There is no federal public debt problem in the U.S.

Bill Mitchell

I would have thought the role of a Professor of Journalism at a university would be to teach students how to write copy and to research issues in the field of journalism. I would not assume that such a person would claim expertise in macroeconomics and start pontificating about national economic policy. But I was wrong – again. In this article (July 31, 2011) – American dream comes with a heavy cost – which was published in the Melbourne Age (but previously the UK Guardian) one Rosalind Coward proves how little she knows about economics. Contrary to the sway of media opinion from these “tin pot” experts – there is no federal public debt problem in the US.

Coward, a professor at Roehamption University (near London) starts like this:

The US debt debate reveals a nation living beyond its means.

The US debt debate in the US Congress is solely focused on public debt. In fact, the propositions advanced by both sides of politics – to cut net public spending indicate that the politicians are in denial of private debt.

Why do I say that? Answer: given the current account deficit which is not going to be eliminated in the foreseeable future, a cut in movement towards a budget surplus will simultaneously be a move towards a private domestic sector deficit. Further, by cutting aggregate demand at a time when the private sector is trying to save to reduce its debt exposure, the government will be undermining the private efforts.

So if we are focusing on the public debt, then the debate in Congress is not about “living beyond its means”. As I have noted in the past, a sovereign government has no means by which I mean real resources. What such a government has is its monopoly over currency issuance which means simply that it can always purchase whatever is for sale in that currency. Always means always. I know some will say the debt debate proves otherwise – that the Government is bound by the rules of Congress, which can stop it spending. Yes, the government can stop the government spending. I don‟t want to get into debates here about what the government is in the US. Clearly, the combination of the legislature and the Administration forms the government.

Further, even if we considered the US government to be the Administration, the statement that there are no financial constraints on its spending hold. I think the discussions over the last few weeks have shown that if the US

President had the will he (in this case) could ignore the US Congress and continue to spend without further debt accumulation (a vastly preferred option from the perspective of MMT).

This article – 3 ways Obama could bypass Congress by a US constitutional lawyer is interesting. The discussions (growing) that I have read in the last week confirm to me that the US Treasury could just ignore Congress and spend anyway. That would mean that all these elaborate voluntary accounting conventions that have given life to the “debt ceiling” debate are just a hoax and provide fiscal conservatives with a soapbox.

Anyway, the only “means” that the government has are those that it can tease out of the private sector via public spending. The role of taxation, in part, is to provide the incentive for the private sector to “accept” this spending and transfer real productive resources (labour, goods and services) into the public sector. This is the way a government can pursue its socio-economic charter.

Then we ask – what might signify that a nation is living beyond its means – where nation means include all the productive resources that are available to it. In other words, I am asking who is “its”?

While we might debate that at the margin what means are available, the US as a whole is so far from being at that margin that I think we can agree that with 9 per cent unemployment, about double that in idle marginal workers (the US Bureau of Labor statistics U6 measure) and vast quantities of idle capacity (productive equipment) the “nation” is hardly stretching its means.

For many Americans they are living well and truly within their means at present because their productive capacities are being squandered by a government intent on giving breath to the irrational Tea Party demands for small government. The author then claimed that:

ONE word is missing in the American debate over the debt crisis: austerity. It‟s a revealing absence. In spite of the vast deficit, and despite the US being the home of individualism, no way is being offered for individuals to make a difference by changing their lifestyles. People in Britain have become familiar with talk of the “new age of austerity”. Politicians of both left and right use the expression to frame the narrative about the cuts Britain is now facing. While both sides “warn” about this coming era, austerity is not negative in the British psyche. Associations with wartime Britain soften it. Austerity is associated with personal changes that benefited society and made sense to people who learned to tackle wastefulness, to “make do and mend”.

I actually thought that austerity was the centrepiece of the “debt debate” at present. The irrational belief that fiscal austerity – that is, lower spending overall – will actually spawn higher spending overall is what is driving the positions on both sides. Both sides of politics share that religious conviction – the differences are only about so-called equity issues – should the rich be subjected to higher taxes or not etc.

In that context, I found the description of the US debate and the British example to be mind-numbing and confused. The vast deficit – by which I presume she means the Federal budget deficit in the US is a sign that “individuals” have adopted a path of austerity themselves after a decade or more of credit-binged consumption.

She appears to be implying that a “vast” budget deficit is a sign that the government is spending too much relative to its income. While that representation is common among ill-informed commentators it is a complete misrepresentation of what budget deficits are and what they do.

How would we know if the US government was spending too much overall in net terms (that is, relative to its tax revenue)? Answer: if there was full employment, full capacity utilisation and inflation was being driven by nominal aggregate demand growth outstripping the real capacity of the economy to respond by increasing output.

A deficit per se – large or small – has no independent scale – by which I mean that one cannot say that it is excessive or deficient without reference to balance between nominal aggregate growth and the growth and utilisation of real productive capacity. Using descriptors such as “vast” just reflect one‟s ignorance of what a deficit is.

It is quite clear that the US federal budget deficit is way too small at the moment and the “deficit-cutting” agreement the leaders in Congress signed off to today (Monday Australian time) proves they are intent on damaging the economic prospects of their nation. The irony is that the “agreement” once enacted (if) might not even deliver lower deficits. If the damage to the private sector of the public spending withdrawal is such that tax revenue slumps even further we could see a rising budget deficit on the back of the automatic stabilisers. We are seeing that in Ireland, the UK, and elsewhere at present.

The other point to note is that the proposed fiscal austerity is offering “individuals” the path “to make a difference by changing their lifestyles”. But it will the wrong individuals and there will not be any volition. The proposed cutbacks will impact mainly on the most disadvantaged individuals in America and work the damage up into the ranks of the middle classes. The rich will be largely untouched.

Arguably, if we are worried about reduced private sector “spending” then a policy position that mainly attacks the unemployed and lower income earners is not a very effective way to reduce overall private spending. The author links “austerity” to the:

… environmental issues of recycling, cutting consumption and reducing our carbon footprint.

I support the moves to reduce our carbon footprint and they should be at the forefront of public policy. But the fiscal austerity being imposed in the UK is not aiming to reduce the private use of resources in any systematic way.

The answer to the challenge to reduce our carbon footprint is not to create unemployment and impoverish individuals accordingly. Yes, that is the surefire way of reducing consumption but it doesn‟t make much sense in terms of humanity. We could significantly reduce the carbon footprint by killing off millions of people in nations that haven‟t the capacity to militarily defend themselves.

What is needed is a clever re-appraisal of resource usage and a expenditure-switching fiscal intervention to ensure we steer resources away from carbon-intensive uses towards production of goods and services that use less carbon.

Market systems fail to do that unless taxes or regulations are introduced which force producers to “price” the carbon created as well as the other real resources used in the production process.

Further, we have much better chance of reducing carbon if we steer resources into the public sector in the form of personal care and environment care services. These activities are unlikely to be “profitable” in the narrow private cost-benefit calculus sense but have the potential to increase our welfare and sustain our lives on the planet for longer. That implies that over time public activity will become more important and that budget deficits will be higher than in past decades – independent of the state of the cycle. The author however claims that she has:

… never heard the word austerity in political discussion. There was nothing about individuals living beyond their means. Yet the US deficit is founded on overconsumption, made possible by too much consumer credit and, less well recognised, too much environmental credit. In the current war of words in Congress, there is no reference to the immoral lending that encouraged people who could not afford it to invest in the American dream. Yet that is what led to the property crash and the financial crisis. From individuals I heard nothing about the need for prosperous people to change their ways. There are, of course, many worthy ”green shoots”, such as the ”locavore” movement or the ”greening the campus” initiative at the university I was visiting, where a newly appointed sustainability officer tries to cut energy use. But people like him have their work cut out.

Once again the public deficit has risen because the private sector are finally cutting back its spending. I agree that the the private sector spending patterns – driven by crooked Wall Street financial engineers – was unsustainable both financially and environmentally. I agree that the private sector could not continue to accumulate debt as its consumption binge continued.

That was always going to come to an end and it was only a question of time and how bad the crash was. It took longer than I expected but the crash was commensurate with my expectation – very big. So I support policy that encourages private agents to reduce their debts and be more circumspect in their spending. But that requires several changes that are totally absent in the current discussions:

1. Real wages have to grow in line with productivity growth to ensure that the spoils of real growth are spread among the real producers (workers) and to ensure that aggregate demand grows in proportion to output growth thus reducing the need for credit to underpin consumption. The neo-liberal years were characterised by the gap between real wages growth and productivity growth widening which redistributed billions towards the top-end-of-town who then channelled this largesse into the Wall Street casino – and the rest is history. There has to be a fundamental redistribution of national income back to workers for the reliance on credit to be broken and full employment returned.

2. Budget deficits will remain indefinitely (unless the nation has substantial net exports). In most nations, given the unemployment, budget deficits have to be larger. Moreover, the demand for more environmentally-suitable activity suggests more public activity and less private activity.

Some might argue that public funding of suitable private activity is a preferred way of achieving this. I do not support the public subsidy of private activity in a market economy. If there is an opportunity to pursue environmentally-good activities and the private sector does not want to do that within an appropriate set of market prices (so true costs and benefits) then the public sector should take up the “space”.

I have no pre-conceived ideas that private is more “efficient” than public or whatever. It all depends on how activities are managed and implemented. The financial crisis (and Enron etc before that) clearly demonstrate that the private sector doesn’t have a monopoly on efficient production.

If one wants the private sector to cut back (for environmental then to achieve and sustain full employment the public sector will have to fill the gap. Yes, we might get to a point where we will be so productive that we can work less and enjoy life more (with less demand on real resources). That state of Shangri-La is a long way off yet. Millions of people need to work more and eat more! That requires aggregate demand to be focused on activities that will achieve higher employment levels and income levels for those millions in need. If the inflation barrier is reached in achieving that end then taxation hikes and targetted spending cutbacks are needed – perhaps on top income earners who are also big spenders in absolute terms. But that sort of approach is not the fiscal austerity being pursued at present. The author notes of the US that:

The whole of the east coast and the rust belt are vast, shocking landscapes to which many Americans seem oblivious. This is a society that has lived not just beyond its economic means but beyond its environmental ones, too, as the hundreds of miles of abandoned buildings, abandoned cars, and endless highways bear witness to. Yet the American dream survives. You‟re either in it, or out of it. Being out means destitution. In Britain I know many people who reject consumerism, getting involved in poorly paid environmental or political work. We regard them as rather honourable. In the US, if you don‟t have money you don’t count.

I have sympathy for the view that the human footprint has become too heavy. In relation to the US, when I go to Florida and see the concrete everywhere I conclude as much. When I see the inner city of places like Baltimore I conclude that urban policy is poorly set and implemented.

But sustainable lifestyle changes are not facilitated by cutting budget deficits when a nation has high and chronic unemployment. The lifestyle changes that occur when fiscal austerity is imposed are brutal and counter-productive and do not get to the heart of the problem of over-consumption and waste.

Marx said when there is a generalised overproduction the producers themselves are underconsuming. Which was a neat way of capturing the idea that generalised overproduction indicates an aggregate demand failure and the unemployed who lose their incomes and are forced to stop consuming are the very workers that had created the “flow of income” which is sitting idle.

The theme of over-consumption was also taken up by the UK Guardian economics writer Larry Elliot (July 31, 2011) in his article – US economy needs to rid itself of debt addiction – which stated:

The US can solve its debt crisis but sustainable prosperity lies in improved productivity and real wage growth not asset bubbles.

Elliot recognises that the “high levels of public borrowing are symptomatic of a problem of private-sector debt addiction”. The debt crisis in the US is a private debt crisis. There is no public debt crisis given that the US government is fully sovereign in its own currency.

The press and politicians have wrongly cast the issue as a sovereign debt crisis and in doing so are missing the point which Elliot acknowledges – the future has to be characterised by stronger productivity growth and real wages growing in line with that growth.

America will only be able to regain sustained prosperity if it redirects the largesse currently going to profits back to workers (the ones who produce the real output). That would require a significant reduction in the command over real resources by Wall Street which tells you how big the problem really is in the US. The issue is not that the budget deficit or public debt are too large. The issue is that Wall Street is too large.

Unfortunately, Elliot then eulogises the Clinton surpluses but seems to ignore they were followed by a major recession. He wants the US private sector to reduce its reliance on debt but fails to recognise that the Clinton surpluses were only possible while the asset boom was being driven by ridiculous private sector borrowing.

You cannot have it both ways. Either you have a growth strategy supported by sustainable private spending (that is, allowing for some saving) and budget deficits or growth driven by private accumulation of debt fighting against the fiscal drag created by budget surpluses. The former approach is indefinitely sustainable the latter blows up.

Elliot also quotes some National Australia Bank who demonstrates how little he knows about budget deficits:

Even now there are Americans still in denial about how big a hole they are in. Some take comfort in the fact that the United States is not Greece. But as Nick Parsons, of National Australia Bank, points out, many individual US states – California, for example – are exactly like Greece in that they have high levels of personal indebtedness, public spending that exceeds income by a considerable margin, lots of people out of work and are locked into a monetary union with no exchange rate flexibility and where decisions are taken thousands of miles away. “A similar picture can be done for many of the States and literally thousands of municipalities and cities across the country,”

Parsons said. “In this respect, the debt concerns in peripheral Europe are set to replayed right across America; the significant difference being that instead of relying on the generosity of Germans to bail them out, the US is dependent on Chinese goodwill.”

What? California could be bailed out any time the federal US government desired as part of the federal system. There is no financial constraint on the US federal government giving each US state a demogrant to assist their ailing economies. Such a boost to aggregate demand would quickly restore private activity and improve the budget situations of each state. Ideology is the only thing stopping this from happening.

The EMU is a different kettle of fish altogether. There is no federal fiscal authority. Instead they have been relying on the ECB to play a quasi-fiscal role which has saved the day but at the cost of pernicious and unnecessary austerity. Everyone would have been better off in the EMU if the EU bosses had have recognised that the scale of the private spending collapse was such that deficits in most countries had to rise significantly and be maintained at the higher level for as long as it took for private spending to recover. The ECB could have avoided all the bond market dramas in Greece, Portugal, Italy etc by just funding those higher deficits accordingly. The give with one hand (buying public debt in secondary markets)-but take with the other hand (enforcing fiscal austerity) approach the ECB and the EU have adopted has made the situation much worse than it should ever have been.

Finally, Chinese goodwill has nothing to do with the capacity of the US government to help the states in the Federal system. China does not issue US dollars. Only the US federal government has that capacity and it can always help its ailing states independent of whether the Chinese or anyone desires to accumulate financial assets in US dollar denominations.

The National Australia Bank spokesperson doesn’t know what he is talking about and shame on Elliot for perpetuating that nonsense. The rest of Elliot’s article is a litany of spurious arguments about the need for fiscal restraint in America. It doesn’t warrant any further comment.

From Prof Bill Mitchell’s website: http://bilbo.economicoutlook.net/blog/?p=15490 Bill is Director of the Centre of Full Employment and Equity, and holds the Research Chair in Economics at the University of Newcastle.