Fiscal Sustainability and the American Future
The purpose of the President's recently constituted National Commission on Fiscal Responsibility and Reform as stated in Section 4 of the President's Executive Order establishing the Commission is:
Sec. 4. Mission. The Commission is charged with identifying policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run. Specifically, the Commission shall propose recommendations designed to balance the budget, excluding interest payments on the debt, by 2015. This result is projected to stabilize the debt-to-GDP ratio at an acceptable level once the economy recovers. The magnitude and timing of the policy measures necessary to achieve this goal are subject to considerable uncertainty and will depend on the evolution of the economy. In addition, the Commission shall propose recommendations that meaningfully improve the long-run fiscal outlook, including changes to address the growth of entitlement spending and the gap between the projected revenues and expenditures of the Federal Government.
Key words/phrases in this statement are: “fiscal situation,” “fiscal sustainability,” “balance the budget, excluding interest payments on the debt, by 2015,” “stabilize the debt-to-GDP ratio at an acceptable level once the economy recovers,” policy measures subject to uncertainty depending on the evolution of the economy,” and changes “that meaningfully improve the long-run fiscal outlook,” and “the gap between the projected revenues and expenditures of the Federal Government.” How are these related to each other?
Well that depends on what you think “fiscal situation” means and what you think “fiscal sustainability” means. The statement of purpose above implies that the “fiscal situation” pertains to matters like whether the budget is in deficit or is in surplus and the extent of either, the extent to which the debt-to-GDP ratio is at an acceptable level, and what the gap is between the projected revenues and expenditures of the Federal Government. While “fiscal sustainability” seems to mean: a budget that is not too deeply in deficit, a stable debt-to-GDP ratio, and a gap between the projected revenues and expenditures of the Federal Government that is closing over time.
The big problem with the purpose of the President's Commission, and with the President's own thinking, however, is that this sort of view of the meaning of fiscal sustainability has a Hooverite, neo-liberal ideological bias that condemns the economy to slow growth and working people and the middle class to a bleak future of low wages and salaries while a very small elite in the financial industry and international business spheres get very, very wealthy by using excessive unemployment and slow growth to keep wages low and profits high in their own spheres of financial manipulation and international trade. If, however, one defines the “fiscal situation,” and “fiscal sustainability” differently, in a less narrowly political and arguably more objective way in the context of public purpose, then one's outlook on balanced budgets, deficits, debt-to-GDP ratios, and gap projections between revenues and expenditures will be entirely different. So, here's an alternative way to define these key ideas.
”Fiscal situation” ought to be taken refer to Government spending and its impact on the economy as a whole, including the private sector and the international environment. Why? Because isn't our interest in the value, both positive and negative, produced by Government spending, and isn't the public purpose of Government to do the best it can to produce positive value and to both minimize certain negative consequences and completely avoid those consequences that are entirely unacceptable?
”Fiscal sustainability” is the extent to which patterns of Government spending do not undermine the capability of the Government to continue to spend to achieve its public purposes. Compare this definition to Ben Bernanke's recent one:
“… as achieving a stable ratio of government debt and interest payments to gross domestic product, and setting tax rates at levels that don’t impede economic growth."
Achieving a stable ratio of government debt and interest payments to gross domestic product may constrain and prevent the Government from continuing to achieve its public purposes. In particular, achieving this goal has no necessary relationship to achieving full employment, or to furthering greater economic equality, or to influencing the evolution of the American economy in a way that will make the economy itself sustainable in the face of continuing environmental challenges. Moving to Bernanke's second goal, tax rates may be at levels that don't impede economic growth, but first, we don't know what those tax rates are and second, even if we did, that goal has only a contingent and vague relationship to fiscal sustainability, since it does not address at all the question of whether patterns of Government spending are contributing to public purpose without undermining the future capability of the Government to achieve public purpose. In short, and not surprisingly the definition of fiscal sustainability I've offered is completely different from ideas like Bernanke's which the Presidential Commission is considering. My definition has a particular ideological thrust, in that it puts public purpose first and makes that a test of fiscal sustainability, while the orientation of the Commission, which will undoubtedly be greatly influenced by definitions like Bernanke's relies on indicators like: a budget that is not too deeply in deficit, a stable debt-to-GDP ratio, and a gap between the projected revenues and expenditures of the Federal Government that is closing over time, which have no clear relationship to the Government's public purposes, but which are biased against the well-being of the populace in the short- and medium-terms at least, by targeting public policy on minimization of the values of these indicators regardless of their impact on the Government's public purpose.
It's interesting to compare my notion of “fiscal sustainability” with a list of hints about the idea offered by Professor Bill Mitchell in a series of blog posts. Here are Bill Mitchell's hints about defining fiscal sustainability, along with some comments of mine.
”Saying a government can always credit bank accounts and add to bank reserves whenever it sees fit doesn’t mean it should be spending without regard to what the spending is aimed at achieving. . . . ”
”Advancing public purpose is another component of what “fiscal sustainability” means. You cannot define it in its own accounting terms – some given deficit size relative to GDP or whatever.”
”We won’t find a definition of “fiscal sustainability” conceptualised by some level of the public debt/GDP ratio.”
Of course, “public purpose” was an essential component of my view of “fiscal sustainability,” and I also agree with Bill that definitions cast in terms of indicators like the public debt/GDP ratio having only a vague relationship if any to public purpose make little sense.
”Fiscal sustainability is directly related to the extent to which labour resources are utilised in the economy. The goal is to generate full employment.”
This is one of the most important public purposes that Government spending is supposed to contribute to, so it's no surprise that it would be part of Bill's view of “fiscal sustainability,” as well as my own.
”The concept of fiscal sustainability is not defined in terms of any notion of public solvency. A sovereign government is always solvent (unless it chooses for political reasons not to be!).”
That is, since the US Government is sovereign in its own currency, owes no debt in foreign currency, and has none but self-imposed limits on its authority to spend, the idea of anything but insolvency through political choice is nonsensical. And since this is the case it is silly to view fiscal sustainability from the viewpoint of maintaining the Government's capability to spend money. It always has that capability, whether it should use it or not will depend on whether Government spending in a partricular context contributes to public purpose or not.
”The concept of fiscal sustainability will not include any notion of financing imperatives that a sovereign government faces nor invoke the fallacious analogy between a household and the government.”
There are no financing imperatives to achieve fiscal sustainability, because a Government like the US with a fiat monetary system can spend without first financing (funding) its expenditures first. If it chooses to tax or to borrow, that is not in order to finance its spending, but to accomplish other purposes such as maintaining specific interest rate levels, or containing inflation. Households have to finance before they can spend. In particular, they must earn or borrow money, or make profits, or inherit money. But Governments controlling a fiat monetary system are just horses of a different color. They have the simple authority to spend which they can do by crediting accounts in return for products and services, or just because they want to create certain impacts in the private or non-federal economic sectors. That is why it is important in discussions of fiscal sustainability of such Governments never to use the analogy to households, or any other entity, even another nation that is not in control of its currency, such as Greece. Such analogies are always false and always to be viewed with extreme suspicion, because all but the most untutored in economics must know at some level that this analogy is false and highly misleading.
”The concept of fiscal sustainability cannot be sensibly tied to any accounting entity such as a debt/GDP ratio.”
Again this is because such accounting entities do not measure whether the Government is accomplishing its public purposes, or whether it's spending is unsustainable, since sustainability has nothing to do with the amount or level of Government spending, but only whether its impacts continue to contribute to public purpose. It is those impacts one has to measure. Not budget, deficit, debt, or debt-to-GDP ratio indicators.
”The concept of fiscal sustainability will not include any notion of foreign “financing” limits or foreign worries about a sovereign government’s solvency.”
Again the reasons for this are that there is never any question of solvency as long the Government continues to remain sovereign in its own currency. And, as far as foreign financing limits are concerned, there is no need for foreign finance at all. Governments that are sovereign in their currency sell bonds and securities only by choice. If foreign governments decide not to buy those instruments anymore, the Government can still spend what it wants to accomplish public purpose, however, it will not be able to maintain short-term interest rates above zero, and its interest-bearing debt will not increase commensurate with its spending.
By offering alternative definitions of “fiscal situation” and “fiscal sustainability” with reference to the idea that it is the role of the Government to seek and achieve public purpose, I've tried, and I hope succeeded, in throwing the Administration's statement of purpose for its new National Commission on Fiscal Responsibility and Reform into high relief. This commission's purpose is not to seek fiscal responsibility, reform, and fiscal sustainability, because it defines “fiscal situation” and “fiscal sustainability” in ways that “take off the table” any possibility of achieving that. Instead, its recommendations will focus on constraining deficits, debts, and public debt-to-GDP ratios regardless of the effects or impact that these constraints will have on pubic purpose. Managing Federal fiscal activity with the purpose of constraining these indicators to some pre-determined levels, condemns the economy to slow growth, and working people and the middle class to a bleak future of low wages and salaries, while a very small elite in the financial industry and international business spheres get very, very wealthy by using excessive unemployment and slow growth to keep wages low and profits high in their own spheres of financial manipulation and international trade.
Such management is the height of fiscal irresponsibility. It is not reform. it is a return to Hooverism in the guise of neo-liberalism, and it creates a paradox of reflexive and recursive economic failure, a downward cycle, that will even thwart achieving “fiscal sustainability,” in its own misconceived terms. This will happen because substituting fiscal sustainability conceived in terms of constraining these indicators, will result in falling economic activity, and in further decline in tax revenues, and further increases in expenses caused by still existing automatic stabilizers. So the attempts to constrain “good deficits” caused by Government spending devoted to valuable public purposes will only lead to even larger deficits and to greater economic problems. The attempt to seek this kind of “fiscal sustainability” is exactly the wrong thing to do for our country, its future, and the future of our children and grandchildren.
The theoreticians, mavens, messengers, and prophets of Government austerity, including this President of the United States, talk about the need for toughness, realism, and sacrifice for the good of the country, while they are by-and-large very well-off people who will make very few, if any material sacrifices, to achieve their version of “fiscal sustainability.” Sacrifice is fine for other people, but they are entitled to avoid it, while they feel just a touch morally superior to the rest of us who are resisting the need for accepting the inevitable. This is all well and good, except for the fact that there is no inevitability about the retreat from economic and social progress they are calling for. There is only their own stubborn adherence to an economic world view that was dated in FDR's time, and that became completely irrelevant when Richard Nixon ended the gold standard in the early 1970s. The adherence of these “realists” to an ideology that has been illusion for the past 40 years, is one of the best demonstrations one can imagine that those who most trumpet their realism are often people who are most caught up in fantasy and who are most strongly committed to shaping the real world according to their fantasies. We must not let them do that at our expense. We must stop them from destroying our economy and our futures because they are incapable of understanding that a Government, sovereign in its own currency, is not at all like a family, or any other entity that is operationally limited in its ability to spend for its purposes. When the private sector suffers a collapse in demand, and when its desire to save increases, then the Government must take up the slack in aggregate demand that is created. For the Government to behave in any other way is to betray its public purpose.