April 22, 2018
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Countering US deficit mania

By John Buell

Many of the same folks who overlooked skyrocketing mortgage debt and an unprecedented housing bubble now demand that governments rapidly balance their budgets. Following their advice would be economic suicide.

AmericaSpeaks is hosting a national grass roots discussion on June 26 in 20 cities, including Augusta, on the federal budget deficit. Progressives might wish to register and express their concerns. The Maine Center for Economic Policy can provide details.

Our gravest economic problem is unemployment. A sixth of the workforce unemployed or underemployed constitutes an economic and human catastrophe. Prolonged unemployment erodes skills, undermines morale and robs us of our health.

What is lost is never fully regained. Every day that workers and plants sit idle, the goods upon which future growth depends are not produced. This is a compound interest problem with an interest rate of zero or lower.

Runaway government spending isn’t the culprit. The collapse of an $8 trillion housing bubble led to a decline of $500 billion in residential construction. The negative wealth effect associated with collapsing housing values then reduced consumer spending by another $500 billion.

Only government expenditures can fill the trillion-dollar gap. Despite facile talk of recovery, job growth is still too slow even to match population increase. The housing market is wobbly at best, the stimulus package is winding down, temporary census hiring is soon to end and states are still trimming payroll.

The risks of insufficient federal job creation far outweigh those of overstimulation and inflation. Franklin Roosevelt’s decision in 1937 to embrace budget balancing toppled a sluggish recovery and plunged the nation back into a severe recession. That event became the basis for misleading conservative claims that the New Deal and more generally Keynesian economics don’t work. We are already in the process of reliving that tragedy.

Even in the unlikely event that inflation resurfaces, the Fed can more easily choke it off with higher interest rates than it can combat deflation. The Fed’s so called independence amounts to subservience to bankers’ interests in enhancing the value of the currency in which their loans are repaid. It has a long history of curbing expansions well before inflation sets in. The latest signals from Ben Bernanke show that, if anything, the Fed remains overly worried about inflation and too likely to add monetary tightening to the dangerous push for premature fiscal austerity.

Combating deflation is more difficult. Under normal circumstances, if government cuts spending, interest rates can be lowered enough to stimulate private investment. In a severely depressed economy like ours, however, interest rates on short-term government bills are effectively zero and long-term government bonds are at or near historic lows. In the event of deflation, the Fed has few tools.

Only direct government spending will induce further consumption and investment. But such action is spooked by the fashionable idea that foreigners, alarmed by our growing deficits, will soon be unwilling to lend us money. That notion, however, is belied by low interest rates even on 30-year bonds. If they were afraid of future default, why accept low interest rates? (In both historic and comparative international terms, U.S. debt to Gross National Product ratio is quite moderate.)

In addition, foreign nations crave our markets and have little interest in devaluing our currency. In any case, dollar devaluation would not be an unmitigated evil. The U.S. is not Greece. Its debt is denominated in its own currency and its prosperity is far less dependent on trade.

A fall in the value of the dollar relative to the yen and the euro would expand U.S. export markets and ease the process of rebuilding U.S. manufacturing hollowed out by a long-overvalued currency and corporate trade treaties.

In the long run, U.S. and world prosperity must move beyond a system where every nation strives to export its way to prosperity through competitive currency devaluations or forced working class austerity. Keynes knew this, but he also knew that in the long run we are all dead.

The U.S. is fortunate that it can still address its own problems first and then turn to the sticky matter of negotiations with trading partners. More in future columns on why dangerous deficit obsessions persist and where the more substantial problems lie.

John Buell is a political economist who lives in Southwest Harbor. Readers may contact him at jbuell@acadia.net.

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