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Progressives and the Budget Deficit
The budget situation today looks hugely worse than it did two years ago. The reason for the deterioration is not that the country has suddenly embarked on a massive new round of social spending, undertaken another major military adventure or even emptied the coffers through tax breaks. The reason that the deficit situation looks hugely worse than it did two years ago is that the $8 trillion housing bubble that had been driving the economy finally collapsed and threw the country into the worst downturn since the Great Depression.
The tragedy in this story is that the collapse of the bubble and its devastating consequences were entirely predictable. Had policymakers recognized the housing bubble and its dangers, they could have easily taken measures to avert this disaster, preventing the surge in unemployment, the flood of foreclosures and the huge budget deficits that characterize this downturn.
Unfortunately, the sociology of the economics profession and economic policy-making is structured so that the voices of those who raised concerns about the housing bubble were largely excluded from public debate. Federal Reserve Board Chairman Alan Greenspan and other leading lights of the economics profession insisted that everything was fine. As a result, nearly all the properly credentialed "experts" marched in lockstep behind their leaders, also insisting that everything was fine.
Remarkably, even after this collapse, nothing has changed in the structure of debates over economic policy. Nearly every day of the week an organization in Washington sponsors a policy session on the budget deficit or some other important economic topic and every last "expert" is among that distinguished group that somehow could not see an $8 trillion housing bubble.
This would be like hosting a session on the future of US military involvement in Iraq in which every participant had confidently predicted in 2003 that the United States would cakewalk to an easy victory. Even the Republicans wouldn't be foolish enough to host a panel like this. Yet, there seems to be a bipartisan consensus that completely missing the biggest economic calamity in almost 80 years doesn't call into question your competence as an economic analyst.
This should scare people. There is no reason to believe that people who were incapable if independent analysis before the bubble collapsed are now capable of thinking for themselves. In other words, the vast majority of the so-called experts who pontificate on economic policy are still people who are more accustomed to deferring to authority than doing their own analysis. This means that a great deal of silliness is likely to be perpetuated, just as was the case before the housing bubble collapsed.
The basic story on the budget deficit is very simple: We need badly need large budget deficits in the short term. They are the only force that can sustain demand in the economy after the collapse of housing construction and the loss of the consumption that had been supported by $8 trillion in illusory housing bubble wealth.
In the longer term, we will need to reduce our trade deficit to replace this demand, but this can only be brought about by a reduction in the value of the dollar against the currencies of our trading partners. If our budget experts had been capable of independent thinking before the crash, they would have pointed out the over-valued dollar as a main cause of imbalances in the US economy. Unfortunately, most of them are still incapable of recognizing the obvious.
The other big oversight that the budget experts commit is the failure to recognize the positive role that moderate rates of inflation can play in our economic recovery. Sustained inflation in the range of 3 to 4 percent will be the quickest way to rebuild the balance sheets of households who saw most or all of their wealth disappear with the bursting of the bubble.
Modest inflation will also help to erode the debt burden the government was forced to take on due to the housing crash. For those old enough to remember, inflation was also a major factor in reducing the burden of the huge debt that the country incurred as a result of World War II.
Of course in the long term, if we don't fix health care then the deficits will be unbearable, but this calls for discussions of health care, not budget deficits. If we don't fix health care, the economy will be wrecked regardless of what we do with the budget.
But, we won't get a more serious discussion of these issues until we have budget experts who actually form independent assessments of the economy. As it stands, the debate is dominated by a follow-the-leader crew who could not see an $8 trillion housing bubble.
23 Comments so far
Show AllThe biggest cause of all or our country's biggest problems is that the unfairly-high spending its political campaigns are doing in their election races is giving it such low-quality politicians. Low-quality politicians rely on low-quality economists.
US Gov. debt will drive high inflation no matter what anti-inflation strategy is employed.
You are witnessing the same pattern in the "health care reform" discussion.
"Health care reform" is being crafted by the people who created the crisis. The people with the solutions have been repeatedly locked out of the discussion.
Better than an excellent comment.
The problem was that the Neo-Con's Great Deluge came one year sooner than it was supposed to.
Obama could have used that fortuitous timing to his (and our) advantage. Instead he hired the people who caused the problems, thereby assuring he will own all of the problems that Dubya created.
Not sure I get this: The dollar is severely overvalued, but deficit spending is OK. If the dollar were to be valued lower, it would become less desirable and people would want higher interest for their US treasuries--the instruments which carry our debt. Paying back that interest would kill us, so we would have to keep borrowing down. No more stimulus spending to juice the economy.
We can't have it both ways: a fairly valued dollar and low interest rates. Which way is better? As someone fairly ignorant of economics, I have no idea.
I'm a bit of a novice myself, but I know a few facts. Deficit spending right now helps avoid a true Depression. Stimulus spending does not cost nearly as much as one might at first assume because without the spending more people would be on unemployment and food stamps, etc. If the dollar loses value we are less likely to buy more foreign stuff and hopefully save a bit more. Also a weaker dollar makes our exports more attractive to foreigners, thereby helping to rebuild our industries. If we have a moderate amount of inflation, then when we pay back the Chinese and others the debt we owe them, they will get their money back at somewhat less value than when they originally lent it to us. If we can keep interest rates relatively close to inflation, then this works great. When the economy picks up, we definitely need to get our spending, both personal and government, in better order. Most importantly, we must control health care costs and war expenditures.
Thanks for the help.
If the dollar is worth less, since our manufacturing sector has largely disappeared, I wonder if we won't be buying necessary stuff from the Chinese at higher prices. Of course, that could promote entrepreneurial action on our part and we would create more factories to build stuff.
Whoever called economics "the dismal science" was right on. There are so many variables it is hard to figure a correct course of action. Clearly what we have been doing is wrong: allowing an overvalued dollar, not investing in education, spending money on unproductive ventures like wars, deregulating the investment banks, and dabbling in "supply-side" economics. Baker at least offers something different.
We might have avoided the housing bubble if the wealthy citizens had been required to help pay for the Iraq war instead of charging it to the nations credit card. After all, think how much less would have "trickled down" to ordinary people for them to spend on housing. In addition, they would have had their taxes raised also if the war had been financed the way previous wars have been. People were allowed to believe good times were here to stay which caused much more spending and debt. Greed and materialism was the cause of our near collapse, not any one guilty group of people.
Sorry, DB, but without 18 million jobs ASAP, all which you write is irrelevant.
And there ain't nothing on the horizon that suggests the creation of millions of jobs any time soon. And DB and the rest of the experts know that super-scary truth.
As if we were planning on actually paying back our budget debtors ever anyway...
Thanks! This is all irrelevent if there are no jobs. That there is no solution but changing our system from destroying jobs to creating jobs.
Hi frank1569--If the labor force is to be defined as all those wanting to be employed fulltime, then 18 Million jobs isn't even close to being enough. About 25% of the 200 Million-strong labor force would like to be employed fulltime--that's 50 Million un-and underemployed. As Greider points-out in "Come Home America," the outsourcing of jobs has undermined the foundation of the US economy to the point where it's very unlikely all of those 50 Million will ever find fulltime employment. Indeed, the US government's support for outsourcing goes directly againt the Full-Employment Act and its amendments--in other words, US macroeconomic policy is and has been unconstitutional ever since Reagan. But now, the damage is done, yet it continues at a rampant pace. I don't know where this stuctural increase in unemployment will top-out, but my current WAG is 35%, or 70 Million. The BIG problem is there will be no recovery as many job losses are the result of overcapacity being whittled away in the retail and consumer services areas of the economy. The USA's Consumer Age has ended, and much of what I describe above is a result of that bubble's deflation; and unless the national government reigns-in its profligate spending on unproductive things like wars and weapons, the deficit will continue to grow because revenues will continue to shrink.
The only policy likely to generate 50+ Million jobs is a massive Green Energy build and massive infrastructure servicing whilst retreating wholesale from Empire as fast as possible.
Budget deficits are another reason I don't know whether I really am a conservative or a progressive/liberal. 8 years ago, it was the liberals who were against deficit spending when they were out of power. Today, the same conservatives of 8 years ago who argued for their own wasteful spending and tax cutting for the wealthy/corporate elite are suddenly acting like yesterday's liberal Democrats. Ralph Nader and most third party candidates never back down from their support of paying down the debt in a more humane manner. It is laughable to watch Dubya or Obama giving a massive tax cutting package designed to help the already well to do with crumbs for the poor and working class and then suddenly see them talking about paying down the deficits. I would not only like to see the already well to do be required to pay their fair share of their taxes but I also want to see Congress actually spend what it earns wisely instead of abusing the revenue they earn from taxes. My apologies to anyone if I sound a little too conservative but Washington needs to get its spending priorities straight as part of balancing the budget(s).
Hi JenniferBedingfield--I would say you are practical when it comes to deficits. One point of correction: "Liberals" used to be denounced as "tax and spend" by "Conservatives," who became "Borrow and Spend." Now, I ask you which is more practical--Paying your way or mortgaging the future, and which is it that has us in our current mess?
"Now, I ask you which is more practical--Paying your way or mortgaging the future, and which is it that has us in our current mess?"
Definitely the former. I haven't allowed the lenders to give me sugarcoated deals that were prone to sudden twists and turns.
"But, we won't get a more serious discussion of these issues until we have budget experts who actually form independent assessments of the economy."
How do the Swiss always avoid these problems?
"Economists have a worse record of correct predictions than do bookies" Science News article
It's very instructive to observe the UK economy's performance as it's the only one that closely emulated the US's consumer-spending/debt-driven economy, and it is quite sick. Towards its demise, the Ottoman Empire was described as the "Sick man of Europe." We now have the spectacle of the US/UK Empire becoming the Sick Men of the World: "The working age employment rate is 72.5% - down 0.8% on the last quarter and down 2.1% on the last year." http://www.hrmguide.co.uk/jobmarket/unemployment.htm
Which is to say that 27.5% of the UK's working age people aren't fully employed--a rate even worse than I project below for the USA. At least all those un- and underemployed have health insurance and don't have to worry about timelimits for their unemployment benefits.
The EU nation with the best domestic economic situation is Germany. And for those with savings wanting to avoid the declining value of the dollar, the Swiss Franc is a good choice.
The only problem is that we'll get inflation in everyting EXCEPT incomes.
Dear Dean Baker,
Here are some ideas ...
1. De-Militarization ... cutting the military budget by 50% over 5 years ... more over the long term/
2. Sovereign Money ... Nationalization of all deposit banks, the government to spend directly into the system at a rate avoiding rampant inflation and deflation. Leverage and derivatives severely curtailed or eliminated. Greater regulation with severe monetary and personal penalties including unlimited liability for fraud, real prison sentences, life time bans and death penalties for corporations.
3. A real safety net ... single payer, unlimited unemployment benefits, public daycare, national retirement system.
4. Reduced working hours, the 30 hour workweek, free education at least through junior college.
To pay for all this ...
1. Sovereign money spent into the system ...
2. Reduction of military spending ...
3. Pre-Reagan income, capital gain, dividend and estate and corporate tax rates, closing loopholes.
4. A carbon tax collected and given right back to the people equally on a per capita basis with the proviso that it be used to prepare for much higher energy prices ...
5. Financial transaction taxes, taxes on carbonation, trans fats, salt, sugar and sweeteners.
6. Minimum tariffs on all imported goods, strict enforcement of existing trade agreements ...
Last but not least ...
7. Public funded campaigns and elections and the de-personhood of corporations ...
This is just off the top of my head ...I probably missed something but it's a good start.
If we do not de-militarize and we continue to allow banksters to print our money all is for naught ...
Inflation in and of itself is no answer. We need deep radical reform.
Sincerely,
mmckinl
Thanx again, Dean Baker (one of the 10 or more economists who should replace Obama's current advisors).
You've inspired me to compose a poem:
Come senators, congressmen
Please heed the call
Don't stand in the doorway
Don't block up the hall
For he that gets hurt
Will be he who has stalled
There's a battle outside and itis ragin
IT'LL SOON SHAKE YOUR WINDOWS
AND SHATTER YOUR WALLS
For the times they are a-changin. ( Bob Dylan helped me a bit on this).
I might be naively dreaming. But, let's make it happen!
"This would be like hosting a session on the future of US military involvement in Iraq in which every participant had confidently predicted in 2003 that the United States would cakewalk to an easy victory. Even the Republicans wouldn't be foolish enough to host a panel like this."
The Republicans are foolish enough to do just that.
Balderdash!
Mr Baker wrote, "The basic story on the budget deficit is very simple: We [need] badly need large budget deficits in the short term. They are the only force that can sustain demand in the economy after the collapse of housing construction and the loss of the consumption that had been supported by $8 trillion in illusory housing bubble wealth."
This sort of Keynesian reasoning is utter nonsense and what caused the bubble economy in the first place. We cannot get out of our economic abyss by digging the hole deeper, faster.
In the past decade, Greenspan and Bernanke massively inflated the money supply. We can expect greatly increased prices for goods with a much weaker dollar in the next several years. If the Fed tries to raise interest rates when prices begin to rise dramatically, it will trigger another recession or it may cause a currency crisis ... that's a bad thing.
Keep in mind, NOTHING has been resolved from the economic meltdown of 2007 except more people are heroically saving their money (against the government's wishes). All those "toxic" (worthless) assets are still on the Fed's books, unemployment continues to rise, the FDIC is bankrupt, home foreclosures keep climbing, the imperial military machine is still fighting two absurd wars while operating over 700 foreign bases and 12 carrier battle groups, the recent stock market rise is based on speculation encouraged by the government stimulus nonsense not increased production, public debt is growing by the trillions, etc.
The way out of this economic mess is through sacrifice, savings and increased production. That is what ended the Great Depression following World War II not a bundle of Keynesian contradictions. For the most part, Americans of the 1930's - 1940's were a tough, thrifty, self-relient lot that believed it dishonorable to buy goods on credit. Is that you see today?
Friends, all material wealth in a capitalistic economy is produced from just three sources - agriculture, mining and manufacturing. The United States' agricultural base is the strongest in the world bar-none while our mining sector (including fossil fuels) is near peak production. It's our manufacturing capabilities that are greatly reduced thanks to the high cost of skilled labor, NAFTA plus other absurd trade agreements, outrageous military expenditures, interest on the government's massive debt, subsidized health-care, etc.
Sacrifice, savings and production.
Dean Baker's comments about Economists remind me of the comment the Physicist Lev Landau once made about Astrophysicists. He said that they are always confident and always wrong. It certainly seems appropriate for Economists today.