Tuesday night, I thought I’d attend The National Journal’s Debate on "Our Fiscal Future" between John Podesta and Douglas Holtz-Eakin with Jim Tankersley moderating at The George Washington University’s Marvin Center. I was interested because Podesta is often thought to be on the left-wing of “mainstream” opinion, and also it is said that he is one of the leading possibilities to succeed Rahm Emanuel as the President’s Chief of Staff. So, I wanted to see if I could find some glimmer of novelty in the point of view he expressed; some indication that he might bring some new thinking into The White House beyond what Obama has been hearing from say, Austan Goolsbee.
Unfortunately, the event filled up too fast and I wasn’t able to go, so I tuned into the live video stream, which is now available at the Center for American Progress web site. By the end of the debate I was very glad I didn’t go. First, because I got to “cover” the debate in my living room, and Second, because I didn’t appear to lose anything in translation, especially since the promised Q & A period was limited to answers to one question, and contained nothing that could possibly embarrass any of “the notables” or make them think twice about what they were saying.
In my view, both debaters gave us nothing but the Washington conventional wisdom we’ve been hearing about now almost since the beginning of this Administration. Their theories differed slightly since Podesta is a deficit dove and Holtz-Eakin, a deficit hawk, but their basic outlook on the economy is similar, relies heavily on the ideology of neoliberalism, and reflects many fantasies that I’ve referred to in my title as “loose talk” and “numbskull notions.” There are so many of these that I can’t complete this critical analysis in one post, and will need what now looks like two. So this will be Part One.
H-E: We need immediate deficit reductions.
Me: Deliberate attempts to reduce deficits immediately by raising taxes will make a double-dip recession almost certain since raising taxes will take financial assets away from the private sector, and, in fact, as a matter of actual government monetary operations, lead to the destruction of those financial assets.
Also, it isn’t likely that raising taxes to reduce deficits will actually reduce deficits. Removing financial assets from the private sector, will reduce aggregate demand and lead to more job losses and poverty. That will, in turn drive up spending on the automatic stabilizers by the Federal and State Governments, and will lead to both another round of job cuts at the State level, and to further deficits at the Federal level. Will the amount spent by the Government exceed the amount of financial assets withdrawn from the economy. That’s not clear, but if it does H-E’s prescription will lead to higher, and not lower, deficits.
P: We should wait until we’re out of the recession to implement deficit reduction
Me: This is conventional deficit dove wisdom. But it shares with Eakin’s deficit hawkism the notion that deficits are to be managed, and that their reduction is the primary goal of fiscal policy in the long run, and that we will have to cut Federal spending to balance a fiscal situation that is now out of balance. Podesta makes no attempt to explain the notion that we ought to reduce the deficit after we recover, or to justify that policy. He just takes it as obvious, and he nowhere attempts to outline a model or a line of reasoning that shows a connection between deficits and negative economic and political consequences for nations with fiat monetary systems that do not incur debts in any currency but their own.
Lastly. he makes no attempt to account for the empirical fact that each time the United States has attempted to significantly reduce its debt, that effort has been followed quickly by a depression or in the case of the Clinton Administration, a recession. Prior to Podesta or anyone else advocating deficit reduction in either the short or long runs, or implementing policy that attempts to achieve that, we ought to insist that they have an economic theory-based explanation for this fact that squares with their prescribed deficit reduction policy. Otherwise, we ought to view their prescription for what it is, an old wives tale that has been refuted by actual historic economic outcomes.
Why do we have to make deliberate attempts to reduce the deficit after the recession is over? What will happen if we don’t do that, but just let nature take its course. Won’t deficits go down by themselves as we gradually recover? Will our ignoring the state of the deficit lead to inflation? Will our taking deliberate deficit reducing action result in more unemployment, and a stagnating economy. Why isn’t Podesta answering questions like this instead of just assuming that we must have a deficit reduction program?
P: We have to stabilize the debt-to-GDP ratio, and after getting GDP growth going again, to ensure that every dollar spent is paid for.
Me: Why do we have to stabilize the debt held by the public-to-GDP ratio? What happens to a nation with a fiat currency system and no debts in foreign currencies like ours if it doesn’t stabilize that? We know what happens to nations like Greece that don’t have their own currency. We know what happens to nations that owe big debts in currencies not their own. But, nations that have sovereign fiat currency systems, don’t seem to experience serious consequences, as Japan illustrates very well.
And once we get GDP growth going again, why do we have to have every dollar spent paid for? What happens if we don’t pay for every dollar spent? Do we then have a solvency problem? Do we have an inflation problem? No? Then, why should we care?
H-E: If we follow our present course we’re “on-track” to leave every child in America $180,000 in Federal debt.
Me: A lot of people say things like this. But it is not true that each child in America will have incurred such a debt. No one will be able to take our children or ourselves to Court to get a judgment requiring them to pay any such thing. We will not all owe $180,000 per person. It is the Government who incurs such debts, and who is on the hook to repay them.
How can the Government pay such debts? Well it could levy taxes high enough to repay them; but, if it did, that Government would surely fall. And, in any event no sensible Government would attempt to do that, fearing electoral consequences. What it is more likely to do, is to borrow more money, or even to spend without issuing further debt, and to pay off old debt with current tax revenues. The Government has unlimited constitutional authority to spend, regardless of what it chooses to do about incurring further debt, or taxing. So, if it wants to, it can repay old debts, however large they may be, without either taxing or borrowing to pay that debt.
Also, why don’t people like Holtz-Eakin and Podesta know that the National Debt is not only not a generator of private sector debts, but instead represents financial assets that have been transferred from the Government to the private sector. It’s true that a sizable portion of those assets are held by foreign individuals and nations who have re-cycled their dollars into bonds, but the rest of it belongs to the private sector in the United States, so that the national debt clock actually represents a national savings clock, since Government spending always adds to private sector savings, simply as a matter of accounting. I can’t resist concluding this comment by asking: where do Holtz-Eakin and Podesta think that financial assets originate except with the Government (the combined Treasury and Federal Reserve)? After all, only they have the constitutional authority to create USD.
H-E Government expansion needs to be financed, so it’s not sustainable and will lead to a rise in taxes, or we could have a sharp spike in interest rates as bond markets make it difficult for US to borrow at low interest rates.
Me: Government expansion doesn’t need to be “financed” or “funded.” Government spends by marking up private sector accounts. That is what happens, in fact. Taxes are collected, and Treasury Bonds sold, completely independent of spending activity. Whether the Government wants to get revenue by taxing, depends upon whether it wants to remove financial assets from the private sector. It does not depend on the Government’s needing that tax revenue in order to spend. Whether the Government wants to get revenue by issuing debt and borrowing, depends upon what interest rate the Federal Reserve wants to maintain on that debt. This is apparent when we recognize, as we should, that ceasing to issue short-term debt would drive down interest rates on overnight bank reserves to near zero, and that long-term interest rates could similarly be reduced simply by ceasing to issue any or very little of that kind of debt.
The truth is that the bond markets do not control the interest rates paid by Governments sovereign in their own currency. Interest rates in such nations are a policy variable and can be wholly controlled by the combination of the Government and the Central Bank. If they choose to cease giving welfare to the wealthy and foreign nations, then they can do that. They can cease paying high interest costs on Government debt, or can even cease issuing debt altogether, if the Government, including the legislature wants to do so.
In short, Government expansion is sustainable without raising taxes and without experiencing high interest rates. Of course, it’s not infinitely sustainable. Government cannot expand to such a degree that it denies the private sector real resources. But government expansion that ensures full utilization of our human resources is perfectly sustainable and has nothing to do with the numerical size of the deficit, the national debt, or the GDP-to-Debt ratio.
H-E claims Japan shows that expansion in Government spending doesn’t result in growth since theirs has been only about 1.5% annually.
Me: I think Holtz-Eakin knows better than to claim this. The Japanese have funded their constant deficits for a long time by using low interest bonds and they have shown that even fiat currency nations with huge debt-to-GDP ratios need not worry about high interest rates. What they have not shown is that direct Government job creation through deficit spending won’t work to end a serious recession, simply because they’ve never put through a vigorous Government spending program that would test that notion.
On the other hand, Argentina represents a recent case where that kind of spending worked, and, of course, the most important historical cases in point are the Great Depression in the US, and World War II. In the former case, public spending produced very excellent results, until FDR listened to people like Holtz-Eakins and prematurely cut back on the New Deal in 1937-38, leading to a recession within the Depression. When FDR began again to spend strongly the economy improved, until the enormous public expenditures during WWII ended it entirely.
P: We shouldn’t borrow $100,000 per person from China to make the tax cuts for the rich permanent.
Me: Here we have the notion that our borrowings from China will, and should not “pay for” the tax cut for the rich. The problem with this notion is that we don’t really either borrow from China, or tax other people to pay for tax cuts, even if, in our lack of understanding of the monetary system, that is what we think we are doing. Either we borrow from China because we don’t want to deficit spend without issuing debt, or because we want to maintain Federal reserve overnight rates at a particular level rather than letting them fall to zero. But we don’t borrow from China to fund tax cuts for anybody. And when we tax, it only takes financial assets out of the economy, not because we need to do so to “finance” tax cuts for the rich, or any Government program.
So, John Podesta, if you don’t want to borrow $100,000 per person from the Chinese, then don’t borrow it! “Just say no” to debt issuance! And tell China to jump in the lake if it wants to buy bonds. Maybe then, they’d let their currency rise against the dollar, so they don’t accumulate so many dollars that they can’t earn any interest on at all. And maybe you’d be worried a lot less about Social Security expenditures if you could project $11.8 Trillion in saved Federal interest payments over the next 15 years.
(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).