The Author argues government should keep running deficits (even if it means printing money) until unemployment declines to about 7%.
I say, let's calculate how many dollars of Government spending it takes to achieve that?
And what of the Risks & Consequences of such unfettered borrowing (or worse printing $$s)?
Given that trillions are spent already and no reduction of unemployment is in sight (I suppose for "true believers" that makes no difference),
where is the logic in that?
Take last months Jobs report: out of 421,000 + / - "new jobs" 390,000 of these "new jobs" were caused by Census bureau !
How long will those last?
The Chinese, among others, say classic definition of insanity is "you keep doing the same thing (run deficits) and expect a different result (near full employment)".
What about the confidence of the International community in the green back? Confidence is like a Vace, once it is broken, you can't put it back together....
Few people understood that better than John Maynard Keynes.
A Better solution is to come to grips (before it is too late) with the fact that real, responsible and sober restructuring of balance sheets is the right way to take care of the problems.
Some pain for sure, but a little pain that the wise will take, to avoid the far bigger pain that will come -- when we fall off the Clif.
And that means balance sheets of US Govt, and the Federal Reserve included (as well as Corporations and Individuals).
Otherwise sooner or later we will look like Greece... (then restructuring will be Forced on us by the debt holders around the world). The US is too big to have anybody bail it out -- not even EU, not even Chinese (never mind they would not want to).
If you don't believe that talk to the shareholders of AIG who lost out, under the wise auspices of the FDIC and the Fed to the bondholders of AIG (Pimco and China, Inc.).
And that restructuring will be Really painful: you can imagine that....
Enough said.
Barry Soltani
Los Angeles, CA
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Deficit Hysteria
by Ted P. Schmidt
Deficit hysteria is in full spin mode. The business pages of daily newspapers (including our own) are filled with propaganda about federal government deficits, telling us that “we need to fix Social Security now,” or “the federal government can’t keep bailing out states, the dollars just aren’t there anymore.” Hogwash! If Obama and Congress try to fix the deficit now, history will repeat. Just as FDR’s attempt to balance the budget in 1937 caused the teetering economic recovery to totter into a double-dip depression the following year, Obama will experience the same if he tries to cut spending now.
There are serious issues to address regarding projected future government deficits, but now is not the time to “fix” them. The US economy has shown signs of recovery, but in now way are we “out of them woods yet.” If we reduce government spending now, then we lose the main driving force in the economy, and, as it goes, so will more jobs. It is absolutely idiotic for the federal government to pursue the same contractionary policies that state and local governments are forced to do, and the irony is that attempts to reduce the deficit now will actually cause the deficit to grow. Say what?
With the exception of the export sector, nearly all the growth we’ve experienced in the past year has come from increased government spending, tax cuts, or tax incentive programs. These are now over. As deficit hysteria causes Congress to start cutting spending and raising taxes, like the states and locals have been doing, the total government (fed, state, and local) fiscal situation will move from expansionary to contractionary (previously, federal stimulus spending was helping to counteract state and local cuts), causing unemployment to rise even higher. The result will be even lower tax revenues and higher government spending on unemployment benefits—deficits will be higher!
Maybe, as Representative Chris Lee said, the State of New York shouldn’t rely on handouts from the feds, and maybe it needs to be forced to make significant fiscal changes, but making these changes now is not what the patient needs. (Unless the real issue of the deficit hawks is to break unions and force change by creating even more misery?) However, it’s either ignorance or deceit for him to say “the dollars just aren’t there anymore” [to bail out the states]. Bull crap! The US Treasury owns the mint! It has an unlimited amount of dollars.
Printing money you say? Bu-bu-bu-but, isn’t that inflationary? Under normal conditions (meaning close to full employment) perhaps, but these are not normal times. Inflation occurs when resources are scarce; that is, unemployment is low and factories are running near capacity. We currently have excesses galore. Given this situation, the federal government must be the engine of demand until the recovery seriously takes hold. And if the government has to finance $1 trillion-plus deficits by “printing money” (or in actuality selling bonds to the Federal Reserve), then it should. And it should pursue this policy until unemployment approaches seven percent. Then, and only then, should we start talking about “fixing” that deficit thingy. By the way, guess what happens when unemployment goes down? With more people paying taxes and less spending on benefits for those formerly unemployed, deficits fall.
People are trying to scare you about deficits, either because they are ignorant or they have an agenda, and the same “Chicken Little” economists who believe we need to cut the deficit now are the same ones who argued that the financial sector could regulate itself.
The US government was in worse fiscal shape during World War II than it is in today, but it was government spending on the war that brought us out of the Great Depression. (Unemployment was actually less than two percent during the war.) After the war, government spending declined as the private sector transitioned back to a consumer-based economy, and the fiscal situation was eventually resolved.
The surest way to fix the current fiscal situation is through economic growth, and right now federal government spending is the “teeter” to the private sectors “totter.” The federal government needs to spend like we are at war (and in a sense we are, with the so-called “Great Recession”), then, as businesses gain confidence in the recovery and private spending goes up, federal spending can and will go down. The federal government is the big kid sitting on the other end, and if he jumps off now, well, you get the picture…
Dr. Ted P. Schmidt is an associate professor in the Department of Economics & Finance at Buffalo State College.
Reader Comments (posting new comments is closed!)
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Barry Soltani 12 Jun 2010, 16:41
TS 13 Jun 2010, 12:43
First, let me say that I agree with Ben Bernanke that the long term fiscal situation of the government will need to be addressed, but now is not the time to enact change. We can debate exactly when the feds should begin this process, but I believe we need to wait until the recovery is firmly established, which is at least another 6 18 months away (in my opinion). As for the "logic of job creation," you can talk about the lack of, but the more important impact has been to limit the losses. The rhetorical question back is, "what would umemployment have been without the stimulus and deficits?" And Mr. Keynes understood this very well too... By the way, would your definition of taking a little pain include higher unemployment? And if you lost your job would you be so quick to say we need to suffer a little pain? As for the international sector, where are investors holding their money now? The euro is no longer a short or medium term option. As long as the US and global recovery is in question, investors will continue to purchase US treasuries, but if there is a slack, then yes I believe the federal reserve should accomodate (buy t-bills as well). I disagree with any analogy to the Greek situation, since they no longer have thir own currency. I would say the Greece situation is more like your state of residence, California (Go Jerry Brown!). I think you probably understand that "printing fiat money" occurs mainly through electronic credits, not actual physical $s being created. Just as the central bank can create these, they can destroy when the time comes (as true inflationary pressures start to build). The real issue about deficits is the longer term. Poor fiscal policy (aka supply side economics) during the good times made pursuing the "right" fiscal policy during bad times more difficult. Supply-side economics created a higher "full employment structural deficit." That will have to be resolved,and I hope to address solutions in a future editorial. Regards, Ted Schmidt Buffalo, NY
Jason 13 Jun 2010, 22:08
Alexander Fraser Tytler said it best when he wrote - " A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship. " Printing money is not inflationary; it is INFLATION, by definition. Rising prices are merely a consequence of inflation. And, as we know, there are three ways for the government to raise funds: tax, incur debt debt, and inflate. The former is least politically palatable. The latter two are easier but quite devastating in the long run. If and when this recovery "takes hold", what do you think will happen to the inflation rate? And lowering the interest rate is not likely to happen. In a true free market, the interest rate would be much higher. However, the Fed distorts the market price of borrowing money. Price fixing has a terrible track record – it just doesn’t work. Ludvig Von Mises wrote: “Government spending cannot create additional jobs. If the government provides the funds required by taxing the citizens or by borrowing from the public, it abolishes on the one hand as many jobs as it creates on the other.” When the private sector adds to the GDP, it produces something of value. When the government adds to GDP, they must first steal from more productive members of society to then dispense that wealth as it sees fit. The euro is on the decline (following the bailout model). What makes you think we are immune? We are no exception to the rules. Money is fleeing from the euro to the dollar, inflating the US Dollar Index, but this is just a measure of fiat vs fiat. Look at gold and silver - they are at record highs, and the uptrend shows no signs of stopping. Even while other commodities are crashing (copper, iron, etc), inflation hedges like precious metals are going up, up, and away. The most troubling thing you wrote was that the treasury and the Fed should work in concert to fix the problems. The depression of 1929 was made into the GREAT depression through actions of the Fed. While contractionary policies, as you deamonized, meant that the recession of 1920 (which was similar in magnitude, at first, to the great depression) is nearly unheard of.
TS 14 Jun 2010, 09:37
Response to Jason: I somewhat agree with the democracy quote, but I would replace voters with "special (especially corporate) interests." Voters don't influence spending, corporate lobbyists do. Inflation. Libertarians don't seem to understand the difference between fiat money and commodity money. It's almost two years now since the Federal Reserve (FR) started to inject (over) $2 trillion of reserves (money) into the financial system, yet inflation is non-existent, why? With few exceptions, inflation is caused by too much demand (spending power of consumers) relative to supply of goods. Inflation won't be a threat until unempolyment falls below (roughly) 5%. As for the FR printing money, it essentially swapped reserves for bad mortgages. The reserves are simply "electronic chits" credited and held on account by the FR. There is NO PRINTED MONEY that magically goes into your or my pocket to increase spending power. Until bank reserves are used to make loans, AND unemployment falls low enough, there will be no inflation. Yes, investors are speculating in precious metals because there are no alternatives--a nice bubble in the making. Another indication that there is no inflation, your statement "while other commodities are crashing..." Can the government create jobs? Suppose the private sector decides to build a space ship and take people into space for nice hefty fee, then borrows $10 billion in credit markets to finance the project, creating lots of jobs. They will re-pay the loans with the expected revenue from the joyriders. Now simply replace "private sector" with NASA. All this said, I am not a pro-big-government person, and in normal times I would argue to cut spending. But these are not normal times, and until the private sector is confident enough to spend and create positive momentum in growth, then government has to keep the spigots open. Finally, I disagree with your belief in the cause of the Great Depression, but that is another debate...
Jason 14 Jun 2010, 12:52
Dr. Schmidt: If corporate lobbyists have total control over spending, then why would we want more government spending? Doesn't it seem obvious that the corrupt nature of the corporate-legislative partnership will only mis-allocate resources at best and outright rob the tax payer at worst? Inflation is not caused by too much demand. It is caused by too many dollars chasing too few goods. More dollars printed (electronically created, but you get the idea) does not mean more goods will magically appear. Yes, demand plays a major part. But if you have slips of paper that are being created in large number, you would want to dispose of them for consumer goods as soon as possible - creating artificial demand. We should be seeing DEflation in a time of economic hardship since there will be less dollars to spend as people save money or lose jobs. Instead, we see mild inflation. This is the cumulative effect of deflation through the economic downturn and higher levels of inflation beneath the surface - summing these factors leads to the 2-3% inflation we see today. And when the economy recovers, the tsunami of inflation that will appear might just knock us back into the mess we were in in 2008-09. Investors may be speculating, but around the world people are hoarding gold and silver. India just bought 200 tonnes a few months back when the IMF offered it up. I wouldn't call the central bank of India a speculator - that is a long term hedge against the dollar. The other commodities are down because production is down. This shows that precious metals are rising not due to industrial demand (gold and silver are used in electronics, for example), but rather to get out of paper money. The government can create jobs, but it must first take from someone since government owns nothing of its own. If 100,000 jobs are created, I cringe to think of the amount of jobs destroyed by the higher taxation needed to pay for those jobs. In total, no jobs are created. In fact, some might have been lost. The example with "NASA" replacing "private sector" would require another modification. Replace $10 billion with $100 billion or more. NASA is notoriously inefficient and frequently goes over its generous budget. As an engineer, I have friends working at NASA and NASA contractors, as well. Their wastefulness is legendary. If you advocate an expansion of the books of government, you ARE pro-big-government. You suggest that the government largely replace the private sector (in bad times, only, I am sure). The problem is that government never likes to contract. It is always a struggle because those who receive benefits of government largess and those who fund the "generous" bureaucrats. Government cannot eliminate business cycles. Getting drunk on easy money (aka malinvestment) inevitably leads to the initiation of projects which would not otherwise be undertaken - a distortion in the market. Hair-of-the-dog does not cure a hangover (recession), it merely postpones it and ensures it will be much worse.
TS 15 Jun 2010, 09:19
J, While I am sympathetic to shrinking government, the problems I see with letting things work themselves out now are 1) the middle class and poor are the ones who feel the most pain from the; and 2) the underlying weaknesses are so severe that this crisis would be worse than the 1930s if we let it play out, and that could lead to civil disintegration (maybe some people would like to see that..?). I hope to publish a couple of related pieces, with the last being my views on how to proceed (solve) this mess. Maybe we are having semantic difficulties? When I say demand, I mean effective demand, which means spending power (dollars). But spending power (dollars) is NOT handed out from trees or the FED. No one is given green pieces of paper either when so-called money is created. The FED has injected close to $2 trillion into the financial system, but there is no inflation--not even 2-3%, which has been the FED's target. Why? Because it is not getting to those who spend it on goods and services. And, the FED can destroy money just as easily as it creates it. When inflation pressures begin to take hold, the FED can and will take necessary steps to restrain it. Rigth, government can't stop business cycles, but it can dampen them through countercyclical policies and regulating the financial system. Jason, Am more than happy to continue the discussion via email. schmidtp@buffalostate.edu Thanks for your responses. TS
Jason 15 Jun 2010, 11:29
Dr. Schmidt: I appreciate your willingness to discuss this topic further. I just wanted to make one point on this public forum. The necessary steps you refer to is a liquidity trap, I am guessing. So, the Fed creates some money and gives it to banks at 0% interest (free). Then, if inflation occurs, they pay the banks (lets say 5%) to keep the money as a reserve and not lend it out. So, we continue the corporate welfare by giving banks loans at -5% interest rates. Essentially, paying them to take out a loan. I wish my bank would offer me such a deal!
Barry Soltani 17 Jun 2010, 18:50
To: everyone interested in independent investigation of the municipal financial truth I hope you can see this link: San Diego has unfunded obligations of $3.5 Billion. Day of reckoning is coming... http://www.moneynews.com/StreetTalk/San-Diego-Consider-Bankruptcy/2010/06/17/id/362289?s=al&promo_code=A17C-1 More evidence soon -- that workout is required. Barry Soltani LA, CA
Matthew Green 21 Jun 2010, 23:50
Dr. Schmidt, In reading your response to criticism, I am sort of reminded of the conundrum that the late George Carlin presented to his Priest while in school, which was something like, "If God is all-powerful, can he create a rock that is so big that even he can't lift it?" In your response to Jason, you said, "Voters don't influence spending, corporate lobbyists do." If it is this cut and dry, then won't government spending only benefit the corporate interests that get to lobby for what they want? And if this is the case, isn't that a strong reason to keep as much money out of government coffers as possible, to avoid spending on things that only benefit the corporations? I am curious to know your thoughts on the coming tax increases in 2011? If the economy is too fragile to deal with any significant cutback in government spending, how is it supposed to deal with the certain decrease in investment that will come from the new taxes (Some going up by as much as 100% or more on the investment engines of our country)? A consistent position would be one where the coming tax increases would be even more detrimental to the economy as a whole than a decrease in government spending, especially when the spending is not on some purchase of products that the private sector might benefit from ("Private sector" aka, "the people") but on maintaining already horribly bloated state governmental bureaucracies? However, I suspect that you see these new taxes as less bad because it is taking money from productive private citizens and companies (AKA, "bad people") and allowing the federal government (AKA "the good people")to redistribute it to their own causes, under the guise of "Stimulus". I think New York and California are poster children for what Jason brought up about the voters getting their wishes through the ballot box. Reminds me of an experiment I heard about mice that could push a button and receive a "pleasurable" sensation (like say the government giving me other people's money) eventually, the mice found it so pleasurable, they died because they stopped eating (like say a job that creates value that can generate tax revenue). I don't know you Dr. Schmidt, but I hope your teaching is a more pragmatic and less one-sided political version of economics than your commentary suggests. An early economics professor of mine said that there are only like three truths in economics. The rest of it is wishful thinking and opinion. The older I get, the more correct he becomes. Matt
TS 22 Oct 2010, 17:51
Matt, Sorry never got an email notice about your post; hope this gets to you. The argument I'm making here is a macro one, focused on stabilizing aggregate demand in the economy until a recovery firmly takes hold. As I'm sure you know, there are 4 sectors that generate spending, and until the C+I+NX sectors firmly take hold, then G is the only other option right now. Without the large government deficits, there would have been significantly more unemployment. If I had my way, the majority of the stimulus would've been done through a "payroll tax holiday." At the very least, cut the payroll tax in half until recovery takes hold. But I'm not in control. I do see the macro need to maintain a large deficit until the recovery does take hold, and one could create that deficit by increased spending or cutting taxes. I hope it's clear which one I prefer. My arguments are also pointed at ways to ameliorate the impact on the lower and middle classes, because they (we?) typically bear the brunt of the problems created by, in this case, Wall Street. Does this put me me on one side of a political aisle? I would hope not. I like to consider myself an independent, and in fact in 1996 I stopped voting for either major party. And I agree with what you said, under normal conditions I am all for starving the beast. But these are not normal conditions. You may think I am inconsistent; I would disagree. I am making a macro argument that government deficits have to be maintained until the recovery takes hold, and if you read my piece carefully, I didn't say that it had to be done by increased spending. As for economists, I like to think that I am more pragmatic than most. In fact, I start off all of my macro classes by telling students everyone has a bias (me included), and that macroeconomics especially lends itself to bias. For heavens sake! The dominant macro theory has no explanation for financial crises! Not too pragmatic is it? W.r.t. my views, the most influential economist was the late Hyman Minsky who, IMHO, has the most realistic take on the macro economy (his theory is known as the "financial instability hypothesis"). You would think since market economies have a nearly 300 year history of crises, that economic theory would try to explain crises, not some tendency toward equilibrium??? But that's just my bias... The one economic truth that I learned comes from an article by Al Wojnilower (the chief economist for First Boston in the 1980s), and goes something like this: "as soon as one identifies a statitical economic relationship and tries to use it to control/regulate the economy, you soon set into motion forces that will destroy it." I'm pretty sure he was directing this at Milton Friedman. Cheers, TS |
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