by William K. Black, New Economic Perspectives
A little bit of economics can be a truly terrible thing, for the introductory classes in micro and macro-economics are the most dogmatic and myth-filled part of the neo-liberal curriculum. Dogmas that have been falsified for 75 years (such as austerity) are taught as revealed truth. The poor indoctrinated student is then launched into the world “knowing” that austerity is the answer and that mass unemployment and prolonged recessions are small prices to be paid (by others) to achieve the holy grail of a balanced budget. Students are taught that national budgets are really just like household budgets. These dogmas are not simply false, they are self-destructive and cruel. Neo-liberal economics is so bad and has gone downhill at such a rapid rate that it now worships the economic analog to bleeding patients – austerity – as a response to a Great Recession. Millions of people are indoctrinated annually into believing this long-falsified nonsense, and that includes people who consider themselves progressives.
The remarkable aspect of neo-liberal economics is that the power of its myth has survived for many progressives even after its failed dogmas caused massive economic destruction, massive elite fraud with impunity, and crony capitalism so corrupt that it cripples democracy. Indeed, the brainwashing they received is so effective that even after the eurozone ran a massive experiment with austerity that proved (again) to be a catastrophic failure they remain neo-liberal acolytes. This column discusses three examples that exemplify the problem.
The Guardian (U.K.)
The Guardian is the U.K.’s most famous paper of the left, but its finance editor’s embrace of the neo-liberal austerity myth is passionate and inane. Consider this remarkably incoherent discussion of the “fiscal cliff” by the paper’s finance editor.
“The fiscal cliff explained: what to know about the biggest story in Washington. Is America really heading off a cliff? Why can’t Congress and the president strike a deal? Get the lowdown with our handy primer.”
I chose the Guardian’s coverage as the first example because it begins with the most basic and common neo-liberal myth supporting austerity – a nation with a sovereign currency is really just like a household.
“So let’s start at the beginning: what is the fiscal cliff?
It’s not one cliff, but two things: a group of spending cuts and tax hikes that will come into effect on January 2.
The US has about $2.3tn of money coming in, and it spends about $3.6tn. So imagine you were making $23,000 a year and spending $36,000. What would happen? You’d be in debt, and you’d have to cut your spending. The US is in the same pickle. Except, instead of a few thousand, it has to cut $1.3tn.”
The U.K. did not adopt the euro, so it retains a sovereign currency. The U.K. allows the value of the Pound to float freely and it borrows overwhelmingly in its own currency. The Guardian, therefore, has no excuse for failing to understand a national economy like the U.S. that also has a sovereign currency. A nation that borrows in its own freely-floating sovereign currency is not a target for bond vigilantes. It can and should spend considerably more than it brings in through tax revenues in response to a recession. That is what “automatic stabilizers” do. Automatic stabilizers greatly reduce the severity and length of recessions. Austerity does the opposite. Nations with sovereign currencies can create money directly through key strokes on the central bank’s computer or by borrowing at exceptionally low interest rates during a recession. The U.S., the U.K., and Japan all borrow long-term (10 years) at interest rates below two percent because they have sovereign currencies. Nations with sovereign currencies typically run budget deficits in most years. The U.S. has run a budget deficit over the great bulk of its history.
If a household reduces its spending because its income falls during a recession there is a negligible effect on the Nation’s economy. If a national government cuts spending because a recession reduces its income it directly reduces public sector demand and indirectly reduces private sector demand. A recession occurs when demand is seriously inadequate. Governmental austerity inflicts a far more severe recession on the nation by further reducing demand. A household and a Nation should follow the opposite strategy when their incomes fall sharply. The Guardian’s claim that they should follow the same strategy shows their indoctrination into one of neo-liberalism’s most destructive myths. The fact that the Guardian is making this claim in December 2012, after seeing the recession that austerity inflicted on the eurozone, proves that the problem is dogma, for only dogma is impervious to facts that repeatedly falsify its predictions.
The Guardian, of course, knows that the eurozone has been forced back into recession by the “troika’s” policies, but it reverses the causality. Here is a related piece by the same finance editor about the world’s reaction to the failure to reach a deal on the “fiscal cliff.”
“Q: What does the rest of the world think of this?
They think we’re ridiculous, and that we’re playing fast and loose with not just our own economy, but that of the world. IMF chief Christine Lagarde said the US is becoming its own worst enemy by delaying a decision. Still, this is a case of pots and kettles. It’s not like Europe can really look down on us: they’ve been delaying the same hard decisions on spending cuts for over three years and have been on the brink of a meltdown many times since. Should we be smart enough to look at their example and avoid the same troubles? Yes, technically. But this is the nature of negotiations: they go down to the wire.”
The Guardian’s remarkable explanation of why the Eurozone has been forced back into recession is: insufficient and delayed austerity! If only the Eurozone had made promptly made deeper “spending cuts” things would have been much better. That “logic” comes from assuming that nations are just like households. The Guardian’s answer to the fact that bleeding the patient makes the patient weaker is to bleed them more, and faster.
Note that the Guardian’s finance editor also seems to believe that sovereign monetary systems like the U.S. and the U.K. suffer the same risk of “meltdown” that nations that abandoned their sovereign currencies because they adopted the euro experienced “many times.” The “meltdowns” that the eurozone nations have suffered “many times” because of the deadly vulnerability of nations that lack a sovereign currency to the toxic mix of recession, austerity, and the debt vigilantes. The Guardian’s finance expert’s failure to understand such fundamental and critically important features of the financial system is a testament to the danger of dogma.
The U.S. has “avoid[ed] the same troubles” as the eurozone following the Great Recession. It has not suffered financial “meltdowns” “many times.” It has not been thrown back into recession and it does not suffer Great Depression levels of unemployment. The U.S. budgetary deficit has been reduced at a record rate over the last three years. The U.S. has been able to “avoid the same troubles” as the eurozone because it has not embraced the austerity dogma and it has not given up its sovereign currency. The U.S. did not provide remotely adequate stimulus of the kind recommended by competent economists, but the modest stimulus has been sufficient to produce a modest, sustained recovery. The Guardian, however, implies that we have failed to avoid the eurozone’s troubles after the onset of the Great Recession.
Governor Howard Dean
Governor Dean served as Chairman of the Democratic National Committee from 2005-2009. He was an early opponent of the invasion of Iraq. His self-description is “progressive Democrat.” He is a physician. Dean is a frequent guest on MSNBC’s evening programs. Dean takes the position that the U.S. should go off the “fiscal cliff” because austerity is desirable. He claims that a “balanced budget” is essential and that “everybody” should pay higher taxes to balance the budget. He thinks, contrary to the history of the U.S., that no nation can continue to run deficits.
On CNBC, Dean cheered for the austerity that the “fiscal cliff” would inflict on the nation. He did so even though he believed it would cause a recession for at least six months. He predicted that the recession would be short and mild and a small cost to reduce the deficit. He assumed that austerity would reduce the deficit even though he conceded it would cause a recession.
Dean, a self-described progressive, and one of the nation’s most prominent Democrats, is more dogmatic than Speaker Boehner on austerity.
Andrew Stern (former head of SEIU)
Andrew Stern headed one of the largest unions in America. He made it a growing union and a political force devoted to progressive causes. He was a member of the Bowles-Simpson (BS) deficit reduction commission appointed by President Obama. Obama appointed co-chairs he knew were zealous supporters of austerity and unraveling and privatizing the safety net. Erskine Bowles is a leader of the Wall Street wing of the Democratic Party and Alan Simpson is a very conservative Republican. Stern declined to vote in favor of the BS austerity recommendations, but his vote was not based on any rejection of austerity.
On December 3, 2010, I voted “no” on the Simpson-Bowles report presented to the National Commission on Fiscal Responsibility and Reform. Here is what I had to say about it at the time:
This Commission report also challenges our President to offer his plan for economic growth, and fiscal responsibility no later than his State of the Union, and challenges Congress to adopt a plan no later than Election Day 2012.
I voted no, despite my admiration for the effort, because any plan, I feel strongly, must tackle both our fiscal and investment deficit needed to create jobs and a dynamic economy. No family would willfully balance its budget by not sending their child to college. No business can successfully compete with outdated equipment. And no nation can simply cut its way into prosperity. I felt the plan should better balance revenues and spending cuts, could balance Social Security while preserving more benefits, made too many short term cuts in health care before full reform was implemented in 2018, and did not have shared corporate responsibility.”
Stern now says that he regrets voting against the BS recommendations.
He pushed for the “Super Committee” to “go big” and adopt massive austerity before it statutory deadline in November 2011.
Stern’s co-panelists at the conference, organized by one of Pete Peterson’s groups, whose participants unanimously urged the “go big” super-austerity plan included the former CEO of the AARP, Bill Novelli. Novelli’s support for austerity is particularly noteworthy given the BS plan’s proposals to cut and begin to privatize Social Security – Wall Street’s unholy Grail.
Neo-liberal economics has devastated the global economy and produced all of the predictive failures and evil consequences that progressives have long attributed to its micro-economic myths. Far too many progressives, however, continue to believe the similarly mythical and self-destructive macro-economic myths about deficits, debt, and austerity. It is hard enough countering Pete Peterson’s billion dollar campaign to inflict austerity and unravel and privatize the safety net. Peterson funds myriad front groups. We also have to counter the Wall Street wing of the Democratic Party, which dominates Treasury, OMB, the Justice Department, and the office of the Chief of Staff and favors austerity and unraveling the safety net. We should not have to deprogram progressives indoctrinated into repeating neo-liberal economic dogmas.
Progressives should be able to observe that the neo-liberal macro-economic predictions have been consistently falsified by reality. They should have seen documentaries like Inside Job and Capitalism: A Love Story about the catastrophic failure of neo-liberal economics and economists. They should read sites like New Economic Perspectives and Paul Krugman’s columns that explain why austerity is self-destructive and why the safety net need not, and should not, be attacked. Progressives need to say “no” to anyone who wants to “bleed” the economy through austerity or cutting the safety net.