Jobs, Stimulus and Debt


In much of the world, including the United States and Europe, a debate is taking place about whether the government’s first responsibility should be to reduce unemployment – which is at elevated levels – or to reduce government deficits and debt. Many of the arguments for deficit reduction are simplistic, based on ignorance, or ideologically-based. For example, there are inappropriate comparisons of government to household debt, a fixation on absolute numbers without any comparison to national income, or just right-wing opposition to government in general. Although these are the most commonly propagated views on television and through the media, it is worth taking a moment to examine the (ostensibly) more sophisticated and economics-based arguments and see whether they hold water.

Kenneth Rogoff is professor of economics at Harvard University and a former chief economist at the International Monetary Fund (IMF). This week he responded to some of the pro-stimulus arguments:

“Some portray Japan, with nearly a 200 percent government debt to income ratio, as a poster child for extremely indebted countries with low interest rates. Japan’s ‘success,’ of course, has a lot to do with its government’s ability to sell debt domestically. How the country will handle its finances as saving by retirees shrinks and as its labour force rapidly shrinks, remains to be seen.”

Some background: Japan has a gross debt-to-GDP ratio of about 227 percent of GDP. This is more than three times the level of the United States. But more than 100 percentage points (of GDP) of this debt is owed to the Japanese central bank. This means that the interest payments on this debt go to the government of Japan, so there is no interest burden added by this part of the debt. In fact, Japan’s net interest payments are less than 2 percent of GDP, which is a modest amount.

It also means something else that most of the economists in this debate are not eager to talk about: Japan has financed nearly half of its public debt by creating money. In otherwords, instead of the government borrowing money from investors, the central bank created money and lent it to the government. In the popular imagination, this creation of trillions of dollars (in yen) to finance government deficits has to cause serious inflation. However, the Japanese experience has been the opposite: Over the last 20 years, Japan’s consumer price index has risen about 5 percent – that’s the 20-year total, not annual inflation.

Rogoff is correct to say that the domestic ownership of Japan’s debt is key to its success. But this is just an additional argument for the United States, or Europe, to finance deficit spending through money creation at this time. Such financing is by definition domestic ownership – i.e. ownership by the central bank. In the Eurozone, the ECB would have to agree to refund the interest payments on the debt to the borrowing countries, so as to duplicate what Japan (and the United States) has done with its own central bank.

Of course, Japan’s debt that is held by the public is also held mostly by domestic investors. So this part of Rogoff’s argument is really making the case for avoiding the chronic trade deficits that the United States has run for decades. It is the overvalued dollar, and the resulting trade deficits, that drive foreign borrowing in the United States.

As for the warnings about what might happen when savings and the labor force shrink, we have heard this rhetoric for decades from deficit hawks in the United States and Europe. Suffice it to say that there are many options open to rich countries should they ever face the problem of a “labor shortage.” But unfortunately our problem for the foreseeable future is the opposite. It is a shortage of jobs, not labor.

Rogoff cites his own work, with Carmen Reinhart, in arguing that debt-to-GDP ratios of more than 100 percent are “above the threshold where growth might be affected.” But their paper really doesn’t show much at all, especially for economies such as the United States and the Eurozone that can borrow in their own currencies. Countries that end up with debt greater than 100 percent of GDP are likely to have other problems that got them there. As others have also noted, without controlling for these other factors – which this paper decidedly does not do – there is no way of establishing causality. In fact, the authors do not even control for changes in population growth, since they look only at GDP growth rather than per capita GDP.

Rogoff adds another self-defeating argument: “Importantly, governments that emphasize long-term fiscal sustainability are likely to have an easier time inducing their central banks to maintain highly supportive monetary conditions.”

In other words, he is saying that central banks might react to expansionary fiscal policy in the present situation by tightening monetary policy. But this just means that the central bank should be subordinated to national economic policy, instead of the other way around. He is taking for granted that central banks must be “independent.” But as experience has demonstrated – e.g. the U.S. Federal Reserve somehow missing the two biggest asset bubbles in world history – this doesn’t necessarily mean independent of Wall Street, it means independent of the public interest. So yes, a government that wants to use expansionary fiscal policy will need the co-operation of its central bank. And should have it.

Rogoff argues that “anemic growth with sustained high unemployment is par for the course in post-financial-crisis recoveries.” Par for whose course? If past governments made stupid mistakes and/or didn’t care about condemning a generation of low-income young people to years of unemployment, does that mean we should do the same? At the end of the day, Rogoff provides no convincing economic argument why either the United States or Europe cannot, or should not, finance the necessary stimulus until unemployment approaches more normal levels.

MARK WEISBROT is an economist and co-director of the Center for Economic and Policy Research. He is co-author, with Dean Baker, of Social Security: the Phony Crisis.

This article was originally published in The Guardian.







November 26, 2015
Ashley Nicole McCray – Lawrence Ware
Decolonizing the History of Thanksgiving
Joseph Grosso
The Enduring Tragedy: Guatemala’s Bloody Farce
Roxanne Dunbar-Ortiz
Imperial Myths: the Enduring Lie of the US’s Origin
Ralph Nader
The Joys of Solitude: a Thanksgiving!

Joseph G. Ramsey
Something to be Thankful For: Struggles, Seeds…and Surprises
Dan Glazebrook
Turkey Shoot: the Rage of the Impotent in Syria
Andrew Stewart
The Odious President Wilson
Colin Todhunter
Corporate Parasites And Economic Plunder: We Need A Genuine Green Revolution
Rajesh Makwana
Ten Billion Reasons to Demand System Change
Joyce Nelson
Turkey Moved the Border!
Richard Baum
Hillary Clinton’s Meager Proposal to Help Holders of Student Debt
Sam Husseini
A Thanksgiving Day Prayer
November 25, 2015
Jeff Taylor
Bob Dylan and Christian Zionism
Dana E. Abizaid
Provoking Russia
Oliver Tickell
Syria’s Cauldron of Fire: a Downed Russian Jet and the Battle of Two Pipelines
Patrick Cockburn
Trigger Happy: Will Turkey’s Downing of Russian Jet Backfire on NATO?
Robert Fisk
The Soothsayers of Eternal War
Russell Mokhiber
The Coming Boycott of Nike
Ted Rall
Like Father Like Son: George W. Bush Was Bad, His Father May Have Been Worse
Matt Peppe
Bad Policy, Bad Ethics: U.S. Military Bases Abroad
Martha Rosenberg
Pfizer Too Big (and Slippery) to Fail
Yorgos Mitralias
Bernie Sanders, Mr. Voutsis and the Truth Commission on Greek Public Debt
Jorge Vilches
Too Big for Fed: Have Central Banks Lost Control?
Sam Husseini
Why Trump is Wrong About Waterboarding — It’s Probably Not What You Think
Binoy Kampmark
The Perils of Certainty: Obama and the Assad Regime
Roger Annis
State of Emergency in Crimea
Soud Sharabani
ISIS in Lebanon: An Interview with Andre Vltchek
Thomas Knapp
NATO: This Deal is a Turkey
November 24, 2015
Dave Lindorff
An Invisible US Hand Leading to War? Turkey’s Downing of a Russian Jet was an Act of Madness
Mike Whitney
Turkey Downs Russian Fighter to Draw NATO and US Deeper into Syrian Quagmire
Walter Clemens
Who Created This Monster?
Patrick Graham
Bombing ISIS Will Not Work
Lida Maxwell
Who Gets to Demand Safety?
Eric Draitser
Refugees as Weapons in a Propaganda War
David Rosen
Trump’s Enemies List: a Trial Balloon for More Repression?
Eric Mann
Playing Politics While the Planet Sizzles
Chris Gilbert
“Why Socialism?” Revisited: Reflections Inspired by Einstein’s Article
Charles Davis
NSA Spies on Venezuela’s Oil Company
Michael Barker
Democracy vs. Political Policing
Barry Lando
Shocked by Trump? Churchill Wanted to “Collar Them All”
Cal Winslow
When Workers Fight: the National Union of Healthcare Workers Wins Battle with Kaiser
Norman Pollack
Where Does It End?: Left Political Correctness
David Macaray
Companies Continue to Profit by Playing Dumb
Binoy Kampmark
Animals in Conflict: Diesel, Dobrynya and Sentimental Security
Dave Welsh
Defiant Haiti: “We Won’t Let You Steal These Elections!”