Jobs, Jobs, Jobs — Not Austerity

By William K. Black

Cross-posted at New Economic Perspectives.

Bob Rubin and Alan Greenspan convinced the New Democrats, over a quarter-century ago, that the key to economic growth was to out-Republican the Republican Party in the fervency of their embrace of austerity.  This began the long war of the New Democrats against the working class that culminated in the loss of their candidate, Hillary Clinton, to Donald Trump.  Rubin’s and Greenspan’s support for austerity constitutes economic and political malpractice.  Austerity is the enemy of the general economy and the people of the world, but it targets for its greatest harm the working class.  As I have explained in earlier columns, Hillary was so devoted to austerity that she made it her major new policy theme in the closing weeks of her campaign – even as every poll warned her that she had enraged the white working class, a principal victim of austerity.

The stranglehold that Rubin and Greenspan’s anti-worker dogmas continue to exert over the Democratic Party’s faux centrists’ policies even after Trump’s election is illustrated by a December 5, 2016 New York Times editorialentitled “How to Help Working People” and Larry Summers’ December 4, 2016 op ed entitled “Trump’s tax plans favour the rich and will hamper economic growth: The proposals would threaten to increase federal debt and interest rates.”  Summers is Rubin’s protégé.

Any plan by Democrats to “Help Working People” should begin with the word “jobs.”  But the creation of “jobs” funded by the federal government in its critical role of employer of last resort is not even an option when policy is in the grips of austerity fever.  New Democrats take the bizarre policy position that it is too expensive to pay people who want to work to do useful work, but fine to pay them extended unemployment insurance because there are not enough private sector jobs to employ them full-time.

The NYT editorial is so mixed up that it never mentions either the primary problem – the devotion to self-destructive austerity of New Democrats and Old Republicans – and never mentions the essential policy that would transform our economy and win the devotion of the working class to whatever party puts the policy in place.  That policy is a dedication to permanent full employment by making the federal government the employer of last resort for any American who wants to and is able to work.  Instead, the editorial focuses on a number of desirable policies to help workers who are already fully employed.  Yes, most Americans who wish to work are employed and we should implement policies that help fully employed working class Americans.  But tens of millions of Americans are classified as “underutilized” by the Bureau of Labor Statistics.  Many were so discouraged by the job markets that they dropped out of the work force.  Worse, Americans in general and the working class in particular no longer believe that they have any meaningful job security – that our jobs could disappear without warning within months.  The federal employer of last resort would transform the workplace by restoring job security.

The editorial’s sole emphasis is on increasing the income of fully employed workers.  That is a worthy goal that should be pursued in parallel with the paramount goal – jobs and providing the security to all Americans of always being able to find a job if they are willing and able to work.  More income for the already fully-employed working class is great, but Americans want to work and working class males are the most vulnerable psychologically to being unable to hold a full-time job or the constant fear introduced by the destruction of job security.  When working class males are unable to hold down a steady job the results are horrible for family formation and family success.

Austerity’s Choice

Millions of Democrats are salivating at the prospects of being able (again) to chortle at the hypocrisy of Republicans when it comes to austerity.  Yes, Republicans always say they love austerity, but when they are in power in modern times they always rise above their pro-austerity dogma and adopt at least some stimulus.  Democrats are eager to attack the hypocrisy and Congressional Democrats are gleefully planning to trap Trump in a welter of demands for “revenue neutral” taxes (code for austerity) and “pay fors” (another code for austerity).  The New Democrats are so eager to attack Trump’s “mountains of debt” that they are about to launch a new offensive against the working class in the New Democrats’ long war against the working class via economically and politically illiterate austerity.

And how will the Republicans respond?  Enough will bend to Trump that they will likely do a major infrastructure program.  Then the Republicans will confront the New Democrats with their own odes to austerity and “pay fors” and demand that the New Democrats make an analog to Sophie’s choice.  Austerity demands budget cuts in other fields, so the Republicans will tell the New Democrats to choose which social program they are most desperate to preserve – and consign the other programs to death via austerity.  In sum, the New Democrats are about to replay the same disastrous economic and political mistakes that have caused so much harm to Americans, particularly the working class, and gifted the presidency to Trump.

Please read Randy Wray’s primer or his newest book.  A government with a sovereign currency such as the United States is not “just like” a household or a corporation or the State of Vermont.  A budget surplus or deficit for the U.S. federal government is not a moral issue.  A budget “surplus” or “deficit” is not an intrinsically good or a bad thing – it depends on the economic conditions of the real economy.  For the U.S., with its unique role as the international currency and large trade deficits, federal budget deficits are typically desirable – and typically occur under both Democrats and Republicans.  We do not “burden” our “grandchildren” when we run federal budget deficit in typical circumstances or in response to a Great Recession.  We greatly aid our children and grandchildren by rejecting austerity in such circumstances.  We would help them far more if we provided a federal job guarantee of last resort.

Summers’ Shout Out for Austerity

Summers’ subtitle warns that Trump’s tax proposals “would threaten to increase federal debt and interest rates.”  In other words, Summers is banging the war drums to renew the New Democrats’ long austerity war against the working class.  There are two parts to Summers argument.  First, Trump’s proposed tax cuts are crafted to help the wealthiest Americans.  Second, the tax cuts would increase the budget deficit.  Summers’ first argument is mostly fine, indeed, it is understated.  (He makes the false claim that President Reagan’s tax cuts did not favor the wealthy and represented a “bipartisan” “reform.”)  Trump’s plan is to betray the 99% and rig the system to lock in the power and wealth of the one percent (indeed, the top .0001).  Trump remains, as he has been for decades, a crony capitalist.

Summers’ second argument is “Austerity Forever.”  He leads with another code phrase for austerity, implying that the proper standard for any tax changes is that they be “revenue-neutral reforms.”  That means no net tax cuts.  Why?  What we know, as even Summers agreed, was that President Obama (who told New Democrats that he was a New Democrat) proposed a stimulus program that he knew (because Summers told him) was far too small and then turned his back on stimulus and then in early 2010 in the State of the Union abandoned stimulus and proposed austerity (the code, provided by the Rubinite Jack Lew, was that the federal government should “pull in its belt” in response to the Great Recession because households were doing so).

The 2009 stimulus, though deeply inadequate, materially increased U.S. growth.  The self-destructive switch by January 2010 to supporting austerity greatly extended the recovery time from the Great Recession and weakened job market reovery.  The U.S. economy could benefit greatly from stimulus even now, so why should Democrats be insisting that they will fight any net tax cut?  Summers’ answer, as always, is the need for austerity.  He stresses that Trump’s (net) tax cuts would violate austerity.

It would also mean grave damage to federal budget projections. The envisioned Trump tax cut is about the same size relative to the economy as the 1981 Reagan tax cut. It is worth remembering that Reagan, hardly a fan of reversing course or raising taxes, found it necessary to propose significant tax increases in 1982 and 1984 (the equivalent in today’s economy of $3.5tn over a decade) due to concerns about federal debt.

So, we now have the New Democrats’ lead economist, Summers, telling us we should be in panic mode because Reagan had such a dogmatic belief in austerity that he raised taxes (though, net, Reagan actually cut taxes).  Summers is seriously proposing that the Democrats should take their policy advice on austerity from Reagan!  He claims that Democrats, in response to the revolt of the white working class, should embrace austerity and renew the New Democrats’ long war against the white working class even though he knows that is terrible economics and politics.  Reagan knew next to nothing about macroeconomics.  Let me be explicit – both the Old Republicans like Reagan and the New Democrats shared this embrace of austerity’s long war against the working class.  Reagan’s embrace of austerity was a key contributor to the stagnation of working class wages and the rise of the plutocrats.  This is how out of touch the New Democrats are with the American people – Summers’ sees Reagan as the role model that Democrats should emulate.

Summers goes so far as to claim that stimulus would slow growth.

Today’s budget situation is much more worrisome. The baseline involves much higher levels of debt and deficits. Then the economy was suffering from a deep recession; now it approaches full employment. If extreme tax cuts are legislated in the next months, uncertainty about the federal budget and about further tax adjustments is likely to rise. Finally, I can find no basis in either economic history or logic for Mr Mnuchin’s claim that the proposed reforms would increase the economy’s growth rate from its current 2 per cent rate to the historical 3 to 4 per cent norm. Adult population growth has slowed by nearly a percentage point, the gains generated by more women entering the workforce have been exhausted, and it is far from clear why tax reform will hugely spur productivity growth.

Indeed, because the Trump proposal would redistribute after-tax income towards those most likely to save it, push up long-term interest rates because of debt pressures, increase uncertainty and the advantages of overseas production, it is as likely to retard growth as to accelerate it.

Summers’ second paragraph has some important truth.  As with the second President Bush’s tax cuts, Trump’s proposed cuts go so heavily to the plutocrats that they will have less stimulus effect because so much of the cuts will be saved rather than spent.  The reduces the stimulus of the proposed tax cuts, it does not eliminate it.

The first paragraph is mostly an opportunity for Summers’ to renew his “secular stagnation” claims that suggest that the U.S., and much of the global economy, will suffer from weak growth under austerity for many decades.  If Summers is correct, then stimulus is particularly vital now.  But Summers’ primary cause is austerity, so he claims that we should accept weak growth and higher unemployment.  If Summers were correct about secular stagnation, however, the imperative policy response would be to end the New Democrats and the Old Republicans’ long war of austerity against the working class and ensure that the federal government provided a guarantee that it would serve as the employer of last resort.  Summers, of course, claims that our current condition closely approaches “full employment” and we need not worry about the millions of Americans who have dropped out of the labor force or are unemployed or underemployed.  At the insipid growth rates he believes will become the norm under austerity, the unemployment rates would grow substantially.

Krugman’s Failure to Speak Truth to Power about Austerity

By William K. Black

Cross-posted at New Economic Perspectives

In the first column in this series I explained how Hillary Clinton, during the closing 40 days of her campaign, showcased repeatedly her promise to assault the working class with continuous austerity.  I explained that her threat represented economic malpractice – and was insane politics.  I showed that the assault on the working class via austerity was such a core belief of the New Democrats that their candidate highlighted that assault even as the polls showed massive, intense rejection of her candidacy by the white working class.  I also noted that in this second series in the column I would discuss the failure of her campaign team, and her de facto surrogate, Paul Krugman to speak truth to power about the dual idiocy of her campaign promise to wage continuous war on the working class through austerity forever.

The broader point is the one made so often and so well by Tom Frank – it is morally wrong, economically illiterate, and politically suicidal for the New Democrats to continue to assault the working class via austerity, “free trade” (sic) deals, and financial deregulation.  The only thing worse is to then insult the working class for reacting “badly” to being pummeled for decades by the Party that once defined itself as the party of working people.  The New Democrats decided to insult the white working class in response to polls showing that the white working class was enraged at Hillary Clinton.  Arrogance and self-blindness are boon companions.

I grew up in the Detroit-area and saw George Wallace win the Democratic Party primary for the presidential nomination, so none of this is new to me.  We all know that the New Democrats are never going to listen to my warnings or Tom Frank’s warnings.  But the leaks show that Hillary had many competent staff who raised difficult questions.  Why wasn’t any senior campaign staffer willing to tell her that her austerity threats were economically illiterate and politically suicidal?  Krugman warned President Obama several times that austerity was a terrible economic policy.

John Boehner, March 2009:

It’s time for government to tighten their belts and show the American people that we ‘get’ it

Barack Obama, yesterday:

“At a time when so many families are tightening their belts, he’s going to make sure that the government continues to tighten its own,” Obama said. “

We’ll never know how differently the politics would have played if Obama, instead of systematically echoing and giving credibility to all the arguments of the people who want to destroy him, had actually stood up for a different economic philosophy. But we do know how his actual strategy has worked, and it hasn’t been a success

Why did he cease speaking truth to power as the election came down to the wire?

The New Democrats Were Locked Into Austerity

Ever since the birth of the New Democrats, their adherents have embraced austerity.  This act of mutual economic and political self-destruction has become so core to their identity that Hillary unhesitatingly made it one her most important closing pitches during the last 40 days of her campaign against Trump.  At the very moment when her pollsters were warning her that she could lose due to working class hostility, she chose to showcase her hostility to the working class by promising to inflict eight more years of austerity on them.  In your face working class!  This is a political strategy that has no upside, but a toxic downside.  Despite intense criticism from progressives of her austerity threats, Paul Krugman never urged her publicly to promise to end austerity’s assault on the working class.  Similarly, no one on her official campaign team had the courage and strength to tell her to stop and reverse her position.

Part of Krugman’s problem was that while he has come some distance from his long-held support for austerity, his reflexes are still wrong because he does not understand sovereign money.  A November 14, 2016 Krugman column revealed the hold his past dogmas still had on him.

Eight years ago, as the world was plunging into financial crisis, I argued that we’d entered an economic realm in which “virtue is vice, caution is risky, and prudence is folly.” Specifically, we’d stumbled into a situation in which bigger deficits and higher inflation were good things, not bad. And we’re still in that situation — not as strongly as we were, but we could still very much use more deficit spending.

Many economists have known this all along. But they have been ignored, partly because much of the political establishment has been obsessed with the evils of debt, partly because Republicans have been against anything the Obama administration proposes.

Krugman still does not understand sovereign money.  A budget deficit for a government with a sovereign currency is not a moral issue.  Budget surpluses are not a “virtue” and deficits are not a “vice.”  The economic issue is strictly pragmatic – what size budget deficit or surplus is best for the overall economy?  The political issue is the one Krugman made in his criticism of President Obama’s embrace of the self-inflicted wound of adopting your opponents’ economic illiteracy.

But notice that even though he was writing after the 2016 elections, Krugman could not bring himself to be candid about the identity of “much of the political establishment.”  Yes, Republicans always said they favored austerity (except when they held the presidency and had to deal with a recession).  But New Democrats believed in the same terrible economics and, unlike the Republicans, Hillary’s embrace of continuous austerity as a means of waging a unceasing onslaught on the working class was so passionate that she highlighted that embrace during the last 40 days of her disastrous campaign even as ever poll and pundit warned her that she was enraging the white working class.  Krugman cannot identify Hillary and the New Democrats as the most prominent leader of “the political establishment [that] has been obsessed with the evil of debt” without raising the obvious question – why didn’t he speak truth to power?  Why didn’t he advise her to end her obsession with sovereign debt and her economic policies that made war on the working class?

Of course, Krugman did something worse than simply fail to speak truth to power.  He joined in the reprehensible effort to trash the reputation of a well-respected economics scholar, Professor Gerald Friedman.  Friedman had donated to Hillary’s campaign, who dared to point out that Bernie Sanders’ economic stimulus proposals were far superior to her proposals.  On what basis did Krugman seek to destroy the scholar?  Krugman complaint was that the economist was insufficiently “obsessed with the evils of debt.”  Friedman’s study made a point that Krugman had long made (and I quoted above).  The 2009 fiscal stimulus was far too small and that the federal government had made a dire mistake in moving toward austerity in 2010 rather than increasing substantially the size of the stimulus package.

What was really going on, of course, is that Krugman was out to defeat Bernie’s candidacy for the nomination.  Had Bernie won that nomination he would now be President-elect.  Sanders was the one candidate for the nomination that embodied what Krugman said the Democratic Party desperately needed – ending the hold of “the political establishment obsessed with the evils of debt.”  Krugman simply viewed truth and Friedman as collateral damage in his zealous fight to defeat Bernie.  Krugman has been unable yet to summon the integrity and courage to admit how badly he served the Nation and the millions of Americans that rejected that “political establishment.”  I hope he will reach out to Friedman and begin to offer his apologies.