We begin a series of Demand Side relays today. Over the next four or five weeks we will be relaying in its entirety the Bernard Schwartz Symposium of the Economists for Peace and Security. That symposium, entitled A Strategic Policy: Investment, Social Security and Economic Recovery, was held in early October, 2010, and thus benefits us additionally by recalling at least in part what economic discourse sounds like in the midst of silly season, the Congressional election season.
On the podcast today, introductory remarks by James K. Galbraith, a short introduction to the first panel by Richard Kaufman, and remarks from Thomas Palley of the New America Foundation. The complete video can be found on the EPS website at epsusa.org.
James K. Galbraith
Good morning and welcome. My name is James Galbraith and I am the chair of EPs and I would like to welcome you to this Bernard Schwartz Symposium entitled "A Strategic Policy: Investment, Social Security and Economic Recovery."
As we begin this morning, I am tempted to say that a spectre is haunting Washington. It is the spectre of the Bowles-Simpson Deficit Reduction Commission. Meeting behind closed doors and occasionally dropping hints of the debate to come after the mid-term elections. The spectre of a wave of demands for cuts in Social Security and Medicare as a kind of sacrifice on the altar of fiscal responsibility.
In other words, it is an argument that is gathering force to the effect that such are the problems of the federal fisc, of the public budget deficit and the national debt, that we need to act now in order to make severe cuts in what remains of the American social safety net. No one uses any more the word "privatization," but behind this campaign there is in fact the same forces that was calling for the privatization of these programs just a few years ago.
Today the program is buttressed by dire warnings of a fiscal doomsday, and these are anchored in the projections of highly reputable authority, the CBO, a non-partisan and highly respected institution. The question facing us this morning is whether this agenda really meets the economic crisis that still faces the United States and the American people and whether it serves the larger public purpose. And if not -- and I believe the answer is that it does not, most emphatically that it does not -- then the question facing us is, What should be our priorities in setting a new direction for economic policy in the United States in the years ahead. A strategic direction, as we emphasize in the title of this symposium, a strategic direction that can help in a sense to set a path for the redevelopment of our economy, for the resumption of economic growth, and above all for creation of jobs and tackling our vast and unsolved problem of unemployment.
So with that in mind, we've organized three panels this morning around three separate aspects of this issue. The first is to examine what is the actual state of our economy, what is the outlook, what are the true problems, and how these may be distinguished from issues which are more or less contrived in the service of an ulterior agenda. The second panel will ask the question, What is the true record of Social Security and Medicare? What is their actual funciton in our economy? Can they be sustained? Should they be sustained as they are, or even expanded, in order to serve the purposes of stabilitzation and to serve a role in a successful economic strategy going forward.
And the third panel will look at how these issues fit into a larger picture of a need for an economic strategy that fosters economic and national security in the broadest sense of the term. In other words, What are the true priorities that we should be pursuing as a matter of economic strategy going forward.
I will have considerably more to say on these subjects later on in the morning, but I would like to invite the first panel to come forward. That panel will be chaired by the Vice Chair of Economists For Peace and Security, Richard Kauffman, my longtime colleague and former General Council of the Joint Economic Committee of the US Congress.
Thank you, Jamie. I want to say a few words amplifying the opening remarks that James Galbraith just gave us as they relate to the deficit. Our topic, “The Economy and the Budget” - that is the topic of this panel - under the present circumstances, leads inevitably to deficit spending. But do deficits really matter?
How and when do they matter? Do they matter in different ways at different times in the economic cycle? Are present trends leading towards crippling deficits? How can deficits be usefully employed now and over the long term to reduce unemployment and achieve sustained economic growth? These are some of the questions that might be addressed in a recent debate and discussion about economic policy. I’m not sure that recent debate is possible at the present time of the oncoming elections, which used to be described as the silly season, but the silly season started a little earlier this season, this cycle.
What passes for debate and discussion today is far from reason. Instead, especially in conservative circles, one’s attitude about deficits has become the purity test of our time. Conservatives, as presently defined, have demonized deficits as necessarily a product of reckless spending, and a plot to destroy America as we know it. Liberals and progressives suspect, with good reason, that the deficit hysteria is being used to support a not-so-secret agenda to prepare the ground for frontal assault, as James Galbraith mentioned, against Social Security and Medicare. Our panelists are well qualified to discuss these matters. There are short biographies about each of them in the folders that have been distributed. And in the interest of time, I would forego the usual introductions, and proceed with our first speaker, Thomas Palley of the New America Foundation.
Thank you, Richard. Good morning, everyone. It’s a pleasure to be here with you. The organizers have told me that I have only eight minutes and that the Chair has teeth. The one thing I always like to do when I give a talk is to make sure that I deliver my main message, and there you have it: “Fiscal austerity is a trap.” It is a trap that risks sabotaging growth, and it’s also a trap that risks producing self-fulfilling budget difficulties. That is the message. If you like what I have to say in the rest of my talk, there is also a paper available on the New America Web site at www.NewAmerica.com, I think - .net, yeah, there we go.
The US economy is struggling to escape the deepest recession since the Great Depression of the 1930s. Let’s get one thing clear here: this recession is due to a massive failure within the private sector. Yet many in Washington and in the policy establishment here are back to arguing that government is the problem, and that we need fiscal austerity. This is a case, to quote Yogi Berra, “of déjà vu all over again.” The fiscal austerity agenda is a Washington perennial. It was the wrong economic agenda before the crisis, and it’s the even more the wrong agenda now. Our challenge is therefore two-fold. We need to discredit the fiscal austerity agenda, and we need to create support for a new economic agenda that includes public investment. Larry Summers called for timely, targeted, and temporary fiscal stimulus. He was wrong, not for the first time. What we need is substantial, smart, and sustained fiscal stimulus.
The first critical challenge I referred to is to discredit the fiscal austerity agenda. Here’s a figure that shows average total G7 government debt as a percentage of GDP. It’s actually an IMF chart. The IMF, when they focus on this, focus at the end of the chart, and you do see that total debt has increased very significantly after the financial crisis.
But as usual with the IMF, they miss what is really important in this picture. Something happened in the late 1970s and early 1980s that started to reverse and change structurally our budget outcomes around the entire G7, and it includes the US, though the patent in which these developments took place does vary a little from country to country. It was not the oil shock. It was the turn to neoliberal policy that increased unemployment, lowered growth, lowered taxes, and above all, raised interest rates. That is absolutely critical. To me, it means we will not fix our budget challenges until we reverse neoliberal policy. The problem is that we are stuck in what a friend of mine, Stephan Schulmeister, calls “the neoliberal two-step.”
The two-step works as follows. Step one is you adopt neoliberal economic policy and create a problem. Step two is then you claim we need more neoliberal policy to solve the problem. It really is that simple. That is exactly what’s going on with the budget deficit debate in this talk about taxes – irresponsible tax policy creates huge budget deficits, and then we need more irresponsible tax policy to get out of it. Same way we talk about regulation. Irresponsible regulation and lack of regulation created a problem, so guess what? A lot of the Congress says we need less regulation, more of that irresponsible stuff. The same on labor market policy. The same on trade policy. The same across the board with federal reserve policy. You look everywhere you go, and you see the imprint of the neoliberal two-step, and we have to get that message across here.
We have to discredit neoliberal policy because we cannot fix these problems until we abandon neoliberal policy and restore a pro-people shared prosperity policy, but that’s really very tough. It’s tough because a lot of Democrats, a lot of the media, a lot of voters, and almost the entire economics profession believe in neoliberal economics in one form or another.
I’m going to argue now for three reasons why we need sustained deficit finance fiscal policy. Reason number one is we still need stimulus – and it’s not a word I like because it does cast too short-term a shadow. We need stimulus to jumpstart the recovery. We have a shortfall of private sector demand, and in that situation, the government should step in and plug the shortfall to prevent a deeper recession. We have not yet established recovery. That means there is a very great danger that fiscal austerity now could trigger the feared double-dip recession. Here, as many commentators have mentioned, history does hold lessons. Back in 1937, the Roosevelt administration succumbed to political pressure for deficit reduction, and guess what happened? There was a second dip or second recession in the midst of the Great Depression.
Reason number two that we need sustained deficit finance fiscal policy is to facilitate private sector deleveraging. The private sector is over-indebted. That means it needs to deleverage. The result – and this is particularly in the household sector – has been a massive increase in saving that has resulted in saving far greater than investment demand. This is what economist Richard Koo calls a balance sheet recession, when households save to restore their balance sheets, causing a collapse of private sector demand. In this case, the private sector must find a taker for its savings. If it does not find a taker, demand and income will contract further, which will increase unemployment, which will actually reduce saving, and therefore extend the duration of the deleveraging process. The role of government in this type of economic situation is to run deficits; to take the private sector’s excess savings and then rebuild the private sector’s balance sheets by supplying bonds and spending those savings. That is the way to accelerate the escape from a balance sheet recession.
Reason number three why we need sustained deficit finance fiscal policies: to spur economic growth. The old growth model that we’ve lived with this past 25 years was based on debt and asset price inflation, and it is clearly broken; it just doesn’t work. That raises a question of where will growth come from. We need a new growth model, and deficit finance public investment can play a very important role in this new growth model. We know that public investment has a high rate of return, and after 30 years of low public investment, we have the need and the opportunity. We can create a virtuous circle of growth, where deficit financed public investment increases economic growth, which then creates the fiscal space to reduce budget deficits, and to keep funding that public investment. The fiscal austerity agenda risks the exact opposite.
It will create a vicious circle, the reverse logic, where we cut deficits and public investment now. That lowers growth and then tightens the fiscal noose. This is a critical message we need to get across to people.
Let me conclude. The evidence is clear. Fiscal stimulus has already created jobs, and already helped reduce the scale of job loss. We must contest this situation where economists can say anything, where the media can report anything. It unhinges our discourse. The evidence on this is absolutely clear. The budget deficit now is also helping us through the deleveraging cycle, through the process I described. We have a public investment gap. We know that public investment can have a high rate of return, and we know it can help spur growth. I don’t have the time now, but later today, Jamie Galbraith will show that we have the fiscal space to pursue this substantial, smart, sustained deficit financed public investment agenda.
Again, I come back to the point I started with. I must emphasize that smart fiscal policy is not going to be enough. The budget deficit is significantly determined by economic performance. If we don’t abandon neoliberal policy, which includes the terrible neoliberal fiscal policies of the last 25 years, the economy will underperform. Then eventually, we will get stuck in a true fiscal crisis. Let’s begin by getting fiscal policy right. But we must also realize, we have to fix the problems of corporate globalization. We have to fix the problems of a corporate-inspired deregulation agenda. We have to fix the weakness in the American labor market. And we have to fix federal reserve policy making. That is where the Obama administration and many Democrats still have a lot of learning to do. Thank you very much.