Fueled by Deficit Hysteria, Obama and the Republicans Are Choosing the Path of “Economicide”

Reprinted from New Economic Perspectives

By Michael Hoexter

In the “fiscal cliff” negotiations and the subsequent debt limit talks between Obama and the Republican leadership of the House of Representatives, it appears that there will be no “good guys” because the talks and policy framework within which they are operating are at odds with the welfare of the American people.  Set up by a series of interactions over the last four years between Obama and his nominal opponents in the Republican Party, the framework of the negotiations ignores the way that the US government finances itself as well as the only known economic policy orientation which will allow our economy to thrive; the proposed policies and negotiations have been to date economically illiterate.  The biggest losers in these talks if they “succeed” according to the self-evaluations of the Republican and Democratic leaderships will be the American people and politically the Democrats who go along with a framework that demands cuts in federal budget deficits at all costs.

The 2011 Budget Control Act, initiated by the Republican controlled House, is one of the most foolish pieces of legislation ever passed into law by Congress, as it forces the government to attempt to “balance” its budget and reduce the budget deficit.  National government budget deficits, which are the net contribution of government spending to economic growth, are actually integral to economic growth, contrary to the anti-scientific conventional budget lore upon which deficit hysteria has been built.  Without government budget deficits, the economies of nations with trade deficits CANNOT grow in monetary terms due a matter of simple arithmetic; those few nations (China, Germany, not the US) with large trade surpluses MIGHT be able to grow without a budget deficit but always with the cooperation of other nations financing those surpluses through trade and, in most cases, government budget deficits on the side of the net-importing nation.

A fiat currency-issuing national government, unlike a local government, business or a household, does not depend upon tax or other income and therefore is not and should not pretend to be bound by conventional balance sheet accounting, which was perhaps a more applicable, though not particularly successful, means of national government accounting during the gold standard era. The reasons for transitioning away from the gold-standard, the rigidities which it imposed on aggregate demand and the money supply, have been suppressed from public discourse in an era in which deficit hysterics like those at “Fix the Debt” hold honored seats at the policymaking and policy advocacy tables.  These deficit hysterics, funded by Wall Street tycoons freelancing as economic pundits, would like Washington insiders and the media to believe that the gold-standard never went away, specifically for the purpose of cutting social programs that stand in the way of Wall Street’s expansion into new markets.

I have recently proposed that we rename the so-called budget deficits specifically of currency-issuing governments, the government’s “net contribution to monetary/economic growth” so that the confusion no longer persists that these so-called deficits are by their nature “bad” and to be avoided.  The fiat currency issuer can never run out of its own money, can never be in “deficit” in it; “net contribution” is a better formal description of the excess of spending over taxes for specifically a fiat currency-issuing government.  The government spending over taxes collected becomes the incremental increase in the money supply for the real economy as it grows in real terms, underneath the pro-cyclical expansion and contraction of money available from bank credit (i.e. expands in a boom and collapses in a bust).  Too much price inflation is a possibility with too much government spending over-and-above taxes collected but demand-led inflation in our current situation would be a “high quality problem” indicating that we have reached full capacity in our economy, which is not nearly the case.  Right now we have a very large output gap as well as high demand for government-led expenditures on things like infrastructure, public services and education, making increased government expenditures very unlikely to cause inflation.

The foolishness of the 2011 Budget Control Act has been compounded by its timing:  attempts to balance budgets during an economic boom can sometimes have lesser yet often negative effects but during a period of economic weakness, during a debt-deflation, budget balancing and deficit reduction efforts (reducing the government’s contribution to economic growth) can have dire effects.

Despite the fact that cutting government spending and vital government programs will in the medium term not serve either Party well politically, elements of the Democratic and most of the Republican Party are trying to commit this “economicide” together now.  Why are they so foolish?  While getting elected is important to politicians, in between elections, the electorate tends to be ignored and politicians have as a primary constituency and funder the now extremely wealthy and politically cosseted financial services industry.  The FIRE sector with its political emissaries in organizations like Third Way and “Fix the Debt”, is desperately trying to throw up enough dust to escape re-regulation and downsizing, as happened during the last debt-deflation, the Great Depression of the 1930’s.  So far, no leader in one of the major finance centers has stood up as did Franklin Roosevelt almost 80 years ago to diminish their power.  Even worse, in the historical place and time where a 21stCentury FDR should have stood, President Obama has been, despite the appearance of a rift with Wall Street, a true believer in rescuing the financial services industry as it is now constituted.  Good opportunists that they are, the financial services industry’s proxies are attempting via whipping up public debt hysteria to use this crisis to expand their markets:  downsizing or eliminating the risk-free government provision of retirement and health insurance would open the market for the FIRE sector’s riskier and less secure products that will cost us all more while delivering less.

This is also fundamentally a fight about the nature of our economic system, the nature of money and the source of money, in which government leaders play a critical role.

The Myth of Market Self-Regulation

Not too long ago, it was considered to be a middle-of-the-road political position to suggest that capitalism needed to be saved from itself.   Government’s economic role was seen in the post-Depression era largely as the stabilizer of an economy that would otherwise run off the rails as it had in the 1920’s.   Many businesspeople and the citizenry at large accepted this compromise between government and market dynamics, an acceptance of the fact of a mixed economy that had existed in various forms since the inception of complex economies in the ancient world.

During the 1950’ and 1960’s, when Keynesianism was viewed as the economic policy norm, there emerged groupings of dissenting economic philosophers led by Friedrich von Hayek and Milton Friedman, that came to be called neoliberals, who suggested to leaders that in the name of “liberty” they should rid economies of regulation and let “the free market” do its work.  In part inspired by neoliberals, in the 1970’s and 80’s,a series of “innovations” in neoclassical economic theory posited that in fact capitalism is a self-regulating system (efficient markets hypothesisreal business cycle theory, etc.) and that markets are the fundamental institution in society.  An accompanying counter-theory of government based on neoclassical economics’ Homo Oeconomicus (public choice theory) portrayed government officials as simply self-interested market participants and not potential representatives of some common interest.  These political and economic theories in turn boosted the self-regard of many businesspeople to delusional levels who were told by academics, politicians and the media that they in fact were the paragon of economic virtue and could do without government’s role in the economy.

Our current set of political leaders almost to a man or woman now operate within the narrowed assumptions of the market fundamentalist/neoliberal picture of the functioning of the economy.  They are also under continual pressure to support the reality distortions demanded by wealthy political patrons, who, as they have breathed in the new self-flattering theory, become increasingly short-sighted in their perception of their self-interest.  The current fiscal cliff and debt limit fiascos are a direct outgrowth of the delusional view of capitalism as a self-regulating, self-sufficient system promoted successively by neoclassical economics, neoliberalism and now austerity economics.

Capitalism’s Habitual Destruction of Effective Demand

One of the critical and obvious ways that capitalism and markets cannot regulate themselves is in maintaining sufficient demand for products and services to allow continuing growth of the economy, an existential need for the existence of capitalism.   There are two primary reasons for capitalism’s chronic and increasing demand gap: on the one hand, a tendency towards inequality and concentration of resources and, on the other, the drive to increase labor productivity and reduce unit labor costs.

Effective demand is weakened by the tendency within capitalism towards increasing inequality in income and wealth, intensified by financialization of the economy.  The increasing inequality leads to shortfalls in demand as money becomes concentrated more and more in savings, which are differentially concentrated among the wealthy.  To preserve these savings, ways are found by financial intermediaries and con men, with the help of lax or enabling government regulations, to grow these savings without putting them fundamentally at risk in real investments in businesses that need to hire people and thereby distribute income more equitably.  Without targeted intervention by government, the formation of a Ponzi economy becomes a matter of course, and eventually the inevitable collapse of that economy in a debt-deflation, similar to that of the 1930’s or of the current period.  Private debt is offered as a means to boost buying power but this only provides a short-lived stopgap as debts become bad debts because average incomes cannot support both current consumption and the debt burden, leading to the collapse of the Ponzi house of cards.

Another area, that has recently received some media attention, is that capitalism and “economic development” as widely understood means the replacement of human labor with machines (powered by a non-food energy source like fossil fuels, nuclear or renewable energy) and the accompanying increase in labor productivity, i.e. the amount of goods and services produced per unit labor.  Even though productivity is celebrated as a universal good, it leads systemically to the reduction in demand for labor as well as reduction in effective aggregate demand for goods and services.  Payment for labor has been one of the primary ways that money gets into the hands of people who want goods and services.  With every rise in productivity and investment in labor-saving technologies, effective demand is endangered locally unless other means are found to distribute income or the primary market, usually abroad, still has a favorable enough income distribution to enable the purchase of these goods.  Eventually this process of capitalizing on others’ still-favorable income distribution reaches its endpoint.

Effective demand has two major components:  intent to buy and means to buy.  With increasing inequality and increasing labor productivity, the means to buy, money, is concentrating increasingly in fewer and fewer hands.  Intent to buy is more evenly distributed throughout the population, dependent as it is on the biological needs and wishes of people; many middle income and poor people of equal total income to one rich person have together “more” intent to buy than that one wealthy person, who by definition is saving a good portion of his or her very large income.  So with increasing inequality and increasing labor productivity effective demand is on a systemic basis destroyed.

It should now also be obvious that by reducing effective demand, which is a primary driver of the economy, capitalism also stifles economic growth and reduces the profits to be gained from selling real goods and services.  Without the stoking of effective demand via injection of the means to buy from outside the market, capitalism would be dead in the water as an economic system; to repeat, our economic system is not a self-regulating system, contradicting the assumptions that have become embedded in contemporary political discourse and that underlie the self-induced debacle that is the Budget Control Act of 2011.

The Only Known Solution: Government Sponsorship of Demand

As money gets more concentrated in the hands of people who are less inclined to spend it, the only way to stabilize capitalism and enable economic growth of some kind, is for the government to put money into the hands of people who are inclined to spend it.  The means available to government are various forms of government spending, including old age and disability pensions, low cost public health insurance that frees up private money for discretionary purchases, as well as payment for labor, goods and services from the private sector in the process of operating the government and creating government projects.  The governments of most advanced economies have for the last 80 years used these solutions to stabilize their economies, building a social welfare state that also manages the economy as a matter of course.  In the context of these efforts, we have seen wealth shared between social classes and, in historical terms, relative social peace.

Of course, government payments are not simply issued to boost demand in the economy but to fulfill the public purpose and increase overall social welfare, which might be considered the primary intention of engaging in these activities in the first place.  The demand-related effects of these activities are an important byproduct of building public infrastructure, taking care of the sick, funding for basic research, caring for the elderly, etc.   The dual benefit of this work makes it all the more foolish to try to cut it in the name of a phantom deficit problem.

In the current budget negotiations, both sides of the negotiation are in agreement that they should permanently eliminate this only solution available to stabilize and rescue capitalism from itself, the ability of government to put money in the hands of people who will spend it.  This is notwithstanding the absolutely vital and ever more valuable services of government which are endangered and also in increasing demand (see for instance the aftereffects of various climate disasters like Hurricane Sandy).  No plausible substitute is being offered by austerity advocates for the vital role of government in providing critically needed services as well as sponsorship of demand.  No private enterprise or bank can offer these services to the people and to the economy.

Obama’s and the Democrats’ focus on increasing taxes on the rich could be only seen, in the context of our current fiat currency system, as an effort to reduce the purchasing and the informal power of the wealthy but not a means to support social spending and the government’s role in sponsoring demand.  Without the Democratic side standing up for maintaining or increasing government spending in combination with the increased taxation on the wealthy, the reductions in income inequality from that taxation will be washed out as lowered growth will reduce proportionally the incomes of the middle classes and the poor more than the incomes of the wealthy.  Furthermore overall economic growth will diminish with both increases in taxation and decreases in government spending.  Targeted taxation of specific activities, for instance a financial transactions tax and a carbon tax, will drive economic activity towards more socially productive ends and perhaps lower unemployment as more labor intensive activities become more attractive investments.  Yet these taxes without increases in government spending overall and/or the serendipitous reduction in the trade deficit will not lead to aggregate economic growth in monetary terms.

Politically Instigated “Economicide”

As Bill Black has just pointed out, the austerity drive that has become popular among political elites in capitals of the world over the last 4 years is a surefire way to “kill the economy”.   Fueled by deficit hysteria, the Cameron government has done its best to kill the UK economy and the Euro-Zone’s “structural” austerity is in the process of killing the Greek, Spanish, Irish and Italian economies.  If you the reader are incredulous that well-attired, well-informed politicians could do such a thing, I have hoped above to show you that 30 years of ideological training has so obscured politicians’ perception of how the economy works, that they are now capable of inflicting damage on their own economies, still convinced of their own rectitude.

The two pillars of the delusional system that enables politicians to commit economicide already discussed above are

  1. the neoliberal view that capitalism is self-regulating and government intervention in it optional and
  2. the Wall Street-led austerity drive’s reinforcement of myths about modern money that are holdovers from the gold-standard.

It also helps sustain this delusional thinking about the economy, for politicians to recognize that they will, in all probability be “saved” in their post-public service lives by the patronage of the elite community that now demands sacrifice from the least while realizing the social vision of the most privileged and corrupt.  Thus there are two sets of “books” kept, one for the elites and one for the rest of society.  The idea that the fates of all are yoked together is not yet fashionable enough.

Michael Hoexter is a policy analyst and marketing consultant on green issues, climate change, clean and renewable energy, and energy efficiency.


One Response to “Fueled by Deficit Hysteria, Obama and the Republicans Are Choosing the Path of “Economicide””
  1. RickD says:

    A wonderfully insightful and “balloon puncturing article” and I thank this forum and the author for it.

    I believe that a student of history would confirm that every recession and economic downturn in our nation’s history has been resolved by the government spending money ( or by the start of a war which amounts to the same thing). The nonsense spouted by the right wing ( and controlling wing apparently) of the GOP is just so much bunco and political hot air designed to raise the testosterone levels of that element of the electorate easily fooled by such rhetoric.

    Reagan’s nonsense about the “infamous nine words”; “I’m from the government and I’m here to help” would never stand up to closer scrutiny, especially with the clear and immediate response to Hurricane Sandy fresh in all our minds. In fact, if it weren’t for George W. Bush’s unfunded war and Obama’s refusal to end it and also deal with the bloated health care industry we might not be hearing so much about our deficit now.

    I will save this article and re-read it often.

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