(This guest post originally appeared at NewDeal2.0)
When in doubt, create a commission. It’s always the best way to legitimize stupid ideas. In that regard, it is dispiriting to see 2010 usher in the same discredited dogma that has done so much to contribute to the economic misery of the past decade.
According to the Washington Post: “The limit on the government’s credit card to a record $12.4 trillion gave a significant boost to a proposal to appoint a special commission to make the tough decisions that will be required to dig the nation out of debt. ”
Sadly, (but predictably), President Obama has voiced support for such a plan, as have 35 Democratic and Republican senators, who have signed on to legislation that would create a bipartisan commission with broad power to force painful spending cuts and tax increases through Congress.
Please note the focus of the commission: Cutting Medicare, Medicaid and Social Security and other forms of “unsustainable entitlement spending and a massive accumulated public debt”, which are allegedly “threatening to undermine the nation’s economy and the U.S. credit rating abroad.”
Well, so much for an open-mindedness and fact finding! Even before its official inception, the proposed commission is starting with remarkably partisan assumptions about debt and entitlement programs. What is so inherently “unsustainable” about our current levels of government debt? In the early Victorian period, for example, the British government debt to GDP ratio was nearly 200 per cent and almost reached that level again in the early 1920s. The historian Lord Macaulay noted that at every stage of debt increase, “it was seriously asserted by wise men that bankruptcy and ruin were at hand; yet still the debt kept on growing, and still bankruptcy and ruin were as remote as ever.”
The ideas which underlie this new commission also display fundamental ignorance about double-entry bookkeeping principles which have been in existence for over 7 centuries.
In truth, today’s deficit hawks are nothing more than zealots — poised again to preach their nonsensical theology that government deficits are dangerous and need to be cut, without honestly explaining the full consequences of their recommendations. If households attempt to net save by spending less than they are earning, and businesses attempt to net save (reinvesting less than their retained earnings), then private sector incomes and real output will decline absent an increase in government spending. The danger of premature fiscal tightening was illustrated in the US in 1936-37, when the ending of a war veterans’ bonus and the introduction of Social Security taxes helped push the US back into recession when recovery from the Great Depression was far from complete.
The deficit terrorists only begrudgingly note (if at all) that absent the absorbing role of budget deficits over the last couple of years, we would have had a full Great Depression experience. Government deficits, as Paul Krugman has noted on numerous occasions, saved the world from a much more calamitous experience, yet these deficits are still characterized as something like Norman Bates’s murderous “mother” in the attic of Bates Motel, ready to destroy our helpless population under the nefarious guise of “socialism” or worse. The phobias created by supposedly apolitical organizations such as Pete Peterson’s Concord Coalition or the tea party brigades intimidate policy makers into modifying their fiscal responses to the point where they are insufficient to fill the spending gap left by private sector withdrawal.
Budget deficits per se tell us nothing about the state of the economy; nor do they inherently indicate that any given level of government spending is unsustainable. Pro-active fiscal policy will allow the private sector to have healthier finances by providing spending stimulus over time to generate income growth (and private saving) when it is targeted toward creating full employment, not bank bailouts. Bad fiscal policy, by contrast, simply reflects a collapse in private spending and correspondingly lower tax revenues, and the concomitant failure of government s to act so as to prevent increased social welfare payments (such as unemployment insurance or food stamps) from coming into play as a result of this declining economic activity.
A truly non-partisan commission would seek to analyze budget deficits and government spending within that paradigm. But that’s not the objective here. It is particularly galling to see the main beneficiaries of last year’s bailouts being the main champions of “reforming” government entitlement spending, stopping the fiscal expansion in its tracks before it truly starts to reduce unemployment on Main Street.
As we come into a new decade, however, we should always remember that there is no reason to have any unemployment in excess of so-called “frictional unemployment” (people in the process of moving between jobs). When private sector demand fails, the correct role for the public sector should be to absorb all the workers into the public sector via a Job Guarantee program.
There is never a shortage of work — just a shortage of available employers. When the private sector is unwilling or unable to hire additional workers, the only sector that is left is the public sector. One doesn’t have to be a “socialist” to point out that despite the slight recent improvement in the jobs picture (meaning only that things have not got any worse), we need 12 million new jobs just to deal with workers who have lost their jobs since the crisis began, plus those who would have entered the labor force (such as graduating students) if conditions had been better. At least another 12 million more jobs would be needed on top of that to get to full employment-or, 24 million in total.
Instead of obsessing about budget deficits (which rise as a consequence of unemployment), we would be far better served by commissions (if these stupid things are needed at all) which deal with the rapid escalation of joblessness that occurs during recessions. Why not focus on a new, New Deal program with a permanent and universal job guarantee that will supply as many jobs as there are job seekers? We have an enormous number of unemployed people who are drawing significant social welfare payments. Why not use a lot of that same money and deploy them in productive labor?
It is a no-brainer and the only reason governments do not do this is because (as our friend Bill Mitchell notes), they are blinded by an ideology that says they “cannot afford it” and “it would be unproductive” and “private firms might find it hard employing people again” and all the rest of the wrongful and tedious arguments that get wheeled out by the deficit terrorists.
A lot of people in the private sector don’t want this scheme because they prefer the disciplining effect of high unemployment to sustain a low wage model for their workers. Of course, they would never put it so crassly, but employers benefit when working people fear unemployment. Since workers also can vote, however, those seeking to prevent the adoption of a full employment policy do so under the rubric of “non-partisan” commissions, which seek to perpetuate adverse conditions for labor under the guise of patriotic concerns about “unsustainable government spending”.
By the same token, the government itself won’t address the real issues. Why? Because it is bought by the very beneficiaries of the current system, and also because most politicians cling to outmoded economic theories that are predicated on 19th century gold standard concepts such as “affordability” or “fiscal sustainability”. These concepts have no applicability in a fiat currency system, where a government can always generate the spending power required to sustain full employment.
There is no financial constraint on the government introducing a Job Guarantee program to maintain “shovel ready” labor for the private sector. Only political will and good sense are constrained. We begin the year with hope that President Obama will redirect his considerable powers of oratory in order to help the electorate understand this. And with that thought, let’s ensure that 2010 becomes a much happier and more productive time for the vast majority of people — those who have not collected a massive bank bonus check courtesy of the American taxpayer.
Roosevelt Institute Braintruster Marshall Auerback is a market analyst and commentator.
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