To combat the continuing recession in the U.S. and to move toward full employment, the clearly optimal policy is for the federal government to increase spending now on programs that contribute to economic growth while improving the quality of life, such as education, infrastructure, research & development, and – not least – reduction of emissions of heat-trapping gases. President Obama as well as Federal Reserve Bank Chairman Bernanke appear to be well aware of this.
Now that the deadline has passed on Friday for preventing $55 billion in annual cuts to both social and military spending relative to previously allocated levels, it is unambiguous that federal fiscal policy is dominated by an obsession with lowering the government’s fiscal deficit and debt. This is despite the fact that, as I have discussed repeatedly in blog posts, in Back to Full Employment and elsewhere, and as many, many other sensible people, including many co-bloggers on this site have also argued, that this is exactly the opposite of what we need to do to move the U.S. economy onto a decent growth trajectory. That is, this is the opposite of what we need to start expanding new job opportunities and moving the economy onto a path toward full employment.
Yes, President Obama and Congress could possibly come up with some new agreement in the coming weeks or months. But based on where the discussions have been for the past 18 months, and where the reports say they may be heading in the coming months, it is almost certain that any new agreement is not going to be more than marginally better than where we are now. The fundamental problem is that President Obama and the Congress are talking about the wrong thing. They believe, or have been led to believe by deficit-hawk economists such as Professor John Taylor at Stanford , that the overriding problem in the economy today is the fiscal deficit. In fact, the overriding problem is mass unemployment. As long as our leading politicians continue to address the wrong problem to begin with, they will never get anywhere near tackling the right problem with viable policies.
This was a big part of the theme of a blog that I posted last December 29, “As Congress Fiddles, the Fed Can Still Take Real Action on Jobs,” and of other posts as well. In the December 29 post, anticipating that Congress and the President would continue going nowhere or backwards as they have been, I argued that the Federal Reserve still has tools at their disposal for bringing unemployment down. The key here is for the Fed to force the commercial banks to disgorge themselves of a good share of the $1.6 trillion—i.e. 10 percent of U.S. GDP—they are still holding in massive cash hoards and to put that money in the hands of small businesses as affordable credit. This is money the banks have gotten for free through the Federal Reserve’s near-zero interest rate policy for banks. This would enable small businesses to start hiring people and grow again. In addition, the Federal government should extend loan guarantees for small business loans specifically to further encourage this credit expansion to the greatest possible extent and as quickly as possible.
I don’t mean to claim that this is the best possible policy option. Of course, it would be better if such measures were accompanied by the federal government expanding its spending on education, health care, family support, infrastructure and the green economy. But such an increase in government spending is obviously not happening now. So that raises the question, just how much could the Fed do with the policy tools I am proposing?
This exact question was posed to me recently by Professor Thomas Weisskopf of the University of Michigan. A little background: As I hope many readers of this blog know, Tom has long been among the most insightful and accomplished progressive economists in the world. In recognition of Tom’s contributions, Jeannette Wicks-Lim and I organized a conference in his honor in September 2011. A book of the conference papers, titled Capitalism on Trial, will be appearing next month from Edward Elgar Publishers (the papers have been presented on the PERI website in serial form for the past few months). In what follows, Tom asks me a series of highly pertinent questions on my proposals for fighting austerity through the Fed. I hope my answers that follow his questions will be persuasive to Tom and everyone else. In any case, here we go:
This is the second part of a two-part post; the first can be read here.
Many contributors to the “Back to Full Employment” blog have pointed out that the current national focus on reducing the debt of the U.S. Federal Government is completely misguided. I thought it might be useful to identify the major arguments raised by the “debt hawks” and to show why, in each case, the arguments are simply wrong.
1. The U.S. national debt at the end of 2012 came to almost 16½ trillion dollars, amounting to more than $50,000 per citizen. Since we will have to pay off that debt, each of us is really $50,000 poorer than we realize.
First of all: there is no need to pay off the national debt. Hardly any country ever pays off all of its national debt, because carrying that debt can cause a problem only if the burden of servicing the debt becomes too onerous. That burden in any given year depends on the relationship between (1) the amount of debt service payments that must be paid out that year by the Federal Government and (2) the size of the national economy that year. The smaller is (1) relative to (2), the easier it is to raise the tax revenues needed to make the debt service payments.
As we approach the end of the calendar year, we are hearing more and more expressions of alarm about the “fiscal cliff,” over which the country could tumble on January 1, 2013. As I will argue below, there is indeed reason to be worried about this cliff; but the reason is actually the opposite of that expressed by many of the alarmists.
The biggest obstacle to a pro-employment policy in the United States today is widespread fear about running federal government budget deficits, which add to the national debt – the sum of all past deficits minus all past surpluses. Most politicians, not only Republicans but also many Democrats, believe that reducing the national debt is now our single most important economic task. So they call for policymakers to focus single-mindedly on reducing the annual federal government deficit. And they have been encouraged in such beliefs by all too many economists.