Warren Mosler and Joseph M. Firestone
Paul Krugman agrees that “We’re Not Greece.” But he only appears to have a glimmer of an understanding of the most important reason why this is so. We hope this commentary on his op-ed piece improves his understanding, and that of other deficit doves who appear to disagree with the deficit terrorists, but who in the end share their false basic assumptions about deficits, national debts, fiscal responsibility, and fiscal sustainability.
It’s an ill wind that blows nobody good, and the crisis in Greece is making some people — people who opposed health care reform and are itching for an excuse to dismantle Social Security — very, very happy. Everywhere you look there are editorials and commentaries, some posing as objective reporting, asserting that Greece today will be America tomorrow unless we abandon all that nonsense about taking care of those in need.
True. One of us just finished a week in D.C. fighting back against the bipartisan move to cut Social Security. And both of us are part of a coordinated effort to generate a counter-narrative to the Administration’s and the Peter G. Peterson Foundation’s austerity message.
The truth, however, is that America isn’t Greece — and, in any case, the message from Greece isn’t what these people would have you believe.
So, how do America and Greece compare?
Both nations have lately been running large budget deficits, roughly comparable as a percentage of G.D.P. Markets, however, treat them very differently: The interest rate on Greek government bonds is more than twice the rate on U.S. bonds, because investors see a high risk that Greece will eventually default on its debt, while seeing virtually no risk that America will do the same. Why?
One answer is that we have a much lower level of debt — the amount we already owe, as opposed to new borrowing — relative to G.D.P.
The level of the GDP to Debt ratio has nothing, by itself, to do with interest rates. Japan’s debt is near triple ours, and their 10 year rates are about 1.3% for example. So, Krugman’s assumption that the debt-to-GDP ratio is causing high interest rates for Greece and his implication that it would cause such rates for us is refuted by the Japanese case.
True, our debt should have been even lower. We’d be better positioned to deal with the current emergency if so much money hadn’t been squandered on tax cuts for the rich and an unfunded war.
Not true. with U.S. Govt spending not operationally constrained by available revenues the way Greece’s is, we are always able to spend (or cut taxes) however much we want to, because all U.S. Government spending is operationally nothing more than the Fed using its computer to credit member bank accounts — what can be called ‘the creation of new dollars.’ That is, the U.S. can always (and necessarily does) create more dollars when and if needed. whether we spend or not is a political decision without external financial constraints. In other words, even if we hadn’t had tax cuts for the rich and unfunded wars, we’d still be in the same position as we are now to deal with our emergency. That position is that we have a Government that is sovereign in its own currency and can always pay for whatever it needs to pay for. We have no greater solvency risk due to foolish spending than wise spending. In any case the ability of the U.S. government to make payment in dollars is limited only by political will, not by variations in financial ability to pay at different times.
But we still entered the crisis in much better shape than the Greeks.
Yes, because we are the issuer of the Dollar and Greece is not the issuer of the Euro. Greece is like a U.S. state in that regard. And so is every other Eurozone member, including the so-called fiscally strong members such as Germany and France.
Even more important, however, is the fact that we have a clear path to economic recovery, while Greece doesn’t.
We have that clear path for the same reason. We can manage our aggregate demand because our fiscal policy is not operationally constrained by revenue the way Greece’s is. We can sustain full employment. We can adjust policy to facilitate greater aggregate demand, and we can do other things we need to do, as well, because we have no solvency risk; we are not dependent on borrowing to be able to spend, and WE cannot run out of money.
The U.S. economy has been growing since last summer, thanks to fiscal stimulus. , ,
Yes, mostly the automatic stabilizers with some help from the proactive measures congress has taken, however misguided and inadequate they may have been to restore full employment.
. . . and expansionary policies by the Federal Reserve.
We don’t agree with the idea that the Federal Reserve’s policies have had a major impact on the return to economic growth, but that’s another story.
I wish that growth were faster; still, it’s finally producing job gains — and it’s also showing up in revenues.
True. however the output gap — the gap between potential and actual output, which is evidenced by unemployment remains tragically and destructively wide.
Right now we’re on track to match Congressional Budget Office projections of a substantial rise in tax receipts. Put those projections together with the Obama Administration’s policies, and they imply a sharp fall in the budget deficit over the next few years.
Yes, with our only hope for lower unemployment being an increase in private sector debt that exceeds the fall in the Government’s deficit. Not our first choice for mending what ails us, and also an unlikely event. So we may be looking at years of high unemployment and many ruined lives, unless the Government once again recognizes that it its responsibility to sustain full employment through fiscal adjustment.
Greece, on the other hand, is caught in a trap. During the good years, when capital was flooding in, Greek costs and prices got far out of line with the rest of Europe. If Greece still had its own currency, it could restore competitiveness through devaluation.
Krugman should have said it this way — ‘if Greece had its own currency and was running its deficits in that currency, market forces would have caused its currency to depreciate.’ With floating exchange rates, market forces adjust currencies on a continuous basis to reflect ‘indifference levels.’
But since it doesn’t, and since leaving the Euro is still considered unthinkable, Greece faces years of grinding deflation and low or zero economic growth. So the only way to reduce deficits is through savage budget cuts, and investors are skeptical about whether those cuts will actually happen.
True. And worse, the proactive cuts and tax hikes can slow the economy to the point that the deficit doesn’t come down, and might even increase, making matters even worse.
It’s worth noting, by the way, that Britain — which is in worse fiscal shape than we are, but which, unlike Greece, hasn’t adopted the Euro — remains able to borrow at fairly low interest rates. Having your own currency, it seems, makes a big difference.
It is all the difference.
And it’s hard to see why that isn’t obvious. In nations like the US, UK, Japan, etc. etc. each with their own non-convertible currency and floating exchange rates, interest rates are necessarily set by the central bank, and not by markets. The reason is that the Government makes payments and collects taxes in its own currency through its payment system operated by its own central bank. Member banks and foreign governments have accounts at the central bank called ‘reserve accounts.’ these reserve accounts, in aggregate, can get dollars only from the government, and, in the case of excess balances, the government alone can set the interest rate. Likewise, if there is a shortage of balances, they can only come from the government. Therefore, it is necessarily up to the government to set the rate at which member banks can borrow from the Fed as well as the rate earned on excess balances.
In fact, the FOMC (Federal Open Market Committee) announces its target interest rate by voice vote at its regular meetings. and U.S. Treasury Securities, which are also accounts at the federal reserve bank, thereby function to provide interest bearing alternatives to reserve balances and are used by the Fed to achieve the target interest rate set by the FOMC. So, the level of short-term interest rates is determined by political decisions and not as Krugman implies by the market. And Government securities function to support interest rates and not to fund expenditures.
In short, we’re not Greece. We may currently be running deficits of comparable size, but our economic position — and, as a result, our fiscal outlook — is vastly better.
This is the wrong reason why “we’re not Greece.” The right reason is that we are the issuer of our own currency, the Dollar, while Greece is the user of the Euro and not the issuer.
That said, we do have a long-run budget problem. But what’s the root of that problem? “We demand more than we’re willing to pay for,” is the usual line. Yet that line is deeply misleading.
First of all, who is this “we” of whom people speak? Bear in mind that the drive to cut taxes largely benefited a small minority of Americans: 39 percent of the benefits of making the Bush tax cuts permanent would go to the richest 1 percent of the population.
Tax cuts for the richest Americans, certainly weren’t our first choice of which tax to cut to support the private sector. We’d have cut FICA taxes and had a payroll tax holiday; and one of us, Warren Mosler, continues to propose that in a vigorous way.
And bear in mind, also, that taxes have lagged behind spending, partly, thanks to a deliberate political strategy of “starve the beast”: conservatives have deliberately deprived the government of revenue in an attempt to force the spending cuts they now insist are necessary.
And liberals and progressives have artificially constrained their policy proposals, and failed to pursue effective but nominally costly solutions to problems, because they hold the misguided neo-liberal notion that spending is operationally constrained by revenues, and fail to understand that the ‘right sized’ deficit is the one that coincides with full employment and desired price stability.
Meanwhile, when you look under the hood of those troubling long-run budget projections, you discover that they’re not driven by some generalized problem of overspending. Instead, they largely reflect just one thing: . .
An understanding of national income account and monetary operations shows deficits are driven by non-Government sector ‘savings desires’ and Government’s willingness to compensate for those savings desires with greater levels of spending or lower taxes, and it is proactive attempts to increase deficits beyond savings desires that results in inflation.
In addition, however, “troubling” deficit projections such as the CBO’s are driven by assumptions of historically low growth rates for the next decade. If economic growth more closely approaches historical norms since 1940, then CBO’s deficit projection melts away. But, the very likely error in CBO and other projections by deficit terrorist budget analysts is entirely beside the point, anyway, because the real question is why Krugman refers to such budget projections as “troubling?” Even if CBO’s projections were correct, there would be no threat to U.S. fiscal solvency, or to real fiscal sustainability relating to the Government’s ability to spend to achieve public purposes. So, these budget projections are “troubling” only to Krugman, other deficit doves like him, and also deficit hawks, who don’t understand that there is no solvency risk for the U.S. Government in continuing budget deficits.
. . . the assumption that health care costs will rise in the future as they have in the past. This tells us that the key to our fiscal future is improving the efficiency of our health care system — which is, you may recall, something the Obama administration has been trying to do, even as many of the same people now warning about the evils of deficits cried “Death panels!”
Krugman has the wrong causation, since he seems to think that rising health care costs if not cut, will be the cause of future Government solvency and financial problems he associates with Government deficits. And, make no mistake, what he calls our ‘fiscal future’ is the size of future deficits. But they will always reflect future ‘savings desires,’ and the extent to which savings behavior reduces aggregate demand. If demand is too low, deficits will be driven higher by automatic stabilizers, regardless of whether health care costs have been cut. In fact, if we proactively cut Government spending of any kind to make the amount of it smaller than the level we need to compensate for the loss of demand to savings desires, the evidence of this will always be unemployment.
So while cutting health care costs is certainly a ‘good thing,’ as long as the quality of health care improves, when the time comes, future deficits need to reflect future (net) savings desires, if they are to keep us fully employed. So, if health care costs are cut, other Government spending may have to increase, and/or taxes cut, to achieve the required level of deficits to compensate for savings desires so we can sustain full employment.
So here’s the reality:
That is, Paul Krugman’s mistaken, political reality.
America’s fiscal outlook over the next few years isn’t bad. We do have a serious long-run budget problem, . . .
Unfortunately, this kind of talk makes him part of the problem, not part of the solution, since he doesn’t understand that fiscal responsibility and fiscal sustainability are unrelated to budget deficits because these carry no solvency risk for the United States.
. . . which will have to be resolved with a combination of health care reform and other measures, probably including a moderate rise in taxes.
Wonderful, with a screaming shortfall in aggregate demand as evidenced by tragic levels of unemployment, the celebrity voice from the left is calling for spending cuts and tax hikes not to cool an over-heating economy, but to reduce non-government savings of financial assets and make the unemployment problem worse. (The Government deficit = non — Government savings of financial assets, to the penny, as a matter of national income accounting, etc)
But we should ignore those who pretend to be concerned with fiscal responsibility, but whose real goal is to dismantle the welfare state — and are trying to use crises elsewhere to frighten us into giving them what they want.
While we tend to agree with that statement, unfortunately it is made in the context of one of the current iterations of the ‘deficit dove’ position.
It does not cut it.
It is part of the problem, not part of the solution.