John Buell

The Fiscal Cliff and Other Imaginary Monsters

How has a trillion-plus dollar deficit become a crisis entailing a complete overhaul of the nation’s finance? A trillion dollars is a big number, but in inflation adjusted terms pales in comparison to World War II deficits. Never has a crisis been so patently engineered and manipulated to serve the interests of the wealthy. Homely themes and narratives of poorly understood foreign events are woven together to create a terrifying tapestry. The corporate media constantly suggest that profligate government spending on social programs like Social Security has created a situation where the US government, like Greece or like spendthrift households, is in danger of no longer being able to pay its bills.

Such a stark view of this crisis would not be possible if media were even to ask a series of simple questions. Instead we are fed over and over hollow debates between Democrats and Republicans over how best to reduce deficits that both sides treat as the basic malady of our political economy.

For starters the media might ask if Social Security is actually going bust. Usually the corporate media simply assume that it is, but can gain some plausibility only through deceptive tricks played by Social Security opponents. They say Social Security and Medicare are in trouble. Since the latter does have some issues, the claim seems plausible. Nonetheless, it is like saying Hank and Tommy Aaron were the greatest homerun hitting brothers of all time. Hank hit 715 and Tommy hit 3. Economist Dean Baker points out: “The projections of the Congressional Budget Office … show that Social Security will pay full benefits through 2038. After that, even if Congress makes no changes to the program whatsoever, Social Security will still be able to pay over 75 percent of the full benefit. The payable benefit after the projected date of trust fund depletion will still be higher than the benefit received by retirees today, so the system would be far from broke.“ Medicare’s problems are rooted in the private sector and in legislation that doesn’t allow its administrators to negotiate drug prices in the same manner as the VA.

More basically we might ask if governments, like households, always need to pay off their debts. The whole notion of a fiscal cliff is premised on an absolute limit to what governments can spend. So if a speculative housing bubble — financed by loose though highly profitable lending practices by the private sector — collapses, government debts supposedly become unsustainable. Government must cut spending just as the households bankrupted by the housing collapse must. Yet this is exactly wrong. In such circumstances public sector spending can and must fill the void if deeper recession is to be avoided.

Households are like the US government only if those households can print dollar bills in the basement. A sovereign government the debts of which are denominated in its own currency can never default on those obligations unless it chooses to do so. As University of Missouri/Kansas City economist Michael Hudson points out, sovereign governments have always been able to fund major social needs like war. During World War I, the common wisdom was that: “if Germany could not defeat France by springtime, the Allied and Central Powers would run out of savings and reach what today is called a fiscal cliff and be forced to negotiate a peace agreement.

But the Great War dragged on for four destructive years. European governments did what the United States had done after the Civil War broke out in 1861 when the Treasury printed greenbacks. They paid for more fighting simply by printing their own money. Their economies did not buckle and there was no major inflation. That would happen only after the war ended, as a result of Germany trying to pay reparations in foreign currency. This is what caused its exchange rate to plunge, raising import prices and hence domestic prices. The culprit was not government spending on the war itself (much less on social programs).” Economist Stephanie Kelton, also at UMKC, points out that most hyperinflationary episodes like Zimbabwe were not a consequence of government’s spending to create jobs but of supply side problems.

Paul Krugman, Baker, and other labor economists have pointed out that rising government spending and declining revenues were a consequence, not the cause, of recession and rising unemployment. This is even more clearly the case for Spain, often taken as one of the poster children for the dangers of government spending. Before the collapse of its housing bubble, a bubble funded in part by improvident loans from German banks, Spain was a model of fiscal prudence. The Spanish government’s current debt is courtesy of its bailout of its reckless private banks, just as is the case for the trillions of dollars of bad debt now on the books of the US Federal Reserve system.

And if deficits were a consequence, then attempts to cut those deficits are no cure to the current economic malaise. Indeed a major reason that the US has weathered the world recession far better than Europe is not our so called “flexible labor markets,’ but instead the set of automatic stabilizers from the New Deal era. The trillion dollar plus hole in the budget was mitigated in part by such automatic stabilizers as unemployment compensation and social security. In this context Greek economist Yanis Varoufakis has asked us to perform a thought experiment. Imagine that the housing bubble in Nevada, Arizona, California had collapsed and each had been required to fund its own banks and unemployed workers. Each of these states would now be near or in default of its bonds. Both Varoufakis and University of Texas economist James Galbraith have pointed out that the US and Europe faced relatively comparable recessions but the US has emerged in far better—though hardly adequate—shape. Europe had no continent-wide surplus recycling mechanism like social security or pension guarantees and in addition has pursued a suicidal austerity course. The nature and effects of this austerity are another theme our corporate media hardly ever touch.

Surely at least some of our corporate media know that literal default or even hyperinflation are hardly realistic threats. Yet the rhetoric persists for at least two reasons.  Both investment banks and the Federal Reserve create money, mostly by computer strokes rather than printers today. Investment bankers would rather see the holes in our highly unequal economy (loans for housing, pension investments and their services0 filled by bank loans and private fund investors rather than by taxes on the rich or public dollar creation. Secondly, as left Keynesian economist Michael Kalecki pointed out, if government can always safely spend up to the point where full employment is achieved, corporations lose their ability to blackmail workers and citizens with threats of plant closings.  Apparently printing dollars is okay if war is the goal but hardly acceptable if greater equality is the aim.

John Buell lives in Southwest Harbor, Maine, and writes regularly on labor and environmental issues. Email jbuell@acadia.net.

From The Progressive Populist, February 1, 2013