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Sunday, November 30, 2008

Obama's economic program, American jobs and the myth of the balanced budget

If we were a bank, the government would give us big bucks

I don't know if there is any scrutiny being applied to the business press that would compare to that being done on the main news stories by Eric Boehlert, Eric Alterman and the other folks at Media Matters. Bob "the Daily Howler" Somerby is universally regarded as "incomparable", so by definition nothing "compares" to him.

But my impression is that some of the business press in general, and Business Week in particular, have not taken the leap off the cliff in terms of reporting quality that has occurred with the Establishment press when it comes to the front-section-type national and international news, not to mention their analysis and commentary.

BW has its peculiarities, for sure. They can hardly be expected to go out of their way to sound sympathetic to Obama's economic program, for sure.

But this article asks an important and fair question: Can Obama Keep New Jobs at Home? by BW chief economist Mike Mandel 11/25/08. The link also has a video by Mandel.

The problem he raises is that $500 billion of stimulus spending doesn't necessarily guarantee the hoped-for effect on American jobs. Depending on how much is spent in ways that rely on imports, it would boost jobs in other countries rather than in the US.

Mandel has enough realism to recognize that "free market" hoodoo isn't going to fix the current economic problems:

Now, whether Obama's stimulus package creates 2.5 million jobs or not, economists believe it is a good idea, given the ferociousness of the downturn. "Without it, you could get a protracted period of negative or weak growth," says Nariman Behravesh, chief economist of IHS Global Insight in Lexington, Mass. "With it, you could get the economy coming out of recession in the third quarter" of 2009.

The 2.5 million jobs is, according to Mandel, the number of jobs Obama has promised to "save or create" over the next two years. That's a potentially very flexible way of measuring the effects of the stimulus, since jobs saved would have to be measured against some baseline estimate of what job losses would be absent the stimulus.

A big part of Mandel's article frets over the possible effects of Buy American requirements - I didn't realize there was a 1933 Buy American Act still on the books - on free trade. Free Trade being the Holy of Holies before which all business reporters and respectable economists are expected to genuflect.

But this statement deserves some additional thought:

The coming debate over "Buy American" restrictions in the fiscal stimulus is no sideshow. The financial crisis was caused, in large part, by U.S. consumers borrowing trillions of dollars from the rest of the world to buy imported cars, clothes, and gasoline, even as jobs slipped overseas. As long as the U.S. is running a big trade deficit and borrowing from abroad, a fundamental cause of the crisis remains. [my emphasis]

This idea that borrowing abroad and running a big trade deficit are both inherently bad for the US economy is widespread but is often understood in, at best, a superficial way.

Economist James Galbraith in his 2008 book The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too, one book on economics I would recommend to all Democrats, has a chapter called "The Impossible Dream of Budget Balance". Although it had also been a widespread conviction of economists for a long time that a country could not indefinitely run trade deficits, in fact, as he writes "after 1974, the American economy was almost never again to be in surplus with respect to the rest of the world" in terms of net trade. That pretty much qualifies as a permanent condition, though permanent does not mean "eternal". Like financial bubbles, trade deficits can also change.

And Galbraith explains, despite the official orthodoxy of both the Republican and Democratic Parties, budget deficits are the flip side of trade deficits. However much it may offend our sense of fiscal probity, that the way the world works under our current international currency rules:

What few understood [in 1974] was that the budget deficit and the trade deficit were closely linked, and each was closely related to the evolving character of the global financial system. They were so closely related, in fact, that they usually amounted to two aspects of the same thing. And as the new global monetary system developed [after the end of the Bretton Woods system in 1971-73], the growing need for dollars - for monetary reserves - held outside the United States would come to guarantee that the United States would necessarily experience both trade deficits and budget deficits almost all of the time. The deficits were not so much a symptom of a declining position as the tribute paid to the United States for its position atop the world financial order. [my emphasis]

In other words, as long as we run a trade deficit, we're going to have a public budget deficit. Unless, as was the case briefly at the end of the Clinton administration, private borrowing in the US balances the trade deficit to the point where the federal deficit goes into surplus. (States and municipalities are generally required to balance their budgets annually.) So policies aimed at reducing the federal budget deficit as an end in itself are pointless - unless you're a Republican trying to prevent money from being spent on useful programs instead of corporate boondoggles like Star Wars.

And Republicans Ronald Reagan and Shrub Bush both treated deficits in practice as irrelevant. In the words of what may be the only accurate thing Dick Cheney ever said, "deficits don't matter". Or, as Galbraith puts it, "once the United States restored its grip on the top of the financial pecking order in the 1980s - the Reagan deficits, for all the horror they provoked in political circles, did not cause financial problems.

According to Galbraith, the basic concept of the relationship of trade deficits to budget deficits is pretty much widely accepted among macroeconomists, though even their accurate ideas can take decades to trickle into public policy, and sometimes never trickle into the heads of the captains of business:

There is a basic relationship in macroeconomics, as fundamental as it is poorly understood, that links the internal and the international financial position of any country. A country's internal deficit, that is, its "public" deficit and its "private" deficit - the annual borrowing by companies and households - will together equal its international deficit. [my emphasis]

This is a very important relationship that the Democrats need to act as if they understood in their budget policies.

That doesn't mean that federal spending somehow has no effect on the economy. It obviously does. It does mean that federal budget deficits are not something the Democrats should let stand in the way of enacting needed programs like universal health insurance and action on global climate change.

Also, Galbraith is not arguing that under all conditions, budget deficits as such don't matter. Under the Bretton Woods system where the dollar was tied to gold and other major currencies to the dollar, it was a different matter. But that system formally ended in 1973, replaced by today's system of floating currency values. As he puts it, after 1973:

... the anchor that had ... tied the U.S. federal budget position to one of approximate balance had been broken - without anyone in high policy positions taking note. The old wisdom, which held that budgets should be balanced or perhaps balanced over the business cycle, continued to be spoken, but it was obsolete.

Galbraith praises the progressive nature of the tax system enacted during the Clinton administration. The standard Democratic argument is that Clinton's efforts to balance the budget led to lower interest rates, which led to the strong economic expansion of the 1990s. Galbraith writes of the argument:

This is nonsense. Whatever the merits of the Clinton tax program, which was on the whole progressive, it did not generate either the recovery that began in 1994 or the boom that took hold in the late 1990s. The sources of growth and then of boom came from other places.

When Congress passed the key deficit-reduction package in 1993, long-term interest rates rose instead of falling.

The policy sequence of cutting budget deficits in order to reassure credit markets and lower long-term interest rates was tried. It did not work.

The recovery took root anyway, and one can pinpoint the date it really began - precisely - to February 4, 1994. On that date, Alan Greenspan raised the short-term interest rate, allowing short rates to begin to catch up to the rise in long-term rates that had been under way for some months by that time.

He goes on to explain that though this normally would have impeded growth, in the particular circumstances of the economy in 1994, it forced American banks to ease up on credit for businesses:

The "credit crunch", widely discussed in the press for weeks leading up to this action, abruptly disappeared. Money suddenly became available for risk-taking firms. Job growth almost immediately resumed. This was an important development that actually saved the Clinton administration down the road, but it had almost no connection to the deficit-reduction package of late 1993. [my emphasis]

The bottom line, no matter how much the all-knowing punditocracy and the business press howl in outrage, the Democrats should not let the budget deficit get in the way of enacting Obama's economic program.

I take it for granted that the Republicans will fight it like all hell.

Tags: deficit spending, james galbraith, us economy

posted at 3:05:00 AM by Bruce Miller

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