The Regressive Austerity Arguments of the Washington Post

Austerity is where governments refuse to pursue policies that boost consumer demand. Austerity really has hurt a lot of people and there’s even evidence that the poverty it caused has ruined millions of lives.

Last week the Washington Post ran a column by Maya MacGuineas, the president of the Committee for a Responsible Federal Budget, one of the many pro-austerity organizations that received generous funding from the late Peter Peterson. The immediate target of the column was the standoff over the debt ceiling, but the usual complaints about debt and deficits were right up front in the first two paragraphs.

“At the same time, the federal debt as a share of the economy is the highest it has ever been other than just after World War II. ….”

“So our plan is to borrow a jaw-dropping roughly $900 billion in each of those years — much of it from foreign countries — without a strategy or even an acknowledgment of the choices being made because no one wants to be held accountable.”

This passes for wisdom at the Washington Post, but it is actually dangerously wrong-headed thinking that rich people (like the owner of the Washington Post) use their power to endlessly barrage the public with.

The basic story of the twelve years since the collapse of the housing bubble is that the U.S. economy has suffered from a lack of demand. We need actors in the economy to spend more money. The lack of spending over this period has cost us trillions of dollars in lost output.

This should not just be an abstraction. Millions of people who wanted jobs in the decade from 2008 to 2018 did not have them because the Washington Post and its clique of “responsible” budget types joined in calls for austerity. This meant millions of families took a whack to their income, throwing some into poverty, leading many to lose houses, and some to become homeless.

At this point, the evidence from the harm from austerity in the United States (it’s worse in Europe) is overwhelming, but just like the Pravda in the days of the Soviet Union, we never see the Washington Post, or most other major news outlets, acknowledge the horrible cost of unnecessary austerity. We just get more of the same, as though the paper is hoping its readers will simply ignore the damage done by austerity.

And it is not just an occasion column from a Peter Peterson funded group, the Post’s regular economic columnist, Robert Samuelson, routinely complains about budget deficits, as do the Post editorial writers. We get the same story in the news section as well, for example, this piece last week telling us about the need to “fix” the budget. The Post is effectively implying that a lower budget deficit, which results in lower output and higher unemployment is “fixed.”

If the Post cared about the logic of its argument, instead of just repeating platitudes about the evils of budget deficits, it should quickly recognize that its push for austerity makes no economic sense. The argument of the evils of a budget deficit is that it is supposed to lead to high interest rates and crowd out investment.

That leaves the economy poorer in the future, since less investment leads to less productivity growth, so the economy will be able to produce fewer goods and services in future years. (The implicit assumption is that the economy is near its full employment level of output so that efforts by the Fed to keep interest rates down by printing money would lead to inflation.)

The nice part of this story is that there is a clear prediction which we can examine; high budget deficits lead to high interest rates. Or, if the Fed is asleep on the job, high budget deficits will lead to high inflation.

The interest rate on 10-year Treasury bonds at the end of last week was just over 2.0 percent. That is incredibly low by historic standards and far lower than the rates of over 5.0 percent that we saw when the government was running a surplus in the late 1990s. The inflation rate is hovering near 2.0 percent and has actually been trending slightly downward in recent months. So where is the bad story of the budget deficit?

In the classic deficit crowding out investment story, if we cut the budget deficit, investment rises to replace any lost demand associated with lower government spending or higher taxes. We can also see some increased consumption, mostly due to mortgage refinancing, and some increase in net exports due to a lower valued dollar.

But what area of spending does the Washington Post and its gang of deficit hawks think will fill the gap if it could find politicians willing to carry through the austerity it continually demands? It shouldn’t be too much to ask a newspaper that endlessly harps on the need for lower deficits to have a remotely coherent story on how lower deficits could help the economy.

There is also the burden on our children story that the Peter Peterson gang and the Post likes to harangue readers with. Our children will inherit this horrible $20 trillion debt that they will have to pay off over their lifetimes.

This story makes even less sense than the crowding out story. The burden of the debt is measured by the interest paid to bondholders, which is actually at a historically low level relative to GDP. It’s around 1.5 percent, after we subtract the interest rebated by the Fed to the Treasury. It had been over 3.0 percent of GDP in the early and mid-1990s.

And, even this is not a generational burden. It is a payment within generations from taxpayers as a whole to the people who own bonds, who are disproportionately wealthy. Much of this money is recaptured with progressive income taxes. More could be captured with more progressive taxes.

But this is actually the less important issue with this sort of accounting. Direct government spending is only one way the government pays for things. It also provides patent and copyright monopolies to provide incentives for innovation and creative work. These are alternatives to direct government payments.

To be specific, if the government wants Pfizer to do research developing new drugs, it can pay the company $5-$10 billion a year to do research developing new drugs. Alternatively, it can tell Pfizer that it will give it a patent monopoly on the drugs its develops and arrest anyone who tries to compete with it.

Generally, the government takes the latter route with innovation. This can lead to a situation where Pfizer is charging prices that are tens of billions of dollars above the free market price. This monopoly price is equivalent to a privately imposed tax that the government has authorized the company to collect.

Anyone seriously interested in calculating the future burdens created by the government would have to include the rents from patent and copyright monopolies, which run into the hundreds of billions of dollars annually, and possibly more than $1 trillion. (They are close to $400 billion with prescription drugs alone.) The fact that the deficit hawks never mention the cost of patent and copyright monopolies, shows their lack of seriousness. They are pushing propaganda, not serious analysis.

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Burden from Pharmaceutical Industry Drug Patent Monopolies Exceeds Interest Payments on National Debt

The pharmaceutical industry must find it convenient that the financial burden it imposes in general on American society is mentioned a lot less than the much more minor burden imposed by interest payments on the national debt.

The deficit hawks have also never raised any concerns about the burdens created by government-granted patent and copyright monopolies. This is bizarre since these monopolies are an alternative mechanism to direct funding. The government could directly pay for research on drugs, software, and other items, paying for it through taxing or borrowing, or it can tell private companies to do the research and then give them monopolies to allow them to recover their costs.

The deficit hawks hyperventilate endlessly about the former route of paying for things, but completely ignore the latter, even though it poses a much larger burden. In the case of prescription drugs alone, the burden is more than $370 billion a year (we pay more than $450 billion for drugs that would likely cost less than $80 billion in a free market). This sum is just under 2.0 percent of GDP and more than twice the interest burden net of money rebated by the Fed. The total cost from these monopolies, including medical equipment, chemicals, software, and other items would likely be more than three times the cost of drug patents.

Anyone who is seriously concerned about the burden of government debt on future generations must also be concerned about the burden posed by patent and copyright monopolies, if they are consistent. Of course, if their goal is simply to cut Social Security, Medicare, and other social programs then it is understandable they would not want to discuss patent and copyright monopolies.

I’m not linking to the full article, but what’s not referred to is that there’s a different process possible to incentivize pharmaceutical innovation than using patent monopolies and other unjust legal protections for the industry. The pharmaceutical industry’s trade group, PhRMA, says that pharma corporations spend $70 billion a year on research and development. This is also in light of the industry spending more on stock buybacks that mostly benefit the upper class than it spends on R&D.

So the U.S. spends a few hundred billion dollars more a year than it has to on prescription drugs, and instead of giving that taxpayer-directed money away to be misused by the pharma industry, a lesser amount could be spent on direct funding for the NIH (say $90 billion a year) — with much better research outcomes and lower prescription costs for consumers. This isn’t the easiest concept to understand, but it’s valuable if you’re able to see it, and I linked to where I wrote about it in more depth as well.

U.S. Consumer Debt at Record Levels

In around the last decade in the U.S., there has been a particular theft of wages into a conversion of corporate profits. From about 1977 to 2007, the main story of income inequality there was upwards redistribution (theft) of income directly to higher-income professions. (See chapter 2 of the book Rigged for further data.) If wages hadn’t been largely stagnant over the last four decades (among other policy failures) for many workers, there wouldn’t be consumer debt of this magnitude. This is because stagnant wages and rising costs (such as U.S. university) force many to borrow more than they’d otherwise have to with higher incomes.

Also, $193 billion is a lot of money, and the reporting would be better if it and other figures were expressed in terms that most people could understand more easily. An increase of household debt by $193 billion is an increase of about $1529 per U.S. household.

Total household debt rose by $193 billion to an all-time high of $13.15 trillion at year-end 2017 from the previous quarter, according to the Federal Reserve Bank of New York’s Center for Microeconomic Data report released Tuesday.

Mortgage debt balances rose the most in the December quarter rising by $139 billion to $8.88 trillion from the previous quarter. Credit card debt had the second largest increase of $26 billion to a total of $834 billion.

The report said it was fifth consecutive year of annual household debt growth with increases in the mortgage, student, auto and credit card categories.

Report Finds Significant Benefits to Canceling All Student Loan Debt

Canceling student debt is a proposal worth supporting, and it isn’t even radical when it’s considered that the student debt shouldn’t have been allowed to accrue anywhere near the depraved level of $1.4 trillion. It’s also not radical when it’s considered that there is enormous U.S. welfare granted to the rich and to major corporations, much more welfare than the amount that goes to poor and middle-income people.

report from a group of economists at the Levy Economics Institute of Bard College finds that there would be huge benefits if the federal government were to forgive all existing student debt. This would ripple out from young people struggling to pay off massive college loans to the economy as a whole, according to the report.

“The idea of canceling student debt is not just some crazy idea out of left field, but is actually something that could be done, and done in a way that has a moderately positive economic impact,” Marshall Steinbaum, a fellow and research director at the Roosevelt Institute and a coauthor of the report said in an interview.

“The way this and similar polices are often discussed is in a mode of ‘well can we really afford this?’ and the answer is definitely yes,” he added.

The report finds that canceling all student debt would likely lead to an increase in U.S. GDP between $861 billion and $1,083 billion over the course of 10 years. It would also lead to an increase of 1.18 to 1.55 million additional new jobs over the same period — that’s about 50% to 70% more jobs per year compared to an average of recent years.

This new analysis comes at a time when more than 44 million American have a collective $1.3 trillion in student debt — higher than both auto U.S. debt and credit card debt.

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The report also finds that total loan forgiveness would cost the U.S. government approximately $1.4 trillion over the course of 10 years — a number that is almost exactly the same as what the CBO recently projected the Republican’s new tax bill would cost.

But researchers said that the positive impacts of canceling student debt would likely be more broadly felt than those of the tax bill.

“[The GOP tax bill] is going to add 1.5 trillion to deficits over the next 10 years,” Stephanie Kelton, Stony Brook University professor of public policy and economics, said in an interview. Kelton is one of the authors of the report, and recently worked as the chief economists for the Democratic minority on the Senate budget committee.

“What else could we do? Canceling student loan debt was just about perfect because it comes in at about 1.4 trillion and it’s almost six of one, half a dozen of the other in terms of the price tag,” she said.

Kelton emphasized that U.S. government shouldn’t be thinking of how it can spend money to help Americans as a zero sum game. But at the same time, if lawmakers can spend money to provide massive tax cuts for the wealthy and corporations, it can also afford to spend nearly the same amount to cancel student debt and grow the economy simultaneously.

Government Budget Deficits as Overblown Concerns

Government budget deficits can actually be beneficial if the spending that results in them is in the public interest. This is contrasted with large trade deficits, however, which in wealthy countries have a negative impact on demand in the economy. Both of these truths are important to know for public policy debates.

There are three ways in which deficits or debt can be seen as a problem. First, large deficits can overheat the economy leading to high interest rates or high inflation. Second, a large debt can impose a significant interest burden on the government and implicitly on future taxpayers. The third way is that excessive indebtedness can cause a country to become uncreditworthy, making it difficult or impossible to finance the government. None of these issues plausibly apply to the United States at present.

The first point is the classic story in which large amounts of government borrowing pulls capital away from the private sector. This would be bad news because businesses and state and local governments would have to pay higher interest rates, which would reduce their investment. With less investment, we would see less productivity growth, which would mean that we would be poorer in the future.

There are times when excessive deficits may crowd out investment, but this is clearly not one of them. Interest rates are extraordinarily low. In fact, they are far lower than in the years at the end 1990s when we were running surpluses.

There also is no evidence that excessive spending has led to inflation. The Federal Reserve Board has been struggling for most of the last decade to raise an inflation rate it views as too low.

The second issue is that the debt service — the amount of interest that we pay on the debt each year — will impose a large burden requiring either higher taxes or cuts in other spending or some combination. There also is no basis for this concern at present.

The interest that the government pays on its debt each year comes to around 1.0 percent of GDP, after we subtract the amount that was paid to the Federal Reserve Board and then refunded back to the Treasury. By comparison, the interest burden was more than 3.0 percent of GDP at the start of the 1990s.

It is also worth noting that the much larger interest burden of the 1990s did not prevent us from having a very prosperous decade. In other words, there is a long way to go before we face any serious problem by this measure.

Finally, there is the argument that we could end up in the same situation as Greece was in a few years back, where no one wants to lend money to the U.S. government. There are two major reasons the United States will not end up like Greece.

First, we borrow in our own currency. The U.S. prints dollars; we don’t have to worry about being able to borrow them. By contrast, Greece borrowed in euros, which it did not print.

This brings up the second point; we could print so much money that we face hyperinflation, like Zimbabwe did in the last decade. In principle, that could happen, but the problem in that case would be having a weak economy, not having a large debt. As long as the U.S. economy remains strong and grows at a respectable pace, we will never end up like Zimbabwe.

If we need proof of this fact, we need only look at Japan. The country has a debt that is two-and-a-half times as large as the U.S. debt relative to the size of its economy. Nonetheless, it can borrow long-term at a near zero interest rate. Its inflation rate has also been near zero as the government has been desperately trying to increase inflation for the last two decades.

In short, the country has many real problems. Tens of millions of young people struggle to pay for college. Young parents struggle to pay for quality child care and tens of millions of people have inadequate health care insurance.

These are all issues that deserve our attention. The federal debt is just a huge distraction.

Attorney General Rescinds Guidance Meant on Abolishing Debtors Prisons

Debtors prisons are horrific and should be abolished entirely. That an aspect of the Trump regime is supporting them is a sign of how regressive the current federal government is, and it’s also an unpleasant reminder of how the Justice Department reinstated corrupt police civil asset forfeiture earlier this year.

During the holiday season, many of us think about what we can do to help people struggling with poverty. Attorney General Jeff Sessions, on the other hand, decided just before Christmas to rescind a guidance meant to protect low-income Americans.

The 2016 guidance, issued by former President Obama’s Justice Department, urged state and local courts nationwide to abide by constitutional principles prohibiting the jailing of poor people who cannot afford to pay court fines and fees. Jeff Sessions’ action makes clear that he and his Justice Department are unconcerned by courts trampling on the rights of poor people.

The Obama Justice Department issued the 2016 letter after reports and lawsuits by the ACLU and other groups revealed how modern-day debtors’ prisons function in more than a dozen states, despite the fact that the U.S. two centuries ago formally outlawed jailing people simply because they have unpaid debts.

These efforts revealed that poor people were being locked up in GeorgiaWashingtonMississippi, and elsewhere without court hearings or legal representation when they could not pay fines and fees for traffic tickets or other civil infractions or criminal offenses. These efforts also show that modern-day debtors’ prisons result from state laws allowing or requiring the suspension of driver’s licenses for unpaid court fines or fees without first requiring confirmation that the person could actually pay.

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There is no place in this country for a justice system that lets rich people buy their freedom while poor people are locked up or lose their driver’s licenses because they can’t afford to pay money to courts. The momentum for change will continue even as the current Justice Department declines to lead by encouraging fairness and equal treatment of rich and poor.

U.S. “Retail Apocalypse” Only Beginning and Receives Little Awareness

There isn’t much awareness or planning for what’s being referred to as a retail apocalypse, which could have a considerably negative impact on areas of the U.S. economy. Risky retail debts are set to be due with other potentially destabilizing debt loads in the few years ahead, and local economies look as though they’ll be hurt by the loss of retail jobs and reduced tax bases.

The last time I heard the data, the Federal Reserve said that I think somewhere around 15 percent of at least certain aspects of the means of production (land, factories, equipment) were sitting idle in the U.S. That isn’t because there’s a lack of work that needs to be done. On the contrary, there’s plenty of work that needs to be done — which can be easily seen by merely looking around at crumbling infrastructure of cities — and there are people who would like to do it. The economic system isn’t putting those together, however.

And to me, all those malls sitting idle is ultimately a wonderful example of how inefficient the corporate state capitalist system is. If those malls are no longer functionally productive, they should be used by the communities that have often been hurt in neoliberal globalization. They could use the facilities and land to do productive work themselves, and beyond that, the workers could have actual ownership stakes in the enterprise, so that the typical capitalist top-down structure of employer and employee is altered. I say that because how the economic system functions now isn’t working real well for most people, and introducing actual democratic measures into where people work (and spend much of their time) is a way of changing that for the better.

The so-called retail apocalypse has become so ingrained in the U.S. that it now has the distinction of its own Wikipedia entry.

The industry’s response to that kind of doomsday description has included blaming the media for hyping the troubles of a few well-known chains as proof of a systemic meltdown. There is some truth to that. In the U.S., retailers announced more than 3,000 store openings in the first three quarters of this year.

But chains also said 6,800 would close. And this comes when there’s sky-high consumer confidence, unemployment is historically low and the U.S. economy keeps growing. Those are normally all ingredients for a retail boom, yet more chains are filing for bankruptcy and rated distressed than during the financial crisis. That’s caused an increase in the number of delinquent loan payments by malls and shopping centers.

Screenshot-2017-11-11 America_s ‘Retail Apocalypse_ Is Really Just Beginning

The reason isn’t as simple as Amazon.com Inc. taking market share or twenty-somethings spending more on experiences than things. The root cause is that many of these long-standing chains are overloaded with debt—often from leveraged buyouts led by private equity firms. There are billions in borrowings on the balance sheets of troubled retailers, and sustaining that load is only going to become harder—even for healthy chains.

The debt coming due, along with America’s over-stored suburbs and the continued gains of online shopping, has all the makings of a disaster. The spillover will likely flow far and wide across the U.S. economy. There will be displaced low-income workers, shrinking local tax bases and investor losses on stocks, bonds and real estate. If today is considered a retail apocalypse, then what’s coming next could truly be scary.

Until this year, struggling retailers have largely been able to avoid bankruptcy by refinancing to buy more time. But the market has shifted, with the negative view on retail pushing investors to reconsider lending to them. Toys “R” Us Inc. served as an early sign of what might lie ahead. It surprised investors in September by filing for bankruptcy—the third-largest retail bankruptcy in U.S. history—after struggling to refinance just $400 million of its $5 billion in debt. And its results were mostly stable, with profitability increasing amid a small drop in sales.

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Even worse, this will hit as a record $1 trillion in high-yield debt for all industries comes due over the next five years, according to Moody’s. The surge in demand for refinancing is also likely to come just as credit markets tighten and become much less accommodating to distressed borrowers.

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The coming wave of risky retail debt maturities doesn’t take into account that companies currently considered stable by ratings agencies also have loads of borrowings. Just among the eight publicly-traded department stores, there is about $24 billion in debt, and only two of those—Sears Holdings Corp. and Bon-Ton Stores Inc.—are rated distressed by Moody’s.

“A pall has been cast on retail,” said Charlie O’Shea, a retail analyst for Moody’s. “A day of reckoning is coming.”