by Randolph T. Holhut
Chief of AR Correspondents
April 21, 2011
HOW TO RE-FRAME THE DEBATE OVER DEFICITS AND SPENDING
DUMMERSTON, Vt. -- The budget game that is being played out in Washington is clear for all to see.
Republicans aren't interested in budget deficits. After all, the current deficits - mainly caused by fighting wars of choice in Iraq and Afghanistan, bailing out the banks, giving huge tax breaks to the wealthy and corporations, and trying to deal with the aftermath of the current recession caused by the collapse of the housing bubble - were brought on by policy decisions made by a Republican president and approved by a Republican-controlled Congress (at least for the first six years of George W. Bush's presidency).
What Republicans are interested in is seizing and holding political power. The huge budget deficits that their policies created are being used now, and have been used for decades, as the pretext for achieving their long-held goal of repealing the 20th Century and all the social welfare programs created over the past 100 years.
That is the lens that should be used when looking at what's going on right now in the White House and in Congress.
In a piece entitled "Beyond Austerity," that appeared in the April 4 issue of The Nation, William Mitchell, an Australian economist and educator, laid bare the lie that government spending must be cut because our government is bankrupt.
Mitchell points out that the central tenet of neo-liberal economics - that markets can regulate themselves and bring sustained prosperity to all - is a lie that brought the global economy to the brink of collapse. But the way that governments are responding to the aftermath of the worst economic crisis since the 1930s - by cutting public spending - is equally mendacious.
"Austerity will worsen the crisis, because it is built on a lie," Mitchell wrote. "Public deficits do not cause inflation, nor do they impose crippling debt on our children and grandchildren.
"Deficits to not cause interest rates to rise, choking private spending. Governments cannot run out of money. The greatest lie - endlessly repeated by neo-liberal economists and uncritically echoed by the mainstream media - is the claim that if governments cut their spending, the private sector will 'crowd in' to fill the gap. British Prime Minster David Cameron's austerity campaign and President Obama's foreshadowed budget cuts are built around these lies."
To Mitchell, it seems that no one wants to remember the main lesson from the Great Depression - that capitalism is inherently unstable and, without government intervention, it is prone to delivering lengthy periods of unemployment.
Deficit spending paid for the U.S. war effort in World War II, and provided full employment at home and victory over Germany and Japan as a result. At the end of the war, the fear was that another economic depression would follow. But a precedent had been set. With deficit spending supplementing private demand, every worker who wanted to work could find jobs.
The formula that achieved this was simple. Government would serve as the buffer to smooth out the extremes of the business cycle, providing jobs and income during the slack times, and income support for those in need. From the mid-1940s to the early 1970s, this was the economic consensus that gave the United States its longest sustained period of prosperity in its history.
But Mitchell points out that consensus frayed as conservatives gained political power in the 1970s, and the OPEC oil embargoes wrecked the U.S. economy. A new economic philosophy soon gained currency. Unemployment was not the fault of an economic system that failed to create enough jobs, it was the fault of people who were lazy, uneducated and coddled by a general social welfare system that sapped their work ethic.
Following this line of reasoning, if you wanted to reduce joblessness, the best way to do it was to make it harder receive government assistance, while also eliminating the barriers to hiring and firing (in other words, get rid of the unions and government regulations.)
At the same time, we saw the rise of monetarism, as promulgated by conservative economist Milton Friedman and his team at the University of Chicago. This theory holds that the only objective of government is to control the money supply to keep inflation in check, and that deficit spending was to be avoided at costs.
This shift - blaming the poor and unemployed for being poor and unemployed, moving the responsibility of government from smoothing out the business cycle to assuring that investors receive a good return on government bonds, and painting budget deficits as evil - is at the heart of three decades of conservative public policy.
It's hard to break through three decades of misinformation and myths, but Mitchell offers a coherent counter-argument to neo-liberal economics.
Start with Mitchell's point that it is impossible for a government that creates and issues its own currency to go broke. Some may counter with the examples of Greece, Iceland, Ireland and Portugal, but those governments gave up their own sovereign currencies in favor of the Euro. By using a currency they don't issue, these countries have had to borrow to cover their deficits, which made them dependent on the bond markets and put them at risk of insolvency.
By contrast, the United States and Britain have can never run out of money and thus can never default on its public debt. In fact, these governments have issued debt to match their deficits only because of the pressure placed on them by conservatives to restrict spending out of fear of stoking inflation or driving up interest rates.
"The reality is this: if the economy is operating at full capacity - which means it cannot produce any more new products - then attempts by the government to expand spending will cause inflation," wrote Mitchell. "But up to that point, governments can run deficits forever without causing inflation."
As for driving up interest rates, we've seen that the U.S. prime rate has been near zero for several years now, despite massive deficit spending. That's because central banks, such as the Federal Reserve, set interest rates, not the markets.
In short, as Mitchell sees it, "the size of the deficit should never be the concern of policy. Fiscal sustainability is being defined by the austerity myth in terms of some arbitrary financial ratio (public debt to GDP, etc.) But actually deficits should be whatever is required to maintain overall spending at the level consistent with full employment. No more. No less. Fiscal sustainability is about fulfilling the government's responsibility to maintain an inclusive society in which everyone who wants to work can."
So, if the central economic problem facing the United States is a collapse of private spending coupled with a massive amount of private debt, and if consumers won't spend because they fear losing their jobs, and if corporations won't spend to hire people and produce goods if sales are flat, austerity is not the solution.
The solution instead is public spending to create jobs, which would in turn provide stable incomes, which would boost consumer confidence, which would lead to increased private spending, which would help spur an economic recovery for the private sector.
There is no economic excuse for not trying this solution. The main obstacle is political. Conservatives have monopolized the policy debate, while the few progressives who challenge the prevailing orthodoxy struggle to be heard.
Mitchell believes too many progressives - including President Obama - have bought into the idea that advocating fiscal restraint makes them look serious and responsible. The reality is that buying into this argument "largely undermines their capacity to pursue enlightened social and environmental policies."
If the idea of government operating for the public good is to prevail, perhaps the first order of business for progressives is to stop apologizing for budget deficits and explain to people the fiscal truth - that conservatives have turned a private debt crisis brought on by reckless and dishonest banking practices into a supposed sovereign debt crisis, and are using this policy-making bait-and-switch to further their own political goals.
AR Chief Correspondent Randolph T. Holhut has been a journalist in New England for more than 30 years. He edited "The George Seldes Reader" (Barricade Books). He can be reached at email@example.com.