FacebookTwitterGoogle+RedditEmail

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.

 

 

More articles by:

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.

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

June 29, 2017
Dave Lindorff
Sy Hersh, Exposer of My Lai and Abu Ghraib, Strikes Again, Exposing US Lies About Alleged Assad Sarin ‘Attack’
Chuck Collins
What Happened to America’s Wealth? The Rich Hid It
Rev. William Alberts
When the Bible is the Root of Evil
Jeff Mackler
Trumps ‘No Fly Zone’ Escalates U.S. War Against Syria
Bill Willers
The Next World War Won’t Just Be “Over There” 
Ellen Brown
Sovereign Debt Jubilee, Japanese-Style
Jack Laun
Will There Finally be Peace With Justice in Colombia?
Binoy Kampmark
Holding the Police to Account in the UK
David Swanson
Against Ignoring the KKK
Rima Najjar
Israel’s Illegitimate Tactics Against Palestinian Armed Resistance vs. Legitimate Global Security Concerns
Mel Gurtov
Advise, Assist, Arm: The United States at War
David Welsh
Berkeley Capitulates to Police Militarization and Spying
Marion Andrew
Not Being Considerate of One’s Audience: US Television’s Coverage of Olympic and International Sports
June 28, 2017
Diana Johnstone
Macron’s Mission: Save the European Union From Itself
Jordon Kraemer
The Cultural Anxiety of the White Middle Class
Vijay Prashad
Modi and Trump: When the Titans of Hate Politics Meet
Jonathan Cook
Israel’s Efforts to Hide Palestinians From View No Longer Fools Young American Jews
Ron Jacobs
Gonna’ Have to Face It, You’re Addicted to War
Jim Lobe – Giulia McDonnell Nieto Del Rio
Is Trump Blundering Into the Next Middle East War?
Radical Washtenaw
David Ware, Killed By Police: a Vindication
John W. Whitehead
The Age of No Privacy: the Surveillance State Shifts into High Gear
Robert Mejia, Kay Beckermann and Curtis Sullivan
The Racial Politics of the Left’s Political Nostalgia
Tom H. Hastings
Courting Each Other
Winslow Myers
“A Decent Respect for the Opinions of Mankind”
Leonard Peltier
The Struggle is Never for Nothing
Jonathan Latham
Illegal GE Bacteria Detected in an Animal Feed Supplement
Deborah James
State of Play in the WTO: Toward the 11th Ministerial in Argentina
Andrew Stewart
Health Care for All: Why I Occupied Sen. Sheldon Whitehouse’s Office
Binoy Kampmark
The European Commission, Google and Anti-Competition
Jesse Jackson
A Savage Health Care Bill
Jimmy Centeno
Cats and Meows in L.A.
June 27, 2017
Jim Kavanagh
California Scheming: Democrats Betray Single-Payer Again
Jonathan Cook
Hersh’s New Syria Revelations Buried From View
Edward Hunt
Excessive and Avoidable Harm in Yemen
Howard Lisnoff
The Death of Democracy Both Here and Abroad and All Those Colorful Sneakers
Gary Leupp
Immanuel Kant on Electoral Interference
Kenneth Surin
Theresa May and the Tories are in Freefall
Slavoj Zizek
Get the Left
Robert Fisk
Saudi Arabia Wants to Reduce Qatar to a Vassal State
Ralph Nader
Driverless Cars: Hype, Hubris and Distractions
Rima Najjar
Palestinians Are Seeking Justice in Jerusalem – Not an Abusive Life-Long Mate
Norman Solomon
Is ‘Russiagate’ Collapsing as a Political Strategy?
Binoy Kampmark
In the Twitter Building: Tech Incubators and Altering Perceptions
Dean Baker
Uber’s Repudiation is the Moment for the U.S. to Finally Start Regulating the So-called Sharing Economy
Rob Seimetz
What I Saw From The Law
FacebookTwitterGoogle+RedditEmail