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Robert Reich has been writing a series on “the Grand Bargain” and the “fiscal cliff.” In this post, I'll do a commentary on his “The President's Opening Bid on a Grand Bargain (II): Put a Trigger Mechanism in the Legislation”, because I think it's a good example of self-defeating progressivism or “loser liberalism. Take your choice of epithet.

Reich begins:

When he meets with Congressional leaders this Friday to begin discussions about avoiding the upcoming "fiscal cliff," the President should make crystal clear that America faces two big economic challenges ahead: getting the economy back on track, and getting the budget deficit under control. But the two require opposite strategies. We get the economy back on track by boosting demand through low taxes on the middle class and more government spending. We get the budget deficit under control by raising taxes and reducing government spending. (Taxes can be raised on the wealthy in the short term without harming the economy because the wealthy already spend as much as they want - that's what it means to be rich.)
So, the good “progressive” defines the problem pretty much the same way as the rest of the Washington mainstream does. And he just assumes everyone agrees on that, especially on the idea that the budget deficit is out of control and that we need to reduce deficits by raising taxes and reducing government spending. So he gives away half the game by agreeing on essentials with the deficit hawks. But why does he agree that the deficit has to be brought “under control,” implying that the deficit is a problem? Why are WE just expected to accept that? Why isn't there an explanation? When are we going to make these “progressives” explain exactly why the deficit, debt, debt-to-GDP ratio is such a problem for them?

After all, Robert Reich has been around long enough to know that the Government of the United States is a currency issuer and that no deficit it may incur is beyond its power just to make more money? So why do they think it's a problem? Let's go on and see if we get a hint of what the explanation for Reich's concern with “the deficit problem” comes from.

But before we do that, let's briefly note that Reich's easy comment that taxing the rich more won't harm the economy, isn't quite true since since for every dollar taxed away GDP does decline by about $.30. Of course, that can easily be fixed by spending an equivalent amount to the amount taxed on something more productive than tax cuts for the rich. But since we can easily spend that amount of money on that more productive thing if we want to, anyway, there's no reason to tax the rich more arising out of any imagined shortage of dollars. Of course, there are many more reasons to tax them, like justice, fairness, the desire to make them pay for ill-gotten gains, etc. But the need for money in order for the Government to spend on other things is just not one of them.

It all boils down to timing and sequencing: First, get the economy back on track. Then tackle the budget deficit.
Get the economy back on track, indeed. But, again, why is the deficit something that has to be “tackled”?
If we do too much deficit reduction too soon, we're in trouble. That's why the fiscal cliff is so dangerous. The Congressional Budget Office and most independent economists say it will suck so much demand out of the economy that it will push us back into recession. That's the austerity trap of low growth, high unemployment, and falling government revenues Europe finds itself in. We don't want to go there.
We certainly don't want to go where Europe has been going lately. They're a great example of how NOT to manage your way out of a Great Financial Crash. But what makes Reich and other progressives think they can avoid the fate of the Eurozone nations by planning for deficit reduction later ,or at all? The assumption here is that there must and will be a time when we can reduce the deficit without harming the economy. But what if there's no such time? What if any substantial deficit reduction to under 4% of GDP, a figure envisioned in most of the deficit reduction plans being offered, means making the private sector poorer in the aggregate?

That's not just a theoretical question. Right now, the US imports more than it exports in an amount greater than 4% of GDP. If we continue to do so, and the Government deficit is forced down to a number below 4% of GDP, then a private sector surplus in the aggregate will be literally impossible to attain, and, if we continue with such a policy, year after year, the private sector will lose more and more of its net financial assets as the Government eats the private economy in a fit of fiscal irresponsibility, that since it's now way past 1984, the austerity advocates label fiscal responsibility.

Although the U.S. economy is picking up and unemployment trending downward, we're still not out of the woods. So in the foreseeable future -- the next six months to a year, at least -- the government has to continue to spend, and the vast middle class has to keep spending as well, unimpeded by any tax increase.
Of course, that's true, but the “vast middle class” can be impeded from consuming by cuts in discretionary Government spending and in social safety net spending equally effectively, and deficit reduction, without raising taxes on the middle class, is likely  to involve a good bit of those kinds of cuts, if there's any compromise at all with the deficit hawks on the budget.
But waiting too long to reduce the deficit will also harm the economy – spooking creditors and causing interest rates to rise.
Now we're getting an inkling of what Reich's problem is. He's afraid of the “bond vigilantes” and their supposed power to raise interest rates and leave us with a great big interest bill that will further increase the deficit. So, all this concern over a “deficit problem” is due to fear of the markets and, perhaps, Reich would have no problem with running continuous deficits if he thought that the Fed, along with the Treasury, control interest rate targets, and that the bond markets are powerless to impose their will on Mr. Bernanke and the Treasury Secretary if they want to keep rates near zero, or at any other level of interest they would like the US to pay? Well, if that's true, then let me assure Professor Reich that the bond markets and the ratings agencies are powerless to drive up interest rates against the combined determination of the Fed and the Treasury to keep them low.

We can see this if we imagine what would happen if the Fed continues to target overnight rates at close to zero, and the Treasury issued mostly 3 month debt. We know that short-term debt tends strongly to the overnight rate, and that there's nothing the markets can do about that. So, if the Fed targets that rate at say 0.25%, and if the Treasury issues only short-term debt, the result will be that the markets cannot drive the rates much higher than that even if Moody's is follish enough to downgrade US debt to below Japan's rating.

This is why any "grand bargain" to avert the fiscal cliff should contain a starting trigger that begins spending cuts and any middle-class tax increases only when the economy is strong enough. I'd make that trigger two consecutive quarters of 6 percent unemployment and 3 percent economic growth.
Triggers are a really bad idea, and I'd hate to be among those 6% on the U-3 measure of unemployment, or the likely 12% on the U-6 measure, when the spending cuts and tax increases specified in the trigger mechanism occur, because those levels aren't ones associated with a booming economy or one that is anywhere prosperous enough to stand against years of reduced Government spending at a deficit level below that necessary to compensate for the loss of aggregate demand due to our trade deficit. A trigger like this would take an already fragile economy, operating at way less than full employment, and would make unemployment higher, while it reduces private sector net financial assets during the years of deficit reduction triggered by such a plan. Depending on the details of the trigger, and assuming there's no private sector credit bubble putting off the day of reckoning, a recession is a sure thing within an unpredictable, but relatively short space of time.

And keep in mind please, that this notion of Reich's is a proposal for Obama's opening bid, which presumably is open to compromise. So, perhaps Reich would be willing to set the deficit reduction at a compromise level of 7% U-3 unemployment? What a “loser liberal”!

But the real mistake here is in having any “trigger” at all. The whole idea is really dumb from an economic point of view. Fiscal policy needs to be guided by our expectations about its likely effects on real outcomes; not by some scheme that assumes that deficits are “bad” and must be minimized. We no longer live under the gold standard Professor Reich! A deficit is nothing more than the amount that Government spending exceeds tax revenue. It's just a number!

To assess its appropriateness we have to place it in the context of what the private sector wants to save, and how much it wants to import, assuming the willingness of other nations to export to the US. The best fiscal policy is one that spends what the US needs to spend to solve its serious problems and achieve public purposes, and at the same time lets the deficit float as it will given such spending.

Of course, too much deficit spending can cause demand-pull inflation. But the proper remedy for that is to raise specific taxes and lower specific spending in such a way that price stability and full employment, as well as other good outcome result from fiscal policy. The size of the deficit or surplus is not a proxy for such real outcomes, and responsible fiscal policy should not be attempting to maximize, minimize or optimize either deficits or surpluses, rather than the real outcomes of government fiscal policy. In other words, run fiscal policy in accordance with expected real outcomes, and forget about deficits and surpluses per se. They should be treated as insignificant side effects, not as as centerpieces for fiscal responsibility, as they were under the gold standard.

To make sure this doesn't become a means of avoiding deficit reduction altogether, that trigger should be built right into any "grand bargain" legislation - irrevocable unless two-thirds of the House and Senate agree, and the President signs on.
Please, no more foolish legislation that tries to constrain the freedom of action of future Congresses! The context of fiscal policy is always changing, and the Government must be adaptive to changing conditions. Future governments have to take into account things that have gone or are likely to go wrong. We should not, and really cannot bind them to “triggers” that can't take into account the future conditions that may present themselves.

The fiscal cliff is itself an example of this principle. The “cliff”, after all, results from the sequestration trigger. And now, after agreeing to it, how's that working for Congress and the rest of us? It's made Congress look really, really stupid, and has only made it more obvious that the only crisis is what Congress has manufactured, and now refuses to fix in any way that won't hurt the economy. And it has put the nation in a bind and subjected Congress to an immediate high pressure situation and the people to more “shock doctrine.” The agreement producing it was the last thing we needed. But we've got it, because people resorted to a “trigger.”

Now Reich wants to turn to another kind of trigger. But what we need instead is a return to real fiscal responsibility, and some education about what it means to have a non-convertible fiat currency, a floating exchange rate, and no debts in a currency not our own.

The trigger would reassure creditors we're serious about getting our fiscal house in order. And it would allow us to achieve our two goals in the right sequence - getting the economy back on track, and then getting the budget deficit under control. It's sensible and do-able. But will Congress and the President do it?
If the main reason for the trigger is to stop the creditors from reacting badly to attempts to create an economy that produces full employment at a living wage and prosperity for all Americans, as well as a modern economy that fulfills our health care, educational, infrastructure, education, energy, climate change, and environmental needs, then I say let's stop issuing debt and get the bond markets out of the Treasuries business entirely. That will certainly stop our interest costs from getting out of control and also render the bond vigilantes irrelevant to the finances of the US. Then neither Professor Reich, nor anyone else will have to give a moment's thought to what “our creditors” think about our deficits, our national debt, or anything else we do.

Last time I looked, comparatively few of the bond market investors were actual American voters. So, why should they have any influence over what we choose to do anyway?

(Cross-posted from New Economic Perspectives.)

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Comment Preferences

  •  my question... (1+ / 0-)
    Recommended by:
    kurt

    Doesn't the growing interest being paid on the national debt present a danger in itself?

    But why does he agree that the deficit has to be brought “under control,” implying that the deficit is a problem? Why are WE just expected to accept that? Why isn't there an explanation? When are we going to make these “progressives” explain exactly why the deficit, debt, debt-to-GDP ratio is such a problem for them?
    I know that Bush said deficits don't matter (or was that Cheney) but todays tremendous size of the debt makes paying interest on it prohibitive. Don't we end up payng out scarce money we need for other things in return for nothing?

    America could have chosen to be the worlds doctor, or grocer. We choose instead to be her policeman. pity

    by cacamp on Sun Nov 18, 2012 at 06:37:52 PM PST

    •  Are we printing money, more of it (0+ / 0-)

      to pay interest?

      Doesn't the growing interest being paid on the national debt present a danger in itself?

      Not Presently.

      I'm way more concerned with the output gap of 2-3 trillion. And the number of jobs that represents.

      FDR 9-23-33, "If we cannot do this one way, we will do it another way. But do it we will.

      by Roger Fox on Sun Nov 18, 2012 at 06:56:14 PM PST

      [ Parent ]

    •  Interest on existing (1+ / 0-)
      Recommended by:
      psyched

      debt is much lower than it's been in living memory. Now you may consider them a problem because they provide welfare payments to the rich and foreign nations. I say welfare payments because they provide essentially risk-free savings accounts to these investors where they can park their money and still make something.

      If for this or some other reason you dislike interest payments, or the notion that the Government is in debt then here's the solution to that problem -- no debt and no interest.

  •  So to sum up your diary, (0+ / 0-)

    Deficit spending does not have any affect on the economy other than the potential demand-pull inflation that could occur as the economy reaches full employment and manufacturing capacity.

    Progressives that want to keep deficit spending down are bad progressives and economic neophytes that do understand that our government can spend what ever it likes for as long as it likes and just create more currency supply to compensate.  Again I assume this is true from your perspective, up to the point where the demand-pull inflation issue begins to kick in.

    The demand-pull inflation pressure can of course just be alleviated by increasing the labor market supply through immigration in conjunction with increasing manufacturing capacity.  So that there is never really a point at which demand-pull inflation actually has to be allowed to become an issue.

    One question about this economic philosophy is, is there ever a point that the deficit spending over supplies the currency market which would cause a cost-push inflationary period that would not be able to be subdued?

    Another question I have is about the supply of raw materials.  As raw materials become more scarce, does that not create a cost-push inflationary cycle that would not be able to be controlled?  And if that were the case would not the continued deficit spending which creates a downward pressure on the currency value create an even further erosion of the ability to control inflation?

    "If Tyranny and Oppression come to this land, it will be in the guise of fighting a foreign enemy" James Madison 4th US President

    by padeius on Sun Nov 18, 2012 at 07:40:01 PM PST

    •  Yes (1+ / 0-)
      Recommended by:
      psyched

      It can continue as long as there are no resource constraints.  

      Real resource constraints means living within those constraints. This happens at the very least when there is full human employment - in other words, anybody who wants to work can work at a living wage (or whatever passes for a living wage under the real resource constraints) It also means a redistribution of wealth and income by taxation and government spending. -- This of course if we as a society feel that a human being has an unalienable right to life, liberty and the pursuit of happiness -- we have enshrined this in the Declaration of Independence (though not in the Constitution)

    •  No, that's not what I said (1+ / 0-)
      Recommended by:
      psyched

      and I'll thank you to quote me, rather than to mis-characterize what I said.

      Deficit spending does not have any affect on the economy other than the potential demand-pull inflation that could occur as the economy reaches full employment and manufacturing capacity.
      No, deficit spending makes up for demand leakage due to savings and the trade deficit. In doing so, it closes the output gap between potential and actual GDP. Right now, that output gap is more than $3 Trillion annually. In closing the output gap, we will also get full employment, and if we implement the right jobs program, the MT Job Guarantee, we will also get price stability barring cost-push inflation. So, deficit spending has enormous and very positive effects, apart fro its potential effect on demand-pull inflation. Convenient how you forgot to mention that other stuff.
      Progressives that want to keep deficit spending down are bad progressives and economic neophytes that do understand that our government can spend what ever it likes for as long as it likes and just create more currency supply to compensate.  Again I assume this is true from your perspective, up to the point where the demand-pull inflation issue begins to kick in.
      Again, a mis-characterization. My view is that progressives who want fiscal policy to revolve around a long-term deficit reduction plan are not being economically progressive because they are being fiscally irresponsible and are working against full employment and are damaging the economy. Further, the issue is not about the desirability of adding to the currency supply. One can do that in various ways. But, what it is about is deficit spending in such a way that people are put to work and full employment is created. The fact that such spending adds to reserves in private accounts and so to the money supply is not the important point. The important point is full employment and greater income equality over time because full employment at a living wage will drive up wages across the board.

      I am concerned about the possibility of demand-pull inflation, because I want both full employment and price stability. That's why I want to evaluate fiscal polices based on their results rather than based on some economic theory that was refuted by Keynes back in the 1930s (i.e. the false Quantity Theory of Money; a zombie theory that neoliberal economists keep bringing back even though there is never any evidence corroborating it, and plenty of evidence running counter to it).

      The demand-pull inflation pressure can of course just be alleviated by increasing the labor market supply through immigration in conjunction with increasing manufacturing capacity.  So that there is never really a point at which demand-pull inflation actually has to be allowed to become an issue.
      I'm not advocating either of those two things though they may happen when the economy gets prosperous. What I suggest is that when we get demand-pull inflation, we moderate that with higher taxes on the rich, and with automatic stabilizers that have the effect of reducing deficit spending as the economy approaches full output. These stabilizers would include cutting back on State revenue sharing programs; re-imposing payroll taxes, and the naturally shrinking with growing prosperity Federal Job Guarantee program
      One question about this economic philosophy is, is there ever a point that the deficit spending over supplies the currency market which would cause a cost-push inflationary period that would not be able to be subdued?
      That;s not cost-push inflation. It's demand-pull. To much currency supply spread broadly through the population would raise demand too much. Cost-push inflation originates not with the government, but with suppliers that control markets and restrict supply in order to raise prices as the oil cartel did in the 1970s.
      Another question I have is about the supply of raw materials.  As raw materials become more scarce, does that not create a cost-push inflationary cycle that would not be able to be controlled?  And if that were the case would not the continued deficit spending which creates a downward pressure on the currency value create an even further erosion of the ability to control inflation?
      Yes, you have this right. If there are resource constraints, then we don't want to deficit spend in the face of that, unless we ration supplies and introduce price controls. That happened here in WW II and should happen again in areas of serious resource constraints. However, we don't have that kind of problem here right now; so we need neither rationing nor price controls. Nor do we have to worry much about demand-pull inflation if we don't deficit spend past the point of full employment.
      •  Hold on, I was not trying to mis-characterize (0+ / 0-)

        what your diary was saying.  I was trying to boil down points I thought were salient to our current deficit spending situation and wanted your feedback on whether I was understanding you correctly.  I agree with your point of view.  That being said, I would appreciate further clarification, this is not me trying to call you out.

        On point one, your further explanation, from what I comprehend is that our current deficit spending is in fact not enough.  We should actually be spending about 3 trillion per year more than we are already, based on our current output gap.

        So on point 2, you are basically saying that the pundits that are talking about fiscal responsibility are actually being irresponsible in calling for less deficit spending at this point in our economic recovery and should be calling for a stimulative spending program on the order of 3 trillion per year in order to close the output gap and by doing so get our economy headed back toward real full employment.  Full employment would of course reduce deficit spending mainly because when you attain full employment tax receipts increase thus reducing the deficit.  Also when levels of full employment are reached taxes can be raised across the board in order to balance the budget if there is any hint of demand-pull inflation.

        On point 3, I was actually advocating for a loosened immigration policy in order to allow for a broader employee base to counter demand-pull inflation.  You are not advocating that but I wished to clarify that increased immigration with added manufacturing capacity would in fact remove the danger of demand-pull inflation.

        On question one, as the money supply increases, there is downward pressure on the value of the currency as it is traded abroad, what I am reading from you is that even though the currency may be slightly lower in value cost-push inflation does not occur with currency devaluation even though the cost of imported raw materials or finished products may have a higher cost?  Again this is just for clarification, due to the global nature of the our economy, I would think that as we increase the money supply by 2 or 3% a year in addition to the normal supply increases that are a function of banking and capital formation there could be some cost-push inflationary pressure on things like oil and rare earth minerals.

        On question 2, good I am glad I at least got one thing right, LOL.

        "If Tyranny and Oppression come to this land, it will be in the guise of fighting a foreign enemy" James Madison 4th US President

        by padeius on Mon Nov 19, 2012 at 08:52:50 PM PST

        [ Parent ]

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