An Open Letter to President Obama
Dear President Obama:
I'm not entirely sure how to put this, so I guess I'll just come right out and say it. During the last presidential campaign and in the context of John McCain's admission that he didn't understand economics very well, you let us know that you thought you had a very good understanding of it. Well, Mr. President, I'm here to let you know that you don't understand it, don't know what you're doing, and are now preparing to do exactly the wrong things. And, I've got lots of evidence for thinking that. What's my evidence?
To begin with, you've been President for close to a year and a half now, and your bailing out of the big banks, toleration of big bonuses in the finance industry, reluctant pursuit of new financial regulatory legislation that will, in fact, regulate, and an economic stimulus package, in combination, have only, at best, stopped the march toward economic deflation temporarily. There appears to be no sustained recovery underway, little new economic activity on Main Street, little prospect for achieving full employment anytime soon, and every prospect that close to 20% of our labor force will have blighted working and economic lives for some years to come.
This last is especially likely when one realizes that 75% of the stimulus has now been spent and that you and other members of your Administration have not only been giving aid and comfort to the deficit terrorists in Washington in statements giving credence to entirely unwarranted concerns over deficits, but have been actively enabling them with your deficit terrorist-stacked National Commission on Fiscal Responsibility and Reform, and with the close relations your Administration has established with the epicenter of deficit terrorism, the Peter G. Peterson Foundation.
In short, your ideas and efforts to transcend the economic crisis so far spell MEDIOCRITY, and your evident intention to now emphasize austerity and fear of inflation in the face of historically unequaled post-war levels of unemployment and under-employment spells FAIL, and the real probability of a double-dip recession even before the November elections, and thereafter in the aftermath of likely Republican victory, two years of disruptive investigations, and a failed one-tern presidency.
The reason why this is happening, Mr. President, is a combination of bad economic ideas about fiscal sustainability and responsibility, solvency, the implications of Government spending for future generations, inflation and hyperinflation, and policies to achieve fiscal sustainability
Bad ideas about the meaning of fiscal sustainability and responsibility
Based on the mission statement of your National Commission on Fiscal Responsibility and Reform you evidently believe that fiscal responsibility is about balancing “. . . the budget, excluding interest payments on the debt by 2015,” and stabilizing “. . . the debt-to-GDP ratio at an acceptable level once the economy recovers.” And you also seem to have in mind moving toward what you think of as “fiscal sustainability” through “. . . changes to address the growth of entitlement spending and the gap between the projected revenues and expenditures of the Federal Government.”
The problem with this is you can't possibly know what fiscal sustainability and responsibility are about unless you begin to think of them in relation to a clear idea of what they might mean. First, begin with “fiscal.” It pertains to Government spending, and the “fiscal situation” at any point is Government spending and its impact on society 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 negative consequences and completely avoid those consequences that are entirely unacceptable? Second, what about “fiscal sustainability”? Since sustainability is about the capability of an activity to continue on into the future, “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. And “fiscal responsibility” pertains to Government spending of a particular kind. What kind? Clearly Government spending that achieves public purposes which also maintains or increases fiscal sustainability.
So, Mr. President, just what is the direct connection between balancing “. . . the budget, excluding interest payments on the debt by 2015,” and public purposes. How does this goal help us to achieve full employment, or to reduce inequality. Or to avoid further recessions or even depressions? Why is it “fiscally responsible” to pursue policies that will balance the Federal Budget? What public purposes will be achieved by such a policy? How will such a policy maintain or increase (i.e. sustain) the capability of the Federal Government to continue to spend on public purposes?
The answers to these questions, Mr. President are not obvious to me. On the contrary, I see attempts to follow a balance the budget policy as likely to reduce economic activity substantially over the next 4 years, to leave much of the economy unemployed through this period, and to result in the destruction of a portion of our productive capacity. With less productive capacity, there is also less scope for Government spending to fuel aggregate demand without encountering the spending limit beyond which the Government can't go without causing inflation. Mr. President, inflation is caused by demand outpacing productive capacity. If you follow an austerity policy that leaves much of our productive capacity idle for four years or more, the result will be the deterioration of that capacity, and the loss of real, not just financial capital. If Government then attempts to ramp up spending in order to increase aggregate demand, the fiscal room to do so will be far less. And while the capacity to spend will unaffected, because there is never a danger of insolvency in a country whose Government is sovereign in its own currency, the capacity to both spend for public purposes and to avoid inflation, which is certainly one of our public purposes, will be reduced. So, in brief an austerity policy will reduce, not increase, fiscal sustainability, because Government will run up against the inflation barrier sooner. In addition, austerity in the face of bad economic times and high unemployment is fiscally irresponsible, since it not only reduces fiscal sustainability, but also will prevent us from achieving full employment, and many other public purposes such as educational reform, developing alternative energy capacities, achieving Medicare for All, renewing our infrastructure, protecting our environment, and many other public purposes that will cost money to accomplish.
The mission of your National Commission also emphasizes stabilizing “. . . the debt-to-GDP ratio at an acceptable level once the economy recovers,” through addressing the growth of entitlement spending. But, once again, what does a particular level of the public debt-to-GDP ratio have to do with “fiscal sustainability” or “fiscal responsibility,” and what exactly is an “acceptable” level of this ratio. How is any level of this ratio related to public purposes? Why does the ratio have to “stabilized” at all? And why does it have to be stabilized by “addressing the growth of entitlement spending”? Once again, insofar as our attempts to stabilize the debt-to-GDP ratio impact negatively on our attempts to achieve full recovery and full employment, they are opposed to important public purposes, so why should we attempt to achieve stabilizing the ratio. Is doing that important to public purposes in itself. I don't see any connection, and I don't think you can make that case Mr. President. You certainly haven't made it so far. And until you do, you won't be able to persuade people that you're not acting in opposition to fiscal sustainability and fiscal responsibility on behalf of deficit terrorism and Hooverism, and in opposition to the interests of the American people.
Bad ideas about spending constraints on Governments sovereign in their own currency
In addition, to the mistakes in your ideas on fiscal sustainability and fiscal responsibility, Mr. President, you also seem to have ideas about spending constraints on the United States Government, and other Governments sovereign in their own currency, that do not exist. On a number of occasions now, you have told the American people that the Government is “running out of money,” it needs to fulfill its obligations. Surely, Mr. President, you jest. Hasn't your Secretary of the Treasury, or Mr, Bernanke told you yet, that the Government of the United States, can always cause non-Government accounts at the Federal Reserve Bank to be marked up by any amount needed to meet obligations? Governments sovereign in their own currency are like scorekeepers at games. They neither have nor don't have money. Instead, they have the power to mark up or mark down non-Government accounts (or Government accounts), such as Social Security accounts or that matter). This power is not dependent on anything else. It is not dependent on the international markets. It is not dependent on foreign Governments. It is not dependent on commodity backing of their currency. It is a matter of fiat, which is why such currencies are called fiat currencies.
Mr. President, the United States of America can't go broke. It has no solvency risk. It can always meet its obligations. It doesn't really fund its expenditures with tax money, or borrowing, and it never needs to do so in order to “fund”, even though it does tax and also borrow money to regulate inflation and establish interest rates. This doesn't mean that the Government can spend without limit. It can spend so much that it creates inflation or the risk of it. But this is not a solvency issue. It is not running out of money. So, please don't tell us any more that we are running out of money or respond to policy proposals by asking “How are you gonna pay for it?” Because I know, and so should you, that we can always pay for it. The real issue here is what the impact will be if we do pay for it, whatever “it” happens to be.
Bad ideas about deficits and debt numbers and our children and grandchildren
In many of your statements, Mr. President, you have echoed the view of the deficit terrorists that unless we bring our deficit and debt numbers under control and reduce Government spending on job creation and the recovery, and other very necessary things, we will be bequeath to our children and grandchildren huge debts that they will personally have to repay. Mr. President, that view is ridiculous, and if you believe it, then I have a very big bridge to sell you.
In fiat money systems, like ours, when Government expenditures exceed revenues, a deficit doesn’t have to be reduced by increased tax revenues, or other transactional income, nor does it have to be financed by borrowing. Instead, since money isn’t limited by its relationship to a material commodity, the money necessary to make Government expenditures can just be created at will by the Government. It need not be the product of either increased taxes or debt financing, as it must be in commodity-backed systems.
Whatever Government debts we leave to our children also need not be repaid by them through either further borrowing, or increased taxation. These debts, just like our own, can be managed by our children and grandchildren by creating whatever money they need to pay their obligations when they fall due. Of course, if they want to reduce their well-being, they can raise taxes or borrow money to handle those deficits. But what they do to pay Government obligations, and the precise size of the burden they choose to assume is up to them. It has nothing to do with us, so long as they are wise enough to retain our fiat money system.
As Warren Mosler says: “our children get to consume whatever they can produce.” Unless they choose not to produce it, because they raise taxes and cripple economic productivity, in a vain and misguided attempt to pay down a fiat debt with money they might otherwise use for investment. In short, Mr. President, and contrary to what Peter G. Petersen may have told you, there is no debt burden for our children and grandchildren. That there is, is a myth, a fairy tale, “a deadly innocent fraud, as Mosler says. It is not reality, and we ought not to make it reality by believing it and acting accordingly.
Bad ideas about inflation
Mr. President, your reluctance to incur further deficits in the service of fixing the economy and solving other problems, suggests that you believe that inflation is something we have to be concerned about now; even with close to 20% of our labor force either under- or unemployed, and a substantial risk of a double-dip recession given the failure of the private sector to begin to pick up the spending slack, and the plans of many other nations to implement austerity programs.
Under conditions of a healthy economy and full employment, deficit spending can create “demand pull” inflation by creating too much aggregate demand. However, we have not seen a case of that kind of inflation in modern times in a nation like the United States, sovereign in its own currency with a fiat money system. The possibility of such inflation in a situation like the one we find ourselves in, is purely theoretical. And the theory that demand pull inflation is a serious risk is refuted by the history, or lack of it, of inflation in such systems. It is refuted by the history of the 1990s in this country. It is refuted by the history of Australia since the 1970s where the unemployment rate has been considerably lower than here and social safety net spending has been much higher. It is refuted by the absence of a single modern case of this kind of inflation.
If Government spending created full employment, the price of some commodities might go up, but, on the other hand, the housing market might recover some of what it has lost, and the lives of 30 million under- and unemployed Americans would be greatly improved. So, Mr. President, are you really intending to tell us that not increasing the prices of gold and silver is more important than creating full employment for those 30 million?
Don't you understand that our real wealth produced at any point is equal to our domestic production, plus what we import, minus what we export? When you make cutting Government spending, more important than increased spending to enable full employment, you are acting against both increasing domestic production and increasing imports. So, you're acting to reduce our creating more real wealth. Why? Because you believe in a theory about demand pull inflation that has been refuted again and again in modern times? Give us a break. Don't make a false economic theory more important than our lives and the futures of our children.
Bad ideas about policy proposals for fiscal sustainability
Mr. President, your ideas about fiscal sustainability seem to be restricted to wearing green eye shades, cutting Federal spending, and in this way both reducing deficits and the public debt-to-GDP ratio. I've already written about why that's not increasing fiscal sustainability, and why policy proposals advocating reducing Government spending are bad ones. I am not saying that reducing spending on programs that are not producing value or that are having negative impacts isn't always a good idea. Cutting such spending gives Government more room to spend on things actually produce value. We need a lot more of that kind of cutting, and perhaps I'll write another letter, about all the things that could be cut, whose elimination would improve our overall situation. But what we also need is much greater Federal spending on useful measures that will create jobs and add to savings in the non-Government sector.
The most important of these things is a Federal Jobs Guarantee (FJG) program for all Americans who want a job. Such an FJG should be at a wage of $8.00 per hour in counties with the lowest cost of living in America and should be cost-adjusted upwards in proportion to cost of living variations from the lowest cost of living counties. An FJG job would carry normal fringe benefits including vacation time, holidays, and most importantly full eligibility for employees in the Medicare program. Such an FJG program would eliminate unemployment, and at the same time increase the number of Americans with access to health care. Since the wage paid in the FJG would be the minimum wage, plus cost of living adjustments, the program would provide a built-in protection against wage-driven price increases. It would also provide an immediate boost in consumer demand. As the FJG program employed more and more people, and business responded to increased consumption, with increased activity and investment, it would end the recession, and also end most of the poverty we have in America, and it would do so quickly, over a period of months and not years, and would have cost the Government roughly $500 Billion, a fraction of the money you've spent on various top-down approaches to stimulating the economy.
In fact, Mr. President, had you established an FJG program, when you came into office in the Winter or Spring of 2009, it is likely that the Great Recession would be history right now, and that the private sector would have begun growing again. And with that growth we would also have seen a shrinking in the FJG program since, as the private sector began to hire again, it would have hired FJG employees, at higher wages than the minimum, to staff up. This points up one of the great features in the FJG program. It's an automatic stabilizer, a creative way to expand the safety net. When times are bad, it expands, and with it so do Government deficits. But as it boosts demand, and begins to call forth renewed private sector activity and investment, it shrinks, and with it so do Government deficits, until full employment is reached.
Even though the FJG would by itself solve the recession problem, since it would take some time to work, it's wise to do some things that would have immediate effects. Warren Mosler, the Independent Party candidate for the US Senate, in addition to suggesting the FJG, also favors a Federal Payroll Tax Holiday to immediately boost demand and a $500 per person grant to every State. With the new funds, the States could avoid cuts in employment and key services and could avoid the impending fall in aggregate demand as they implement planned sizable cuts in their payrolls.
Some Final Words
Mr. President, this has been a long open letter, and I'll close it with some short statements. First, you will hurt, not help fiscal sustainability by pursuing austerity in Federal spending. Second, austerity in these times is not fiscally responsible. It is fiscally irresponsible. Third, real fiscal responsibility means spending what Government needs to spend to fulfill public purposes, and spending in such a way that spending can continue in the future, until public purposes are achieved. There are all kinds of public purposes going begging right now, and you're proposing that achieving those has to be subjected to austerity constraints because we are running out of money. Fourth, I can't imagine a more fiscally irresponsible course than the one you appear to be moving towards now. And that fiscally irresponsible course will, make no mistake about it, also hurt fiscal sustainability. While it won't destroy our solvency, it will destroy part of our productive capacity, and this will give us less room for government spending in the future to both heal our economic problems and avoid inflation while doing it.
So, please Mr. President, don't do austerity. Don't assume you know all about economics. Don't believe we have solvency problems when we have none. Don't believe we have to worry about inflation, when there is not the slightest chance of it anytime soon. Look at what you've done so far and evaluate it honestly. No excuses, please. It can't be right, because it has not worked. Don't be fiscally irresponsible and join the other global elites in following an ignorant and mistaken economic policy, likely to drive the world into a double-dip recession, or perhaps even a Great Depression 2.0. Instead, change course right now! Act like our President, an American President. Give us what we need, not what they need. Be loyal to us, not to them. And end this recession before it ruins any more American lives.