NYC, 28th April 2020.- This week a significant number of economic indicators and corporate earnings will be release in the US. In the meantime the number of paralyzed businesses and people filing unemployment in the US continue to grow, the House of Representatives has just approved the fourth bailout of 484 billion USD aimed to support small businesses and hospitals. Thousands of entrepreneurs in the United States, as in 185 other countries are paralyzed by Covid-19. Everyone expects the worst reports in decades.
Money is coward; it does not go to places where there is fear and uncertainty, it needs answers, trusting and largely hope. Everybody agrees that the short-term answer to this crisis is to go back to “depression economics” (Keynes), fiscal stimulus and government’s liquidity injections into the economic system. Now the critical questions are, how, how much and for how long?. Of all the articles I have read on this matter, Robert Kuttner presents some very interesting facts, remind us that this is not the first time Governments have rushed back to Keynes and that most of the economists independently of their stripes welcome public deficit in the current circumstances.
Robert L. Kuttner is an American journalist and writer whose works present a liberal/progressive point of view. Kuttner is the co-founder and current co-editor of The American Prospect, created in 1990 and according to its mission statement as an “authoritative magazine of liberal ideas,”. He was for 20-year columnist for Business Week and The Boston Globe, and continues to write columns in and for the Huffington Post. Kuttner is also one of five 1986 co-founders of the Economic Policy Institute, and currently serves on its executive committee.
Robert Kuttner’s economic diagnosis
Deficit phobia is mercifully dead for the duration of the corona pandemic. Along with its devastation of the economy and the public’s health, the crisis has upended the standard economic story about public spending, deficit, and debts.
But austerity economics is one of those zombies that keep arising from the dead. Is deficit obsession really defunct for good?
For now, Congress and the Fed are willing to create almost limitless sums of money to save the economy from outright collapse. A New York Times opinion writer sub-headed his column: “Everyone’s a socialist in a pandemic.”
The macroeconomic counterpart: In an economic collapse, everyone’s a Keynesian.
But what sort of Keynesian, and for how long? That is a hugely consequential question, both for practice and for theory.
At the rate Congress has authorized borrowing to prevent the total devastation of purchasing power, the deficit could easily grow from its current $1 trillion to $3 or $4 trillion dollars this year. If anything, it needs to be even higher.
The obsessively watched ratio of public debt to GDP could rise from its pre-corona level of about 80 percent of GDP to twice that before this crisis is over. What then?
If we review the theory and practice of deficit politics for the past few decades, one category is pure deficit-hawkery, personified by the late investment banker and billionaire influence-monger Peter G. Peterson and his multiple front groups.
In this view, federal deficits and the rising debt load are toxic for the economy because they raise interest costs on the public debt and thereby “crowd out” productive private investments. Peterson and company argued that lower deficits and debts, per se, quite apart from their impact on interest rates, would increase private investment because they would be good for business confidence. Paul Krugman famously ridiculed this view as belief in the “confidence fairy,” who of course never comes.
As a good conservative Republican, Peterson averted his eyes from deficits created by GOP tax cuts. His real target was government spending, especially Social Security and Medicare.
Over four decades, Peterson predicted catastrophe driven by public debts. But when the economy collapsed in 2008, the culprit was private speculative debt; and it was new public debt that kept the collapse from turning into a second Great Depression. Other nominal deficit hawks in the business elite suddenly suspended their concerns, as long as government bailout money went to them.
A second category is made up of situational deficit hawks, who consider themselves “neo-Keynesians.” They dominated both the Clinton and Obama administrations, reflecting Wall Street’s capture of both.
In 1993, Clinton agreed to a grand bargain in which he cut the deficit, and in return, Fed Chair Alan Greenspan lowered interest rates, stimulating a boom that became a bubble. So enamored were Clinton and his aides with deficit reduction that they made it a badge of virtue, pushing the budget all the way into surplus by 1999, to the point where serious people worried about how the Fed would conduct monetary policy when all Treasury bonds were retired.
Bush II put an end to those worries with two huge tax cuts, mostly for the rich, pushing public deficits skyward again. In the meantime, events completely undermined the premise of Bill Clinton’s deal with Fed Chair Greenspan—the idea that public borrowing raises interest rates and inflation.
For the past two decades, interest rates have been low and getting lower—and rising deficits don’t seem to affect them. Even before the corona collapse, despite Trump’s trillion-dollar deficit, interest rates on 30-year Treasury bonds were well under 2 percent.
Yet Obama’s economic team was afflicted with the same deficit phobia as Clinton’s. When the collapse of 2008 hit, Obama’s team proposed a stimulus that would be “timely, targeted, and temporary,” almost as if they were embarrassed to propose it.
Worse, by the fall of 2009, when the economy was far from recovery, Obama’s advisers decided it was time to pivot from stimulus to deficit reduction, killing a second stimulus bill passed by the House and incautiously branding 2010 as “recovery summer.” In Obama’s 2010 State of the Union address, he embraced the austerity plan recommended by the Bowles-Simpson Commission, and even used the discredited metaphor of a household needing to live within its means.
In practice, neo-Keynesians are about as Keynesian as neo-liberals are liberal. Their counsel is a watered-down version of true Keynesian economics—what Keynes’s great disciple Joan Robinson called “bastard Keynesianism”—namely, very mild counter-cyclical public spending.
In office, neo-Keynesians have embraced large deficits reluctantly, guiltily, and as a last resort in national emergencies. They have been eager to return to budget balance as soon as possible, even embracing automatic formulas like the so-called budget sequester.
But one lesson of the 2008 collapse is that the Federal Reserve can simply create huge amounts of money by going into financial markets and buying bonds—with no apparent effect on either interest rates or inflation. The Fed camouflaged what it was doing with the antiseptic term, quantitative easing.
That experience has blown away orthodox fiscal and monetary theory. For if the Fed can create massive amounts of money with no ill effects and many beneficial ones, then a lot of received wisdom goes up in smoke.
The coronavirus outbreak has triggered a stunning collapse in the U.S. workforce with 10 million people losing their jobs in the past two weeks.
Since then, neo-Keynesians have writing op-ed pieces rebranding themselves as friendlier to deficits. In March 2019, former Treasury Secretary Larry Summers co-authored an article with economist Jason Furman titled, “Who’s Afraid of Budget Deficits?: How Washington Should End its Debt Obsession.”
If this is a sincere conversion, let’s welcome it. But let’s also be wary that these fair-weather Keynesians will be among the first to call for austerity to pay down debt once the crisis passes, as they did after 2010.
Somehow, when progressive economists call for large deficits to fight a deep recession, or to combat or low wages that co-exist with near-full employment, they are considerd suspect, as unsound leftists. But when a Larry Summers belatedly comes around to that view—a decade late and a trillion dollars short, and without crediting the prescient dissenters—it is a stop-the-presses, Eureka moment.
Though there would seem to be a consensus on the need for very large deficit spending, there really isn’t. For the really interesting part of the debate concerns how big deficits can be, for how long, and for what purposes.
Modern Monetary Theory, for instance, holds that the capacity of government to borrow and a central bank to create money is virtually infinite. The capacity is especially large at a time when the economy has collapsed and there are good uses for that money.
If the economy ever reaches full capacity to the point of generating inflationary pressures, that would be the time to start pulling back. But until then, full speed ahead.
MMT has evolved. In its current incarnation, the proposition that government can create unlimited amounts of money until the economy hits capacity constraints doesn’t apply everywhere, but only to nations that can borrow in their own currencies.
If Argentina tried to follow MMT, for instance, the result would be massive inflation and a run on the currency. One policy question is how the rules of the global system disadvantage smaller, dependent nations—and how they might be revised so that such nations would have the same MMT policy options available to the U.S.
Other, broader questions for economists of all stripes, now embracing massive deficits include these: Is one dollar of fiscal stimulus as good as another? Is public borrowing to replace lost paychecks the same, macroeconomically, as borrowing money to bail out hedge funds?
Is a tax cut as good as public investment? If not, why not? In terms of stimulus, does it matter whether a tax cut goes to the rich or the poor?
It’s an old argument. In 1962, when President John F. Kennedy proposed a stimulus, his chief economic adviser, Walter Heller, wanted it in the form of a tax cut. John Kenneth Galbraith, a left Keynesian, argued for more public spending, both on grounds that America’s public household needed the money and because every dollar would be spent; hence public investment would be more stimulative.
Heller won, more on political grounds than economic ones. Everybody loves a tax cut; not everybody loves public spending.
One other issue divides conservative economists and different stripes of self-described Keynesians: what to do when the current crisis ends. Suppose the legacy of all this public spending is a debt of 200 percent of GDP? Is that a problem? Do we need to go on an austerity kick to bring the debt ratio down, at the risk of reducing economic output and increasing unemployment? Or are there even more public needs that justify more public borrowing?.
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