September 25, 2022

Why U.S. Deficits Are Necessary and Austerity Is Self-Destructive – Finance For Dummies

Would the United States be committing economic suicide by instituting an austerity program to reduce the national debt and deficit spending?  One man who thinks so is Bill Black, author of “The Best Way To Rob A Bank Is To Own One.”  Bill Black is a financial expert, frequent critic of the banking industry and an associate professor of economics and law.  In a long rant published on the New Economic Perspectives website, Bill Black argues that the U.S. can effectively spend without limit and that an austerity program in the U.S. would send us spiraling downward into another great depression.

Free money - courtesy telegraph.co

Free money - courtesy telegraph.co

The call to “balance the budget” during a weak recovery from a Great Recession is profoundly unserious, wasteful, malicious, and self-destructive.  It also displays a callous indifference to suffering of tens of millions of people.  Most of all, it is obscene that the media still accepts as fact the myth that austerity would balance the budget.  I explained recently why Spain’s austerity program caused its budget deficit to grow.  This result is not anomalous – it is precisely what economic theory predicts will often be the result of pro-cyclical fiscal policies.  Severe recessions are the leading cause of major budget deficits.  Pro-cyclical fiscal policies (austerity) make recessions more severe by reducing private and public sector demand at a time when demand was already severely inadequate.

The unserious nature of the Romney/Ryan’s odes to austerity has been made clear by Romney’s admissions (twice) that adopting austerity at this time would be so self-destructive that it would likely throw the nation back into recession and by the lack of specifics and incoherence of Ryan’s “plan” to purportedly achieve a balanced budget while embracing enormous tax reductions for the wealthy.

The claim that deficits are immoral because they harm our children reverses reality.  Austerity is the leading enemy of children.  Forcing parents into unemployment and bankruptcy and their homes into foreclosure represents the leading assault on children.  Counter-cyclical fiscal policies reduce the severity of recessions and speed recovery.  Our automatic stabilizers help our children.  Austerity harms our children.  The “deficits are a burden on our children” argument rests on another economic myth.  It is a myth that a nation with a sovereign currency like the U.S. is not “just like” a household with regard to deficits or surpluses.  The U.S. has, throughout our history, overwhelmingly run budget deficits and history shows that every effort to balance the budget and reduce the debt was soon followed by a depression or the Great Recession.

The words and graphics reinforce the message that it is time to panic.  The reader does not need to know that nations like Japan with sovereign currencies have debt-to-GDP ratios twice as large and are able to borrow funds at exceptionally low interest rates, that the U.S. has had larger debt-to-GDP ratios in its history, that the U.S. has run budgetary deficits for the vast bulk of its history and that such deficits helped it become an economic powerhouse, that severe recessions produce large deficits, that counter-cyclical fiscal policies have proven highly effective in reducing the severity and length of recessions (which reduces budget deficits), and that austerity rather than being “serious,” “heroic,” “moral”, or “the only alternative” is a disastrous policy to follow in response to a Great Recession and has intensified the Eurozone’s crises.

Mr. Black’s arguments about the dangers of excessive austerity programs are compelling, especially after considering the examples of Spain and Greece where austerity programs are hastening an economic collapse and causing mass societal misery.  Exactly how the U. S. government would be able to finance unlimited spending is not directly addressed by Mr. Black nor are the potential adverse consequences of such actions.  Would continued deficit spending be funded by additional borrowings or would the Federal Reserve simply print up whatever amount is necessary?

If unlimited borrowing by the U.S. without adverse consequences is possible, why not simply present each American with a check sufficient to pay off all debts and even throw in a little extra for some “fun spending”?  What the hell, I wouldn’t mind having my mortgage paid off nor would I mind not having to worry about anything if the government could simply send me a large check each month.  If Mr. Black knows a way to do this, please Mr. Black, let everyone know so that we can all get back to our free spending ways, end this depression and enjoy our lives as we are entitled to!

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