Skip to main content

In the real world and the reality based community, there is talk about austerity from people who understand the nuances of it and macroeconomic accounting identities. They point out the undeniable fact that there is austerity in the UK, the Eurozone, and yes, the United States. This interactive chart will show this, though I can't embed it here. So instead, I will add a small snapshot of some of the data.

Net spending in the United States has steadily declined since it rose from 2008 to 2009 when the inadequate stimulus(only $500 billion of direct spending at about 1.5 percent of GDP) was passed. Stimulus packages don't exist in a vacuum, and you have to count all government spending, which basically shows how exactly the numbers, including the stimulus as this does, didn't close the output gap. And since the numbers didn't, that is actually austerity. After all, spending went up in the UK and Eurozone from 2008 to 2009 as well, and since then, their spending has declined. Even though it is on a higher level, it is being cut at an even more alarming rate with its fate set to go below our miserable level by 2017.

I have pointed this out before. Sometimes I get frustrated, and point this out harshly, because some pride themselves on denying this established data to support whatever a politician in their party says or does. I don't know why. Denying reality is not going to give resources to people who need them. There is a reason my last diary has been cited by the reality based Post Keynesian MMT community, in which I am truly grateful for and humbled by; it is the truth.

The real economy of jobs and wages continues to go nowhere thanks to the lack of deficit spending and an illogical debate in DC about how much austerity we need to appease the invisible bond vigilantes and confidence fairies. It is neoliberal deficit terrorist economic insanity based on lies. And on that note, it is my pleasure to republish a piece by someone in the reality based economic community whom I can now proudly say is a friend of mine, Post Keynesian MMT economist John T. Harvey. He, once again, brings clarity to these matters in a way that only he can.

John T. Harvey has given me written permission to post his latest piece from Forbes in its entirety as well as his other commentary.

Austerity Leads To... Austerity!

Ever since this blog started about two years ago, I’ve been repeating over and over that what the economy needs is more deficit spending, not less. This is so because:
  • We have plenty of idle capacity. Our problem is not one that requires that we each settle for less because we have “spent beyond our means” and thus can no longer produce the goods and services we did five or ten or fifteen years ago (if anything, that ability has grown). We have no logical need for layoffs, pay cuts, and forced days off. All that will do is create even more idle capacity.
  • The reason for the idle capacity is the systemic inability of the private sector to generate sufficient demand to hire every willing worker. Such levels can be sustained for short periods, but in general consumers and firms are unable to spend enough money to allow all those who want a job to find one. (See Why do Recessions Happen? A Practical Guide to the Business Cycle for a more in-depth explanation of this point.)
  • The extra demand necessary to bring us back to full capacity and employment can come from foreign countries (i.e., US exports) or the public sector (i.e., the government). If we could export more, we would already be doing so. Furthermore, our trading partners have no responsibility to help our economy. The federal government does.
  • Not only that, but the federal government does not face a budget constraint. There is no debt denominated in dollars that we cannot repay and thus the idea that the US could be forced to default is absolute, utter, ignorant nonsense. Deficit spending can create inflation and capture of resources IF we are at or near full employment. Otherwise, however, a public sector deficit is like having a trade surplus.
  • The basic accounting is inescapable: public sector deficits = private sector income and public sector debt = private sector assets.

This is not to say that there are not good and bad ways for the federal government to create demand or that abuse cannot occur. But those (very real) concerns are independent of whether or not we spend in deficit. We can, we should, and we must. It’s not a drag on the economy, it is a vital boost.

I and many of my colleagues have been banging this drum for a long time. Not that all economists agree, of course, and probably the highest-profile dissenters were Kenneth Rogoff and Carmen Reinhart. Their work not only came out of the Harvard economics department, but it was cited repeatedly by those in Congress arguing for deficit reduction. And yet the egregious errors in Rogoff and Reinhart’s study are now well known (discovered, I am proud to say, by economists in my school of thought):

Did This Excel Error Cause Panic Over Federal Debt?

Researchers Finally Replicated Reinhart-Rogoff, and There Are Serious Problems

On National TV Last Night, The Austerity Movement Became A Laughingstock

Debt-to-GDP Ratios and Growth: Country Heterogeneity and Reverse Causation, the Case of Japan

Conclusion: at best, Rogoff and Reinhart’s work is sloppy.

And so it is high time for an outright rejection of the austerity model for recovery. It doesn’t make sense theoretically, there is no empirical evidence, and it is illogical. Are the groceries that air traffic controllers used to buy gone? Did we have less stuff to go around and therefore needed to reduce their income so their demand wouldn’t just lead to inflation? Of course not, the groceries are still there, they are just sitting unsold on the shelf. The air traffic controllers are worse off, the grocery store is worse off, the farmers are worse off, and air travelers are worse off. Nothing positive have been accomplished. Austerity accomplishes one thing and one thing only: austerity. We demand aggregate demand.

As we know, the public deficit is falling faster than at any time since after WWII. It's true that it is now fallen to 642 billion. And yet, we hear Democrats brag about this on cable news and the blogoshere about how "This shows Republicans how serious we are about deficit reduction" as if it is a good thing. It's not.

There is some mediocre GDP growth in the US now because the top 10% own 90% of the value of all shares of stock. Since the stock market has been doing well lately, they feel lucky enough to place their bets in the Wall St. casino. The 35% of the economy this spending consists of, is keeping GDP above water. That, and companies are borrowing money at low rates and buying back their own shares of stock. This is what a bubble economy looks like. Is this what we call a "recovery?"

Not if we care about the unemployed and the real economy; specifically, workers, wages, real unemployment, and the long term unemployed. In order to celebrate falling deficits in the absence of any meaningful road to full employment, one would have to be blissfully unaware or to not really care about the American peoples' idle productive capacity wasting away. Wasting away, like their lives gone a stray, because of a government that sees deficits as the crisis instead of their wasted potential on this Earth.

Or if that's not the case, one has to face that they just might be living in their own bubble where national accounting and financial sector balances don't exist. The problem is that in the real world, they do, and their significance with regard to fiscal policy, matters. However, as you can see from the existence of John T. Harvey's excellent pieces, they do exist and our leaders do have the means to at least learn about this. That is, if they care at all anymore.

Therefore, I recommend all of his pieces be sent to Congress pleading for economic sanity, rather than the inanity of applauding deficit reduction(taking away national income from the private sector with not enough aggregate demand). This comment from John T. Harvey explains this dilemma quite well as you will be able to tell. I'll end with that.

I don't understand all these Democrats who are taking pride in the data showing that the deficit is falling. This should not be a goal, and the fact that it is is a function of the fact that the Democrats have allowed the Republicans to set the agenda. Both sides agree in principle, just not in degree. But the principle is wrong.

Over the past three or so years, the deficit has shrunk because spending has leveled off (actually fallen in real terms) while tax revenues have climbed. While unemployment has inched down, a) it has done so at a very sluggish rate and b) policy makers are declaring Mission Accomplished and, as we all know, setting the stage for even bigger spending cuts. That will help just as much as it did in the middle of the Great Depression, when 14% unemployment jumped back to 19% after an attempt to trim the deficit.

There is ZERO reason that unemployment should not now be, at the very worst, 6% to 5.5%, and there should be no movement toward budget cutting until we are at full employment (no higher than 4% and hopefully lower). It is impossible for the US to default on debt denominated in dollars and public sector deficits = private sector surpluses. Those are undeniable facts, not theories. ANY deficit in your own currency is sustainable. Any.

Democrats, stop focusing on numbers that are important to you only because those on the other side of the aisle say they are. They aren't! UNEMPLOYMENT should be our first priority, period. Wake up!

Whew, I feel better now.

Cross posted at Voices on the Square, The Stars Hollow Gazette, and Doucudharma

Originally posted to The Amateur Left on Wed May 22, 2013 at 08:10 AM PDT.

Also republished by Pushing back at the Grand Bargain and Money and Public Purpose.

Your Email has been sent.
You must add at least one tag to this diary before publishing it.

Add keywords that describe this diary. Separate multiple keywords with commas.
Tagging tips - Search For Tags - Browse For Tags


More Tagging tips:

A tag is a way to search for this diary. If someone is searching for "Barack Obama," is this a diary they'd be trying to find?

Use a person's full name, without any title. Senator Obama may become President Obama, and Michelle Obama might run for office.

If your diary covers an election or elected official, use election tags, which are generally the state abbreviation followed by the office. CA-01 is the first district House seat. CA-Sen covers both senate races. NY-GOV covers the New York governor's race.

Tags do not compound: that is, "education reform" is a completely different tag from "education". A tag like "reform" alone is probably not meaningful.

Consider if one or more of these tags fits your diary: Civil Rights, Community, Congress, Culture, Economy, Education, Elections, Energy, Environment, Health Care, International, Labor, Law, Media, Meta, National Security, Science, Transportation, or White House. If your diary is specific to a state, consider adding the state (California, Texas, etc). Keep in mind, though, that there are many wonderful and important diaries that don't fit in any of these tags. Don't worry if yours doesn't.

You can add a private note to this diary when hotlisting it:
Are you sure you want to remove this diary from your hotlist?
Are you sure you want to remove your recommendation? You can only recommend a diary once, so you will not be able to re-recommend it afterwards.
Rescue this diary, and add a note:
Are you sure you want to remove this diary from Rescue?
Choose where to republish this diary. The diary will be added to the queue for that group. Publish it from the queue to make it appear.

You must be a member of a group to use this feature.

Add a quick update to your diary without changing the diary itself:
Are you sure you want to remove this diary?
(The diary will be removed from the site and returned to your drafts for further editing.)
(The diary will be removed.)
Are you sure you want to save these changes to the published diary?

Comment Preferences

Subscribe or Donate to support Daily Kos.

Click here for the mobile view of the site