Why Isn’t Democracy Working?

October 12, 2021

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I woke up this morning to more headlines announcing disagreement among Democrats regarding President Biden’s $3.5 trillion spending bill. Ah, if only Democrats could get their act together, the country could move forward. But is that the real story?

Once upon a time, the United States had a two-party system with a range of opinion within both parties. The Democrats were more liberal, but contained some moderates and conservatives, at least on some issues. The Republicans were more conservative, but contained some moderates and liberals on some issues. Neither party could stray too far from the center without risking popular support, and both had to reach across the aisle from time to time to get things done. In order to pass liberal bills like the Voting Rights Act, Democrats needed moderate Republicans to offset the opposition of Southern Democrats.

Today, bipartisan cooperation is conspicuously missing. About the only one of President Biden’s proposals that both parties can support is improvements in physical infrastructure. Republicans have an explanation for the larger legislative impasse: that Biden has a radical socialist, fiscally irresponsible agenda that the American people do not want and his own party cannot agree on. I want to play down the last part of that narrative, since it is nothing new. The Democratic Party has been a loose coalition of various interest groups for a long time. “Democrats disagree” is about as newsworthy as “Republicans don’t like taxes.” What is more unusual and troubling is Republican lockstep opposition to just about everything Democrats want to do.

How radical?

Most of the president’s domestic agenda is in the same spirit as the Affordable Care Act, which has become more popular as Americans have come to understand what it really does. Biden’s main objective is to help working families afford services they need in order to be productive. Making child care more affordable so that parents can take jobs without child-care costs devouring their paychecks. Making college more affordable so that students can prepare for today’s jobs without starting their careers deeply in debt. Providing paid family leaves for new parents and other family caregivers. Extending the child tax credit so that people can afford to raise children at all. Letting Medicare negotiate prescription drug prices with pharmaceutical companies so that people can afford their medications. These are the kinds of things that many other countries are already doing, and they poll well with a majority of the American people.

Biden’s plan calls for spending $3.5 trillion over ten years, and he proposes to pay for it by rolling back some of the Trump tax cuts of 2017, mainly the parts affecting corporations and the wealthiest 2% of taxpayers. The top personal income tax bracket would go back up from 37% to 39.6%, where it was before 2017 and where it is scheduled to return in 2025 anyway if Congress takes no action. (And remember that the actual rate that rich taxpayers pay is far lower than that because of tax deductions and loopholes, and because the top rate only applies to income that exceeds a high threshold.) The corporate tax, which was lowered from 35% to 21% in 2017, would go up to 28%.

Some economists argue that certain forms of spending help make people more productive and employable, and therefore can reduce unemployment without increasing inflation, even if the spending is not paid for with tax increases. (See The Deficit Myth.) But even economists who do not make that argument often expect more economic stimulus from spending on useful services than on tax cuts for the wealthy. Either way, the important point is that the Biden plan is neither especially radical nor fiscally irresponsible.

The real problem

Then why is it so hard to get it done? The most obvious answer cites two Democratic senators who just don’t accept the rationale for the proposals But while I don’t share the conservative views of Joe Manchin or Kyrsten Sinema, I don’t really expect unanimous consent from the Democrats in Congress. The real problem is unified opposition from a Republican Party that has been purging moderate voices from its side of the aisle for years. Moderate Republican politicians are now an endangered species, thanks to campaigns by rich donors with anti-government views and vested interests in the status quo, like the Koch brothers (see Kochland), propaganda from right-wing media like Fox News, and most recently the Trump movement. Every elected Republican is now expected to support all tax cuts, oppose initiatives like Obamacare, block action on climate change, and propagate the Big Lie that Trump won the 2020 election.

The Senate filibuster allows a 41-vote minority to stop senators from debating and voting on any bill. Filibustering used to mean extending debate, but now it means avoiding debate altogether in what once was known as the “world’s greatest deliberative body.” The filibuster is not in the Constitution, but is only a Senate rule that a majority can change at any time. When they were in charge, Republicans abolished it for approving Supreme Court nominations, so that Democrats would be unable to block President Trump’s nominees. (That’s how we got the most conservative court in almost a century.) Today, a new voting rights bill—needed because conservative justices threw out the old one—seems unlikely to overcome a Republican filibuster. Another way around the filibuster is the “reconciliation” process, but that applies only to certain budget bills, and it requires the Democrats to be as united in their support as the Republicans are in their opposition. That’s not bipartisanship.

Republican Senators even used the filibuster to block a vote on raising the debt ceiling, which has to be done to finance the deficit increased by the Republicans themselves during the Trump administration. (They relented, temporarily, but are threatening to block it again in December.) Why oppose something that almost everyone agrees has to be done? The aim is to force the Democrats to raise the debt ceiling all by themselves, through reconciliation, so that Republicans can dishonestly attribute the change to Democratic spending plans. (If you ever have the opportunity to go out to dinner with Mitch McConnell, don’t do it. He will probably order an expensive meal, stick you with the bill, and then if you pay it tell everybody what a wasteful spender you are!)

The greatest danger here is that Republicans will make good on their threat to block the debt ceiling increase. That would be an act of financial terrorism, since a democratic government cannot function without the confidence of its citizens. People will not buy and hold government bonds at reasonable rates without the “full faith and credit” of the U.S. Treasury, which has never defaulted on an obligation. Republicans seem more interested in making the Biden administration fail than making government work. Mike Pence has even said that the purpose of the Congressional investigation into the January 6 assault on the Capitol is to distract attention from Biden’s “failed agenda.” He did not mention that Senate Republicans are refusing to allow that agenda even to be debated.

While blocking Senate debate on voting rights, Republicans are working at the state level to keep Republicans overrepresented in state legislatures and Congressional delegations. They are accomplishing this through redistricting, gerrymandering, and restrictive voting laws that disproportionately impact Democratic voters. Worse still, they are trying to make it easier for state legislators and administrators to overturn election results if Democrats win. And of course, they continue to rally around Donald Trump despite strong evidence that he encouraged foreign interference with the 2020 election and tried have its results thrown out. I cannot think of a greater threat to our democracy in my lifetime.

One more form of obstruction deserves dishonorable mention. Opposition to vaccination and masking is strongly associated with Republican Party affiliation, Trump support and watching Fox News. It has prolonged the pandemic, delayed the economic recovery, and cost thousands of lives.

Restoring bipartisanship

Few Americans want a system in which one party has unrivaled power. That is too susceptible to corruption. But those of us who believe in the two-party system have to do more than encourage both parties to reach across the aisle and compromise. We must first demand that each party play by the rules of democracy, like engaging in honest debate, encouraging every citizen to vote, and respecting the outcomes of fair elections. Supporters of a democratic society have an obligation to stand up and vote down a party that is willing to lie and cheat in order to win. We must be willing to send a strong message that an increasingly authoritarian party must either change its ways or suffer massive defeat at the polls. Only then can two or more major parties thrive and hopefully cooperate to move the country forward. I only hope that it is not already too late.

The Deficit Myth (part 3)

September 1, 2021

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In the first six chapters of The Deficit Myth, Stephanie Kelton discusses the six misconceptions about the deficit I have covered in my last two posts. The last two chapters of this rather short but provocative book are called “The Deficits That Matter” and “Building an Economy for the People.”

The deficits that matter

According to Kelton, the gap between the number of dollars the federal government takes from the economy in taxes and the dollars it puts into the economy with spending doesn’t matter as much as most people think it does. For a government with monetary sovereignty, deficits are part of the normal functioning of the economy, and in fact are a useful way of developing its untapped resources. The deficits that really matter are the gaps between our current economy and the economy we could have if we made better use of our natural and human resources.

The good jobs deficit is the gap between the jobs we are creating and the jobs we could create. For the past few decades, “job growth has been overwhelmingly concentrated in low-skill, low-paid occupations.”

The savings deficit is the gap between what Americans need to save for such purposes as college education and retirement and what they are able to save out of their existing wages. Non-mortgage household debt rose by a trillion dollars between 2013 and 2019.

The health-care deficit is the gap between the health care that is possible and the health care Americans can afford. Compared to other developed countries in the OECD, the United States has the lowest average life expectancy.

The education deficit is the gap between the education today’s good jobs demand and the education Americans can pay for. The cost of college has risen much faster than incomes, one of the biggest reasons for the surge in household debt.

The infrastructure deficit is the gap between the state of the nation’s infrastructure and what it should be, according to the American Society of Civil Engineers. ASCE graded the difference as D+ vs. B, and put a price tag of $4.59 trillion on the task of bringing it up to standards.

The climate deficit is the difference between the global temperature change expected under current policies and the much smaller change permissible if we are to avoid a climate catastrophe. “To hit the [smaller] target, the world will need to cut its fossil fuel use in half by 2030 and eliminate all fossil fuel consumption by 2050.”

The democracy deficit underlies all of the other deficits. Consistent with the logic of Modern Monetary Theory, every deficit is someone else’s surplus. For Kelton, an excess of power for the few is the counterpart of a shortage of power for the many. She then cites the kinds of statistics that have become familiar: The wealthiest 10% own over 70% of the wealth, and the richest three billionaires own more than the entire bottom half of the population. She also cites research showing that when the policy preferences of the rich conflict with those of the majority, it is usually the rich who have their way. The obvious example is that tax cuts for those who pay the most taxes take precedence over spending increases for things that Americans say they want.

An economy for the people

Like many economic theories, Modern Monetary Theory has a descriptive side and a prescriptive side. My favorite passage in the section on the descriptive side was this one:

As an analytic framework, MMT is about identifying the untapped potential in our economy, what we call our fiscal space. If there are millions of people looking for paid work and our economy has the capacity to produce more goods and services without raising prices, then we have the fiscal space to bring those resources into productive employment.

This, of course, is very different from treating the economy as a self-balancing machine that functions fine as long as government does as little as possible. MMT represents a fundamental shift of philosophy that may or may not appeal to enough policymakers to make a difference.

On the prescriptive side, MMT aims to give precedence to fiscal policy, despite calling itself a monetary theory. It has a strong monetary premise—the monetary sovereignty of nations like the United States—but it sees that condition as potentially liberating the nation to spend in more constructive ways. It is not at all like the monetary school inspired by Milton Friedman, who recommended limiting inflation by strictly controlling the growth of the money supply, and had little use for fiscal policy at all. MMT gives fiscal policy a major role in growing the economy.

To some degree, fiscal policy already revs up automatically when the economy contracts. When incomes fall, so does tax revenue, while federal spending for things like unemployment insurance and food stamps rises. The federal job guarantee recommended by MMT would be “a powerful new automatic stabilizer,” employing more people whenever jobs are scarce. Kelton describes it as a “highly decentralized Public Service Employment (PSE) program that offers paid work at a living wage (we recommend $15 per hour) with a basic package of benefits that include health care and paid leave.” She estimates that about 15 million people could be employed. The Department of Labor could fund and administer the program, but local communities would have a lot to say about the specific work to be done. The work could address the “deficits that matter” described above, by such means as adult education and training or environmental projects.

As I said at the start, this is a more optimistic economics that emphasizes real resources instead of artificial budget constraints. Kelton’s final thought:

In the United States, where we have an abundance of resources and labor, there is no reason we cannot embark on a policy agenda that results in provisioning our entire population with quality health services, providing each worker with adequate and appropriate advanced education and job training, upgrading our infrastructure to meet the demands of a low-carbon world, and ensuring adequate housing for everyone while redesigning our cities to be clean, beautiful, and nurturing of community spirit….

With the knowledge of how we can pay for it, it’s now in your hands to imagine and to help build the people’s economy.

The Deficit Myth (part 2)

August 30, 2021

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Myth #4: Government deficits crowd out private investment, making us poorer

The logic of this familiar argument goes like this: The country has a limited supply of “loanable funds,” money that people are willing and able to save and invest. When government has to borrow in order to finance a budget deficit, that puts it in competition with private firms for loanable funds and raises interest rates. That discourages private investment and damages the long-run growth of the economy.

Kelton says that the historical evidence does not support this argument. She quotes Timothy Sharpe, who found that “the empirical evidence reveals crowding-out effects in nonsovereign economies, but not within sovereign economies.” The difference, consistent with Kelton’s general argument, is that sovereign economies influence the supply of loanable funds by their power to create money. This myth is another example of thinking the wrong way around, putting borrowing first—as in (TAB)S—instead of spending first—as in S(TAB). With spending first, “the government’s own deficit supplies the dollars that are needed to purchase the bonds” (emphasis in original). The demand for dollars to borrow goes up, but so does the supply.

Although the historical experience does not support the claim that government borrowing leads to investment-crushing interest rates, Modern Monetary Theory does make the case that borrowing keeps rates from going too low. If the government were to put too many dollars into the economy without borrowing some of them back, that could produce a surplus of loanable funds and very low interest rates, which in turn would trigger inflation by encouraging too much private borrowing and spending. “From an MMT perspective, the purpose of selling bonds is not to ‘finance’ government expenditures (which have already taken place) but to prevent a larger infusion of reserves from pushing the overnight interest rate below the Fed’s target level” [for controlling inflation].

The public and private sectors of the economy work in tandem. Kelton calls them buckets. For every deficit in one sector, the other sector has a corresponding surplus, and vice versa. (A third bucket, the foreign sector, is discussed in the next section.) This helps explain why government budget surpluses tend to contract the economy. When the federal budget is in surplus, the government is taking out more dollars in taxes than it is giving back in spending. But that means the private sector is in deficit, giving up more dollars to government than it receives through government spending. That means, “It’s fiscal surpluses, not fiscal deficits, that eat up our financial savings” and reduce our capacity to invest for the future.

On the other hand, the combination of public deficit/private surplus has the potential to help grow the economy. How much it will, however, depends on how productively the surplus is used. What has been disappointing about the recent economy is the sluggish growth despite the large deficits. The Trump tax cuts were another big gift to the private sector, but the benefits went mostly to the wealthy. From this perspective, what the country needs to do is not put an end to deficit spending, but use it to invest in more of what most people need.

Deficits can be used for good or evil. They can enrich a small segment of the population, lifting the yachts of the rich and powerful to new heights, while leaving millions behind. They can fund unjust wars that destabilize the world and cost millions their lives. Or they can be used to sustain life and build a more just economy that works for the many and not just the few.

Myth #5: The trade deficit means America is losing

Here Kelton introduces the third bucket in MMT accounting, the foreign sector. It includes all the other countries with which we trade. Now all three sectors must be in balance. The total of any dollar surpluses must equal the total of any deficits. For purposes of understanding that balancing act, the US trade deficit is actually a foreign sector surplus. “America’s trade deficit arises from the rest of the world’s desire to accumulate a surplus of US currency.” People in many countries are happy to hold US dollars in reserve, rather than convert them to some other currency. They like having dollars available either to buy American goods or to invest in what is still one of the strongest economies on the planet. That includes investing in bonds that are backed by the full faith and credit of the US government.

In return for our dollars, we get “stuff”—a lot of material things that other countries can make better—or at least more cheaply—than we do. Up to a point, global trade is a win-win, not a loss at all.

However, since the trade deficit represents a foreign surplus, it must be balanced by some kind of domestic deficit, either in the private sector or the public sector, or both. We don’t want more dollars flowing out of the private sector than coming in, because that means fewer dollars to spend or invest in our own economy. The only logical alternative is for the federal government to spend more than it taxes. As long as we have a trade deficit, “only Uncle Sam can supply enough dollars to keep the private sector in surplus. To do that, the government must run budget deficits that exceed the US trade deficit.”

That conclusion reinforces the conclusion of the previous section that government deficits create private-sector surpluses. But not all government deficits are equally conducive to a strong economy. Think of all the ways that government can run a deficit—cutting taxes, increasing transfer payments like unemployment compensation, buying more weapons, spending more on health care, and so forth. Why not use deficit spending to address what most concerns Americans about the trade deficit—loss of American jobs? (Not to say that free trade is the only reason for losing them. Automation is reducing the demand for labor in many industries, and will do so even more in the future.) Kelton wants to shift from a policy that tolerates joblessness for the sake of austerity and low inflation, to one that guarantees a federal job to any unemployed person who wants to work. Whether that is inflationary would depend on how productively the additional workers are employed. The goal would not be to pay people for pointless busywork, but to get them doing publicly useful work that the private sector is not getting done. “With decent jobs guaranteed for all, workers can engage in a public-led industrial policy aimed at producing sustainable infrastructure and a wider array of public services.” More on that in the next post.

Kelton is very critical of the recent policies for dealing with globalization. We have run federal deficits that pump dollars into the private sector. But we have increased deficits not so much with useful public investments as with tax cuts that primarily benefit the wealthy. We hold wages down in the mistaken belief that cheap labor—as opposed to smarter labor—is the only way to compete globally. We punish Americans for buying foreign products by taxing them with tariffs.

The Trumpian approach to trade creates strife and a zero-sum race to the bottom over too few globally available jobs. Already, President Trump’s tariffs have failed to revive American manufacturing, raised prices for US consumers, invited retaliation from China, and contributed to a slowdown in the global economy. All in subservience to the trade deficit myth.

Kelton refuses to believe that we have to accept slow growth, wage stagnation, and tariffs as the price for living in a global economy. Instead, we can combine the government’s ability to create dollars with the unrealized potential of our workforce. We have nothing to fear from global trade, as long as we do a better job of creating qualified workers and good jobs at home. Government spending on human capital development and a federal job guarantee can lead the way.

This chapter also puts American complaints about globalization in perspective by acknowledging the plight of the truly disadvantaged peoples of the global economy. They are the poorest developing countries, with nothing to export but cheap labor and raw materials—often a legacy of colonialism—but needing dollars to import other necessary goods. Their reliance on a few basic commodities makes their economies vulnerable to fluctuations in world prices, and their dependence on foreign capital puts them at the mercy of speculative investors, who often invest intermittently and selectively instead of contributing to longer-term, diversified development. International banking policies create additional problems for these countries, as when richer countries raise interest rates to fight inflation, increasing poorer countries’ debt burden; and when, as a condition of assistance, international agencies impose austerity measures that further increase unemployment and poverty. And we think the global economy is hard on us!

Myth #6: “Entitlement” programs like Social Security and Medicare are financially unsustainable

This myth is another consequence of thinking that all government spending must be paid for with taxes. Franklin Roosevelt set up the Social Security system that way by creating a new payroll tax to fund it. Current workers would pay in so that current retirees could draw out. As people started living longer, the ratio of retirees to workers increased, making that particular funding method harder to sustain. Making matters worse, recent generations of workers have also faced slower wage growth and loss of traditional pensions with guaranteed benefits.

What is really unsustainable here is not the idea that retirees should have a decent income, but the particular funding method the government has been required to use. Kelton makes that point very effectively by contrasting how the government’s own reports distinguish different entitlement programs:

Social Security’s programs and Medicare’s Hospital Insurance are considered fiscally unsustainable because the government isn’t committed to making payments, while Medicare Parts B and D get a clean bill of health because Congress has granted the legal authority to make the payments no matter what else happens.

Social Security could also have a clean bill of health by a simple change in the law committing the government to make their payments come what may. Federal Reserve Chairman Alan Greenspan acknowledged as much when Congressman Paul Ryan, an advocate for Social Security privatization, asked him to confirm that the system was in trouble:

Greenspan started by dismissing the entire premise behind Ryan’s question. “I wouldn’t say that the pay-as-you-go benefits are insecure,” he said, “in the sense that there’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody.

As usual, the point here is not that the government can spend whatever it likes. It is that the real limit on spending is the country’s ability to grow its resources and use them wisely, something that the government of a democratic society can influence. “We should stop asking the question, How will we pay for it?, and start asking, How will we resource it?” The price we pay if we do end up spending beyond our resources is inflation. But even that has the upside of spreading the pain around instead of singling out the elderly to bear the burden of our economic mistakes. (OK, that last point is mine, but I suspect that Kelton would agree.)

Here’s a good summary of the MMT perspective:

Our big challenge isn’t cost. It’s making sure that our economy is producing the right output mix over the coming decades. The problem isn’t a lack of bits and bytes on some electronic spreadsheet. The problem is a lack of vision. There are many ways to improve life for all of us, even in a world of limited resources, if we’re smart enough to imagine them and brave enough to try.


The Deficit Myth

August 27, 2021

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Stephanie Kelton. The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy. New York: Hachette Book Group, 2020.

How many of these statements do you agree with?

  • The federal government should budget like a household.
  • Deficits are evidence of overspending.
  • One way or another, we’re all on the hook [for the national debt].
  • Government deficits crowd out private investment, making us poorer.
  • The trade deficit means America is losing.
  • “Entitlement” programs like Social Security and Medicare are financially unsustainable. We can’t afford them anymore.

According to economist Stephanie Kelton, none of these statements is true. Together they create a “narrative of scarcity” that puts unnecessary restrictions on our government’s ability to build a “people’s economy” that works for all of us. What is especially disappointing is that politicians invoke this narrative selectivity, using it mainly to cast doubt on the affordability of programs like Social Security or universal health insurance. “Somehow, there’s always money for war and tax cuts. For just about everything else, however, lawmakers are expected to show that they can ‘pay for’ their spending. At least on paper.”

Kelton wants to replace this narrative with what she calls a “narrative of opportunity.” She challenges us to think outside the box about government’s role in the economy, and does it with simple and cogent arguments. (She credits her editor with saving her from herself, resisting the temptation to fill her book with formulas and charts.) Kelton is a leader in the school of Modern Monetary Economics (MMT). Her arguments should appeal to progressives, but not to free-market conservatives who want to minimize government’s role in the economy, or to cynics who have lost faith in democratic government’s capacity to work for the general good.

Here I will examine the first three of her six economic myths.

Myth #1: The federal government should budget like a household

I have often written that living within one’s means is the first rule of personal finance. Spend less than your income, and your savings will build wealth. Spend more than your income, and you will run up debt and see your net worth deteriorate. And you’re not allowed to paper over the difference by printing money in your basement!

Conventional wisdom applies the same reasoning to government. As President Obama said in his 2010 State of the Union Address, “Families across the country are tightening their belts and making tough decisions. The federal government should do the same.” The argument of this book rests on the idea that the federal government is not the same, and does not have to adopt the same kind of frugality. “Unlike a household, the federal government issues the currency it spends.” That difference applies to countries with monetary sovereignty, “where the government is the monopoly issuer of a fiat currency.” That has been the fact ever since the United States left the gold standard in 1971, but most citizens and policymakers have yet to grasp its full implications and possibilities.

Governments without monetary sovereignty have to follow the rule Kelton summarizes as (TAB)S, shorthand for the requirement that taxing and borrowing must come before spending. But the federal government can follow the rule S(TAB), where spending can be somewhat independent of taxing and borrowing. Government does not have to take a dollar out of the economy for every dollar it puts into it by spending, and it usually doesn’t. The country’s money supply does not consist of a fixed number of physical dollars, backed by a supply of gold or any other commodity. When the government makes a major purchase, such as military hardware from Lockheed:

…the US Treasury instructs its bank, the Federal Reserve, to carry out the payment on its behalf. The Fed does this by marking up the numbers in Lockheed’s bank account. Congress doesn’t need to “find the money” to spend it. It needs to find the votes! Once it has the votes, it can authorize the spending. The rest is just accounting. As the checks go out, the Federal Reserve clears the payments by crediting the sellers’ account with the appropriate number of digital dollars, known as bank reserves.

It’s the digital equivalent of printing money in your basement, with the important qualification that it’s perfectly legal and ordinary.

The need to balance such spending with revenue is not absolute, and it’s only one of the reasons for taxation. If the government puts much more money into the economy by spending than it takes out by taxing, that can be inflationary, as discussed in the next section. But government has other reasons to tax, such as redistributing income to those who need it and modifying behavior with tax penalties and credits.

Similarly, the government sells treasury bonds not just because it must borrow to cover deficits, but to reward people for saving and investing, in this case investing in their government. That helps to insure that savers can invest safely and with a reasonable rate of return. As I’ll explain more later, it also helps keep interest rates from falling below the Federal Reserve’s target for purposes of controlling inflation.

Kelton is not saying that government can engage in unlimited spending. Instead, she is asking us to think differently about what the real limit on spending is. Strictly speaking, it is not the revenue collected or some balanced budget requirement. Historically, deficits have actually been better for the economy than budget surpluses, which have always been followed by economic recessions. So how do we draw the line between responsible and irresponsible spending?

MMT redefines what it means to engage in fiscally responsible budgeting….“It’s the economy’s real resources, stupid!” We are a nation rich with real resources—advanced technologies, an educated workforce, factories, machines, fertile soil, and an abundance of natural resources.

Instead of balancing spending with revenue, government’s more important task is to balance it with the productive resources of the economy.

Myth #2: Deficits are evidence of overspending

Instead, MMT says that the actual evidence of overspending is inflation, which deficit spending may or may not create.

If inflation is a condition of too much money chasing too few goods and services, that suggests two logical ways of fighting it. The first is to restrict the money government puts into the economy, so it won’t outrun economic growth. That calls for fiscal and monetary restraint, with controls on deficit spending and high interest rates to discourage borrowing. The alternative is to expand the real economy to keep it growing along with the money supply. That calls for government spending that increases the production of goods and services.

Kelton believes that federal policy has relied far too much on austerity to fight inflation, and far too little on growing the real economy. She feels that Obama’s fiscal conservatism and the Fed’s premature hikes in interest rates slowed the recovery from the Great Recession. (The Fed began raising interest rates when unemployment was still around 5%, but inflation was under 2%).

Kelton also believes that economists have been too tolerant of unemployment, believing that low inflation requires a relatively high “natural rate of unemployment.” They often attribute high unemployment to a mismatch between job requirements and job skills in a rapidly changing economy. Kelton wants to lay the blame more heavily on misguided inflation-fighting policies themselves. She says that “the majority of economists remain wedded to a fifty-year-old doctrine that relies on human suffering to fight inflation.” Instead, she wants to have a federal job guarantee that spends what it takes to put people to work doing useful things. Again, the government can put in more money than it takes out in taxes as long as the spending actually increases real output.

This argument got me thinking about what it is government actually does and how we account for it. The standard formula for GDP distinguishes private investment (I) from private consumption (C), but lumps together all public spending (G). If we think of government as a big consumer, then deficit spending adds to economic demand while neither adding to supply nor curtailing the demand from other consumers through taxation. That can stimulate aggregate demand when the economy is operating at less than full capacity, but becomes inflationary as the economy heats up. But if we think of government as an investor in the country’s productive capacity, some forms of spending add both to demand (by providing income people can spend) and to supply (by building some form of capital). Spending on infrastructure adds to the country’s physical capital, and spending on health and education adds to the country’s human capital. That’s the kind of spending that is most likely to be good for the economy even if it is not “paid for” with higher taxes. I think that Kelton could have helped her case by distinguishing different kinds of government spending more clearly.

Although Kelton wrote this book before President Biden took office, these points are directly relevant to the debate over his budget proposals. His plan for “human infrastructure” faces serious opposition, both from some Democrats who fear it won’t be paid for, and Republicans who fear that it will be paid for—with tax increases. If Kelton is right, both fears are overblown, since the plan sounds like just the kind of spending most likely to increase employment without inflation, whether the spending is balanced by higher taxes or not.

Myth #3: One way or another, we’re all on the hook

According to conventional wisdom, each taxpayer owes a share of the national debt, so as it goes up our individual net worth goes down. Kelton asserts to the contrary, “The national debt poses no financial burden whatsoever.” How can that be?

If you have a retirement plan or other investments, you may own shares in a corporate bond fund. A corporate bond is a liability for the corporation that issues it, but it’s an asset for you. Such debt is an ordinary feature of capitalism, and it only becomes a problem when a company’s debt burden becomes so great that it defaults on its obligations.

Similarly, the national debt is a liability of the federal government, but it is an asset for owners of treasury bonds. And it is an especially safe asset, since the federal government has never defaulted on a financial obligation and has no reason to do so. A government with monetary sovereignty cannot go broke. It can pay off its debts anytime it likes by replacing bonds with cash it creates. Instead, it chooses to offer people an interest-earning opportunity if they are willing to invest in the government. “There’s nothing inherently dangerous about offering a safe, interest-bearing way for people to hold on to dollars.”

West 43rd Street in New York City has a large clock that displays the national debt as it accumulates. We could just as well call it a savings clock, except that we fail to grasp that in this case, “good old” savings is the flip side of “bad old” debt.

What about the future? Don’t the taxpayers have to pay off the debt to the holders of treasury bonds someday? No. The government is obligated to pay the interest, but it can roll over the principal indefinitely. Even at very low interest rates, treasury bonds always seem to have lots of willing buyers. And if the interest payments were to become a burden, the government could create the money to pay off some or all of the debt. Traditional monetarists would expect that to be inflationary, but MMT economists disagree. Eric Lonergan points out that trading cash for bonds would have no effect on the public’s net wealth. Bondholders were choosing to save their money, and they could still save their money by putting it in some other form of savings. Only if they ran out and spent the cash would they create a situation of too much money chasing the same goods and services. But if that’s what they want to do, there’s nothing stopping them from cashing in their bonds now. Taxpayers needn’t fear that spending to address national needs will force the government to take on too much debt and then make the taxpayers use their limited dollars to pay it off.

The next post will deal with three other myths Kelton tries to dispel.


Kochland (part 3)

August 8, 2021

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The “corporate power” referred to in the subtitle of Kochland is not just economic power, but political power. The Koch brothers became poster boys for the role of big money in the political process. They played a leading role in pushing the Republican Party toward more libertarian, pro-market and anti-government policies, and in blocking collective efforts to address national problems like climate change.

David Koch declared his views publicly, running for vice president as a Libertarian in 1980. Kochland author Christopher Leonard characterizes the Libertarian platform as “calling for the abolishment of everything from the US Post Office to the Environmental Protection Agency to public schooling.” Charles preferred to operate behind the scenes, quietly funding a wide range of conservative organizations and campaigns. The Charles Koch Foundation, created in 1974, soon changed its name to the Cato Institute, but its policy positions were also libertarian, with relentless support for tax cuts and privatization of public programs like Social Security.

The “Kochtopus”

Leonard describes Charles Koch’s political influence machine, nicknamed the “Kochtopus,” as a multifaceted operation “including think tanks, university research institutes, industry trade associations, and a parade of philanthropic institutions to support it financially.”

In part, this is a traditional political operation, working to elect candidates and lobby legislators. But it is especially large and well-funded. Leonard compares Americans for Prosperity, the main Koch advocacy group, to a franchise business with “semiautonomous state chapters” all serving “products from the same menu.” Its organization as a tax-exempt “social welfare” entity spares it from having to disclose its donors. It can easily create the appearance of spontaneous, grassroots movements at the local level. Also, today’s corporate lobbyists do not just provide information and persuasive arguments; they organize lavish fundraisers for politicians who vote their way. Another focus of Koch political influence is education, but it is education of an economically and politically motivated kind. The Koch-funded Mercatus Center at George Mason University promotes free-market economics, while the Law & Economics Center at the same university provides a forum for legal scholars who take a dim view of government regulation. It appears to have shaped the views of a generation of judges by inviting thousands of them to its seminars. By blurring the distinction between education and political contributions, Koch has circumvented the restrictions on campaign contributions.

In 1996, Koch Industries created a nonprofit group called the Economic Education Trust. The group did not need to disclose its donors because it was not ostensibly a lobbying or campaign finance organization…. The Economic Education Trust gave $1.79 million to a company in suburban Washington, DC, called Triad Management Services Inc. Triad was supposedly a political consulting firm, but it had a strange business model: it offered its services for free, to Republican candidates. A US Senate report in 1998 concluded that Triad was “a corporate shell funded by a few wealthy conservative Republican activists.”

Instead of just helping elect legislators and influencing their votes, corporations have sought a direct role in writing legislation. Koch has been a major contributor to the American Legislative Exchange Council (ALEC), originally founded by Paul Weyrich of the religious right, which writes model laws to be adopted by state legislatures. Leonard says it has evolved into a “pay-to-play” organization, allowing its largest contributors to write the bills that its member legislators try to get passed.

Energy deregulation

In the 1990s, ALEC developed model legislation for energy deregulation. Koch Industries and other companies that stood to gain from the legislation (notably the notorious Enron corporation) had a large role in writing it. Utility companies, who were more comfortable with the traditional system, opposed deregulation, but Koch and Enron had their way on ALEC’s energy task force. Leonard tells the story of deregulation in California, one state that adopted ALEC’s general approach.

Before deregulation, utility companies were essentially regulated monopolies. Having more than one utility trying to deliver energy to the same house wasn’t practical, but state regulators could protect the public from price-gouging by setting rates to allow a comfortable but not exorbitant profit. When energy prices became more volatile and the need for both conservation and pollution control more pressing, price regulation became more challenging. Setting prices too high would burden consumers, while setting them too low would dampen supply by discouraging producers from bearing the costs of production and pollution control. The free-market solution advocated by ALEC and the libertarians was to let the market set the price. The California deregulation law, passed in 1998, created a competitive market for power, the California Power Exchange:

The law was radical in nature. It instantly broke apart the state’s big utility companies. The utilities became glorified middlemen, buying energy on an open market from traders at Koch and Enron and then selling it to the utility’s customers. The utilities had to sell their power plants to outside companies—many of them in Texas—that operated the plants as independent companies. The utilities also lost their transmission lines, which were taken away and turned into something that resembled a railroad or a pipeline. Anybody could now schedule power to run across the transmission lines, making them the common carrier of power.

In theory, competition among the producers to sell their energy would keep prices under control for consumers. And the competition among utilities to buy energy would keep prices high enough to incentivize production. The price mechanism would balance supply and demand, as in any competitive market.

But what if demand rose faster than supply, pushing up prices? With many other products—let’s use electric cars as an example—some people would just have to wait to buy one until supply caught up and prices went down. But electricity is special, because it has become a necessity. People can conserve energy up to a point, but they need a lot of it all the time. It won’t do to have too many customers seeing their power cut off because they can’t afford it, or to have utility companies going broke trying to buy power on the open market. So, in order to protect the utilities and their customers, California put a cap on the wholesale price charged by producers to utilities, and a floor under the retail price charged by utilities to customers. The retail price was supposedly high enough for utilities to profit, but not so high as to make energy unaffordable for consumers.

What if shortages occurred because the producers would not or could not produce at the capped price? Then another agency—the California Independent System Operator (ISO)—could step in to buy and sell energy for more than the capped price on the exchange. The system was still partly regulated, but with the good intentions of protecting consumers and avoiding blackouts.

Then the energy traders found a way to game the system, in effect creating make-believe shortages so they could sell energy at the uncapped ISO price more often. The game was called energy “parking”, and it worked like this:

Enron traders seem to have invented the parking scheme sometime in the late 1990s. To execute a parking trade, a trader at Koch or Enron sold electricity from a power plant in California to a customer outside the state, like PNM in Arizona. This sale was made in the day-ahead market, where prices were capped. But the sale was bogus. The next day, when power was supposed to be delivered from California to PNM, the utility would suddenly sell the exact same amount of power from Arizona into California, and into the much pricier ISO hourly market.

Such a sale was fraudulent because no actual megawatts were delivered to the out-of-state utility, which simply collected a fee for participating in the deception. Energy prices skyrocketed, and utilities couldn’t pay those prices and remain profitable without being allowed to charge exorbitant rates to customers. The state began to experience both budgetary strains and rolling blackouts.

Enron eventually went bankrupt after this and other fraudulent practices were discovered. The Republican governor who had championed deregulation was out of office, so the political blame fell mainly on his Democratic successor, Gray Davis. Voters recalled him and replaced him with another Republican, Arnold Schwarzenegger. Koch Industries was a lesser offender than Enron, but did settle charges of market manipulation by paying $4.1 million to the state. Only when the Federal Energy Regulatory Commission stepped in was the California energy crisis brought to an end.

Climate-change legislation

In 2008, Congress was considering environmental legislation that took a “cap-and-trade” approach to controlling carbon emissions. “The concept was simple. The government capped the total amount of a certain pollutant that could be released. But then it gave companies a license to release that pollution.” Companies that wanted to exceed their cap had to pay to buy credits to do so, while companies that reduced their emissions below their cap earned credits they could sell. Because it relied on a more-or-less free market in pollution credits, it had the support of many Republicans as well as Democrats. George H. W. Bush had initiated a similar approach to controlling sulfur dioxide and acid rain in 1990, with apparent success.

But even that much regulation was too much for Koch Industries. It conducted its largest lobbying effort yet in order to defeat the proposal, working through a new subsidiary, Koch Companies Public Sector. Not only that, but Koch waged a large-scale (dis)information campaign to convince the public that climate change wasn’t real, and that efforts to curb carbon emissions could only impose unacceptable costs on the economy. Between 2006 and 2009, as the planet warmed, the percentage of Americans believing in climate change dropped from 77 percent to 57 percent. Other oil companies, especially Exxon, also participated in this effort, but Koch outspent Exxon by a wide margin. Koch’s political arm, Americans for Prosperity, got many climate-denying Republicans elected by targeting their more moderate and reasonable opponents with negative advertising. Cap-and-trade lost Republican support and died in 2010. Americans for Prosperity also helped Republicans win the 2010 midterms, and one of the first things the Republican-controlled House did was cut off funding for the Select Committee on Energy Independence and Global Warming, the committee that had originated the cap-and-trade bill.

I have little doubt that the Koch brothers’ enthusiasm for libertarianism was genuine, and that they sincerely believed that what was profitable for Koch Industries was good for the economy and the country. I also have little doubt that in this case and others, they were very, very wrong.

Koch and Trump

Both Charles Koch and Donald Trump held extreme political views, but they did not agree on everything. Trump’s nationalism sometimes conflicted with Koch’s commitment to free trade. Leonard says that “the Koch political machine employed a strategy that could be called ‘block-and-tackle,'” blocking Trump’s proposals where they disagreed, but helping him tackle the problems they agreed on.

The “Kochtopus” supported Trump’s 2017 cuts in corporate and personal income taxes, which by one estimate saved Charles and David Koch personally over $1 billion dollars a year. It also supported Trump’s efforts to withdraw from the Paris Climate Accord and roll back environmental regulations.

Trump claimed that he could repeal Obamacare and replace it with something better but less expensive. Charles Koch just wanted to repeal it without replacing it with any government initiative on health insurance. Neither had his way on that issue, as Obamacare survived by one vote in the Senate.

Koch did not approve when Trump interfered with free trade by abandoning the Trans-Pacific Partnership agreement and imposing tariffs on foreign products. He also opposed the proposed Border Adjustment Tax intended to favor companies that operated in the U.S. rather than in other countries. Under existing law, companies could escape U.S. taxation by producing things abroad—or using accounting gimmicks to shift profits to foreign tax havens. Koch Industries often avoided taxes in that fashion, headquartering many of its operations in the Cayman Islands. The proposed Border Adjustment Tax would have taxed profits based on where products were sold rather than where they were produced. That would be costly for a company like Koch that imported oil and other products for sale here. In this case, Koch’s efforts to kill the bill succeeded.

One conclusion to draw from Leonard’s detailed history of Koch Industries and its political machine is that the radicalization of the Republican Party was well under way before Donald Trump came on the political scene. The ascendant philosophy was libertarian rather than nationalist, but many of the goals were the same—lower taxes for corporations and the wealthy, no action on climate change that would inconvenience the fossil-fuel industry, and a minimal role for government in regulating the economy. The political transformation of the late twentieth and early twenty-first centuries was only partly a grass-roots movement, but heavily a top-down effort directed and financed by wealthy plutocrats.