Austerity Hits the US! Really?

On March 1, 2013 President Obama signed the Budget Sequestration order that cuts federal government spending. The video clip above, from Russia Today (really), takes a good look at what the effects might be on the World Economy (not good).

Sequestration is essentially a great natural experiment in which Keynesian arguments about the role of countercyclical government spending could be tested. My best guess is that the experiment will never be run. You can read my full analysis here. The role of government spending is the great macroeconomic question of the 20th Century and it won't be resolved in 2013.  We will certainly still be arguing about it 100 years from now.

Perplexed By The Deficit Scolds?

zFacts has produced an interesting graph for the perplexed (here). It shows (click graphic above to enlarge) US National Debt as a percentage of National Income by Presidential term. It shows the Supply-Side debt disaster that started in the Reagan years and continues to the present. It also shows a great counterfactual: what would have happened if Reagan and the Bushes had balanced their budgets. In the counterfactual world, debt would currently be below 30% of National Income.

There's another interesting part of the graphic. Debt during World War II reached 120% of National Income and the US economy did not seem to have been damaged by this much debt in the Post-War years. What's more, a lot of that debt went to pay for equipment and armaments that were entirely expended during WWII and never had a productive lifetime. So, is 30%, 60%, 90%, 100% (the current number) or 120% the magic "bad number" for national debt?

Nations (especially a nation that plays the role of hegemonic leader in the world system) are not households. But, many business people (for example, here) seem to argue that the household analogy is appropriate so let's see where it takes us. 

Let's say you make $100,000/year (your Personal Income) and you have a $500,000 mortgage (your only debt). You are a solid citizen with a good job, savings and a bright future. These numbers don't seem unreasonable. But, your debt to income ration would be 500%. Whoa, the deficit scolds would say. You can only have a mortgage of $120,000 to bring your debt in line with your income (that's not much of a house for a person with a six-figure income).

So, if a deficit scold was your banker, how could you have possibly obtained that kind of loan? Of course, it's not only income but also net worth that should be considered (does anyone want to guess at the net worth of the US Federal government?). Another way to look at the graph above is that Presidents from Eisenhower to Carter did not invest as much in the US as they might have and today we have an infrastructure that is crumbling due to lack of investment. And, money is basically free right now. A great time to invest.

Of course, there are good reasons why the household analogy fails. The US government can print its own money and households cannot. The US National Debt could be wiped out tomorrow by printing more money. Since we have no inflation right now, it's not really clear what the effect of such a one-time jump in the money supply might be but deficit scolds would yell "inflation"  -- I'll look at the US money supply and what the Fed is doing in a future post.

So when people circulate videos such as the one below, the purpose is to scare the perplexed with large numbers. The debt is what it is. The debt from WWII was what it was and was probably necessary to end the Great Depression and win the War. The current debt level may be what is necessary to end the Great Recession (the Financial Crisis of 2007-2008), the worst economic downturn since the Great Depression, and win the War on Terror (lest we forget, the right wing is still at war with the Islamic world). Money is cheap right now and US infrastructure needs upgrading after decades of inadequate investment. The US is a safe haven for investment. WWII did not sacrifice the "future of our children" on the altar of debt. It ushered in decades of prosperity until the Neoliberal Right-Wing Supply Siders came to power. The upcoming Fiscal Cliff experiment will show how important government expenditure is during times of crisis.

Austerity: No Pain, No Gain or No Brain?

After a little bit of discussion about whether or not Greece will abandon the Euro, CNBC commentator Rick Santelli comes on with Harry Dent (The Great Crash Ahead) to talk about Austerity.

First, Harry Dent observes that the EU countries should anticipate a future of slow growth for demographic reasons (a reasonable observation). But then Santelli goes on to "make it easy for his listeners to understand" by claiming that Austerity cannot be pursued without some pain (Dent agrees). This would be a vacuous observation except that it is pretty clear Santelli means "pain for somebody else." Since increases in taxation would reduce the Government Debt -> Austerity link and since Santelli is rabidly opposed to any increases in taxation (especially if that pain falls on the upper classes), he hopes to administer pain on the lower classes who are more dependent on the social programs he would like to see cut. CNBC has provided a great platform for Santelli's no-pain-in-my-backyard platform. This is also the Tea Party platform, for whom Santelli presumes to speak.

To cap things off, Harry Dent argues that what we need is a return of the Iron Lady (Margagret Thatcher) to help us impose Austerity on the lower classes. The last I checked, British Austerity as a response to the Financial Crisis was not going very well. Mr. Dent might reconsider using British economic history as a positive example of what happens under a right-wing Austerity regime.

Austerity is Easy, Growth Isn't

 

Former U.S. Ambassador to Italy, Ronald Spogli was asked about the EU debt crisis. One of his comments caught my attention:

I think growth is one of the most elusive things for these countries to achieve. You can press the austerity button and you can try to gain compliance. Competitiveness, they're working on competitiveness and that's the issue because there is no similar button in my opinion, for growth. You just don't press the growth button one day and growth happens. Certainly liberalization has helped, but it helps over time.

Although I may not agree with his political orientation (he was George Bush's ambassador) and with everything he said in the interview, the comment above was very insightful. A country facing a financial crisis may or may not have any easy obvious choices. If it has it's own currency and is not already heavily in debt to global capital markets, it can engage in deficit spending to increase demand (the Keynesian solution). If that option is blocked, it is easy to resort to austerity, even if it generates wide-spread hardship.

Real solutions to the crisis are not that easy. If the crisis was generated by external events in the world system (such as the US Subprime Mortgage Crisis' effect on the EU), it may not be that easy to withdraw from the global economy or, in the case of Greece, from the EU during the debt crisis. If the crisis was generated within the country due to poor regulation or weak political institutions (for example, weak tax collection, shortfalls in government revenue and increases in debt), it's not so easy to change institutional arrangements, as the US is finding out.

Ultimately, the answer is more economic growth but everything depends on how that growth is achieved. If growth is based on the exploitation of either environmental or human resources, the growth is not ultimately sustainable. Right now, the world economy is desperately in need of technological changes that reduce resource inputs, increase labor productivity, increase employment and reduce CO2 emissions and other environmental damage. These are contradictory objectives and the necessary technological changes, particularly in terms of energy intensity and emission intensity, are having trouble emerging even while financial innovation has run wild. Financialization is probably another one of those "easy" things to do, like austerity, that isn't very functional for the society as a whole.

Ambassador Spogli is in a good position to understand these issues. Not only was he Ambassador to Italy but he also started one of the first private equity firms that have become key players in the financialization of the US economy.

Notes

Shefner, etc. al. (2015)  Austerity and Anti-Systemic Protest: Bringing Hardships Back In

Austerity Index Codes

In a future post, I will present the Austerity Index (AUST) for Italy using the codes above from the World Development Indicators (WDI).

Occupy Wall Street (OWS) In The Bible Belt

A colleague of mine at the University of Tennessee, Jon Shefner, was recently interviewed by the Knoxville News Sentinel (here). Jon studies the interaction of economic policies and how global populations advocate for change, specifically the link between austerity and protest. Government programs are essential to the survival of many working people. Closing those programs down when most needed, during an economic downturn, in order to shift income back to corporations, is the preferred right-wing solution (even when government programs had nothing to do with the economic crisis).

Jon became interested in OWS after studying austerity and protest in Latin America.

OWS is a logical extension of his earlier work, except now the austerity protests are happening in the hegemonic center of the world system.

Jon's comments to the Knoxville News Sentinel were basically that we should be paying attention to both OWS and the Tea Party Movement. However, the howls of "protest" from readers (here) suggest that he might have touched a raw nerve in the Bible Belt.

Christine Lagarde "Speaks the Truth"!

In case you missed the interview on 60 Minutes tonight (here), Christine Lagarde, managing director of the IMF, made a number of interesting statements: (1) Compensation in the banking sector is "obscene," (2) the banking sector needs more regulation since it is capable of doing so much damage, (3) my brand is "truth telling."

Lagarde was a noted antitrust and labor lawyer (read her biography here). Her economic philosophy is described as "liberal," but from her comments I would say she was a pragmatist. One can only hope that having someone who was not trained as a neoliberal economist at the head of the IMF might make a difference in how the institution conducts itself. Time will tell.