everyone for ideas about how to contain health costs, claiming he knew of no better way to do so. Obama, of course, in his deal with the health insurers, had agreed not to adopt the most effective means of cost containment. Here, he was disingenuous.

At the beginning of the last decade, the year 2000, America had a budget surplus of over $200 billion.  (Applause.)  By the time I took office, we had a one-year deficit of over $1 trillion and projected deficits of $8 trillion over the next decade.  Most of this was the result of not paying for two wars, two tax cuts, and an expensive prescription drug program.  On top of that, the effects of the recession put a $3 trillion hole in our budget.  All this was before I walked in the door.  (Laughter and applause.)

Yes, good point – recessions produce large federal budget deficits. Now explain that this is good – it is an “automatic stabilizer” that occurs without any need for new legislation or rules, so it acts far more quickly and reduces the length and severity of recessions. Obama, of course, takes the opposite tack – a tack he knows to be a lie – and presents the growth in the deficit as a bad thing. Note that he ignores the fact that President Bush inherited a recession that officially began in March 2001 at the start of his term so important parts of Bush’s earlier deficits were also the product of automatic stabilizers acting desirably.

But we should start with the budget surplus in 2000. Obama portrays this as unambiguously wonderful, but he presents no basis for his implicit claim. Every time the U.S. has run a substantial budget surplus it has been followed by a depression or the Great Recession. That does not prove the surpluses caused the depressions and the Great Recession, but it certainly puts the burden on anyone trying to tout the desirability of running a budget surplus in the United States, particularly given the balance of trade. Obama presents it as if it were axiomatic that any deficit under Bush was harmful, but presents no evidence that it was.

Now — just stating the facts.  Now, if we had taken office in ordinary times, I would have liked nothing more than to start bringing down the deficit.  But we took office amid a crisis.  And our efforts to prevent a second depression have added another $1 trillion to our national debt.  That, too, is a fact.

No, it is not a “fact” that “our efforts to prevent a second depression have added another $1 trillion to our national debt.” It is a falsehood. Had Obama immediately inflicted austerity rather than his modest and deeply inadequate stimulus our recovery would have been vastly worse. The eurozone’s recovery was crippled by austerity. If our recovery had been far worse, then the national debt would have risen by even larger amounts. Why would Obama have “liked nothing more than to start bringing down the deficit” had he “taken office in normal times”? We all know that is true because he is a self-proclaimed believer in the New Democrats’ failed dogmas, but what is his rationale? The phrase “like nothing better” is meant to indicate that deficit reduction would be one of his highest priorities and that he would do so with great enthusiasm. Why? Would the U.S. have been better off in 2010 with austerity? It would have been worse off. As Obama moved toward austerity he slowed the economic recovery. Had the Tea Party coalition not blocked his “Grand Bargain” with the GOP leadership the even greater austerity would have choked off the recovery and made Obama a one-term president.

I’m absolutely convinced that was the right thing to do.  But families across the country are tightening their belts and making tough decisions.  The federal government should do the same.  (Applause.)  So tonight, I’m proposing specific steps to pay for the trillion dollars that it took to rescue the economy last year.

This is the metaphor from Hell. It is a favorite metaphor of Jack Lew, who Obama would soon name his budget director and eventually his Treasury Secretary. In January 2010, when Obama made this address, Lew and Treasury Secretary Geithner were Rubinites who were extreme deficit hawks even from the perspective of the New Democrats. Geithner denounced stimulus as providing only a harmful “sugar” rush. The “tightening their belts” metaphor violates the most fundamental macroeconomic truth in dealing with a severe recession or depression. Lew is a lawyer. Geithner has boasted that he took only one class in economics – and couldn’t understand it. Rubin was not an economist. Their austerity dogmas were the product of ignorance of economics, but what Rubin, Obama, Geithner, and Lew have in common is a devotion to the interests of Wall Street CEOs.

In a serious contraction, particularly one following a credit-driven bubble, consumers are worried about losing their jobs. They begin to repay their debts and reducing consumption. This is perfectly rational from their perspective. CEOs react to the fall in consumer demand in an equally rational manner – they reduce output and spending on investments. Banks are likely to constrain credit and try to build capital. This too is rational. The result is that there is inadequate demand and unemployment and business failures rise. At the very time that demand is most inadequate and the need for spending on consumption and investment would be most helpful to the economic recovery, consumers and CEOs are likely to do the opposite. Economists call this “the paradox of thrift.”

There is one entity that is an ideal position to do the opposite – to increase demand in response to a recession or depression. This entity is not credit-constrained by bankers. The entity is a government with a sovereign currency that borrows only in that currency and allows that currency to freely float. The U.S. is such a nation. It is critical that our federal government provide fiscal stimulus, in addition to the automatic stabilizers, to counter the recession or depression.

Obama’s metaphor is exactly the opposite of economic literacy. If “families across the country are tightening their belts” then it is particularly essential that the federal government do the opposite – not “the same” – to counter the effects of the sharp fall in effective demand.

No, the federal government need not and should not “pay for the trillion dollars” you spent on stimulus (and, the federal government did not spend a $1 trillion on stimulus). If you “pay for” the stimulus by austerity you will harm the recovery and the people of America and likely increase the ultimate debt. Economic growth is the key to deficits and debt of a sovereign nation.

Starting in 2011, we are prepared to freeze government spending for three years.  (Applause.)  Spending related to our national security, Medicare, Medicaid, and Social Security will not be affected.  But all other discretionary government programs will.  Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t.  And if I have to enforce this discipline by veto, I will.  (Applause.)

Count the number of times New Democratic dogmas drew applause. First, particularly given Obama’s increasing embrace of austerity, but also given the terrible scale of the Great Recession, 2011 was far too soon to even be thinking of inflicting austerity on the Nation. The results were sure to slow the recovery and harm Americans. That is what happened.

Second, this is the paragraph that presents Obama’s simile from hell about austerity. “Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t.” The simile is a variant on the economic illiteracy of Obama’s metaphor from hell. Yes, families are “cash-strapped” when a credit expansion leads to a Great Recession. Families’ incomes and wealth drop as the stock market tanks and their homes lose market value. Families react to seeing neighbors losing their jobs and their homes by decreasing consumption. Families see credit being constrained by banks’ tighter credit policies. Families see interest rates fall sharply on their savings accounts, further reducing their income. It is precisely because families are “cash-strapped” and fearful of further losses that they reduce their consumption – exacerbating the already inadequate demand and deepening the Great Recession.

The United States government is not – and cannot be except through self-inflicted insanity such as austerity and debt limits – “cash-strapped.” The U.S. creates cash. The U.S. can be resource constrained, but not cash or credit constrained. The U.S., with debt levels that Obama is about to describe in his address in histrionic terms, was able to borrow essentially unlimited amounts of money at interest rates near zero. (More to the point, the U.S. does not have to borrow its sovereign currency because it makes its sovereign currency.) These facts explain why Obama’s logic is reversed – it is essential that the U.S. not act as if it were “cash-strapped” in response to a Great Recession.

Third, Obama adds to his inanity by promising to be more of an austerity hawk than Republican legislators and “veto” any bill that would address a growing problem, such as the Zika virus becoming epidemic through increased government spending. This is mind-numbingly stupid as a policy, and the rationale Obama offers for the stupidity rests solely on an economically illiterate simile.

We will continue to go through the budget, line by line, page by page, to eliminate programs that we can’t afford and don’t work.  We’ve already identified $20 billion in savings for next year.  To help working families, we’ll extend our middle-class tax cuts.  But at a time of record deficits, we will not continue tax cuts for oil companies, for investment fund managers, and for those making over $250,000 a year.  We just can’t afford it.  (Applause.)

Getting rid of programs that do not work and cannot be fixed is a good thing. But we can “afford” anything that does not produce a serious constraint on real resources needed elsewhere in more critical applications.

Now, even after paying for what we spent on my watch, we’ll still face the massive deficit we had when I took office.  More importantly, the cost of Medicare, Medicaid, and Social Security will continue to skyrocket.  That’s why I’ve called for a bipartisan fiscal commission, modeled on a proposal by Republican Judd Gregg and Democrat Kent Conrad.  (Applause.)  This can’t be one of those Washington gimmicks that lets us pretend we solved a problem.  The commission will have to provide a specific set of solutions by a certain deadline.

What is the point of Obama calling the federal budget deficit “massive”? Yes, it is a huge number. The Great Recession officially began in the fourth quarter of 2007. The automatic stabilizers began to kick in almost immediately and greatly reduced the length and severity of the Great Recession. Indeed, it officially ended in the second quarter of 2009 shortly after Obama took office – and well before his stimulus program could take effect. The dates on which recessions begin and end is a technical matter that is inherently decided after the fact. It does not mean that the economy was doing well before the official onset of the recession or after the official end of the recession. Indeed, it is typical that the economy was doing very badly before and after the official start and end dates of the recession.

The point is that a huge portion of the Bush deficit that Obama inherited was the product of the automatic stabilizers working well to limit the depth and length of the Great Recession. That was a good thing.

Obama’s “fiscal commission” was an obscenity. It was a creature of Pete Peterson, the Wall Street billionaire whose greatest dream is privatizing Social Security. Obama stacked it with pro-austerity officials. Despite this fact, the commission failed to reach the super-majority required under its own governing documents to make recommendations. The co-chairs, two infamous deficit fanatics, ignored the commission’s own governing documents to present their recommendations. In this article I do not address the supposed crises in the safety net. Again, the short answer is that the meaningful constraint is real resources, and the safety net does pose any serious risk of causing a constraint in real resources.

Now, yesterday, the Senate blocked a bill that would have created this commission.  So I’ll issue an executive order that will allow us to go forward, because I refuse to pass this problem on to another generation of Americans.  (Applause.)  And when the vote comes tomorrow, the Senate should restore the pay-as-you-go law that was a big reason for why we had record surpluses in the 1990s.  (Applause.)

In the last sentence Obama shows he is among the most extreme of the New Democrats in his embrace of austerity. First, the “record surpluses in the 1990s were built on the non-foundation of the two largest bubbles in history – the and housing bubbles. Second, the record surpluses set the stage for the Great Recession. As I noted, prior federal budget surpluses were followed closely by depressions. Third, “pay-as-you-go” is an example of mindless austerity.

Now, I know that some in my own party will argue that we can’t address the deficit or freeze government spending when so many are still hurting.  And I agree — which is why this freeze won’t take effect until next year — (laughter) — when the economy is stronger.  That’s how budgeting works.  (Laughter and applause.)  But understand –- understand if we don’t take meaningful steps to rein in our debt, it could damage our markets, increase the cost of borrowing, and jeopardize our recovery -– all of which would have an even worse effect on our job growth and family incomes.

Ah, a completely unfunny attempt at a joke. I’d like to start austerity now, but the legislative process takes time so I won’t be able to inflict austerity on the American people until next year. It’s a dumb, not funny line for multiple reasons. Tens of millions of Americans were guaranteed to be “still hurting” in 2011, when Obama threatened to begin inflicting austerity. Austerity in 2011 was guaranteed to be a self-inflicted wound. The Democratic Party should be a party in which every congressional member (not “some”) reject inflicting austerity when tens of millions of Americans are in agony as a result of the Great Recession and unemployment rates and rates of leaving the work force are high.

The last sentence of the paragraph is even worse for every argument it makes is a lie. Stimulus was a huge gain to our “economy.” Stimulus did not “increase the cost of borrowing.” Austerity did “jeopardize our recovery” – reducing job growth and family income.

From some on the right, I expect we’ll hear a different argument -– that if we just make fewer investments in our people, extend tax cuts including those for the wealthier Americans, eliminate more regulations, maintain the status quo on health care, our deficits will go away.  The problem is that’s what we did for eight years.  (Applause.)  That’s what helped us into this crisis.  It’s what helped lead to these deficits.  We can’t do it again.

Obama proposed to “make fewer investments in our people” – that is precisely what austerity did. It is not true that Bush’s elimination of “more regulations … helped us into this crisis.” It was Clinton that eliminated key financial regulations. More importantly, it was the combination of Clinton and Bush that desupervised finance – desupervision proved to be far more destructive than Clinton’s deregulation. Bush’s earlier deficits had nothing to do causing the crisis. His deficits once the economy slowed and then went into the Great Recession were the product of the automatic stabilizers and they “helped us” out not “into this crisis.”

Rather than fight the same tired battles that have dominated Washington for decades, it’s time to try something new.  Let’s invest in our people without leaving them a mountain of debt.  Let’s meet our responsibility to the citizens who sent us here.  Let’s try common sense.  (Laughter.)  A novel concept.

“Common sense” is not common. People extrapolate to the federal government what they know best – the nature of the household and its budget constraints. They desperately need the President of the United States, the Treasury Secretary (Geithner), and the soon-to-be-appointed head of the Office of Management and Budget (Jack Lew) explain why the federal government is not remotely similar to a household when it comes to constraints and why that means the federal government has the unique ability and moral duty to use fiscal stimulus and serve as the employer-of-last-resort to reduce the severity and length of recessions and provide full employment to all those willing and able to work.

The NYT Resurrects Its Love for Austerity

On January 9, 2017, the NYT’s op ed guy who spent his summer attacking Bernie Sanders and praising Hillary Clinton turned his sights on Donald Trump and congressional Republicans in a piece entitled “The Betrayal of Fiscal Conservatism.” That is his euphemism for austerity. He began his ode to austerity with this assertion.

The label of “fiscal conservative” used to mean something.

It referred to people — mostly Republicans — whose top priority was the health of the federal government’s balance sheet. They favored a small deficit, or no deficit at all.

He is writing in 2017, when even the IMF admits that stimulus was a success and austerity a failure. We can observe the difference in growth between the eurozone, which mandates austerity, and the U.S. where even a grossly inadequate stimulus program produced far superior growth. But none of this penetrates this writer who so loves the New Democrats’ ever present desire to inflict self-destructive austerity on Americans, particularly the working class. What could go wrong?

A federal budget is not “health[y]” when it is in surplus and sick when it is in deficit. A federal budget deficit due to the automatic stabilizers’ powerful response to the Great Recession is a sign of health. An even larger (short-run) budget deficit through a stimulus program is an even greater sign of economic health that should be celebrated. People who seek to inflict austerity on the people in such circumstances are not “fiscal conservative[s].” They may be well meaning, but ignorant of economics. However, as I explained in response to Dr. Meeropol’s chastisement of my failure to note who wins under austerity, they may want to enrich their wealthy donors and themselves.

Why would a NYT op ed celebrate Republicans “whose top priority” was austerity? The “top priority” of members of Congress should be the welfare of Americans, particularly the non-wealthy. Austerity is not a logical goal of a nation with a sovereign currency, much less its “top priority.”

The NYT op ed ends with this obscenity.

The original meaning of “fiscal conservative” may be gone. In fact, Democrats have had a better claim on the label in recent years than Republicans. But it’s important to remember that the concept is as legitimate as ever. The United States does indeed face a long-term budget deficit that eventually will require a solution, and cuts to government spending almost certainly need to be part of that solution.

So the next time that you hear a politician describe himself or herself as a “fiscal conservative,” I recommend deep skepticism. But I also hope that Washington one day has more real fiscal conservatives than it does today.

Yes, New Democrats are far more consistent proponents of inflicting austerity on Americans, particularly the working class, than are Republicans – and that is a travesty. The NYT op ed was written after Trump’s election driven by the wholesale rejection of the New Democrats’ agenda by the white working class. The New Democrats have learned nothing from that defeat. They continue to push the message of Wall Street and the wealth – the infliction of self-destructive austerity – as their defining mantra. They continue down the disastrous path that Tom Frank has been warning them about for over a decade. (Yes, I know that Trump will continue to betray the white working class.) We desperately need a “Washington” and a political party in which no official buys the Wall Street dogmas favoring austerity. Austerity is to economics as bleeding a patient is to medicine. Among the last things that “Washington” needs is to have “more” Wall Street sycophants pushing austerity “than it does today.”

And no, “cuts to government spending” are not “almost certainly” essential in the “long-term.” Growth is what is essential, and austerity is the great enemy of American growth. Clinton’s “growth” was not the product of austerity and it was not real. It was the product of the two largest bubbles in history. The U.S. had far higher deficits relative to GDP in and after World War II. Does anyone think austerity was the proper answer to Hitler, the attack on Pearl Harbor, or the Great Depression?

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  1. Charles

    I enjoyed reading this piece. I won’t forget the paradox of thrift as it relates to households vis a vis the govt. I also won’t forget his mantra that growth is required for the economy to function properly. It seems to me though that this growth will one day run into limits as the study of ecology suggests.

    1. nonsense factory

      Here’s what I think the average person forgets when thinking about government debt vs. personal household debt – it involves how a monetary system is different from barter. I tried to come up with a very basic example:

      The tribal leaders of an isolated South Pacific island chain want their group to start using money instead of the direct barter of goods and services. They settle on a rare form of sea shell that occasionally washes up on their beaches as the currency. To introduce this money into circulation, they have no option but to hand it out to citizens in exchange for goods and services. Perhaps they would collect goods, such as fish and vegetables and simple manufacturies, from their people as tribute and hand out sea shells in exchange, and then tell the people they could exchange them for goods or services from each other at the same rate.

      Obviously, increasing the amount of sea shells in circulation, all other factors unchanged, would tend to result in inflation, a reduction in their ability to purchase goods and services. But then, let’s say the population doubled and it became twice as productive (they got better at division of labor, perhaps). That would tend to result in deflation if the number of sea shells in circulation was not increased.

      Thus, responsible leaders would clearly want to control the supply of sea shells; and if people could run out and gather shells themselves, it would defeat the system. One way to defeat such private efforts to collect their own sea shells would be to print paper money embossed with sea shells, and replace all the real sea shells with this paper money – which only had any value because everyone agreed to its value. This printed money cannot be exchanged for sea shells, i.e. they’ve gone off the sea shell standard. Money is now a creature of the tribal government, who regulates its supply to the population.

      MMT in a nutshell? However, if sea levels rise and the island is submerged, then the ecological limits on human economic activity you mention come into play; likewise if the population grows too large, starvation will ensue regardless of the monetary policy of the tribal leaders.

      1. Optimader

        Unsupported criticism not ad hominem. Although, would be better framed as “I feel that is a rambling screed because…”

        Whomever would just waste bandwith by writing “what a rambling screed” is stupid.
        That would be ad hominem

              1. Katharine

                No, that one should be whomever: it’s the direct object of concern. The case of the pronoun depends on its grammatical function.

                I may be fighting a losing battle, but I will “go down with the colors nailed to the mast.”

  2. Carla

    This: “(More to the point, the U.S. does not have to borrow its sovereign currency because it makes its sovereign currency)” may be the most important point in this entire overlong article, and it’s buried in parentheses. Furthermore, the entire piece is rendered difficult to read by numerous typos, missing words, and errors or omissions of punctuation.

    Prof. Black’s device of referring to “he who shall not be named” — the “NYT op-ed writer” is too cute by half, IMO.

    Finally, Black’s falling back on “groaf” as the only remedy for economic malaise strikes me as typical of the malignant and mistaken denial of reality that he spends the whole piece slamming the “New Democrats” for. But that’s just me.

    1. Boatright

      Prof. Black will never win an award for concise, understandable writing. His well titled “The Best Way to Rob a Bank…” , intended for citizen readers is also poorly organized, filled with unreferenced acronysisms, etc..

      HOWEVER!! In spite of his deficiencies as a writer, he is a brilliant lawyer/economist and a member of an important group of heterodox economists centered at the U of Missouri. If Western economies are ever to break out of the “secular stagnation” and grinding inequalities of present day political economic conditions we would do well to carefully study and learn from this unfolding revolution in economic thought.

      It is too bad but also too true that starting with Bill Clinton, Obama and nearly every Democratic leader has sadly bought into the neo-liberal idea that the cure for the chronic under-perfomance of our economy and it’s repeated debt-fueled asset bubbles is to tighten our belts and make it ever easier for Wall Street of invent new ways to pump up the latest get rich quick deal..

      1. a different chris


        >sadly bought into the neo-liberal idea that the cure for the chronic under-perfomance of our economy and it’s repeated debt-fueled asset bubbles is to

        I am pretty sure that he did not “buy into that.” He doesn’t know or care. What he, the Clintons and etc do understand is that saying these things opened up the right checkbooks and got the right talking heads you needed to get into power.

        1. GF

          I thank Bill for taking the time (University professors have significant time restraints) to explain in some detail what happened 7, 15 or 20 years ago that led us to the current situation. However, it would be appreciated if some prominent organization could inform us common people the day, week or month after a telling speech that the policy being advocated will lead to probable disaster.

      2. Harold

        I second this opinion as regards to his brilliance & moral clarity (I haven’t read his book, only his articles and have watched videos of interviews on the web. As a live speaker, his charm and twinkling good humor more than make up for any defects in his writing. I do wish the latter were more concise and quotable, though. A few sessions with a good editor could get him into shape in no time, I think.

    2. Rodger Malcolm Mitchell

      Bottom line: Both Republicans and Democrats continue to tell “the Big Lie,” which is: “Federal taxes fund federal spending.”

      Sadly, the public does not understand that those federal taxes they pay fund nothing. FICA does not fund Social Security, and income taxes don’t pay for the military.

      By contrast, state and local taxes DO fund state and local spending.

      Those who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty do not understand economics.

      And as for that so-called federal “debt,” it is nothing more than the total of deposits in T-security accounts at the Federal Reserve Bank. That’s all the “debt is: Bank deposits, similar to savings account deposits.

      1. DanB

        This is what needs to be made explicable/understandable to the public because it is counterintuitive to tell people debt does not matter by virtue of being “nothing more than the total of deposits in T-security accounts at the Federal Reserve Bank.” Tell this to most people and you get a “Great, but what does that mean?” look. Our culture has instilled in us the stricture that debt is bad and even a sign of moral turpitude. The German word for debt, Schuld, is also the word for guilt.

      2. Carla

        Yes, RMM. I understand. But this: “(More to the point, the U.S. does not have to borrow its sovereign currency because it makes its sovereign currency)” … still seems to me to be the most significant point Black makes in his overlong post, yet neither he nor you place any emphasis on it.

        And what is the MMT solution to the obvious fact that a finite planet cannot sustain infinite growth?

        1. reslez

          This article focused on Obama’s embrace of austerity. It is not reasonable to expect it to discuss ecological limits to growth as well. If you’re interested in that topic you could try Bill Mitchell’s blog. He discusses it frequently. Infinite growth is an unhinged idea pushed by capitalism, not MMT.

        2. skippy

          Growth does not necessitate increased consumption, there are myriad ways to increase jobs and wages [local] doing things to clean up the past and prepare for the future, most of imo that the private sector has no interest in.

          Just the environmental aspect of increased global water levels necessitates mitigation or complete demolition and reclamation.

          disheveled…. the monolith thingy is wonky at best….

  3. Watchman

    Great article and you had me until the “white working class” bugaboo. Many working class are nonwhite. Many are. Continuing this NYT-manufactured distinction only serves to divide and conquer, not unite. You cannot continue to invisibilize the many working class who fall into several groups – many voted Bernie! many have PoC for their relatives – like the Right wants you to. For a bit of eyewash corollary to this, check out this post, from NC a few days back:

    1. oho

      ‘white working class’ should read ‘white and non-white people who didn’t have access to the Fed’s Discount Window lending’

      1. Allegorio

        Or simply put, “the working class”. Saying “white working class” perpetuates the meme that they are voting against their own self interest when voting against the neo liberal New Democrat agenda. Did I hear correctly, did President elect Trump say at his press conference that prescription drug prices should be negotiated by the government? Did 15 Democrat Senators vote against importing cheaper drugs from abroad. I would say that the “white” working class did not vote against their own self interest. I would say that in light of the article above, and Hitllery Klinton’s pro austerity ramblings, as in “who’s going to pay for it” garbage economics, it is the working class voters who voted for Hitllery Klinton that voted against their own self interest. Thank heaven for the electoral college. Despite his retro-grade Cabinet appointments, I’d say the lesser of two evils was elected in the last election. Instead of protesting against the President elect, progressives should start persuading and educating the President elect whose instincts seem to be in the right place, instead of drinking the Wall Street Kool-Aid and parading around like useful idiots.

        1. animalogic

          “Did 15 Democrat Senators vote against importing cheaper drugs from abroad [….?]”
          Aren’t “free markets” wonderful…? Unless, aren’t….

  4. Herbert Davis

    Again, the short answer is that the meaningful constraint is real resources, and the safety net does pose any serious risk of causing a constraint in real resources……missing a word?

    NOT..after does and before pose

  5. Jim Haygood

    “An even larger (short-run) budget deficit through a stimulus program is an even greater sign of economic health that should be celebrated.”

    Let’s try rewriting Bill Black’s cri de coeur in human terms:

    “An even larger (short-run) injection of Narcan as a stimulus program for an unconscious heroin addict is an even greater sign of personal health that should be celebrated.”

    In poor Bill’s fevered imagination, a dark cabal of bond managers and conservative Senators takes a private train to Jekyll Island to hatch a conspiracy against the public. “Austeritah!” they cheer in their rich Potomac accents, clinking brandy glasses as contraband Cuban cigars are lit up.

    Amazing that Black can pen a whole article about austeritah without defining what it is. Apparently it’s any budgeting process that he objects to.

    I’d go down in the basement and hug my crates of hoarded Treasuries. But they only exist in electronic form anymore. :-(

    1. Alejandro

      As far as ” fevered imagination”, that’s just you projecting. Remember, the constraints on a user, are not the same constraints on the issuer of a currency, your inability {OR} unwillingness to recognize this fact notwithstanding. It’s more about refuting the sophistry in the ” budgeting process”, than “objecting” to “it”…what’s nominal? and what’s real?

      IMHO, “Capitalism” v. “Socialism” is a false dichotomy. Not sure you can define either, without the other, for context. Even then, it seems you’re left scrambling to use the same referents from a tribal POV…more “idpol” pigeonholing…the “public-private” toggle switch can be and has been a deceptive and misleading ruse, e.g., public-private “partnerships”…”mulcting public money”, i.e., raiding “public” coffers for “private profit pricing”…

    2. Mel

      The definition is larded all through the essay. If you read it, you’ll see it. Typically the provision that if everybody else is cutting spending, then the government has to cut spending too.

    3. Rodger Malcolm Mitchell

      The biggest lie in economics: Federal taxes fund federal spending.

      Those who do not understand the difference between Monetary Sovereignty and monetary non-sovereignty do not understand economics.

    4. reslez

      I guess if it were up to Haygood the “unconscious heroin addict” would be left to die. There’ll always be a few psychotic gold bugs rubbing their hands with glee at the idea of financial apocalypse, or Calvinist sociopaths excited to inflict economic suffering on the innocent. Thankfully the rest of us have better sense.

      For the record I don’t know what “austeritah” is and I doubt Bill Black does either, but anyone who’s lived through the last 8 years certainly knows austerity. According to a cursory google search, “Austerity is a set of economic policies implemented with the aim of reducing government budget deficits.” The point of the article is that budget deficits are meaningless when you control your own currency: you’re better off focusing on economic activity and the trade balance. Anyway happy to help.

  6. Steven Greenberg

    Bill Black is just telling us what economists have known since 1930s and 1940s. It is so very unfortunate that propagandists like Milton Freidman have succeeded in making even economists unlearn the truth they used to know.

    1. Mark Anderlik

      Exactly. In the case of Obama it’s that many Democrats can’t see that the emperor is not wearing any clothes when it come to the federal debt and austerity. This is a good explanation of how Obama has lead to Trump.

    2. UserFriendly

      Interesting, since, weren’t free to have crazy budgets until nixon took us off the gold standard.

      1. susan the other

        but leaving the gold standard was not threatening because all currencies fluctuated with ours, keeping the petrodollar relatively strong, no? I’m beginning to think this GFC is a standoff between us and the EU to see how long either of us can maintain the strongest currency – so far the EU is losing so our lesser austerity proved best for the 1% …also too didn’t deregulation allow more frenzied debt markets so that any fluctuations in the value of the dollar could wipe out billions – that would explain why Wall Street was so determined to impose a vigilante level of austerity that maintained a strong dollar… it would have been better to never let them get on the razor’s edge in the first place. And it also explains the tightrope walk the Fed does; always threatening to raise interest rates if “the economy overheats.” God forbid Trump should prove correct that the dollar is too strong. Who is going to lose this time?

  7. Altandmain

    Compounding the problem, the Bush administration made tax cuts for the rich, something that Trump is likely to repeat.

    This worsens inequality because it means that the rich have far more money than the poor. Worse governments often pass regressive taxes to make up for the lost revenue. Even worse, the rich, absent any investment opportunities and contrary to the “job creator” myth, tend to use their money for speculation, increasing the risks of another crash.

    But yeah, Obama’s hope and change have undermined the legitimacy of the whole system. Clinton may have ran an awful campaign, but Obama helped elected Trump too by delivering a Presidency that failed to deliver the change he promised in 2008. He was supposed to be the President that Bernie Sanders’ platform was. Instead he perpetuated the status quo.

    I suspect that we will see Obama rich off speech money soon enough.

  8. washunate

    I appreciate Black defining what he means by austerity, something many people have refused to do explicitly.

    However, the definition in this piece is so broad as to be meaningless for other purposes. It in no way suggests that balanced budgets are bad or that budget deficits are good. It doesn’t offer any policy guidance at all beyond what we already have known for decades about what works to achieve various goals.

    This is important because other authors use the same word (austerity) to discuss the relationship of tax revenue to spending rather than whether the policy helps the wealthy at the expense of the general public. Black’s definition here cannot be used to support the contention that budget deficits are inherently good.

    1. susan the other

      Yes they are good. I think that is exactly the long point. That deficits are good for a sovereign currency because they prevent deeper imbalances that destroy the economy – and ultimately cause serious inflation/deflation.

      1. washunate

        Deficits don’t inherently prevent imbalances, though, either theoretically or empirically.

        The Reagan-Obama deficit years have been great for wealthier households.

      2. paulmeli

        Deficits are the only way to grow the money supply in a sustainable way, as opposed to private credit. Private credit is a massive wealth transfer from debtors to the banking system.

        What’s that you say? A trade surplus is another way. Yes, but that requires at least one other country to run a deficit.

        If the money supply remains at constant level, any “growth” (financial) will be a bubble, and bubbles must always burst (revert to the mean). Sustainable growth requires running deficits.

        It isn’t a coincidence that in 240 years we have run deficits for ~85% of our budgets. The times we’ve run a surplus or balanced the budget have all been followed by a recession or depression.

        1. washunate

          That raises an interesting question, among others: why do people interested in equity and environmental stewardship and human rights and so forth care about growing the money supply? We have a multi-trillion dollar GDP and a government that is the largest purveyor of violence on the planet. This isn’t the 19th century when government was still fairly small relative to the private sector. How much more do we need? When do we have enough in currency terms and can turn our attention to other metrics of wellbeing?

          I understand that there is a faith-based argument in some leftist circles that the quantity of money matters (where money is defined specifically as currency units in the formal economy rather than more broadly as labor). I am not an adherent of that belief system, however, and find it interesting that advocates of currency-denominated growth are so unable to address substantive critiques thereof.

          1. Left in Wisconsin

            why do people interested in equity and environmental stewardship and human rights and so forth care about growing the money supply?

            This is a different question if the subject is “ordinary people” than if the subject is “left-ish economists.” Ordinary people could care less about growing the money supply. Left-ish economists seem to me to be a varied lot, but many consider themselves “realists” or “practical” and do not see any way to get from where we are to where we would like to be that doesn’t involve continuation of Keynesian growth. I would call this a lack of imagination.

            When do we have enough in currency terms and can turn our attention to other metrics of wellbeing?

            I’m not sure who the “we” is in this question but I absolutely agree it is time to focus on other metrics.

            1. washunate

              Isn’t one of the ironies in invoking Keynes that he offered a way out of the growth trap? He said compounding growth would allow us over time to solve the economic question of how to provide enough resources. Then, instead of continuing down a path of further materialism, we could choose a new direction: progress through working less.

              It’s also what a lot of the New Deal was about, especially SSA and FLSA. Progress through better work and spreading it around, not more just for the sake of doing more. Even direct jobs programs like WPA and CCC were targeted on valuable projects, temporary in duration, and much smaller than the size and power of contemporary government. MMT generally refuses to address this vastness of modern government.

              I don’t think MMT economists are blinded by lack of imagination. I think they generally support a strong central government that tells people what to do and creates lots of opportunity for professionals to earn outsized compensation and so are quite unwilling to address any critiques that public policy itself is destroying our planet and oppressing people. The tell for me is the disdain with which the MMT crowd, to broadly generalize, responds to criticism. People pursuing truth welcome criticism because it strengthens the understanding. People pushing an agenda get cranky because they don’t want alternative values discussed.

              This is what has continued to fascinate me here at NC specifically. There have been years now for MMT authors to discuss conceptual values and concrete policy proposals in realistic and practical terms that take into account what has actually been happening in the real world and honestly argue why they are superior to alternative viewpoints. But that is not what has been happening. Instead, the mantra has been these various faith-based exhortations that we need ever bigger government. And don’t suggest it be funded by taxing the rich – that would do evil things like balancing the budget.

  9. KYrocky

    When I watched Obama deliver that address in real time my heart just sank. I had been full of hope and change in 2008 and it died that night, although it had been in declining health almost since the man took office.

    What was unfortunate is the extent to which Obama was in thrall to Pete Peterson and his cult was on full display. But what was more disheartening was my realization that the Democratic Party was now boxed in. The Party that needed to take on the lie that is supply side economics as the path to posterity had been cock-blocked by their enigmatic, popular President. It was never going to happen.

    I watched as Obama effectively provided immunity to every financial criminal; watched as he set up the smokescreen that was HAMP to provide generous fees to the criminal banks and little to homeowners; watched as he tried to use Simpson Bowles to excuse his desire for his Grand Bargain; watched as his support for a weaker Dodd Frank bill was followed by Democrats; and so on through his defense of the indefensible TPP.

    Throughout all of Obama’s proclamations of the recession ending, green shoots, the stimulus being exactly the right size, etc., the disconnect between Obama’s framing of the economy and the realities being lived by the majority of Americans only grew bigger and more entrenched. Democrats, of course, would not confront him, and Republicans, who condemned Obama for everything, offered criticisms which resonated with the realities of lives being lived by millions of people who Obama’s framing of the economy was ignoring. The disconnect between the Dow Jones average and the lives of regular people was never so stark, but Obama’s expressed measures always seemed to track with those measures that had more bearing for the rich. The Obama administration offered those they overlooked nothing, except hope that things would eventually trickle down to them.

    Obama’s economic policies reflect the austerity Black discusses. I would say they can be defined as the transference of the shares for funding government from the wealthy few to the poorer many. As the burden on the wealthy is decreased their wealth increases significantly, and with the poorer having to assume more shares without the means to fund them they are forced into reducing programs and services which in turn results in a lower standard of living and quality of life.

    Republicans thwarted Obama from inflicting more harmful austerity on the country but they are now poised to inflict even greater amounts now that they are in control. Economics has nothing to do with it, it is about money and power, which the rich have, and which far too many economists serve above all else.

    1. susan the other

      I agree. It’s so pervasive and wrong that by this point nobody can claim to be ignorant of these things.

    2. John Morrison

      “When I watched Obama deliver that address in real time my heart just sank. I had been full of hope and change in 2008 and it died that night, although it had been in declining health almost since the man took office.”

      That might have been the idea. Energize the people into donating what they couldn’t afford, going all out to participate in the campaign — and then betray them, to ensure that they would not try such a thing again, not for a long while.

      I’ve been suspicious of Bernie Sanders, primarily because he got extensive media coverage unlike any other candidate beside Clinton. The media coverage enabled him (and nobody else) to rouse the activists and challenge Clinton.

  10. susan the other

    It is as if Clinton in all his cleverness decided that he would privatize the government obligation to maintain a balanced economy. He “balanced” the budget by slashing the deficit – trickle-down austerity – which he offset by opening the bubble floodgates to the private debt industry. Thereby keeping the value of the dollar high, too high, and above the reach of the vigilantes. But the devil was in the chronic details of private debt which has now paralyzed the economy as much as government austerity. The two together have destroyed both the economy and good faith and made all of us skeptical of both government and capitalism.

    1. HotFlash

      slashing the deficit – trickle-down austerity

      Click! Another piece just fell into place, thank you so much!

  11. Ty Kelly

    I admire Mr Black and agree with most of his arguments, but this is one that goes too far in recycling old criticism of Bill Clinton and New Democrats and forcing Obama into that frame.

    1. Yves Smith Post author

      With all due respect, you need to rebut Black and not handwave. Black has provided lots of detail here and in earlier posts to substantiate his conclusion.

  12. A in Ca

    “Austerity is to economics as bleeding a patient is to medicine.” That’s the best summary of the argument, and should be repeated often, perhaps in similar form:
    Austerity for an economy in recession is like bleeding an anemic patient.

  13. David Troutman

    What are these automatic stabilizers you repeatedly invoke? Suds i miss the explanation somewhere in the article?

  14. Sound of the Suburbs

    There are two areas that are related and outside of the understanding of mainstream economists:

    1) How the money supply effects the economy
    2) How money is created by loans and destroyed by repayment of their loans

    To nearly everyone 2008 was black swan.

    Let’s look at the US money supply leading up to 2008:

    M3 is going vertical before 2008.
    Money = debt and a credit bubble is blowing up.
    2008 bang.

    Steve Keen understood and saw it coming in 2005.

    Look at that tiny graph ………

    Everything is reflected in the money supply.

    The money supply is flat in the recession of the early 1990s.

    Then it really starts to take off as the boom gets going which rapidly morphs into the US housing boom, courtesy of Alan Greenspan’s loose monetary policy.

    When M3 gets closer to the vertical, the black swan is coming and you have a credit bubble on your hands (money = debt).

    This is the money creation during the boom phase when lots of new debt is being taken out.

    What follows?

    Hardly anyone is taking out new debt and nearly everyone is making repayments, the money supply starts to contract leaving less money to pay off the debt. A positive feedback effect can easily cause debt deflation.

    If you cut Government borrowing with austerity, there is even less new debt and less money and the money supply starts to contract even faster.

    The New Deal got the US out of the Great Depression by increasing Government borrowing and the money supply easing debt deflation.

    Ben Bernanke read a book by Richard Koo and insisted the Government didn’t cut spending to push the US off the fiscal cliff.

    Richard Koo, explains all in terms of debt and money:

    1. Sound of the Suburbs

      The money supply reveals everything about the economy:

      A steady rise is ideal and is normal healthy growth.

      When it’s flat or rising too slowly, the economy will be stagnant.

      When it’s rising very fast, a credit bubble is forming.
      If it’s going exponential a black swan is coming, you have an out of control credit bubble forming.

      When it’s falling you have debt deflation and a very severe recession/depression.

      It’s all linked to the debt in the economy.
      money = debt

    2. Sound of the Suburbs

      Central Banks are the lenders of last resort.

      Governments are the borrowers of last resort.

      When the private sector isn’t borrowing and they are paying down debt (debt deflation / balance sheet recession) the Government needs to borrow to keep the money supply stable.

      Austerity kills economies in debt deflation, ask Greece.

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