Beyond Austerity | The Nation


Beyond Austerity

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It is difficult to expose the underlying myths because the assertions are framed in an opaque jargon. Further, the language of austerity has become ingrained in public debate by decades of miseducation and daily onslaughts from Fox News and its ilk. Those networks feature conservative politicians and denigrate those who challenge their views. Anyone who dares advocate larger deficits is shunned as being incompetent and/or a dangerous socialist. However, constantly shouting that government deficits are bad doesn’t make them so.

neoliberalism,  austerity, budget deficits,  conservatives, tax increases, spending cuts, private debt growth, deregulation, sovereign debt, interest rates, euro, government intervention, unemployment, welfare, microeconomic reforms, public sector employment, Job Guarantee

About the Author

William Mitchell
William Mitchell is research professor of economics and director of the Centre of Full Employment and Equity at the...

When British Prime Minister David Cameron said that the government deficit is just like credit-card debt and that Britain was facing bankruptcy, he was invoking the false neoliberal analogy between national budgets and household budgets. This analogy resonates strongly with voters because it attempts to relate the more amorphous finances of a government with our daily household finances. We know that we cannot run up our household debt forever and that we have to tighten our belts when our credit cards are maxed out. We can borrow to enhance current spending, but eventually we have to sacrifice spending to pay the debts back. We intuitively understand that we cannot indefinitely live beyond our means. Neoliberals draw an analogy between the two, because they know we will judge government deficits as reckless. But the government is not a big household. It can consistently spend more than its revenue because it creates the currency. Whereas households have to save (spend less than they earn) to spend more in the future, governments can purchase whatever they like whenever there are goods and services for sale in the currency they issue. Budget surpluses provide no greater capacity to governments to meet future needs, nor do budget deficits erode that capacity. Governments always have the capacity to spend in their own currencies.

Why? Because they are the issuers of their own currencies, governments like Britain, the United States, Japan and Australia can never run out of money. President Obama was wrong to suggest otherwise. Most people are unaware that a major historical event occurred in 1971 when President Nixon abandoned what had been called the gold standard (or US-dollar standard). Under that monetary system, which had endured for eighty-odd years (with breaks for war), currencies were convertible into gold, exchange rates were fixed and governments could expand their spending only by increasing taxes or borrowing from the private sector. After 1971 governments issued their own currencies, which were not convertible into anything of value and were floated and traded freely in foreign currency markets. Most nations have operated “fiat monetary systems” ever since, and as a result national governments no longer have to “fund” their spending. The level of liquidity in the system is not limited by gold stocks, or anything else.

Why, then, do governments borrow? Under the gold standard governments had to borrow to spend more than their tax revenue. But since 1971 that necessity has lapsed. Now governments issue debt to match their deficits only as a result of pressure placed on them by neoliberals to restrict their spending. Conservatives know that rising public debt can be politically manipulated and demonized, and they do this to put a brake on government spending. But there is no operational necessity to issue debt in a fiat monetary system. Interestingly, conservatives are schizoid on the question of public debt: public borrowing provides corporate welfare in the form of risk-free income flows to the rich because it allows them to safely park funds in bonds during uncertain times and provides a risk-free benchmark on which to price other, riskier financial products. The fact that bond yields have remained low throughout the latest economic crisis (reflecting strong demand for public debt) tells you that the parasitic bond markets do not buy the neoliberal rhetoric. They know that national governments (outside the Eurozone) have no solvency risk.

Zimbabwe! Yes, a Bob Marley song. But it has also become the one-word response conservatives use to scare us into believing that deficits cause hyperinflation (the cry used to be Weimar!). 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. But up to that point, governments can run deficits forever without causing inflation. By supporting spending in an economy not at capacity, deficits induce more production rather than higher prices, since companies will be happy to supply the growing demand.

Deficits will drive up interest rates! That’s funny, since deficits have risen sharply in recent years but interest rates have remained close to zero. Japan has been running large deficits since its property market collapsed in the early 1990s and has maintained zero interest rates and low inflation ever since. The neoliberal lie forgets to mention that the central bank sets interest rates, not the market. What neoliberals don’t tell you is that when government deficits stimulate growth, savings also grow as a result of higher incomes. So the claim that private and public borrowers compete for a finite pool of savings is a lie. Far from taking funds away from private investors, deficits expand the pool of available savings. Neoliberals also lie about the way banks work. Any credit-worthy private borrower can get credit from banks. Bank loans create deposits, which can be drawn down when banks make loans to borrowers. Yes, banks need reserves to back their loans, but they also know that the central bank will always supply those reserves should the banks fail to attract the necessary funds from other sources. So private borrowing is not constrained by existing savings. Borrowing typically increases income, which increases savings.

What about the central claim the British government is advancing to justify austerity—that private sector spending will increase if deficits are cut? All the evidence shows that firms are currently very pessimistic and will not expand employment and production until they see stronger growth in demand for their products. Consumers are also pessimistic because they worry about losing their jobs. They are also heavily in debt and are trying to save to reduce risks should they become unemployed. Cutting public spending will only deepen this pessimism. The greatest neoliberal lie denies human psychology. The early indicators from Britain—poor growth figures and surveys indicating growing pessimism among private firms and consumers—are already undermining the substance of the coalition government’s austerity strategy. The only way economies grow is if companies expand in response to increasing demand for their products. When private demand is subdued, the only way to increase growth is for government to spend, via deficits. Austerity will just withdraw the lifeline that has been keeping our economies growing in the past year or so.

Finally, 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.

The Continuing Conservative Dominance

Neoliberal economists and their supporters failed to predict the recent crisis and offered no effective solution once it arose. Organizations such as the IMF and the OECD advocated policies that contributed to the crisis. So why do neoliberal myths still dominate? And how has the British government been able to impose austerity when the indications are that it will severely damage the economy?

If you step outside the mythical neoliberal world, it is easy to see how the crisis occurred. It is easy to understand why there has been persistently high unemployment and rising inequality and why the distribution of income has moved dramatically in favor of capital. It is also easy to understand the rising dominance of the financial sector and the proliferation of financial products that ultimately exploded when banks abandoned any reasonable notions of risk in search of ever-increasing surpluses for their already wealthy owners. The fault lies with government—its failure to regulate properly and to use its fiscal capacity to ensure that there are enough jobs. The nearly religious belief in self-regulating markets led to policies that have allowed the destructive inner logic of capitalism to explode. Governments abandoned their stabilizing role as intermediaries between labor and capital. Instead, as captives of the financial sector, they supported dangerous and at times dishonest banking practices.

Blinded by our willingness to binge on consumption, courtesy of the increasing levels of credit pushed onto us by greedy banks, we never noticed that our political representatives were sacrificing our longer-term interests by advancing the short-term interests of capital. We also fell for the oldest political con: divide and rule. The poor were portrayed as the lazy detritus of this new entrepreneurial age. The unemployed were easily vilified as failures—which suggested that the rest of us were successes—even if success was measured in terms of the size of the houses and accompanying paraphernalia we could ill afford.

This madness was given a sense of legitimacy by a constant media chorus, sustained by a well-funded conservative lobby operating through high-profile think tanks harmonizing with endorsements from academic economists. Money bought national media access, while progressive voices struggled to be heard. Such is the power of this lobby and its mouthpieces that even though their approach has been thoroughly discredited since the crisis, neoliberals remain in control of the policy agenda and have turned what was clearly a private debt crisis into an alleged sovereign debt crisis.

In part, the neoliberals have retained their dominance because the opposition has been weak and fragmented. Progressives have generally been unwilling to contest the mainstream lies about budget deficits and public debt driving the push for austerity. There is a fear among progressives that they will be represented as spendthrifts if they advocate higher deficits. They too often try to appear “reasonable” by saying they will run fairer budget surpluses without realizing that striving for surpluses is the problem. In the buildup to the crisis, economic growth was driven largely by a private credit binge. The accompanying rise in private indebtedness really was unsustainable. Typically, capitalist economies require continuous public deficits to support growth and allow private debt levels to be sustainable. We lost that balance in the period leading up to the crisis. That point has to become a central tenet of the progressive fight back.

Instead, progressives continually propose all sorts of financial offsets—such as “making the rich pay”—which sound fair but do not get to the heart of the problem. Changing the mix of public spending and taxation may be sensible on equity grounds, but if there is an overall deficiency of spending and the private sector is reluctant to increase spending, then the overriding macroeconomic problems of entrenched unemployment and accompanying poverty will not be solved without increasing budget deficits.

With some well-known exceptions (for example, Joseph Stiglitz, Paul Krugman and William Greider), progressives think that advocating fiscal constraint makes them appear responsible. What they fail to see is that their economic stance largely undermines their capacity to pursue enlightened social and environmental policies.

What Is to Be Done?

Austerity is not the only alternative. The major economies are suffering from a collapse of private spending and a massive overhang of private debt. Consumers won’t spend if they fear unemployment; firms won’t hire and produce if sales are flat. Persistently high unemployment means that our economies are forgoing massive production and income-earning opportunities. Unemployment also causes other problems, such as family breakdown, increased alcohol and substance abuse, increased crime rates and community dislocation. An economy with high unemployment is unhealthy. Austerity will worsen unemployment. It beggars belief that a government entrusted with advancing the well-being of its citizens would deliberately introduce policies that force people into joblessness.

As long as private spending is subdued, the greatest need is to expand budget deficits. That’s the only way the advanced economies will drive growth fast enough to absorb the huge pool of unemployed. Inflation is low, and there is considerable slack in the economy, which can be brought back into productive use by further government stimulus. The current obsession with inflation control and austerity (using unemployment to discipline wage demands) is very costly.

In advocating further fiscal stimulus, I would use the increased public spending to directly target job creation. I would introduce an open-ended public employment program—a Job Guarantee—that offers a job at a living (minimum) wage to anyone who wants to work but cannot find employment. These jobs would “hire off the bottom,” in the sense that minimum wages are not in competition with the market-sector wage structure. By not competing with the private market, the Job Guarantee would avoid the inflationary tendencies of old-fashioned Keynesianism, which attempted to maintain full capacity utilization by “hiring off the top” (making purchases at market prices and competing for resources with all other demand elements). Job Guarantee workers would enjoy stable incomes, and their increased spending would boost confidence throughout the economy and underpin a private-spending recovery. There is no reason the government could not afford this program. The labor is available for work, and the government can easily supply the jobs. There were no questions asked when the government, in the early days of the crisis, instantly provided billions for the banks. Let me repeat: the government has no financial constraint on its spending and should immediately allocate funds to a massive job-creation program.

Sustainable growth requires that the private sector save overall and avoid ever-increasing levels of indebtedness. It is possible that strong net exports could allow high levels of domestic activity with both private saving and the government’s budget in surplus. But that situation cannot hold for all countries. Normally, budget deficits will be required. Progressives should stop apologizing for them.

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