Austerity Advocates on the Run

by DEAN BAKER

By now almost everyone knows of the famous Excel spreadsheet error by Harvard professors Carmen Reinhart and Ken Rogoff. It turns out that the main conclusions from their paper warning of the risks of high public sector debt were driven by miscalculations.

When the data are entered correctly, this hugely influential paper can no longer be used to argue that the United States or other wealthy countries need fear a large growth penalty by running deficits now. There is no obvious reason that governments can’t increase spending on infrastructure, research, education and other services that will both directly improve people’s lives and foster future growth.

With the advocates of austerity on the run this is a great time to pursue the attack. The public should understand that the often expressed concerns about long-term growth, the future, and the well-being of our children are simple fig-leafs for inhumane policies that deny people (a.k.a. the parents of our children) work and redistribute income upward.

We can only harm our children by reducing the deficit in the current economy, we are not helping them. The wealthy people who benefit from the policies of austerity may have the power to keep them in place, but the public should realize that the politicians and public figures who promote these policies are not doing it out of a concern for the future.

Once we get past the Reinhart-Rogoff debt disaster story, the only argument left against government deficits is the standard economic argument that it could raise interest rates by crowding out private investment. This argument can easily be shown to be ridiculous; there will almost certainly not be any crowding out in the economy now.

Interest rates will likely remain very low even if the government undertook a major investment program. Furthermore the spur to demand is likely to increase private investment because firms invest more when they see demand for their products growing. Since some of the spending, such as spending on improved infrastructure and reduced energy consumption, will make the economy more productive, a public investment program today should make our children richer, not poorer.

This fact is not changed even if we pass on more government debt; although debt can raise distributional issues within generations. This point is straightforward. At some point everyone alive today will be dead.

This means that the government debt (bonds) that people alive today possess will be passed on to future generations. Future generations will not just owe future debt; they will also own future debt. If we take the extreme case where the ownership of government bonds are evenly divided among our children and grandchildren, then the burden of the debt will be money that they are paying to themselves. How can that make them poorer?

Of course the debt is not evenly held so there can be intra-generational distributional issues. Suppose that Bill Gates grandchildren end up owning all the debt. Then the debt will impose a burden on everyone else’s children and grandchildren. They will be paying interest to Bill Gates’ grandchildren.

But this is an issue between Bill Gates’ grandchildren and everyone else’s grandchildren. If our children and grandchildren tax Bill Gates’ grandchildren, then they will face little burden from debt built up today.

Many of the deficit scare mongers have raised the issue of foreign, and especially Chinese, ownership of the debt. While this may appeal to racist sentiments, it has little to do with government deficits.

China is able to buy up government debt because it has a trade surplus with the United States of roughly $300 billion a year. As long as it has a $300 billion trade surplus China can buy up government debt, regardless of whether or not the government is currently running a deficit. If the government is not currently borrowing then China could just buy up government bonds in the secondary market where hundreds of billions of dollars of government debt are bought and sold every day.

Of course even if China didn’t buy up government bonds, but instead bought the bonds of private corporations or stock and U.S. real estate, the situation would be the same. A portion of future output would be paid to China and other foreigners as interest, profits, or dividends.

If this outflow is large enough (the net flow of such payments is still in the U.S. favor) then it will pose a burden to future generations, but this speaks to the importance of getting the trade deficit down. This in turn depends overwhelmingly on the value of the dollar. If the value of the dollar were lower we would export more and import less, bringing our trade closer to balance. If the deficit hawks were really concerned about our children’s future, they would be focusing on the over-valued dollar, not yelling about budget deficits.

Finally it is important to keep these issues in some proportion. Even though our debt burden is relatively large, because interest rates are extremely low, the interest burden is not. In fact, relative to the size of the economy is near post-war lows. It is at post-war lows if we subtract the $80 billion in interest refunded to the Treasury each year by the Federal Reserve Board.

While this burden is projected to rise somewhat when interest rates return to a more normal level, even in a decade the interest burden is not projected to be back to its early 1990s level. In short, there is absolutely no horror story in this picture.

The deficit hawks have used dishonest fear-mongering to prevent the country from taking the steps needed to get the economy back to full employment. These people have enormous economic and political power. As a result they may be able to keep their austerity policies in place. But we have to recognize, this is about making the rich richer, not helping our children and children.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This article originally appeared on Al Jazeera.

 

 

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. This article originally appeared in Al Jazeera America.  

Like What You’ve Read? Support CounterPunch
August 03, 2015
Joseph Mangano – Janette D. Sherman
The Atomic Era Turns 70, as Nuclear Hazards Endure
Nelson Valdes
An Internet Legend: the Pope, Fidel and the Black President
Robert Hunziker
The Perfectly Nasty Ocean Storm
Jack Dresser
The Case of Alison Weir: Two Palestinian Solidarity Organizations Borrow from Joe McCarthy’s Playbook
Ahmad Moussa
Incinerating Palestinian Children
Greg Felton
Greece Succumbs to Imperialist Banksterism
Binoy Kampmark
Stalling the Trans-Pacific Partnership: the Failure of the Hawai’i Talks
Ted Rall
My Letter to Nick Goldberg of the LA Times
Mark Weisbrot
New Greek Bailout Increases the Possibility of Grexit
Jose Martinez
Black/Hispanic/Women: a Leadership Crisis
Victor Grossman
German Know-Nothings Today
Patrick Walker
We’re Not Sandernistas: Reinventing the Wheels of Bernie’s Bandwagon
Norman Pollack
Moral Consequences of War: America’s Hegemonic Thirst
Ralph Nader
Republicans Support Massive Tax Evasion by Starving IRS Budget
Alexander Reid Ross
Colonial Pride and the Killing of Cecil the Lion
Suhayb Ahmed
What’s Happening in Britain: Jeremy Corbyn and the Future of the Labour Party
Weekend Edition
July 31-33, 2015
Jeffrey St. Clair
Bernie and the Sandernistas: Into the Void
John Pilger
Julian Assange: the Untold Story of an Epic Struggle for Justice
Roberto J. González – David Price
Remaking the Human Terrain: The US Military’s Continuing Quest to Commandeer Culture
Lawrence Ware
Bernie Sanders’ Race Problem
Andrew Levine
The Logic of Illlogic: Narrow Self-Interest Keeps Israel’s “Existential Threats” Alive
ANDRE VLTCHEK
Kos, Bodrum, Desperate Refugees and a Dying Child
Paul Street
“That’s Politics”: the Sandernistas on the Master’s Schedule
Ted Rall
How the LAPD Conspired to Get Me Fired from the LA Times
Mike Whitney
Power-Mad Erdogan Launches War in Attempt to Become Turkey’s Supreme Leader
Ellen Brown
The Greek Coup: Liquidity as a Weapon of Coercion
Stephen Lendman
Russia Challenges America’s Orwellian NED
Will Parrish
The Politics of California’s Water System
John Wight
The Murder of Ali Saad Dawabsha, a Palestinian Infant Burned Alive by Israeli Terrorists
Jeffrey Blankfort
Leading Bibi’s Army in the War for Washington
Mary Lou Singleton
Gender, Patriarchy, and All That Jazz
Robert Fantina
Israeli Missteps Take a Toll
Pete Dolack
Speculators Circling Puerto Rico Latest Mode of Colonialism
Ron Jacobs
Spying on Black Writers: the FB Eye Blues
Paul Buhle
The Leftwing Seventies?
Binoy Kampmark
The TPP Trade Deal: of Sovereignty and Secrecy
David Swanson
Vietnam, Fifty Years After Defeating the US
Robert Hunziker
Human-Made Evolution
Shamus Cooke
Why Obama’s “Safe Zone” in Syria Will Inflame the War Zone
David Rosen
Hillary Clinton: Learn From Your Sisters
Sam Husseini
How #AllLivesMatter and #BlackLivesMatter Can Devalue Life
Shepherd Bliss
Why I Support Bernie Sanders for President
Howard Lisnoff
The Wrong Argument
Louis Proyect
Manufacturing Denial
Tracey Harris
Living Tiny: a Richer and More Sustainable Future