Economist Jamie Galbraith on Panicky Deficit Hawks: There’s No Coherent Story There
Kudos to Ezra Klein for interviewing University of Texas economist Jamie Galbraith on the deficit hawks’ incoherence in warning of the supposed dangers of current US budget deficits. Galbraith, along with Dean Baker and friends, are to the deficit hawks and their cynical scare mongering what the skeptical and ultimately correct McClatchy reporters were to Dick Cheney’s fabrications about Saddam’s weapons of mass destruction and links to al Qaeda. The scaremongering was all a cynical lie that led to a Three Trillion Dollar War.
EK: You think the danger posed by the long-term deficit is overstated by most economists and economic commentators.
JG: No, I think the danger is zero. It’s not overstated. It’s completely misstated.
JG: What is the nature of the danger? The only possible answer is that this larger deficit would cause a rise in the interest rate. Well, if the markets thought that was a serious risk, the rate on 20-year treasury bonds wouldn’t be 4 percent and change now. If the markets thought that the interest rate would be forced up by funding difficulties 10 year from now, it would show up in the 20-year rate. That rate has actually been coming down in the wake of the European crisis.
So there are two possibilities here. One is the theory is wrong. The other is that the market isn’t rational. And if the market isn’t rational, there’s no point in designing policy to accommodate the markets because you can’t accommodate an irrational entity.
EK: What are the policy implications of this view? . . .
JG: It says that we should be focusing on real problems and not fake ones. We have serious problems. Unemployment is at 10 percent. if we got busy and worked out things for the unemployed to do, we’d be much better off. And we can certainly afford it. We have an impending energy crisis and a climate crisis. We could spend a generation fixing those problems in a way that would rebuild our country, too. On the tax side, what you want to do is reverse the burden on working people. Since the beginning of the crisis, I’ve supported a payroll tax holiday so everyone gets an increase in their after-tax earnings so they can pay down their mortgages, which would be a good thing. You also want to encourage rich people to recycle their money, which is why I support the estate tax, which has accounted for an enormous number of our great universities and nonprofits and philanthropic organizations. That’s one difference between us and Europe. . . .
JG: I have one more answer, though! Since the 1790s, how often has the federal government not run a deficit? Six short periods, all leading to recession. Why? Because the government needs to run a deficit, it’s the only way to inject financial resources into the economy. If you’re not running a deficit, it’s draining the pockets of the private sector. I was at a meeting in Cambridge last month where the managing director of the IMF said he was against deficits but in favor of saving, but they’re exactly the same thing! A government deficit means more money in private pockets.
The way people suggest they can cut spending without cutting activity is completely fallacious. This is appalling in Europe right now.
If Galbraith is correct, and as I read them, our best known economists are saying he’s right on the essentials, then what are we to think of the anti-deficit, anti-employment policies now sweeping Europe, partly at the urging of the US government? The logic tells us Europe and Obama’s economic advisers think the way to fix their respective economies is reduce spending and put more people out of work. Huh?
The news is full of stories not just about the efforts to forestall a Greek default — a uniquely extreme problem — but promises by Spain, Portugal and Great Britain to implement severe budget contractions immediately.
When the Obama stimulus plan was being debated last year, our best macro economists taught us that deficit spending was not only okay, it was essential to make up for depressed private demand when monetary policy — lower interest rates — was exhausted. We needed deficit spending to increase demand, to put money into the economy via the public sector to increase spending and create both public and private jobs. These experts had a plausible story: you have to do this to staunch unemployment and rebuild the economy, and if you don’t do enough — "we need a bigger stimulus" — you risked a "jobless" recovery and/or extended period of unacceptably high unemployment, along with increased deficit spending to deal with that. They’ve been proven right.
And the economists also told us that if government curtailed deficit spending too early or too fast, it would push the economy back into a second recession. That would repeat FDR’s strategic blunder in trying to balance the budget in 1937, which reignited massive unemployment and another downturn. So it was a mistake to listen to the anti-Keynesian deficit hawks, who convinced FDR that US deficits had to be reduced or else.
Okay, isn’t that where we and Europe are? I understand there’s another serious complication with the Euro currency disconnected from national budgets and a central bank disconnected from fiscal policy and coherent theory. That makes this harder to solve.
But the lessons of 1937 still seem a coherent, credible story. So someone needs to explain why it makes sense for the UK, Spain and Portugal to be making what appears to be the same mistake FDR made in 1937, and why the Obama Administration is pushing this mistake not only on Europe but on ourselves.
And if, as the Administration has repeatedly told us, we’re counting on increasing exports to help produce our way out of the current recession, why does it make sense for Europe, one of our largest trading partners, to reduce spending, increase unemployment and shrink their economies?
It seems the incoherent story coming from the Peterson/Washington Post/Administration deficit hawks that Jamie Galbraith worries about is sweeping not just Washington but the capitals of Europe. These people seem like the real weapons of mass economic destruction. If that’s not true, we need a coherent story why. Hello?
NYT: Deficit cuts promised in Britain
NYT: Portugal follows Spain on austerity cuts
Dean Baker, The deficit problem is not "we the people," it’s you the incompetent elite, and many other posts there.
Paul Krugman, Are we Greece?, and Shock and Uh?
Brad DeLong, via Matthew Yglesias, A complacent capital [about unemployment]; also Spending cuts for the UK
Baseline Scenario/Simon Johnson: Restructuring the Eurozone; and see The kitchen sink . . .
MSNBC, For lawmakers, easing joblessness isn’t Job #1
Naked Capitalism/Edward Harrison, MMT: The accounting of budget deficits