Cheerleading for Austerity

Yves here. Yet more tired arguments for not just “Why you can’t have nice things,” but “Why you must wear the austerity hairshirt.” Peter Dorman is likely correct in seeing that this scare talk is being revved up for 2020. Can’t have Sanders or Warren, now can we?

By Peter Dorman, professor of economics at The Evergreen State College. Originally published at Econospeak

Not content to follow a news strategy that maximizes Trump’s prospects for re-election, the New York Times leads today with a storythat combines economic illiteracy and reactionary scaremongering in a preview of what we’re likely to see in the 2020 presidential race.

“Budget Deficit Is Set to Surge Past $1 Trillion” screams the headline, and the article throws around a mix of dollar estimates and vague statements about growth trends, leavened with quotes from budget scolds from both Republican and Democratic sides of the aisle.  (That shows balance, right?)  After terrorizing us with visions of a tide of red ink, the article concludes with a ray of sunshine in the form of prospects for a Grand Bargain under a lame duck Trump that would cut benefit programs like Social Security and Medicare to put us once again on a stable path.

Where to begin?  Should we start by mentioning that nowhere in this lead article does it give the single most relevant statistic, the ratio of the federal budget deficit to the size of the overall economy—the money part, GDP.  The raw size of the deficit itself is meaningless, and the trillion dollar line is meaningless squared.  As Dean Baker likes to say, the article shows its respect for our powers of thought by informing us the deficit is a Very Big Number.  Scared yet?

Measurement aside, the article simply assumes that “large” deficits are unsustainable and bad, and that only irresponsible political motives prevent action on them.  In the name of a nebulous, unspecified Evil of Debt, the population of the US must be subjected to a regime of austerity, beginning with cuts in the programs many depend on to keep themselves and family members out of poverty.  Worse, it opines, Democrats will run for office next year on a platform of spending increases, demonstrating they are the party of ruin.  We can only hope, goes the argument, that they are just saying these things to get votes from the gullible public, and once in power they will join the deficit-cutting crusade.

No reason is given for the assumed Evil of Debt, and it’s no surprise, since it’s based on ignorance, willful or otherwise.  To begin with, federal debt is denominated entirely in US dollars, so servicing is not a problem.  Countries that borrow in foreign currencies, like Greece (which had no control over the euro) and Argentina, can default; that’s not a problem for the US.  Second, government debt is private wealth, and the relevant question is whether there are too many or too few government bonds in private portfolios.  If private wealth holders are satiated with public debt and prefer other securities, it would be a problem.  But that would be a world in which interest rates on the debt would be high in order to sell them, and rates are about as low as they can go without flipping negative (as they have elsewhere).

Meanwhile, government debt is an injection of spending power into the economy that counterbalances the leakage of a significant, ongoing trade (and current account) deficit.  That’s not quite the right way to put it, since private and public net deficits, taken together, arethe current account deficit.  Once you understand what this means, you can’t avoid the economic shrinkage—austerity—aspect of deficit-cutting, since that’s what keeps the identity identical at any point in time.  Of course, that doesn’t mean the government’s deficit is at the right level, just that the pluses and minuses of adjusting it have to be considered concretely.  Is it difficult to imagine that, at a time when interest rates are very low and the need for new infrastructure and other public investment is very high, that the current level of borrowing may well above that terrifying $1 trillion figure?

What we have today is just one article, by itself not very significant.  We have seen, however, that the drumbeat of repeated media misinformation can create a climate of opinion that makes idiotic policies appear reasonable; just look across the Atlantic at Brexit.  The time to expose ignorance and propaganda is always now.

Print Friendly, PDF & Email


  1. The Rev Kev

    To tell you the truth, it is hardly worth demolishing the arguments for austerity as even the World Bank’s experts say that it is a shockingly bad idea which always makes things worse. So, radical times requires radical solutions – or maybe even stupid ones. Looking online I see that the price of aluminium is about $1.80 cents per kilogram. Now suppose we took a dime’s worth of aluminium which would work out to be about 28 grams – or about 1 ounce. For context, the biggest US coin – the Half Dollar – weighs about 11.34 grams. They then took this bit of aluminium to one of the four working Mints in the US – the Philadelphia Mint, the Denver Mint, the San Francisco Mint or the West Point Mint – and then had it punched into a coin with some fancy design on it. Maybe even Trump’s profile to get his support. From here they took it over to the US Treasury Building at 1500 Pennsylvania Avenue in Washington. There they assigned the value of that newly-minted coin as $1 trillion dollars, deposited it into the Federal accounts, and then used it to pay a $1 trillion dollars worth of debt. There! Problem solved for all those austerity fans! And I suspect that my solution is arguably more realistic than the arguments of those supporting austerity

    1. Samuel Conner

      Under current law, it would be a platinum coin. There’s an obscure provision of a ’90s era law concerning the Treasury that (perhaps unintentionally) authorizes the Treasurer to mint platinum proof coins in unspecified face-value denominations at his discretion.

      I suspect that the Fed could be able to fund infrastructure spending by extending its unconventional asset purchase strategy to new or recently issued infrastructure bonds.

      All sorts of things might be possible if there were political will.

      1. WobblyTelomeres

        Every time I mention trillion dollar platinum coins, I get shouted down with “what about runaway inflation????” jeers. But, using Sound of the Suburbs equation,

        MoneySupply = public debt + private debt + coinage

        replacing public debt with platinum coins doesn’t change M at all. Is this wrong?

        1. Samuel Conner

          I think that’s right (I think one would include “currency in circulation” as part of “public debt”, currency being a zero interest bearer bond issued by the government [treasury or CB]).

          Per the MMT theorists, public debt can be a useful thing — it provides interest to people who need income and cannot tolerate risk to principal (retirees, insurers, etc).

          The fundamental flaw in the NYT framing is that the public deficit is functioning as a support to an economy that is not generating enough demand to reach full employment — but under current policy the deficit is doing this very inefficiently (tax cuts to people with low marginal propensity to spend has a low multiplier). Framing it that way changes the entire tone of the discussion.

        2. rjs

          this discussion misses the fact that there is still a global shortage of investment grade debt; witness negative interest rates in Europe and Japan…retire any of that debt, and the shortage gets worse…

          1. WobblyTelomeres

            If Bernie needs a source of funds for his new $16 Trillion climate agenda, I hereby volunteer to cash out my meager pension, buy a pound of platinum, and deliver it to a mint facility personally for processing into sixteen one ounce trillion dollar coins.

      2. Samuel Conner

        My bad — that link suggests that there is more flexibility than “just” platinum proof; but in any event the constraint is political will rather than the details of the laws. Austerity evidently benefits those who set the policy.

      3. The Rev Kev

        Ah, Platinum. In that case 1 ounce would work out to be about $847.04 according to Google. About what the Pentagon pays for one hammer. Still doable.

    2. pnongrata

      It is very much worth to demolish arguments for austerity, since the World Bank apologizes for advocating for it on one day, just so it can sell it one more time as THE solution to a developing country’s woes.
      We must not silence until this abhorrent set of policies is banished from everyone’s minds.

  2. John

    Why is it that the runaway unsustainable programs are always Social Security, Medicare, and Medicaid, but never the ballooning defense department budget? Why is it that day by day I feel more and more like a subject and less and less like a citizen?

  3. Samuel Conner

    “Government set to inject more than $1 Trillion into US economy this year, but poorly targeted and still isn’t enough to improve the lives of most people”.

    fixed it.

        1. Dave Chapman

          I would describe it as “recycling”:
          The people who give the biggest campaign contributions get the biggest tax cuts. (Of course, if a foreign government gives an American politician campaign contributions, the resulting payback is called “trade preferences”.)

  4. johnnygl

    I was going to re-write the headline, Samuel conner covered me.

    “Federal policy makes it rain on 1%, causing torrential flooding in luxury goods and asset prices. Rest of country remains parched in multigenerational drought”

  5. Christopher Herbert

    We have been intentionally taught this hocus pocus ‘fake news’ interpretation of our national finances. Why? Because it suits the purposes of capital; the further enrichment of the billionaire class and the corporations they own. All those Treasuries are owned primarily by the owners of capital. We are forced to be the borrowers of debt we do not require. The wealthy become our creditors. How brilliantly evil this is. By issuing them we insure the safety of their immense savings. That is the true purpose of these Treasuries. It is a subsidy to the rich. Debt is not intrinsic to funding our federal spending. Congress creates new currency when it pays a bill. For every deficit dollar spent, a dollar of savings is created at the same time. One needs to understand who possesses those savings. If you don’t know that, you know next to nothing.

    1. Rodger Malcolm Mitchell

      Treasuries have two purposes, neither of which is supply money to a Monetarily Sovereign government that has the unlimited ability to create its own sovereign currency.

      The two purposes are:
      1. To provide a safe place to park unused dollars (which helps to stabilize the dollar).
      2. To assist the Fed in setting and controlling interest rates.

      Rather than calling this “debt” we should more properly call it “deposits.” Everyone loves deposits. Problem solved.

      1. notabanktoadie

        Problem solved. Rodger Malcolm Mitchell

        Unless the yields are positive* then we have welfare proportional to account balance.

        *Actually non-negative given the overhead costs of sovereign debt. That is, inherently risk-free sovereign debt should return no more than ZERO percent minus overhead costs.

    2. templar555510

      Spot-on . Whenever I read this nonsense in the NYT or elsewhere I always ask myself the same question ‘ Is this deliberate or are they really ignorant ? ‘ . I suspect the latter, but I could be wrong.

    3. baldski

      You are so right. Take for instance the Cayman Islands, population 61,000, own 240 billion dollars in US Treasuries. So, the average Cayman Islander owns about $ 4 million in Treasuries. Does anybody believe that?

  6. Samuel Conner

    Something that annoys me to no end is that critics of the size of the US deficit appear to be unaware that it is largely non-government choices that control where the annual deficit “lands”, for any given set of public policies. The prevailing framing is that the size of the public deficit is “controlled” by the choices of the government and that is not true.

    It’s not hard to do thought experiments that illustrate that in fact it is the non-government actors’ savings decisions that determine how large the public deficit will be (given a defined set of policies). Every private sector spending decision generates private income (net of taxes) and tax revenue to the public sector. This continues as long as the private income portion keeps getting spent by successive recipients of the income generated by the successive private spending choices.

    An additional dollar of public spending will result in X cents of private savings and 100 – X cents of increase to the cumulative public deficit. X is determined by the private sector — whether it wants to spend or save its income.

    (This is all in a two-sector model: domestic public sector and domestic private sector; inclusion of the external (non-domestic) sector adds a little complexity without changing the principle that the causality of the magnitude of the public deficit rests more with the private (and external) sectors than with the policy choices of the public sector)

  7. jake

    What’s even more disheartening is the number of NYT comments, from presumed liberals who hate Trump, which embrace the deficit hysteria line.

    These readers, not all of them apparent Biden boosters, claim want to see a Democratic president reduce spending.

    The party is evidently full of voters enthrall to self-punishing moralistic fantasies nearly as destructive as climate change denial.

  8. Ian Perkins

    “War Is Peace, Freedom Is Slavery, Ignorance Is Strength.”
    And if Orwell were still around, perhaps he would add:
    Austerity is Prosperity.

  9. Susan the other`

    Those idiotic austerity bean counters need a new spreadsheet. Not debits and credits declined thru the frenzied consumer economy and denominated in “money”, but debits and credits denominated in units of a clean environment, maybe combined with units of total resources both those still in the ground and those waiting to be recycled. Another ledger category besides money spent and environmental health could be a column or two for social equity showing what we owe toward the well being of civilization. And another for scientific progress. We have the most simplistic and pointless accounting imaginable. Who gives a goddamn about a bunch of useless material junk financialized into tyrannical debits and bribes for credits? Debit and credit cudgels. Jesus.

  10. Dr. James Rustler

    Excuse me, how can the deficit be increasing?

    I was told that a simple bell curve graph called the ‘Laffer Curve’ indicates that cutting taxes increases growth which increases revenue. Its simply mathematics.

    Checkmate, liberals

  11. rjs

    by the election, the US will start seeing negative interest rates, making this question moot, because the government will start making a profit on the debt……

    1. DHG

      The federal reserve will be buying most of the debt then just like the failed auction in Germany. Investors are not stupid and wont take negative rates for long.

  12. Kevin Nell

    Not sure you need much more evidence that MMT is a delusion than the fact we have already “injected” $11 Trillion dollars of debt spending into the economy in the last decade with only sluggish growth to show for it. Ramping up future deficits from one trillion a year to $2+ trillion a year in the name of MMT is not going accomplish greater prosperity.

    1. Plenue

      Strawman. MMT says the money needs to be spent on things that will actually help a majority of the population.

    2. skippy

      Contra to your ill informed perspective on MMT, managed by quasi monetarists, MMT + PK clearly states a different administration of the monetary system. Starting with a JG vs NAIRU and getting rid of the barter based IS-LM and wonky beliefs about equilibrium and EMH.

      If you disagree with mainstream economic policies, since the mid 70s, don’t confuse it as being an issue caused by MMT, lest we forget mainstream economics has not had an evidenced based model of neither the monetary or financial system and instead went off on an ideological lark. All compounded by vested interests that had gold system biases and then attempted to manage MMT in its like, made even more profound by doctrinaire attitudes by dint of funded perch.

      That’s without delving into all the political machinations by those with the means to spew Bernays level PR to muddy the waters and hide their real intents.

  13. Tyronius

    The article strategically mentions nothing about taxation and how little the extremely rich pay relative to the rest of us. Raising taxes back to reasonable levels would solve all sorts of ills that the current pack of shenanigans won’t fix.

    Or we could just have another Great Depression. It’s got the word ‘great’ in it so must be good, right?

  14. Sound of the Suburbs

    While the Americans were worrying about public debt, the black swan of private debt blew up the global economy.

    Our policymakers still don’t know where the real danger lies and spend their time worrying about public debt when private debt is a much bigger problem.

    Policymakers treat things as if they were totally independent with no idea how they are actually connected together.

    If there is no debt, there is no money.

    The money supply ≈ public debt + private debt

    Debt is bad, money is good, but they are essentially opposite sides of the same coin, they are like matter and anti-matter, they come into existence together and disappear together.

    The more Government debt you get rid of, the more private sector debt you need to maintain the money supply. Private debt lies behind the vast majority of financial crises.

    Government surpluses often accompany financial crises, but our policymakers would have no idea why.

    The US Government was in surplus from 1927 – 1930.

    This is Japan when its economy blew up.

    Richard Koo shows the graph central bankers use and it’s the flow of funds within the economy, which sums to zero (32-34 mins.).

    Richard Koo’s graph of the flow of funds shows the Japanese Government ran a surplus as the Japanese economy blew up.

    The terms sum to zero so, as one is going positive, another is going negative. The Government was going positive as the corporate sector was going negative.

    It’s private debt that usually causes financial crises.

    This is the US (46.30 mins.)

    The private sector going negative is the problem as you can see in the chart. This is when the financial crises occur.

    As the Government goes positive, into Bill Clinton’s surplus, the private sector is going negative causing a financial crisis.

    The current account deficit/surplus, public deficit/surplus and private deficit/surplus are all tied together and sum to zero.

    Trying to balance the government budget, while running a large current account deficit, will drive the private sector into debt and cause a financial crisis.

    Policymakers treat things as if they were totally independent with no idea how they are actually connected together.

    1. Dave Chapman

      Sound of the Suburbs: I agree with you in general, but there are more factors at work here than bad law enforcement and a simple propensity to borrow too much. Because the Fed creates money in the form of bond purchases and money center bank deposits, pretty much all Fed actions since 1980 have increased the level of debt, while increases in the level of equity have been driven by organic growth in the economy.
      Since 2000, growth in debt has been maybe 3 or 4 times as large as growth in equity. This is not because of a moral failing of the American people, or an increase in the opportunity of Wall Street to commit fraud. The growth of the debt:equity ratio all across the American economy is due to Federal Reserve policy. Similar comments for the dollar-denominated parts of the global economy.
      This is bad for various reasons. It has destabilized the economy in various ways, starting with a dramatic increase in bond defaults, foreclosures, and bankruptcy. Simply put, a corporation whose debt:equity ratio is 40 is a lot more likely to go broke in a recession than a corporation whose debt:equity ratio is 0.4.

      tl;dr? Is anybody still with me?

      This stuff is highly technical, but you can be pretty sure of one thing: The establishment point of view is clueless.

      1. Sound of the Suburbs

        There are relationships within the monetary system that are inherent in the way the system works.

        Policymakers are unaware of these relationships or how the monetary system works.

        How can banks grow GDP with bank credit?

        The UK:

        Before 1980 – banks lending into the right places that result in GDP growth (business and industry, creating new products and services in the economy)

        After 1980 – banks lending into the wrong places that don’t result in GDP growth (real estate and financial speculation)

        What happened in 1979?

        The UK eliminated corset controls on banking in 1979 and the banks invaded the mortgage market and this is where the problem starts.

        We want the economy to grow. We want GDP to grow.
        No one thought about what it was or what it measures.

        GDP tells us what real wealth creation is.

        In the 1930s, they pondered over where all that wealth had gone to in 1929 and realised inflating asset prices doesn’t create real wealth, they came up with the GDP measure to track real wealth creation in the economy.

        The transfer of existing assets, like stocks and real estate, doesn’t create real wealth and therefore does not add to GDP. The real wealth creation in the economy is measured by GDP.

        Inflated asset prices aren’t real wealth, and this can disappear almost over-night, as it did in 1929 and 2008.

        Real wealth creation involves real work, producing new goods and services in the economy.

Comments are closed.