by Joseph M. Firestone, New Economic Perspectives
I gotta love Bernie Sanders, because he seems so much like people I grew up with and like myself too, and he also seems to have that passion for equality and democracy that is so important for the future of America. Sometimes I think Bernie is one of the few champions of the people left in Congress. But I also think that along with other progressives he has constructed chains for himself that prevent him from being as effective a champion of the people as he otherwise might be.
His chains are the chains of either false beliefs or a decision not to speak the truth about fiscal matters for fear that the “very serious people” in the Washington village will marginalize him even more than they do right now. I can’t say which of these is true, but I think whichever reason is operative, his self-shackling hurts his effectiveness.
Bernie’s shackles were illustrated recently in an article he did for Truthdig called “For a Budget That Is Both Morally and Economically Sound.” This post is an extended paragraph by paragraph commentary on his article, which I hope will make the nature of the chains he’s forged for himself very clear. Here’s Bernie:
As a member of the U.S. Senate Budget Committee, I am more than aware that a $17 trillion dollar national debt and a $700 billion deficit are serious problems that must be addressed.
Why does Bernie Sanders continually reinforce the message of the austerian debt hawks by recognizing that the debt subject to the limit and the amount of the deficit are serious problems? He should be saying that they are political and messaging problems, but not economic problems. He should be beginning to educate progressives about the fact that sovereign fiat currency issuers can’t have involuntary solvency problems no matter what the level of their public debt or public debt-to-GDP ratio is, and that the size of the deficit ought to be determined by the savings and import desires of the private sector, and be ought not to impacted by arbitrary deficit targets set by Government policy.
By constantly making obeisance to the first premise of the austerians, he sets up progressives to target deficit reduction as a requirement of fiscal policy, with other goals, such as full employment, as subject first to deficit reduction needs. This blunts the force of progressive advocacy, because even as they protest their primary devotion to jobs, greater economic equality, ending poverty, education, managing climate change, repairing and modernizing infrastructure, and other important policy goals, they act to approach these goals within the deficit/debt reduction framework that is the home ground of the austerians.
But I am also aware that real unemployment is close to 14 percent, that tens of millions of Americans are working for horrendously low wages, that more Americans are now living in poverty than ever before and that wealth and income inequality in the United States is now greater than in any other major country-with the gap between the very rich and everyone else growing wider and wider.
Yes, but before he does anything about these things, he has to make sure that the fiscal policy he proposes is politically correct in that it projects deficit and debt reduction over time, and the projections he frequently bases his policies on are ones related to CBO projections, which are incoherent in that they don’t take into account sectoral financial balances and their implications for future economic outcomes.
Further, when we talk about the national budget, it is vitally important that we remember how we got into this fiscal crisis in the first place and who was responsible for it. Let us never forget that when Bill Clinton left office in January of 2001, the U.S. had a budget surplus of $236 billion with projected budget surpluses as far as the eye could see. During that time, the non-partisan Congressional Budget Office projected a 10-year budget surplus of $5.6 trillion, enough to erase the entire national debt by the end of 2011.
Is Bernie serious about this? In October 2011, he announced formation of an “expert advisory panel” with 19 economists on it. At least four of those economists: Jamie Galbraith, Bill Black, Randy Wray, and Stephanie Kelton, believe that the Clinton budget surpluses were only achieved at the cost of an equivalent increase in total private sector debt, and also that the CBO budget projections were unsustainable regardless of the fiscal policy implemented following their occurrence.
They believe, in addition, that these surpluses plunged the nation into the recession of 2000 – 2002. They also believe that CBO budget projections are incoherent and invalid, and have said so at various times. If Senator Sanders has spent any time talking to the members of his panel at all, he should have heard plenty about their views on this and also the views on debts and deficits I expressed earlier.
What happened? How did we, in a few short years, go from a large budget surplus into horrendous debt? The answer is not that complicated. Under President Bush we went to wars in Afghanistan and Iraq-and didn’t pay for them. We just put them on the credit card. The cost of those wars is estimated to be between $4 trillion to $6 trillion. Further, Bush and Congress passed an expensive prescription drug program that was unpaid for. They also reduced revenue by giving huge tax breaks to the wealthy and large corporations. On top of all that, the Wall Street collapse and ensuing recession significantly reduced tax receipts and increased spending for unemployment compensation and food stamps, further exacerbating the deficit situation.
Both wars were very bad policy. The prescription drug benefit was both inadequate and far too expensive because it was a giveaway to the pharmaceutical companies. Also, the tax cuts for the wealthy did very little for the economy and certainly exacerbated the situation of increasing inequality in the United States. And additionally, these Bush programs certainly did create deficit spending and end the surpluses.
But, I also think that Bernie Sanders also ought to realize that the surpluses would have disappeared anyway, in a very short time, because they were draining net financial assets from the private economy, and it was only a matter of time before the increasing private debt accompanying those surpluses would have led to a severe demand contraction and accompanying recession. Knowing this is important, because without that recognition policy makers will, in a situation like the one in the years before 2000, continue targeting surpluses until the inevitable increasing private debt bubble produces a crash.
Interestingly, the so-called congressional “deficit hawks”-Congressman Paul Ryan, Senator Jeff Sessions and other conservative Republicans-all voted for those measures that increased the deficit. These are the same folks who now want to dismantle virtually every social program designed to protect working families, the elderly, the children, the sick and the poor. In other words, it’s okay to spend trillions on a war we should never have waged and large defense budgets, and provide huge tax breaks for billionaires and multi-national corporations. It’s just not okay when, in very difficult economic times, we try to protect the most vulnerable people in our country.
Senator Sanders is right to point to deficit hawk/austerian inconsistency and hypocrisy when it comes to deficit spending. Clearly they are austerian when it comes to programs that benefit the poor and the middle class, but fight very hard for government spending or tax cuts that benefit them.
Where do we go from here? How do we now draft a federal budget which creates jobs, makes our country more productive, protects working families and lowers the deficit?
For a start, we have to understand that, from both a moral and economic perspective, we cannot impose more austerity on the people of our country who are already suffering. The time is now for the wealthy and multi-national corporations who are doing phenomenally well to help us rebuild America and lower our deficit.
First, how we get the results Bernie Sanders calls for is outlined in any number of papers, books, and blogs by MMT economists and writers including this recent blog series of mine. Can we do it in a way that lowers the deficit? I doubt it, as long as we maintain the kind of foreign sector trade balance accompanying our role in the international economic system we have now, and as long as we want our private sector to increase its net financial assets year after year.
If we intend to run trade deficits in the neighborhood of 3 – 6% of GDP, while also having private sector aggregate savings of say, 6%, then we must have Government deficits of 9 – 12% of GDP every year we want to accommodate these targets. This isn’t a conjecture. It is an accounting identity.
We can lower the government deficit if we want to, but we’d have to either save less in the private sector or have smaller trade deficits, or even trade surpluses, or all three over a number of years. Government can force such a change by cutting budgets, and this will work as long as private credit sources step up and maintain demand by allowing consumers to increase private debts. But again, this is unsustainable in the longer run, and also it means that both private sector net financial assets and real benefits from trade will grow more slowly over time than people would like.
Second, for a start we have to realize that from an economic and moral perspective it is not so much about realizing that we can’t impose austerity on people who are already suffering, but more that we don’t need to impose it, and it is therefore immoral to do so, because we cannot involuntarily run out of money, and therefore the levels of our debt and debt-to-GDP ratio are of no economic concern, but are only a political and messaging problem. In short, we can create all the money we need to cover the whole of our safety net, and to expand it if we wish, without any help from the wealthy and the multi-nationals.
At a time when the richest 1 percent own 38 percent of the financial wealth of America, while the bottom 60 percent own a mere 2.3 percent-we cannot balance the budget on the backs of people who have virtually nothing. When 95 percent of all new income during 2009 through 2012 went to the top 1 percent, while tens of millions of working Americans saw a decline in their income, we cannot cut programs that these workers depend upon.
Well, actually, and unfortunately, we can do all of these things if we are mean enough, immoral enough, and stupid enough, all of which many of our representatives appear to be. But, again, it would be both economically stupid and also immoral to make these cuts, since we can create the money to pay for the programs on the chopping block without difficulty, and also if we do not do so we will hurt both the people benefiting directly from these programs, and also the larger economy by depriving it of much needed consumption and fiscal multiplier effects.
Instead of talking about cuts in Social Security, Medicare and Medicaid, we must end the absurdity of one out of four corporations in America not paying a nickel in federal income taxes. At a time when multi-national corporations and the wealthy are avoiding more than $100 billion a year in taxes by stashing money in tax havens like the Cayman Islands and Bermuda, we need to make them pay taxes just like middle-class Americans. The truth of the matter is that according to the most recent information available profitable corporations are only paying 13 percent of their income in federal taxes which is near a 40-year low.
While in January 2013, we successfully ended Bush’s tax breaks for the richest 1 percent, the truth is that they continue to exist for the top 2 percent, those households earning between $250,000 and $450,000 a year. That must end.
There’s no question that for the sake of our government’s legitimacy we desperately need progressive tax justice. Those who can afford the tax burden must be made to shoulder it. However, we also need to be clear about some fundamentals. First, some level of taxation is needed to maintain the value of one’s fiat currency. People must at least need to acquire the dollar, pound, or yen of account to pay taxes and settle legal disputes in order for the currency to continue to be valuable.
But, second, there is no reason why it is necessary to match government spending dollar for dollar with tax revenues or credits from the sale of debt instruments. In order for the government to spend enough to lift the economy out of the stagnation produced by the crash of 2008 and our rather pitiable response to it, the government doesn’t need to raise the money it spends through taxing and or borrowing. In fact, it can tax less than it does now, and also not borrow money at all to do that spending.
To make this happen, the Government (i.e. Congress) may want to change the rules of Government financing to mandate the Federal Reserve to create any dollars the Treasury needs to deficit spend Congressional appropriations. But, it is within Congress’s constitutional authority to do that, and politicians like Bernie Sanders ought to be advocating for that change, so that the mere existence of deficits and debts is no longer a political barrier to doing what we need to have done to create full employment at a living wage, and all the other things we so desperately need.
Failing that change, however, it’s possible and perfectly legal right now to cause the Federal Reserve to create the dollars needed to pay off “the national debt” when it falls due, issue no more debt instruments, and also cover all deficit spending by having the Treasury order the US Mint to issue and deposit in its Federal Reserve account High Value Platinum Coins (HVPCs), and then for Treasury to use the seigniorage fulfill all its obligations without either increasing taxes or borrowing back dollars previously created by the Government.
Why isn’t Bernie Sanders and other progressives advocating for the President to use this method of government finance? Surely it’s better to do this than to have repeated debt ceiling crises, or to cut entitlements using the false justification that “we’re running out of money,” or continuing to wallow in economic stagnation, because we can’t get Congress to raise taxes on the wealthy.
So far, only one progressive Congressperson, Jerrold Nadler (D-NY) has called for the President to use Platinum Coin Seigniorage (PCS) to fund spending or repayment of debts, and he quickly backed off when the President took that alternative off the table. So, the question is, why are all these defenders of the people so silent on this subject? Why aren’t they responding to every call by the Administration and its supporters and opponents to legislate entitlement cuts with the reply “We don’t need entitlement or safety net cuts, because you can use PCS to cover the cost of entitlements and other safety net programs forever any time you want to”?
C’mon Bernie, where are you and the progressive caucus in the House on this one? Where are headline progressives like Alan Grayson, Elizabeth Warren, Sherrod Brown, and Keith Ellison? The problems of funding entitlements, the safety net, and deficit spending to create jobs are separate from the problem of creating tax justice. There’s no need to conflate the two.
Also, you need to realize that even if you were able to get increased taxes on the wealthy at this point, that increase in tax equity would need to be accompanied by increased federal deficit spending to avoid economic contraction. Yes, it’s true that the multiplier from federal tax cuts for the wealthy and presumably for federal tax increases on them is only $.30 for each dollar involved. However, that $.30 is $.30 in lost economic activity per dollar taxed, and if we are to raise those taxes, then that loss in economic activity needs to be replaced through passing additional Government deficit spending, or tax cuts on non-wealthy people to increase the deficit.
Bernie and other progressives need to realize this, and never never advocate either tax increases in isolation, or tax increases in return for spending cuts. This last kind of deal is the worst of both worlds from the standpoint of lifting us out of the stagnation we are now experiencing because it destroys net financial assets in the private economy from two directions.
At a time when we now spend almost as much as the rest of the world combined on defense, we can afford to make judicious cuts in our military without compromising our military capabilities.
We certainly can “afford” to cut military spending. But, please, can we forget the meme about spending almost as much as the rest of the world combined?
First, that’s not relevant, because we should be planning our military programs based on real and specific threats, and not based on what the rest of the world is doing. Second, we don’t need to cut military spending out of economic need, because we have all the capability we need to create the money we need for it. Third, by all means cut it to the level appropriate to the real threats we face, but when we do, we also must replace that spending with equal or greater fiscal multiplier federal spending or tax cuts or credits for the middle class and the poor, else we will be hurting the economy by making these cuts. And fourth, very good replacements would be expanding Social Security benefits and expanding the food stamp program.
Frankly, it is time that Congress started listening to the ordinary people. Recently, the Republican Party learned a hard lesson when the American people stated loudly and clearly that it was wrong to shut down the government and not pay our bills because some extreme right-wing members of Congress do not like the Affordable Care Act. Well, there’s another lesson that my Republican colleagues are going to have to absorb. Poll after poll make it very clear that the American people overwhelmingly do not want to cut Social Security, Medicare and Medicaid. In fact, according to a recent National Journal poll, 81 percent of the American people do not want to cut Medicare at all; 76 percent of the American people do not want to cut Social Security at all; and 60 percent of the American people do not want to cut Medicaid at all. Meanwhile, other polls have made it very clear that at a time of growing income and wealth inequality, Americans believe that the wealthiest among us and large corporations must pay their fair share in taxes.
It is about time that Congress started paying serious attention to what people want as reflected in the polls. But the problem here is that they do, in part, but they pay attention to the wrong results in polls. Specifically, they pay attention to polls measuring their own chances for re-election, above all else. What people say they want in other polls is not as important to them as what people say they intend to do about them.
So, somehow, what people want more generally, must be connected to their evaluation of their Congressperson in a very concrete way. Until people themselves decide to vote against their Congressperson because he or she won’t support Medicare for All, or because they’re expressing an intention to vote for entitlement and safety net cuts, or because they won’t do anything about reducing unemployment, things will not change. Bernie and other progressives need to figure out a way to create that kind of coupling so that representatives are exposed to the consequences of their legislative decisions.
It is time to develop a federal budget which is moral and which makes good economic sense. It is time to develop a budget which invests in our future by creating jobs rebuilding our crumbling infrastructure improvement and expanding educational opportunities. It is time for those who have so much to help us with deficit reduction. It is time that we listen to what the American people want, and not just respond to the billionaire class and major campaign contributors.
It is time to do all this, except for worrying about deficit reduction. In fact, it is a great mistake to worry about deficit reduction for its own sake, because: 1) we can afford whatever deficits we need to run, 2) the debts we incur are of no fiscal importance in themselves, 3) we need not even incur additional public debt even if we do run deficits, and 4) we need continuous deficit spending as long we want the private sector to rebuild its balance sheets and acquire real net wealth from abroad in return for dollar credits. So, it is “loser liberalism” to worry about deficit reduction and condition all of one’s fiscal policy legislation to that criterion. Concerns about deficit/debt reduction and all that implies are the chains with which Bernie and other progressives bind themselves in the political fight for social and economic justice. Bernie, please talk to your economic advisers and free yourself from these shackles!
As for tax justice and equity, we badly need that too. But let’s not hold ending economic stagnation, and attaining full employment at a living wage, and all the other problems we need to solve, hostage to creating tax justice. People are suffering out there. Let’s end the suffering first, and then create tax justice.
The opportunity to do that will come soon enough, when economic reasons for raising taxes eventually align with the need for tax justice. That will happen once we get to full employment.