John Buell

Defanging Debt, Denigrating Austerity

A dangerous bipartisanship grips Washington. The two major parties may disagree on who benefits from tax reform or who should control or profit from infrastructure spending, but both agree that any action on the fiscal front must not increase the budget deficit. This agreement stands even in light of little understanding of why deficits have grown or what consequences they have had. Perhaps it is time to rethink the national debt. Stoney Brook professor and former chief economic advisor to Sen. Sanders, Stefanie Kelton, has initiated what ought to be a fundamental re-examination of that issue. Her arguments are clear and persuasive:

“Suppose the government spends $100 into the economy but collects just $90 in taxes, leaving behind an extra $10 for someone to hold. That extra $10 gets recorded as a surplus on someone else’s books. That means that the government’s -$10 is always matched by +$10 in some other part of the economy. .The problem is that policy makers … see the budget deficit, but they’re missing the matching surplus on the other side.

“When there’s a deficit, some of that new money can be traded in for a government bond. What’s often missed in the public debate is the fact that the money to buy the bond comes from the deficit spending itself.

“What isn’t missed is … government pays interest on those bonds. Lawmakers are obsessed with this line item in the budget, as if it’s … taking a bigger and bigger bite out of your household budget. It isn’t. Unlike a household, the government doesn’t have to trim other parts of its budget to make ends meet. Congress can always create more room in the budget by adding rows or widening the columns to put more resources into education, infrastructure, defense and so on. It is purely a political decision.”

Kelton recognizes that “there are real limits to what can be done. No country can commit to large-scale infrastructure investment unless it has the available labor, machinery, concrete and steel. Trying to spend too much will cause an inflation problem. The trick is to adjust the budget to make efficient use of the people, factories and raw materials we have.” As Kelton puts it succinctly,” the risk of overspending is inflation, not bankruptcy.” I would add that the emphasis on bankruptcy induces a kind of hysteria that prevents discussion of how careful targeting of investments would reduce the risk of inflation.

Unfortunately as Kelton argues “the very words ‘debt’ and ‘deficit’ have been weaponized for political ends. They serve as body armor to politicians who would deny resources to struggling communities or demand cuts to popular programs.”

Kelton’s reference to the weaponization of debt suggests that austerity and balanced budget hysteria are sustained by more than faulty arguments. These include a historical narrative about German hyperinflation and the rise of the Nazis. That narrative blamed ecess government spending for inflation so severe that purchasers had to wheelbarrow money to stores., a source of iconic images giving credence to the story, In point of fact, as Mark Blyth shows in Austerity: The History of a Dangerous Idea, The German government intentionally devalued its currency to hurt its creditors in response to the draconian terms of its post World War I accord. Subsequent austerity led to massive unemployment and gave the Nazis, the only party that rejected austerity, its opening. Today’s colorful apocalyptic narrative is fiscal train wreck. Getting the historical narrative right is especially important in an era of economic vulnerability and an authoritarian President.

The US is not going broke. There is a basic difference between us and Greece. We control our own currency. Control of our currency gives the US an escape valve in the face of economic crisis. Greece, tied to the Euro, cannot devalue its currency and thus attract more investment and exports. It is ironic that so many of today’s conservatives, who are so big on national sovereignty, don’t see the advantage of a nation’s control of its own currency.

Just as mistaken is failure to recognize that private debt is often more significant than public. Private citizens cannot print money. They can only retrench if they have fallen on hard times. As they retrench, their decisions adversely affect fellow citizens and deflationary pressures increase burdens on all debtors. Even creditors eventually suffer as their borrowers default. At this point even some fiscal conservatives come to recognize that only government spending can break this viscous cycle unless society is to be allowed to scrape along the bottom until some shoots of recovery begin to appear. In that interim, however, forces of the hard right gain momentum. Often their path to power is the one fiscal stimulus favored by the corporate establishment, military spending.

Private debt has other attractions. Loading citizens with debt is from view of elites a great way to sustain profit making enterprise and create dependence. Indebted citizens find it hard to strike. And borrowed money is a source of financial profits

Finally, Kelton’s essay provokes me to ask: Why has the neoliberal faith in austerity spread so widely even in an era following the Great Recession? At this point one must speculate a bit. In the midst of crisis capitalists, especially financiers, never lost their faith in the virtues of saving. They believed they were rich because they saved rather than they saved because they were rich. And despite the role they had played in the fiscal crisis, government remained a convenient target. Government regulated too much. (Deregulation can never be total and so investment banks can always claim that one more deregulatory step will fix everything.) As for many middle class citizens, hatred of the banks was strong but was often offset by lingering guilt about their own debts or inner doubt about whether their hard work was worth it all. Such sentiments can be expressed in part by contempt for a government that spends money on those deemed unworthy. Nor can one discount that uniquely American sense that one day I will be rich.

Perhaps some emotional resonance with government spending can be achieved by stressing and picturing just what we bought. And the emphasis should be on we. Or if government cannot simply print money — as we did for the banks — how about an analogy with war bonds. The war being one on behalf of the environment or to minimize the suffering an angry nature is inflicting. Those are debts that might inspire pride.

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

From The Progressive Populist, November 15, 2017

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