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What If the US Didn't Join the Race to the Bottom?

letsgetitdone's picture

Deficit terrorism has lately turned to deficit hysteria. With Germany leading the way, most Eurozone countries appear ready to implement austerity programs. The United Kingdom, under its new Conservative/Liberal overlords, appears to be taken with austerity too. And Canada, Australia, New Zealand and Japan have all jumped on the bandwagon. But it doesn't look like this bandwagon will include Brazil and Argentina. They've had their fill of austerity, and the prescriptions of the IMF, and they're not taking on neo-liberal ideology again any time soon. The question is what should the United States do?

I've already written about the consequences of joining the race to the bottom (for example, here and here) as the Peterson Foundation, The National Commission on Fiscal Responsibility and Reform and perhaps the President, seem to want us to do. They promise not to be very pretty, and, in particular, to deepen the recession and perhaps result in a Great Depression II. But what happens if we say no to that, and decide instead to implement a Federal Jobs Guarantee (FJG) Program, a payroll tax holiday, and a Grant to the States of $500 per person to ease their financial difficulties and save jobs?

The domestic effects of that would be to produce full employment in the short run, end the recession, and enable more people to meet their mortgage payments, so that there would be fewer toxic real estate assets. In the longer run, people would move from the FJG program, into the non-Government sector, reducing the size of the FJG program. Here's my view of the global consequences of such an expansion in the context of a world gone mad with austerity.

First, of course, the international money boys and the globalists would be screaming about our fiscal irresponsibility in putting the interests of the American Middle Class, poor people, and older people ahead of their perceived financial interests. They will engage in an orgy of forecasts of doom and assertions that the international credit agencies will downgrade the US's debt rating and that this will result in much higher interest rates for US debt instruments. If the US is threatened with such a downgrade, it can and should respond with a statement indicating that it has no solvency risk since it can always meet its fiscal obligations, and that if such a downgrade takes place it will immediately stop issuing debt instruments in coordination with its spending. Since, if the US does actually goes through with this it would drive short-term interest rates down to near zero, this will have the effect of showing the financial markets that they don't control US interest rates, but that the US can easily do so given its authority to spend without either taxing or borrowing.

Second, of course, whether or not the above scenario occurs, those nations that have embraced austerity, will find themselves with a great need to export goods to prevent their economies from totally collapsing. Their desire to export to the US market, which will have been once more invigorated with consumer demand by full employment programs and other Government spending to end the recession, will leave them with little choice but to accept USD in return for their goods, and to price those goods sufficiently low to prevent the rise of US competitors.

The resulting imports are real wealth for Americans, and with most nations trying to export, but not to import, US citizens will have a great opportunity to acquire that wealth in return for nothing more than dollar credits. Of course, we won't be able to export much ourselves initially because austerity in other nations will lower demand, so our balance of payments will go increasingly negative. But this will only increase the holdings of foreign citizens in USD, until a breaking point is reached. That breaking point would come sooner if we stopped issuing debt instruments when Government spends, because other than leaving their currency in Federal Reserve accounts and earning zero interest, holders of USD will have only one other choice, namely buying American goods and services.

Third, the initial growth of exports to the United States, will also have the effect of draining off some of the USD the Government created to bring the domestic economy to full employment and use of domestic productive capacity. When that happens the Government will have more room to spend to maintain full employment without causing inflation. In addition, just as the US credit expansion since the 1990s has driven the world economy in the past, the US Government spending expansion can drive it in the future, until other nations begin to understand that austerity in Government spending in their own nations isn't the driver of prosperity, and that if they want their own citizens to begin to acquire real wealth they have to stop sending it to the United States in return for mere electronic credits, and begin to emulate the US in resorting to functional finance to ensure that their own populations are fully employed.

Fourth, it's unlikely, that there will be any inflationary consequences if we choose full employment rather than austerity. Why should there be? In the beginning, the gap in employment will be filled by Federal jobs that perform services of various kinds and produce various intangibles at the minimum wage. As time goes by and the privates sector wakes up and draws people out of the FJG program and into private sector jobs, increased wages and profits will produce greater demand, but much of that will be bled off by imports, so that expansion of demand for US private sector productive capacity will be gradual and also will be in new industries where imports are not dominant. In this kind of expansion there won't be any demand pull inflation. Of course, there could still be sudden price shocks coming from artificial scarcities caused by market manipulations in certain commodities like oil. But the economy will be able to adjust to these without accelerating inflation.

Fifth, and not least at all, if the US chooses this course, we would, destroy, for good, the myth that austerity accomplishes any good in a recession or depression. It's important to do this because austerity hurts people, and the myth that justifies it ruins lives. This myth has no basis in fact, and seems to have a certain appeal only for those who have a taste for hair shirts and flagellation experienced by others, while they themselves experience few or no material sacrifices themselves, and may even benefit from austerity because the measures accompanying it give them a chance to profit.

So, apart from the other benefits of choosing to end the recession through fiscal expansion for ourselves, we could do great good for other nations as well. For all they would have to do would be observe our example, and see that it worked, and then the curse of resurgent Hooverism, also known today as deficit hawkism, terrorism, errorism, and sometimes, even hysteria, would be gone forever. The march toward plutocracy we have seen for the past thirty-five years would be ended. And, finally, the prospects for real democracy grounded in a greater measure of economic and social equality would be enhanced.

(Cross-posted at Fiscal Sustainability and All Life Is Problem Solving)

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nihil obstet's picture
Submitted by nihil obstet on

I absolutely believe the U.S. should provide guaranteed jobs, along with the rest of FDR's second bill of rights. I tend, however, not to see expanded government action as merely an emergency tide-over to and jumpstart for the private sector. I'm OK with your arguments first through third. But then some assumptions come in that I wish the argument would consider more.

Wealth is created by the production of goods and services. Capitalists say that privately owned production creates wealth and government owned production drains wealth. Then capitalism blows up regularly and capitalists say the system demands that government owned dollars pour into their pockets. Let's stop that bullshit. Government controlled production of goods and services creates wealth just as much as the private sector, and more equitably at that. The government should hire people to do productive jobs at a decent wage, not produce various intangibles at minimum wage. The government should provide model employment: decent wage, good working hours and conditions, pensions, and the like. Where the private sector can do better, it should. But if it can't do better, why should we privilege capital over the general welfare? I don't think we should.

The government can also decide what is good and productive. We've known for a generation that dependence on oil is bad (remember how Carter tried to do something about it?). We know that for-profit medical firms kill people. We see the benefits of government programs, like the development of the internet and social security. So I'm not real into, gosh golly almighty government can fiddle with little minimum wage stuff but we want private industry to take back over as fast as possible. I think if we talk like that, private capital will be able to gut improvements to our society and economy.

On the foreign trade deficit -- in addition to American goods and services, foreigners can buy American assets with dollars. I'd need to know what the consequences of that would be. Would we need more regulation to insure that what are in effect absentee landlords cannot act to the detriment of our communities? That never seems to work out very well for the locals.

In short, you're convincing on the economics, but I think we have a chance to change the economics more in our favor.

CMike's picture
Submitted by CMike on

Nihil Obstet says:

Wealth is created by the production of goods and services...

And, if I may slip in a few edits:

The government can also [have a role in deciding] what is good and productive.

[Beware...of] the foreign trade deficit -- in addition to American goods and services, foreigners can buy [income producing] American assets with dollars.

As to the services, we have to take a look at the way we measure GDP. Regardless of entrenched neo-liberal academic assumptions, I sure don't buy it that dollar denominated growth in retail services, hospitality services, financial services, and, say, public relations are as useful to the future of America and the American economy as growth in the manufacturing sector or community projects that create non-commercial recreation opportunities or the development of energy alternatives and efficiencies.

letsgetitdone's picture
Submitted by letsgetitdone on

I don't buy that either. And I agree that we need to reconstruct our GDP measure as well many other economic measures we routinely use.

letsgetitdone's picture
Submitted by letsgetitdone on

I like your reply very much and I also see no reason to privilege private financial capital over Government financial capital, and I agree with you that the notion that Government can't produce value is a filthy and transparent lie refuted by the facts.

Having said that, however, I think we're talking about different things. Warren's program is about ending unemployment in a way that doesn't compete with the private sector, but gets the recession over with fast. Warren is talking about a period of 90 days.

For the long term, by all means let's have proposals that make Government jobs that are intended to be permanent and that create value in the economy. Nothing would make me happier than to have the Department of Energy expand and create the infrastructure needed to support solar and wind power within a few years. I don't want to wait for the private sector to do that. We need it done now.

Next, note that the FJG jobs do include a full benefits package including, in some variations, free Medicare Benefits, vacations, holidays, and other standard components of a good benefits package. They are real jobs, and many of those jobs may involve more than intangibles. They would be service jobs, but that might include the kinds of things done during the New Deal, which even though they were service jobs produced very tangible outcomes.

On trade deficits, I wasn't suggesting a laissez-faire attitude with respect to trade. instead, I envision us implementing an industrial policy where we don't import in certain sectors and do what is needed to have very strong domestic industries. But I do see the desire of other nations to export to us as something we can use to allocate our people resources away from industries that are about marginal value and towards the development of industries that will be important for the future.

As for the problem that foreigners will be accumulating so many dollars that they will be able to buy valuable US assets, I'm for regulating what they buy so they can't buy controlling interests in industries that are vital for the development of the United States. They'll still be able to buy plenty of goods and services, so I don't think that'll be much of a problem. But if its, they'll stop exporting to us and create their own domestic demand. frankly, if we institute policies like this, I don't think it will be too many years before other nations emulate us in building internal demand and they'll be scaling down their exports so that their problem of sending us real wealth in return for electronic bits and bytes will go away.


CMike's picture
Submitted by CMike on

Joe nearly says:

[T]he US will stop issuing debt instruments [dollar for dollar] in coordination with its [deficit] spending....[T]he US can easily do so given its authority to spend without either taxing or borrowing.

In corporate-ese: Let's be pro-active not reactive.

letsgetitdone's picture
Submitted by letsgetitdone on

actually. Not entirely sure why I put it the other way. Probably just to visualize getting threatened by the rating agencies and then having the fun of kicking their butts.