Post-Peak Liberal: Give Us Austerity (and Give Us Dearth)

Post-Peak Liberal

....... Life on the Downslope

Give Us Austerity (and Give Us Dearth)

First out of the gate, check out this fantastic piece in the Nation, "Beyond Austerity." The author, William Mitchell, does a really nice job of traversing the broad range of issues involved with government austerity policies: fiat currencies, inflation, credit crunches, the fallacy of 'crowding out,' and more. I haven't seen the Fiscal Stimulus vs. Neoliberal Monetarism clash described better than this.

Let's go over Mitchell's main points, and then we'll move on to some of our own observations.

First, the current recession was caused by out of control private debt (bundled CDOs and the like) and the erosion of government oversight of the freewheeling banking industry (deregulation). In this light, the US government had to step in to rescue the financial sector from its own excesses. But the austerians are using this opportunity to morph a free-market problem into a sovereign debt problem, as if the public sector was the arsonist and not the fireman.
The stimulus vs. austerity clash actually goes back to the late 60s and early 70s, when the New Deal consensus fell apart, and Neoliberals began to attack the idea that the federal government could act as a deficit-spending safety valve, periodically filling in gaps in free market investing and hiring.
Unemployment was thus reimagined as an individual instead of a social problem, one of laziness instead of a situation where capitalists were just not providing enough opportunity for job growth. This pushing of the cause of unemployment onto the shoulders of individuals was given concrete policy pillars via union busting, wage suppression, and public benefit cuts -- all to force the supposedly-lazy back into the application lines.
As the popularity of federal stimulus waned, the road was paved for monetarism, the notion that the only proper role of government vis-a-vis the economy is to control the money supply, and thus interest rates and inflation. Fiscal policy (spending) was portrayed as the crude, inflexible, government attempt to mirror the much more efficient allocations of the free market. Get government out of the way, and the market will 'crowd in' and allocate spending, hiring, and investing in the proper way, raising all tides and boats.
Unfortunately, lo and behold, even though the economy did continue to grow robustly (and probably would have anyway), the labor-busting nature of Neoliberalism resulted in almost all of the fruits of that growth moving to the top. And where the money is, the power soon follows. The enriched owners of capital bought themselves a government, and the Neoliberal consensus was locked into place.
The problem, though, was that stagnant lower and middle classes cannot continue to drive robust growth with flat wages. Maximum consumption is needed to fuel profits and dividends. Thus.....private debt. The financial sector proceeded to craft all kinds of vehicles for usurious household debt: easy car loans, subprime mortgages, 25% interest credit cards, payday loans, etc. Financial companies reaped a huge windfall of fees and interest, which was then plowed into even more exotic debt instruments, like Collatoralized Debt Obligations and Credit Default Swaps. We know what became of all that.
Now, post-collapse, all of this seems to be forgotten. The utter failure of the deregulated free-market is now portrayed as a government spending problem. So we endlessly hear that the federal budget is like a household budget. We can't spend beyond our means indefinitely, so drastic downsizing is needed. We all need to make sacrifices, to create a more realistic fiscal future.
However, a national government that issues its own currency by fiat (as opposed to a fixed standard like gold) cannot go broke. The household analogy is completely false. As Mitchell describes it, "The government is not a big household. It can consistently spend more than its revenue because it creates currency. Whereas households have to save (spend less than they earn) to spend more in the future, governments can purchase whatever they like whenever there are goods and services for sale in the currency they issue. Budget surpluses provide no greater capacity to governments to meet future needs, nor do budget deficits erode that capacity. Governments always have the capacity to spend in their own currencies."
Really then, governments do not need to issue debt to foreign entities at all. They could simply continue to create more economic activity by issuing more currency. Governments only float sovereign debt offerings to appease the Neoliberal cry for limiting federal stimulus itself. It's really an unnecessary loop that could be eliminated by recognizing the benign nature of fiat currency creation.
The only danger in simply creating new currency for federal stimulus is inflation and hyperinflation, which conservatives like Ron Paul are endlessly squawking about. But as Mitchell nails it, "The reality is this: if the economy is operating at full capacity—which means it cannot produce any more new products—then attempts by the government to expand spending will cause inflation. But up to that point, governments can run deficits forever without causing inflation. By supporting spending in an economy not at capacity, deficits induce more production rather than higher prices, since companies will be happy to supply the growing demand."

Mitchell then goes on to describe how perennial deficit spending has not created inflation in the US, nor even in places like Japan, which have run larger deficits for years and years. Interest rates on federal bonds have remained low, indicating no private panic at deficit levels. Also, the idea that slashing government spending will result in massive private investment is manifestly untrue. Companies will not invest in capacity unless they anticipate increased demand, which they won't see because of massive un- and underemployment, and continued household distress (foreclosures, household bankruptcies, etc). Certainly, there are major problems with the format of US federal deficits, specifically our unsustainable military spending and our out-of-control health care costs. Those things do need to be addressed with massive and bold overhauls, including spending cuts and centralized control of medical payments.

In any case, check out Mitchell's column. There's a lot more in there, and I certainly don't do it justice. The main takeaway for the layperson is that we are, as Paul Krugman repeatedly maintains, in a liquidity trap, a downward spiral of reduced demand and thus investment, which puts us on the same track that led to the Great Depression. While certainly not as severe as the 30s, the overall contours are the same. The lack of household demand is reinforced by the stagnant job market, and companies will just not invest in new capacity when the ability of regular consumers to take on more debt-financed consumption is so low. In today's world, global companies will simply move their investment capital to other areas of the globe, where returns are safer and larger (and especially when there are very few tax penalties for offshoring declared profits). In this scenario, the federal government must step in and fill the demand gap, by creating more currency via public works and jobs programs. Without more and massive stimulus, we'll stay mired in sluggishness forever.

In a very mainstream sense, the Mitchell-Krugman argument is unassailable. Austerity programs in Germany and Britain are faring horribly, as the free market has not crowded in to take up the investment slack. And investors continue to park money in the US, as we are seen as still having massive capacity for production and consumption. Everyone's just kind of waiting for something to spark increased activity again, whether it's the recovery of real estate values as excess inventory is finally gobbled up, or a couple good quarters of hiring stats -- or whatever.

But the reality is that nothing significant can really happen structurally unless the mechanisms that have allowed the hyper-concentration of wealth over the last four decades are smashed. All of the private debt that was pushed onto households has to go somewhere. People are never going to get back in the black as long as they have underwater mortgages, 25% credit card balances, next-to-nothing in their retirement accounts, and household incomes that have been flat for years despite longer working hours, longer commutes, and additional breadwinners.

I only see three possible outcomes:

Our major parties and our leaders will continue to pretend that we're just an election or two away from turning the corner, if only the other side's faulty ideology is defeated, freeing up our brilliant program for spawning growth and American awesomeness. But because the narratives of both sides are faulty, and because the entire political process is compromised by the one-sided influence of big money, the promised salvation will not come, and we will slowly sink into the sands of The Long Emergency. This situation will not be good, as all manner of extremism will be on the table as conditions deteriorate. We would be staring a Mad Max-type situation in the face, waltzing back in time to territorial medievalism.
Our major parties (or maybe just one) will have an ideological breakthrough, due to relentless popular pressure, and set off on a bold path of class warfare and massive wealth distribution. We're talking about a national debt jubilee here, with the government forcing the financial sector to write down or write off trillions of dollars in mortgage and other private debt. Then, an uber-progressive tax structure would have to be enacted, to prevent corporations and HNW (high net worth) individuals from simply reconsolidating their power all over again. And then the government would have to engage in major deficit spending, creating all kinds of jobs to rebuild our deteriorating infrastructure and create a brand new infrastructure for green energy, etc. Finally, business and real estate laws would need to be totally rewritten, so that it becomes much easier for regular people to organize collectively, raise capital, start businesses, weather hard times, and get logistical support from private and public sources. It's hard to imagine any of this happening, as our federal government has been populated for so long with big business water-carriers. I just can't see a radical program for downward movement of power happening in the current climate.
A much more desirable and doable option does exist, I think. It is logistically tough, but much less so than the options above. And ideologically, it is almost impossible to imagine. But if we can get past the mental hurdles of our current mores and stereotypes, it does promise the best overall solution to our current state. What is it? Of course, as regular readers of this blog know, it is the creation of an entirely-new social form, a new collective or tribal style of living that hearkens back to our genetic heritage yet promises the only truly sustainable path forward.