Challenging the Myths About Balancing the Government Budget
By Peter Bohmer at Oct 21, 2012
It will Worsen the Economic Situation.
Challenging Austerity in Greece and Spain.
Building Movements to Organize for Good Economic Policy and for a More Just Society!
Notes on Talk at People’s Movement Assembly, Oct. 20th, 2012
October 20, 2012, Olympia, Washington
U.S.—continued growth of inequality, highest since early 1930’s, unemployment rates some improvement since 2009, 2010 but still officially about 8%, close to 14% if we consider part-time looking for full time and does who have given up. Far higher for young people, African-Americans, people with less than an associate degree. Officially 50 million people poor and growing. Prospect is for continued high unemployment. No discussion of full-employment, only to reduce unemployment to about 6% officially which means 10%. High employment not helps formerly unemployed increases worker’s power, less afraid to get fired, improves income equality, lowers profit rate so opposed by those who run corporations.
U.S. government is running a large government deficit meaning government is spending about a trillion dollars more than it is taxing which is significant, high by historic standards. The federal government debt grows by the amount of the deficit and thus will grow by about a trillion dollars from 2011 to 2012. A lot of the debt is held by the U.S. government—e.g., the social security administration, Federal Reserve bank, —Japan and China are the largest foreign holders of U.S. government debt.
According to the Democrats and Republicans, government deficit and debt are one of the major problem facing us. Obama wants to close it over the next few years by raising taxes to cover 1/3 of deficit and lowering spending twice as much.
Romney wants to lower government spending although his tax cuts will also lead to lower tax revenues, e.g., getting rid of taxes on interest and capital gains income, lowering income and corporate tax rates. Clearly Romney-Ryan and Republican concern is to reduce social spending, not really balance the budget. Less social spending, e.g., on unemployment insurance, food stamps, Medicaid, lowers workers bargaining power, thus reduces wages and benefits paid for by employer. Similarly lowering public sector wages puts downward pressure on private wages and benefits, e.g., health insurance.
With regards to taxes generally, not good or bad, but what they are spent on. Strong reasons for federal taxes over state and local so that corporations cannot play one locality against other, also richer vs. poorer states, Maryland vs. West Virginia. Still corporations can do this on an international level.
Similarly government spending, main question is what it is spent on, qua.ity of programs. Military vs. day care.
One other comment, need to not confuse government deficit, mainly federal, which is government spending – government revenues (mainly taxes) from:
Balance of Payments (B of P) deficit which is dollar outflows, e.g., imports, -- dollar inflows, e.g., exports. With B of P deficit, dollars pile up in other countries, foreign governments mainly trade dollars they hold for U.S. government bonds.
Is U.S. government deficit a huge problem, not now,2012, or 2013, 2014. The government borrows money by selling government bonds or treasuries and pays interest on them to holder of bonds. This doesn’t lower output or national income in present. In fact raises it in two ways, government spending e.g., (high speed rail) and then workers, company spend it, and so other people’s income and employment increase. So it is positive in period of high unemployment—lowers unemployment, increases national income and output.
What about in future, our grandchildren; government borrowing incurs interest payments—does that yield burden on future generations, our grandchildren as they have to pay back loans (bonds) ; —probably not—let us see. !
1) if government. borrowing doesn’t’ lead to an increase in interest rates—no burden. Those who bought bonds would have bought private bonds or from other countries. So their income doesn’t go up. In fact if society is more productive, there are future gains in income and production, eg., if in alternative energy investment, education, health. Also bonds can be reissued when they are due so not actually paid back as long as they are easy to sell Low Interest rate is measure demonstrates this.
2) If government deficit and financing it it causes interest rates to rise and government bonds are purchased by rich people in U.S., banks, etc. a) may still increase future product and income if it is productive investment. This higher interest rate increases income of higher income people who own bonds above what it would have been. Solution then is higher taxes on high income people to tax away some of their increased income. Note that production in the future does not decrease because of deficit spending today.
3) What if government bonds are bought by foreign investors, isn’t U.S. income lower in the future as interest payments on bonds go to people outside U.S. Not so clear, issue here is primarily balance of payments deficit. Also if instead foreign investors buy private bonds, stocks no additional income flow out 65han would have otherwise and balance of payments problem is no greater than if government did not increase deficit. Issue here is B of P deficit not directly government. deficit. Is it clear the difference between them? U.S. has been running both. Consider for example Japan which has large government deficit but its debt is held internally because of its large B of P surplus.
4. Deficit causes inflation. If near full-employment, clearly not now,. Small inflation not bad as long as incomes increasing.
Federal government debt is not same issue as individual debt.
Short run government policy should be to raise employment, real wages.
1) Increase government spending on human needs, aid to state and cities, alternative energy, mass transit investment, child care, schools, all t increases deficit in short run.
2) Increase EITC, other government. transfers, TANF, Food stamps, Pell Grants, (so called transfers)
All of this spending increases demand, wages, income and output.
3) Raise taxes on high income people –lower multiplier as they spend less of income on goods and services. Raising taxes by $100 on wealthy people and reducing taxes by $100 on working class and poorer people not only makes after tax income more equal but also increases somewhat employment and income as lower income spend a higher proportion of their income than high income people.
$100 increase in EITC likely to be spent (tax decrease) while $100 increase in taxes on top 1% is likely to only decrease spending by $40 so there is an increase in demand.
4. Reduce the amount of mortgage debt by reducing the principle the amount owed on houses that are in foreclosure proceeding and where people owe more than their house is worth. This would only be for people living in their own house not landlords. It would stimulate housing construction and increase overall demand and employment.
An intermediate goal.
Government as employer of last resort, Humphrey-Hawkins Bill. Proposed in 1970’s, watered down. Could be in non-profits like work-study. Would require major organizing to win.
So government deficit can cause a major economic problem if government has hard time selling government bonds to finance deficit because of fears of inability to repay which is not problem so far in U.S. . Interest rates in U.S. on these bonds, often called treasuries are at close to historic lows.
If there is decreased willingness to hold and buy these bonds by domestic or foreign investors, danger of increasing interest rates, would become larger share of government budget, negatively affect real economy.
In longer run, B of P deficit is bigger problem as dollars pile up in other countries, could lead to huge decline in dollar, possible economic melt-down, although no problem with small decline in value of dollar, would help U.S. exports.
Government deficit is more of a political problem than econ problem,.
An alternative to increasing deficit is balanced budget multiplier, increasing government spending and taxes by same amount. A dollar increases in government spending and taxes increases income and employment, again what matter most is nature of spending and taxes. Balanced Budget multiplier works regardless of nature of taxes and spending but that is more important than macroeconomic effects. Since States cannot run deficits at State level increasing spending and taxes does stimulate output and income.
This is basically Keynesian economics, not very radical.
Why increased government spending opposed by most big business—profits are already good, they fear higher wages as employment increases; financiers fear inflation.
Let me turn to Spain and Greece briefly.
Spain and Greece, in free fall, unemployment rates of 1930’s depression in U.S., people eating out of garbage dumps in Spain. In Greece, growth of left and fascists (Green Dawn)t. Major protests again Thursday, October 18th, against austerity. Growing protest in Spain (indignados)
Basically in Greece large government. and B of Payments deficits. Need to borrow Euros, cannot print Euros like U.S. can print dollars. Rules of Eurozone which they are members in. Continually higher interest rates, particularly of long term ones, as Greece is broke, high likelihood of not paying back loans.
They have to go to EU, IMF, European Commission to get loans to pay for government deficits in order to continue even reduced government spending.
Output is falling rapidly and growth in poverty. Demands by international lenders for Greece to cut spending, privatize like port, and raise taxes to cut government deficit. E.g., Value Added tax (sales tax) on electricity, sell port to raise money.
This is what is called austerity policy.
Idea is to reduce both deficits, government and trade. Lower incomes will reduce imports as people have less money to buy goods from abroad. This will lower trade deficit. Idea is to have wages fall to make Greece more competitive which help exports and will supposedly further private investment causing output to grow. Not happening like it didn’t happen in midst of U.S. depression,. Policy is like cat chasing a tail as cutting government spending and raising taxes to reduce the government deficit further reduces income and employment which further reduces tax revenue. So the deficit stays high and so another round of loans and further cuts of government program and spending tax increases are again required to reduce deficit. This is situation as we speak. Horrendous social costs—Large increase in Value Added Tax (sales tax) which cause large increases in prices) major cuts in government pensions, , health care is reduced, flexible labor as regular jobs with benefits are changed to temporary and contract workers with little or no job security or benefits, and poverty grows daily.
This austerity policy is similar to policy pushed by Paul Ryan except Republican focus is all on cutting spending while Greece, Spain are cutting government spending and raising taxes.
Greece needs to leave the Euro so it can control its own currency, lower its value so that Greece can sell its goods internationally, to make tourism cheaper. It will have to control trade to balance imports and exports, probably have to leave WTO. They should renounce their foreign debt and some national debt. Greece would have difficulty getting any credit but by rationing foreign exchange could slowly restimulate the economy. Greece should also take over, socialize banks to limit people taking currency out of the country, and to support sustainable development and high employment. Goal of banks should change as should control, make it democratic. Maybe Greece could join ALBA. It a very difficult situation but current policies are insane. Not so unstated aim of IMF, European Union, is to substantially lower Greek wages and benefits so that Greece is competitive but costs in unemployment, poverty are inhumane and unnecessary. Devaluation and having their own currency would cause inflation, particularly in imported goods but costs would be more spread out than staying in the Euro and raising unemployment to obscene levels.
Spain was running small or no government deficits in years just before 2008 unlike Greece, but housing bubble has collapsed as have many banks who made mortgages, similar to here although less bail out of bans than here. Also Spain couldn’t increase government spending like Obama did in 2009 (Stimulus Bill) which prevented a full-scale depression here. .
So like Greece, Spain is going to IMF, and two European Union related financial institutions to get loans with the same structural adjustment conditions, similar to Mexico, Latin America in 1980’s.Slightly less extreme declines but similar austerity policies in Portugal, Ireland, Lithuania and many others.
So let me sum up.
1) Austerity which is raising taxes, cutting government spending to balance government budget, privatize government services like post office is policy to destroy quality of life for workers. I t means falling wages, benefits, less secure jobs, anti-union, higher poverty. It is following policies of U.S. President Herbert Hoover in 1930-1932. For most people it didn’t work then and won’t now,.
2) No reason to balance budget, have zero government debt especially in period of high unemployment.
Inequality of income and wealth; growing poverty; high unemployment are the key economic problems right now facing many countries. For South Africa, U.S. continuing growth in inequality with high poverty rates and unemployment. In South Africa, growing resistance by workers,--mines, spreading.
In Italy, Ireland, Southern Europe inequality although better than U.S. or South Africa is growing and unemployment and poverty are increasing rapidly. These are the economic problems we should be focusing on together with stopping global warming,.
3. States like WA must basically balance budget, hence need to raise taxes if government revenues fall. Also need to raise taxes as government services, like education, health care, grow in cost more rapidly than prices as a whole. Reducing prison population is important but not enough to solve fall in government services at state and local level. There is a need to raise taxes on high income people. State and local employment have continued to fall even as private employment has begun to grow slowly because most states such as WA haven’t raise tax rates even as their tax revenues are falling from the great recession and its continuation. Need to raise taxes and spend more. Sad that Inslee and McKenna have already promised no new taxes. Again taxes are not good or bad, depends what they are spent on and who pays. Need to do education on this. Need to also demand more Federal aid but taxing wealth, financial transactions tax, progressive income tax to replace sales tax are also needed.
4. Occupy Wall Street began to change the focus away from government deficit and government debt although you would never guess this from Presidential debates. This change in consciousness is very important and continues. Need for dramatic actions by Occupy Wall Street to capture imagination and to regain momentum. We also urgently economics education, popular economics education—explaining why balancing budget, and focus on government debt is wrong—and that our focus should be on the real problems of poverty, unemployment and the inequality of income and wealth. Without strong popular social movements we are faced with economic stagnation or worse will continue. All of this requires organizing and popular education.
5. Possible demands—shorter work week, government as employer of last resort, strengthen unions, tax on wealth and financial transactions, challenge mortgage debt and stop foreclosures, nationalize banks and turn them into community controlled banks, government money for local projects which are controlled by grass roots groups. .
Two final points, indirectly related
1) Trans Pacific Partnership, TPP, attempt to extend NAFTA, this furthers race to bottom in taxes, wages, environment. It strengthens power of Transnational corporations, particularly finance capital. Secretly being negotiated. Learn about it and oppose it.
2) demand cancellation of student debt, would spur spending and employment, can unite many . 1 trillion plus, greater than credit card debt. growing as tuition increases outpace inflation and wages are stagnant or falling for most. Link cancellation of student to demands for reduction or cancellation of mortgage debt.