THE RHETORIC of government deficits ignores standard financial wisdom. Many people across the political spectrum demand that the government cut its spending in these tough times, as if it were a household or a company facing unemployment or disappearing customers. But these demands for “austerity” and “balanced budgets” achieve a rare combination: they are at once cruel, unjust, and self-defeating.
As Keynes pointed out in our last major depression, governments aren’t like households or companies. Sometimes, in the middle of recessions, they have a free lunch option that no household ever has: to spend money without having to give anything up at all. When people and resources are sitting idle because the private sector can’t find anything productive to do with them, the government can make everyone happier by putting them to work at no cost at all.
As a practical matter, that is, the government can simply hire people to do work that needs to be done. God knows we have enough children waiting for more teachers, scientific experiments waiting for funding, bridges and highways that need to be repaired, passenger railroads that haven’t been built, buildings that need to be insulated, and infrastructure for new energy sources desperately needed to reduce global warming. If the government simply organizes us to take on these essential projects, the unemployed will find jobs, more people will have money to spend, and perhaps the private sector will find customers and begin to grow. We’ll have a better educated workforce, better insulated houses, and more efficient infrastructure.
But, scream our latter-day Herbert Hoovers, we can’t afford these basic government services, even if we are the richest country in the world. Keynes’s point is that in a recession, they don’t cost anything. Even if we weren’t rich, we could afford them. The logic is simple: the resources that are needed to put unemployed people to work or reactivate closed factories are not being used. Since they aren’t being used, nothing needs to be diverted to use them. Even better, putting them to use will make them more valuable. Factories and skills alike rust away if they are left idle; putting the unemployed to work is a social gain, not a cost.
Of course, people won’t work for free. They need to be paid, which requires money. The federal government can, if it chooses, simply print the necessary cash—run a deficit. Or, it can issue new debt and have the Federal Reserve buy it, so that the interest we pay on the debt returns right back to us.
Usually, printing money without offsetting taxes ourselves would cause inflation, as more money chases a limited amount of goods and competition drives prices up. But in a recession, the people hired have no alternative jobs; offering them a job doesn’t increase wages generally. Putting construction machinery to work that otherwise would be rusting in a parking lot doesn’t increase anyone else’s costs; on the contrary, by keeping the equipment in working order and the construction crew together, it reduces private sector costs. Given the current unemployment rate, the low level of consumer demand, and the private sector’s lack of interest in investing or expanding, the government’s spending won’t compete with anyone else’s or drive prices up. It just puts to work people who’d otherwise be rotting at home.
EVEN IF we set aside Keynes’s point about putting idle resources to work, ignore the fact that the federal government can print its own money, and maintain that government spending is analogous to business spending, austerity in this recession would remain cruel and counterproductive.
When a company with a long list of investments that are essential to its future growth discovers that it can borrow at 1 percent, it borrows the money and plans to pay back the loan out of the growth the investments will provide. Indeed, on October 4 the New York Times reported that our largest companies are taking advantage of low interest rates to borrow even though they have no current plans to expand. At these rates, it’s inevitable that something will turn up that is worth doing.
Right now, the United States can borrow at lower rates than ever before. Unlike private companies that see no market for their products and therefore don’t want to invest, the United States has vast infrastructure and education needs that it must meet if it is to maintain its competitiveness and grow in the future. The corporate logic is clear: we ought to be borrowing as much as we can and investing it in building green infrastructure, creating more efficient transit systems, educating our workforce, and even simply giving jobs to the unemployed so that they stay productive and employable. The extra economic growth that this creates will pay for the taxes needed to repay the loans.
But this understates how attractive investing is right now. The federal government is like a company that discovers it can issue stock without making any binding promises at all. If investors are willing to buy stock—which is little more than a right to receive a part of any dividends the company may choose to issue in the future—for ordinary money that is exchangeable for real stuff, companies usually leap at the chance. The only cost to the company is that the new stockholders become voters, and, if it issues too much new stock too often, the market value of the stock may drop, making the stockholder/voters unhappy. The issuers sell the stock and invest the funds they receive. If they invest well, company, stockholders, employees, and customers alike are happy, and no one has to sacrifice at all.
The federal government’s ability to print money is quite similar to the corporation’s ability to issue stock. (The main difference is that money, unlike stock, has an obvious source of value: the federal government accepts it in payment of taxes.) If it uses the dollars it prints to buy the infrastructure and education that will underpin the next boom, we will all be better off as a result. We get future growth and the only “cost” is a shorter recession and less unemployment now.
Investing makes us richer, not poorer. But our politicians, bowing to the great idols of FoxNews and Koch Enterprises, are refusing to invest. Yet markets are willing to give us money for free, or close to it. We should be seizing this once in a generation opportunity to build the future.
TO BE sure, some government spending is consumption rather than investment. Unlike investing, consumption reduces the resources available in the future instead of increasing them. In a recession, even consumption is relatively cheap—the resources being used would otherwise have been idle. But not all our consumption is worthwhile, and we could certainly make the economy grow faster if we shifted these wasted resources into more productive uses.
Wars of choice cause great destruction but do not enhance our ability to produce in the future. Wars on drugs and the enormous prison bills they create are symbolically satisfying, but waste vast quantities of human and financial resources in building prisons, diverting people from useful jobs to staffing prisons, and making prisoners unemployable for life. The military and prisons account for around a third of governmental expenditures; honest budget-cutters would call for reductions here.
Another large chunk of the government spending is inefficient subsidies and redistributions to major corporations and their executives and shareholders: TARP’s rescue of financial speculators and their bondholders, who should have been required to abide by the market’s verdict; the Bush tax cuts for the rich, which culminated in a generation-long rewrite of the tax code to reduce the share paid by corporations and the wealthy; tort “reform” exemptions that allow BP to drill for oil or nuclear power companies to play with dangerous toys without taking responsibility for the injuries to people and property statistics say they must inevitably cause; “privatization” schemes that are designed to allow private actors to make heads-I-win, tails-the-taxpayers-lose gambles, like Fannie Mae, cost-plus outsourcing by the military, or financial market trading by FDIC insured banks and “too-big-to-fail” Treasury-backed institutions; price-fixing schemes and artificial monopolies that allow privileged companies to expropriate the rest of us, like the ever-growing monopolies of copyright law and pharmaceutical patents, or Enron’s famous rip-off of California’s electric consumers; and straight welfare-for-the-rich, like agriculture payments or discount leasing terms for ranchers, miners, and drillers in the West and off our coasts.
These costs are even larger than the government budget shows. For example, the tremendous costs of our government-created drug monopolies (regularly described by Dean Baker on his extraordinarily useful blog, Beat the Press) appear on the government budget only to the extent that they drive up Medicare disbursements. The huge costs, in inequality and diminished growth, of our decision to allow the idle rich to accumulate capital untaxed are simply absent from the national accounts.
Like wars of choice, this forcible redistribution of income and wealth from the middle class to its economic betters is largely unproductive. Indeed, it is destructive. Middle-class employees are also the consumers who will buy the products and services we produce. The more we squeeze middle-class employees and shift income to the über-rich—sending factory work abroad, reducing the pay for the remaining blue-, white-, and pink-collar jobs, shifting gains from productivity to CEOs, hedge fund managers, corporate profits, and investors—the more we threaten the consumers who provide the demand that keeps the economy going. A century ago Henry Ford realized (with a little help from the unions) that he needed to pay his employees enough to buy his product. Forget this lesson, squeeze the middle class too hard, and we will end up with a smaller, less productive economy, and with an ever-shrinking and ever-wealthier group of CEOs, finance managers, and heirs to the Robber Barons, floating on a sea of financial stress and unhappiness.
THE AUSTERITY crowd, however, has no more to say about inefficient corporate welfare and tax subsidies for the idle rich than it does about wars of choice and ideologically driven prisons-to-show-how-tough-we-are. Instead, the likes of Pete Peterson complain about Social Security and Medicare, while the Republican’s Pledge to America, like the earlier Contract with America, promises further cut taxes for the rich and still more meat-cleaver destruction of the regulations that keep our markets honest and functional. It’s as if the market failures of the real estate bubble had never happened.
Instead, austerity proponents speak of an “entitlement crisis.” Social Security has collected more taxes than it has paid in benefits since the 1983 reform and is expected to run a surplus for another couple of decades, or longer if we can get the economy moving again. So it is a strange place indeed to look for overspending. But in any event, Social Security is just a simple savings program: young people save and old people spend. In the private sector, we’d call this insurance or a pension plan. And by the standards of private sector pension plans, Social Security is astonishingly cheap, conservatively run, and safe. To be sure, it’d only take one election victory by Wall Street’s minions to dismantle it. But unlike private plans, the beneficiaries get to vote, at least indirectly, for the managers, and so far, that basic right has protected it.
Medicare is more complicated. The medical care system in the United States has failed: it costs double any other country’s and provides public health results comparable to Cuba’s. Moreover, it is growing in cost faster than the economy, a trend that obviously can’t continue indefinitely. Medicare is designed to work with, not reform, the existing system, and, therefore, it can be no more sustainable than the underlying system. If we fail to cut back on the private sector’s inefficiency and allow medical care costs to rise without limit, medical care will become too expensive regardless of how we pay for it. Still, those who oppose Medicare are not proposing an effective reform; they are simply proposing to take the costs of medical care off the federal budget. Instead of paying for it through our taxes, we’ll pay directly. And undoubtedly, we’ll pay more, since private consumers are obviously going to have less bargaining power than the government, and the available private insurance is far less cost-effective than Medicare.
If we are to remain competitive and return to an economy in which the middle class shares in overall gains, we need major reform. Our political system needs to be freed from its chains of obligations to lobbyists and donors representing the welfare-seeking wealthy—corporations should be excluded entirely from electioneering and lobbying and elections should be publicly funded. Corporate governance and anti-trust law need to be reformed so that markets drive companies to hire people for steady jobs at good wages, to produce reasonably priced goods and services, instead of aiming for instant wealth for a handful of insiders. Our regulatory systems need to be beefed up to protect honest businesses and their customers from rip-off artists whose business plans depend on deception or dumping their costs on the environment or others. We need a major, national program to rebuild our infrastructure—fast inter- and intra-city trains, competitive internet and cell phone service, far more energy efficient construction. We must overhaul our energy supply system, shifting to sustainable, domestic sources that do not cause global warming or other pollution. We need to find an effective way to fund our educational sector, which has degenerated into a tiny and superb elite system sitting on a vast mass of under-funded, penny-foolish inadequacy. We need to reverse the policies that have allowed the top 1 percent to seize an overwhelming share of economic growth, and instead recognize that economic success requires a broad and affluent middle class to produce and consume.
Sometimes, we face a tradeoff between prosperity and justice, between making the worst off or the vast middle better off, between equality and growth, between jobs and the environment. With today’s massive unemployment, our choice is, instead, between jobs, justice, equality, and growth on the one hand, and the harsh hostility of Hooverism, the implicit violence of Tea Party billionaire-populism, and the continuing collapse of the middle class on the other.
Dedication to making our fellow Americans miserable will achieve just misery. Investment, not penny-pinching penury, is the route to both greater justice and greater affluence.
Daniel J. H. Greenwood teaches law at Hofstra University. He has published numerous law review articles, book chapters, and popular opinion pieces on corporate law, corporate speech rights, and the role of corporations in politics, as well as on minority religious rights and related topics.
Homepage image: House Republicans announce their “Pledge to America” (House Republicans Conference/2010)