Originally posted on July 29, 2011 at the New Economic Perspectives blog.
Keynes once said that “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist” (Keynes 1964, 383). Two among those modern economists must surely be Reinhart and Rogoff, as no other book in recent history has contributed so much to the mass phobia and delusion about the debt and the deficit as theirs. This is a book that reinforces some of the worst ideas in the economics profession, a profession that refuses to acknowledge that we are no longer on a gold standard and that a government which has a monopoly over its own currency can both supply it without facing default and regulate its value.
Now, you may be a gold bug who fantasizes about the gold standard of the middle ages and the Dickensian industrial world, or you may be Hayekian who dreams of a market with competing private media of exchange without any state ‘usurping’ power over the issue of money, or you may simply wish to barter with your fellow citizens and not bother with this debt business at all. This is all fine and good, but the latter two types of systems have rarely (if ever) existed in history and the gold standard episodes have always ended in deflations, crises, and disaster. So this is what we’ve got in the US—a state money system. A system in which the state determines the unit of account (an abstract measure called “the dollar”) and issues the very thing that serves as that unit of account and medium of exchange (a paper thingy that also happens to be called a ‘dollar’ or an electronic reserve with the same name). Yes! Monopoly money, or more accurately, state monopoly money. This is the system that we’ve got and the system that we have to work with. And as a monopolist that issues its own currency, the US government need not default. Ever. But Reinhard and Rogoff failed to distinguish between countries which control their own currencies from those that don’t when they warned of the ‘dangerous’ levels the US debt was approaching.
Politicians are the most notorious slaves of defunct economists. How a democratic president ended up offering $650 billion in cuts in the most important social programs in the United States (Social Security and Medicare) is something we need to ponder for many years to come. Fortunately (though there really isn’t anything fortunate in this whole situation), Republicans ‘saved’ President Obama from his folly when Speaker Boehner walked out of the debt talks. Now at least we could remove Social Security from the slaughterhouse. But there is little solace in this small ‘victory’ (if we can even call it that), when the slaves of the defunct idea of ‘austerity’ from the extreme right have been driving the policy agenda for the last 2 years culminating in the madness around the debt talks today.
And while policy makers are slaves to defunct economists, the American public has been caught in the middle between bad economics and bad politics. Sadly, just like a hostage held captive for too long, much of the general public has bought into the fundamentally flawed idea, propagated by their Democratic or Republican kidnappers, that the U.S. government is like a household which sooner or later has to pay off its debts and balance its books.
So how can we break the spell of this Stockholm syndrome? As I have explained before, there is a simple logical flaw with the taxpayer’s anger with the deficit (debt) itself.
If we want the government to correct its budget stance, then we must necessarily be asking ourselves to correct ours. If we demand that the government runs a surplus, then we are demanding that we, the private sector, run a deficit. If we are demanding of the government to pay off its entire debt, then we must be demanding that every single private portfolio, retirement, or college fund lose its Treasury securities. Surely the private sector does not want that. The government’s deficit is someone else’s surplus and the government’s debt is someone else’s asset. If you want to wipe out one, you must be asking to wipe out the other.
Recall the Clinton surpluses. What was then considered to be a very ‘prudent’ government stance was in fact only possible because the private sector acted imprudently and ran negative savings for many years. So, take your pick: would you like the private sector be in surplus or the government? You cannot have both. Presumably, we’d prefer the private sector to save and accumulate financial assets, which means that the government must run a deficit and accumulate financial liabilities… Because most people do not think about this basic accounting result, they tend to think that a responsible government is one that acts like a household, without recognizing that a ‘responsible’ government is possible only with an ‘irresponsible’ private sector behavior and vice versa.
Since all of us agree that it is prudent for the private sector to accumulate savings, we must be in agreement that the prudent thing for the government to do is to allow us to be prudent by running deficits. In other words, a truly prudent government is one that does not mimic the behavior of the private sector, but one that offsets it.
Unless we understand this very basic relationship, the American public will continue to be susceptible to debt and deficit fear mongering, and buy into the defunct ideas of their captors.
And what will happen on August 2nd if the White House and Republicans fail to reach an agreement? Probably not much, certainly not on Tuesday, maybe not on Wednesday. Financial markets may be rattled for a while, but global markets still implicitly believe that the US government will keep guaranteeing its bond payments. And they will be right, because interest payments on bonds are never cut. Indeed interest payments on government debt are subject to permanent appropriations, meaning that rentier income to bond holders is untouchable. Instead, what will actually happen is that the debt ceiling stalemate will force the US government to start cutting its expenditures immediately—that is, its other expenditures.
Programs will go, government offices will shut down, employees will be furloughed and laid off, social protection programs will be slashed, veteran hospitals will keep closing, homelessness will keep rising, grandma and grandpa will move in with their children unable to support themselves on social security, but what good will that do anyway in an economy with a 20% unemployment rate by any reasonable measure.
This is the real price to pay from the debt ceiling stalemate. There are far too many Austerity cases around the world to learn from. We know what the consequences are. All we have to do is look to IMF policies over the last 50 years to see the economic damage and suffering such policies have caused. But the slaves of the defunct economists keep singing the austerity song.
Astoundingly, Republicans got all the austerity they wanted and more from President Obama’s continuing compromises (see also Harry Reid’s plan). But it was not enough. So determined to unseat the president, they are willing to crash the economy to reach this objective. The calculus of course is that the carnage would be blamed on Obama and that the public would boot him out of office paving the way for Republican union busting, privatization of essential public goods, assets, and services, dismantling of Health Care reform, Financial Regulation reform, the Consumer protection agency and on and on and on.
How did it all come to this?
When bad ideas grip the imagination of the public, the only two outcomes are Terrible or Devastating. Apart from the MMT economists, who have long tried to explain some simple accounting that illustrates why the US government need not default and have offered specific proposals on how to deal with the debt crisis (see here, here and here), there is not a single economist out there who can cogently explain to the public that we do not face a Greek-style default and that reducing the deficit in and of itself should never be a singular policy objective, without considering what is happening to the real economy.
And so our defunct economists and their politician slaves have spiked the kool-aid and almost everyone is drinking it. Cuts and default are looming ahead and the subsequent carnage will spread to all of us, whether we like austerity or not.
The only way to cure this Stockholm syndrome is to break off this bad affair once and for all. So turn off your TV, your FoxNews, your MSNBC, pick up the phone and call your representatives. Tell them that you want no cuts, no austerity, and no default. Tell them that you want programs instead that directly create jobs which you can count and which you can see.
I would begin with “We need to talk…”
17 RESPONSES TO “THE DEBT CEILING AND AMERICA’S STOCKHOLM SYNDROME”
- Anonymous | July 29, 2011 at 5:47 pm |When you guys write your MMT equivalent of Milton Friedman’s big book (the one that popularized his ideas, can’t remember the title), I hope you will call it “Monopoly Money”. 🙂
- Dan Kervick | July 29, 2011 at 9:20 pm |I just wrote the following email to my three members of Congress:With a 1.3% GDP growth rate and a 9.2% unemployment rate, this is no time for an austerity budget. Both parties are on the wrong track, and are poised to plunge us back into recession with their mad fiscal tightening plans.Raise the debt ceiling now and table the debt issue until January 2013, after the election. Over the next year, we can have a serious national discussion and debate about the economic direction of this country.Put the attention back on job creation, where it belongs, and drop the debt hysteria.
- Letsgetitdone | July 29, 2011 at 10:13 pm |Thanks Pavlina, beautifully written as usual. We’ll see what happens next week when the rubber meets the road, as they say.
- Lewis MacKenzie | July 30, 2011 at 3:36 am |Great piece. The link to naked capitalism gives a 404 though, fyi.
- KineticReaction | July 30, 2011 at 4:06 am |”Now, you may be a gold bug who fantasizes about the gold standard of the middle ages and the Dickensian industrial world, “I hope you realize that returning to the laws and tax rates of the late 19th century doesn’t mean returning to the capital concentration and level of technology of the late 19th century.The late 19th century had the fastest economic and wage growth rates, and standard of living improvements, in US history.
- KineticReaction | July 30, 2011 at 4:09 am |Just to follow up on that:The policies of the late 19th century shouldn’t be derided simply because the economy was more primitive at the time. The lower level of development was only due to the economy having had less time to develop. It terms of relative performs, the policies did well.
- Anonymous | July 30, 2011 at 4:41 am |This is a very helpful article, but I’m unfamiliar with the 90s. Could someone help me? During the Clinton administration, the private sector “ran negative savings.” In what form(s)? Does this refer mainly to households or firms or to both? For example, were consumers going into debt because of excessive borrowing? Were firms using cheap money to recklessly invest in risky investments? And at what point precisely did Clinton policies result in draining too much money out of the private sector and inviting recession? Is there a good article that systematically compares the balance of public and private saving and spending under Clinton, GW Bush, and Obama? Clear comparative charts and empirical description would greatly help non-economists like me understand the more abstract balance sheet interrelationship, which I would like to understand better. Thank you!
- Anonymous | July 30, 2011 at 5:44 am |”The late 19th century had the fastest economic and wage growth rates, and standard of living improvements, in US history.”This is not true. Highest growth in the whole history was post-WW2. Not only did the population grow exponentially, but standards of living increased quite a bit to the point were average people can own several houses, cars, travel, etc. The middle class standard of living is better than aristocracy in the middle ages, and this for hundreds of millions of people.Also, please note that the technology advancement was huge during the industrial revolution, was the start of the carbon-era growth, based on cheap energy (the revolution started because of availability of cheap energy close to centres of development). Conditions now are far away from that, in fact are the contrary: degrowth and technological stagnation (at least at practical levels and possible capital development).
- Anonymous | July 30, 2011 at 6:59 am |You’ll continue to confuse non-MMT’ers, while providing plentiful ammunition to your regular critics, if you persist in mangling the accepted definition of saving.It’s simply not correct to say that the private sector has negative saving if it runs a financial deficit.
- Dave Raithel | July 30, 2011 at 10:19 am |”…the slaves of the defunct idea of ‘austerity’ from the extreme right have been driving the policy agenda for the last 2 years culminating in the madness around the debt talks today.” And they are but the natural heirs to what the Reaganites (despite their hypocrisy) set into motion 30 years ago. All of domestic and foreign policy the last 30 years has been shaped by right-wingers of various feathers, and our excuse of a “left” always does what it can to soothe their ruffles. That makes the American people the turkeys …..
- Bolo | July 30, 2011 at 12:42 pm |”or you may be Hayekian who dreams of a maker with competing private media of exchange without any state ‘usurping’ power over the issue of money, or you may simply wish to barter with your fellow citizens and not bother with this debt business at all. This is all fine and good, but the latter two types of systems have rarely (if ever) existed in history”I would be very interested to see your proof for this. My understanding is that they are the most common or at least the earliest forms of monetary exchange and that the arrangements found in the modern era, while existing in the past in various shapes, are the exception to the rule.That says nothing, however, about how desirable or effective each system is.
- Anonymous | July 30, 2011 at 1:07 pm |Good link to Fullwiler’s article at Naked Capitalism:http://www.nakedcapitalism.com/2011/07/scott-fullwiller-qe3-treasury-style—go-around-not-over-the-debt-ceiling-limit.html
- Anonymous | July 30, 2011 at 1:41 pm |Thanks everyone for the comments. To anonymous 1, yes, one of my very first papers on this issue was called exactly that… Monopoly Money.To anonymous 2, my reference to the industrial revolution does not negate tech advancements, as the next sentence says it refers to the deflationary bias of these monetary systems. Recall prior to the Great Depression and the era of ‘big govt’ we used to experience a DEPRESSION every 20 years, now weve got milder cycles, called recessions and the fiat monetary system, as well as the new role of govt have a lot to do with this. Note however, that despite all tech innovations, the commoditization of land, labor, and capital was so violent that it necessitated the rise of the protective services provided by govt- one, to limit the social impact of market processes and, two, to facilitate the development of and access to these tech innovations. Really this is best explained in Karl Polanyi’s Great Transformation. To anonymous 3, unfamiliar with the 90s, i would recommend the work of Godley and Wray, also browse this blog for actual data on the sector balances. Also see “Surplus Mania: a reality check” http://www.levyinstitute.org/publications/?docid=581To anonymous 4 on MMt mangling accepted definitions of savings. actually we are the ones that have it right. Net savings of fin assets held by the non-govt sectors as reported by the flow of funds account is the useful and relevant measure. Orthodox definitions of savings are completely mangled, because there is really no real world money in the loanable funds model.Dave, thanks. Yes Reaganite thought is really what set the stage for this madness. Deficit phobia has been brewing for decades.Bolo, there are countless of examples fo privately created moneys in any society. But they are not the dominant organizing principle for economic activity. That is especially true of barter. Indeed, the textbook story that money emerges out of barter is wrong. You are better off reading the anthropologists on that one. Money of account has always been delineated by some governing authority, be that a church, pharaoh, king, modern state. the private sector then denominates its private monies in that state administered unit of account. Good work on the origins of money from economists can be found in Wray’s Credit and State theories book. He gives a good account on money emerging from the early penal system, and there’s also work by Michael Hudson’s on ancient Mesopotamian palaces, and John Henry on ancient Egypt among others.Pavlina Tcherneva
- Calgacus | July 30, 2011 at 4:19 pm |Bolo: Money goes back to Ancient Mesopotamia and Egypt, at the latest. It was state money, fiat money, debt, in essence, as are all forms of money.Anthropologists, archaeologists, sociologists and historians have searched in vain for a SINGLE economy based on barter. Closest things are in the decay of monetary economies, in falling empires. Mad Maximus trading canis food for oil for his chariot wheels.No matter, economists and textbook writers have said. We will just make up fairy tales about barter and commodity money. The historical progression was states -> state money –> market economies using money, the reverse of the fiction of markets developing money as the most tradable commodity which is then hijacked by the state.
- KineticReaction | July 31, 2011 at 1:58 am |”This is not true. Highest growth in the whole history was post-WW2. Not only did the population grow exponentially,”No, the economy grew faster during the late 19th century. The population also grew exponentially at the time with million of immigrants coming to America. DESPITE this huge immigration, this era had the greatest real wage growth in US history.” but standards of living increased quite a bit to the point were average people can own several houses, cars, travel, etc. “That’s irrelevant. You need to compare the magnitude of change, not the absolute level of standard of living reached. Of course people are going to have a higher standard of living in the 1960s than the 1880s. That tells us nothing about which set of laws and government programs encouraged economic growth more, since the two economies started at different places when the respective policies were put in place.”The middle class standard of living is better than aristocracy in the middle ages, and this for hundreds of millions of people.”Again, completely off-topic..”Also, please note that the technology advancement was huge during the industrial revolution, was the start of the carbon-era growth, based on cheap energy (the revolution started because of availability of cheap energy close to centres of development).”There has been just as much technological innovation, if not more, in the 20th century, with the invention of the airplane, computers, and digital telecommunication.
- Anonymous | July 31, 2011 at 6:05 am |“Actually we are the ones that have it right. Net savings of fin assets held by the non-govt sectors as reported by the flow of funds account is the useful and relevant measure”You’ve got to be kidding.The proper definition of saving is embedded like a rock in the flow of funds report – table F.8, based on NIPA. It’s got nothing to do with your definition.On the contrary, your sector financial balances model is derived explicitly from the proper definition.How can you change the definition of something that you are entirely dependent on to arrive at your new definition? It’s completely illogical.
- Anonymous | August 1, 2011 at 5:41 pm |Budget deficit resolution:::Roll back public-sector wages to 2000 levels.DEMAND drug tests for ALL public sector employees:::President, city managers, clerks, janitors (who aren’t contract employees). Public sector job security should be a priveledge.