Category Archives: cpe blog

Occupy Boston – CPE’s Jerry Friedman on Money, Banking and Democracy

 Free School University: Money, Banking, and Democracy

Occupy Boston

When: Tue, November 1, 3pm – 4pm
Where: Free School University, Dewey Square, Boston, MA

One of the resources that the 99% has to draw on is the small but dedicated number of radical political economists who buck recent historic trends in their profession to research and advise as to how our economic systems could be changed so that they really serve the many, and not just the few. Prof. Gerald Friedman, of U. Mass Amherst and CPE, will talk with us about money, and banking, and what kind of democratic changes are really needed in our financial institutions.

Occupy Wall St: Abolish the Fed, Back to the Gold Standard?

The Center for Popular Economics stands in solidarity with the Occupy Wall St. movement. CPE economists have been doing teach-ins in NYC, Boston and Amherst. We have also developed some resource materials on important issues that have been raised by some protesters. (See links below.) The demands to abolish the Fed and to return to the gold standard are frequently heard. It is true that the Fed favors the interest of the banks, and is plagued by a lack of transparency and accountability. However, the Fed serves an important function and rather than destroy, we need to democratize it. A return to the gold standard is not particularly good for the people – it was the Populist movement that demanded an end to the gold standard and the establishment of a Central Bank in the first place.

In 1896, Populist firebrand William Jennings Bryan declared, “If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. We shall answer their demands for a gold standard by saying to them, you shall not crucify mankind upon a cross of gold.”

An Intro to the Federal Reserve – 2 page handout (pdf)

Federal Reserve – a Historical Perspective – 4 page article (pdf)


What Is Economics for? Interview With Economist Jerry Epstein

Published on Truthout, Monday October, 10th 2011

by Leslie Thatcher at Truthout

The Center for Popular Economics longtime staff economist and founding Co-Director of the University of Massachusetts Political Economy Research Institute Gerald Epstein spoke with Truthout’s Leslie Thatcher on Thursday July 27 at Smith College about the history and role of progressive economists and the essential steps to right our economy so that it actually meets people’s needs.

(Photo: David Gray / Flickr)

Leslie Thatcher for Truthout: Jerry, could you tell our readers about the extraordinary confluence of progressive economists in the Pioneer Valley, the longtime work of the Center for Popular Economics and its mission?

Gerald Epstein: It all started at the University of Massachusetts, Amherst where in the late ’60s and early ’70s there were already some radical economists. The big change came when Samuel Bowles, who had been an economics professor at Harvard and some of his former students and colleagues started URPE, the Union for Radical Political Economics. They were influenced by Marx, Veblen, C. Wright Mills … In 1972 Bowles was denied tenure at Harvard, an example of the kind of political discrimination in tenure decisions that is well known. Escaping Cambridge, he came to Leverett MA near Amherst and began talking to a UMass dean then overseeing the economics department – which was then very neoclassical, but also conflict-filled. Dean Alfange and Sam cooked up a scheme to hire a whole group of radical economists from all over the country, including Herb Gintis from Harvard, Steve Resnick from Yale and some very prominent former mainstream economists from leading academic departments. A few years later, the department was essentially awarding PhDs in radical economics.

Sam and Julie Schor (author of The Overworked American) and several other faculty and grad students started the Center for Popular Economics (CPE) in 1975. UMass was already a magnet for progressive economists; Smith, Mount Holyoke, Hampshire College – the whole Valley – became a mecca for progressive economists, now one of the few remaining places with a critical mass of radical economists. There are some, of course, at The New School for Social Research, Notre Dame, UC Riverside (now decimated by a hostile administration). The University of Utah has a heterodox program, as do Colorado State at Fort Collins and the University of Missouri in Kansas City.

I’ve been with CPE since the mid-’70s. Since the early ’70s, CPE’s goal has been to bring together political activists and economists to teach a new way of thinking about economics and to bring people involved in particular social and political struggles together to build a broader movement informed by economics. The newsletter Dollars and Sense developed around the same time. From the beginning, the summer institute [full disclosure: which Thatcher attended this year] was CPE’s main activity. As it grew, CPE gave workshops as well as the summer institute – and since Emily Kawano became CPE’s director, it has become increasingly, though not primarily, focused on the “solidarity economy.” Attendees came more and more from academia, as it had become more difficult to get activists to attend. But in recent years, I believe the balance has shifted back to more political activists and fewer academic types.

A lot of the impetus for alternative economics came from opposition to the Vietnam War and in solidarity with the Civil Rights movement and New Left feminism. It was oriented towards peaceful revolution. The idea was to develop a better economics for a democratic society, a theoretically more valid way to understand capitalism. While its origins were revolutionary, they were also somewhat theoretical. In the last twenty years, alternative economics has become much more policy-oriented, toward developing more equalitarian policies – a lost idea.

I set up the research institute PERI with Bob Pollin to develop policy-relevant research that could be used by people on the frontlines fighting for specific issues that needed a lot of attention.

Thatcher: Is it possible the attention to policy and specifics detracted from progressives’ ability to tell a compelling story about how the political economy works?

Epstein: The other side had hundreds of experts and highly paid lawyers who could write laws that looked good, but with gazillions of loopholes, so that the progressive side was and is totally outgunned. That’s what happened on Dodd-Frank: all the details were left to the regulators and the banks have been writing the regulations. In these areas, people like the researchers at PERI and elsewhere have been able to provide a counterweight.

I do think we’re now at a juncture in the political economy of the US – and maybe of the whole world – where we have to return to our vision in a more believable concrete way.

We have to recognize we’re getting beaten on the policy front, so we have to keep fighting there, but also stay prepared with ideas about what to do next.

Jane d’Arista – who had been a staff person for Wright Patman (D-Texas) and I started a group here, SAFER (SAFER: A Committee of Economists and other Experts for Stable, Accountable, Fair and Efficient Financial Reform) the goal of which was to put people together who could weigh in with Americans for Financial Reform – an umbrella for 250 labor and community groups – on relevant policy. It’s been producing position papers and consultations on financial regulations.

Thatcher: In that vein, you’ve written about the implementation of the so-called Volker rule in Dodd-Frank. Why is this so important? What are the chances of getting it right?

Epstein: Well there were good things in Dodd-Frank that – were they to be implemented forcefully – would make a real difference and there are some regulators who want to implement them, but the GOP in Congress wants to defund those aspects of the bill that actually work.

Thatcher: One of your co-authors for “Globalization and Progressive Economics Policy,” Dean Baker, has written in “False Prophets” and elsewhere about how Greenspan and Bernanke were professionally negligent in failing to see the mortgage-backed securities/housing bubble. Why have progressive economists who did predict the bubble and who have been right about financialization not been heeded?

Epstein: Yes, classical and neoclassical voices are still dominant, but there are more outlets now for progressive voices and more people like Dean who can refute neoliberal arguments point by point. We economists have to make more of an effort to make our voices heard. We’re better at it now than we used to be, but more of us have to try. We’re in a situation now where we need to rebuild from the ground up.

The bankers, with an assist from the mainstream media, have built up the power of the financial sector to such a point that they have us in a vise grip: “Give us what we demand or we’ll go down and take you with us.”

There is a kind of structural blackmail. Look, for example, at the rating agencies’ threat to downgrade treasuries [executed after this conversation]. Here are private companies who make a profit and have the wrong model for credit rating, a neoliberal model and they attempt to force that model on the rest of us. And there is no way we can retaliate for their ideological stance on credit ratings. Governments around the world have given these ratings official credence. So there’s also a form of price-fixing: they are also threatening to downgrade European banks with Greek credit risk if they have to take a hit on the debt. It’s a vise grip on public policy.

Thatcher: Where does the bankers’ power come from?

Epstein: They have the political power that goes with money since money now mostly determines our elections. The House banking committee is stuffed with new Reps who anticipate the need to raise campaign cash and vote for loopholes.

In the ideological realm, they have developed tremendous power as they have successfully sold the idea that the bankers know best and we should do what the bankers tell us. Mainstream economists have developed a whole theoretical apparatus, including the “efficient markets hypothesis” that “proves” markets should regulate themselves. Of course, the hypothesis assumes perfect information and no market power – and is totally wrong, but economists love it because it is very elegant.

And to make matters worse, some of them get paid by the bankers to defend it.

Mainstream economists may also have been personally blinded by the power of money (see “Inside Job“). Many have private associations with financial companies: 70% of them earned money by working for private financial firms and only 2 people revealed those connections when interviewed by the mainstream media.

Larry Summers is perhaps the best example of that: he was earning $5 million a year from D.E. Shaw while he was working on financial reform issues.

Finally, the financial regulatory agencies have been totally captured by the banking sector.

All this is happening as we are in the midst of three huge transitions that also favor finance:

  • the US is losing its position as the most powerful country economically to China and, as we lose high-paying manufacturing jobs, the US economy becomes more dependent on the bubble economy and the non-manufacturing sector. With the loss of union jobs, we also lose a source of political power for working people.
  • the US is moving from being a medium productivity economy to becoming a high (i.e. highly automated) productivity economy, so that the economy becomes more dependent on those sectors that may still generate high-paying jobs, e.g. finance.
  • the US should be – but we are not – transitioning from fossil fuels to renewables and a green economy. That would help us transition out of a financialized economy. We need to shrink the financial sector – which before 2008 accounted for 60% of the profits in the US – and find another sector where we can create jobs.

Thatcher: So, you see the greening of the economy as a way forward?

Epstein: Yes, but we must also transform the financial sector and create public financial services institutions, make more public sector investment and get the money out of politics.

Moreover, the growth paradigm is no longer viable in industrialized economies because of environmental constraints and because it no longer produces jobs. We have to move toward basic guaranteed income for the majority of our people.

What’s the economy for, anyway? We need to rethink: what are our needs and how do we meet those needs?

Also see:

Link to Gerald Epstein’s articles on Truthout and an interview with Epstein on The Real News.

The EPA: A Phantom Menace

By Heidi Garrett-Peltier, CPE Staff Economist

Environmental regulations are not “job-killers” after all.

GOP claims EPA costs jobs

Polluting industries, along with the legislators who are in their pockets, consistently claim that environmental regulation will be a “job killer.” They counter efforts to control pollution and to protect the environment by claiming that any such measures would increase costs and destroy jobs. But these are empty threats. In fact, the bulk of the evidence shows that environmental regulations do not hinder economic growth or employment and may actually stimulate both.

One recent example of this, the Northeast Regional Greenhouse Gas Initiative (RGGI), is an emissions-allowance program that caps and reduces emissions in ten northeast and mid-Atlantic states. Under RGGI, allowances are auctioned to power companies and the majority of the revenues are used to offset increases in consumer energy bills and to invest in energy efficiency and renewable energy. A report released in February of this year shows that RGGI has created an economic return of $3 to $4 for every $1 invested, and has created jobs throughout the region. Yet this successful program has come under attack by right-wing ideologues, including the Koch brothers-funded “Americans for Prosperity”; as a result, the state of New Hampshire recently pulled out of the program.

The allegation that environmental regulation is a job-killer is based on a mischaracterization of costs, both by firms and by economists. Firms often frame spending on environmental controls or energy-efficient machinery as a pure cost—wasted spending that reduces profitability. But such expenses should instead be seen as investments that enhance productivity and in turn promote economic development. Not only can these investments lead to lower costs for energy use and waste disposal, they may also direct innovations in the production process itself that could increase the firm’s long-run profits. This is the Porter Hypothesis, named after Harvard Business School professor Michael Porter. According to studies conducted by Porter, properly and flexibly designed environmental regulation can trigger innovation that partly or completely offsets the costs of complying with the regulation.

The positive aspects of environmental regulation are overlooked not only by firms, but also by economists who model the costs of compliance without including its widespread benefits. These include reduced mortality, fewer sick days for workers and school children, reduced health-care costs, increased biodiversity, and mitigation of climate change. But most mainstream models leave these benefits out of their calculations. The Environmental Protection Agency, which recently released a study of the impacts of the Clean Air Act from 1990 to 2020, compared the effects of a “cost-only” model with those of a more complete model. In the version which only incorporated the costs of compliance, both GDP and overall economic welfare were expected to decline by 2020 due to Clean Air Act regulations. However, once the costs of compliance were coupled with the benefits, the model showed that both GDP and economic welfare would increase over time, and that by 2020 the economic benefits would outweigh the costs. Likewise, the Office of Management and Budget found that to date the benefits of the law have far exceeded the cost, with an economic return of between $4 and $8 for every $1 invested in compliance.

Environmental regulations do affect jobs. But contrary to claims by polluting industries and congressional Republicans, efforts to protect our environment can actually create jobs. In order to reduce harmful pollution from power plants, for example, an electric company would have to equip plants with scrubbers and other technologies. These technologies would need to be manufactured and installed, creating jobs for people in the manufacturing and construction industries.

The official unemployment rate in the United States is still quite high, hovering around 9%. In this economic climate, politicians are more sensitive than ever to claims that environmental regulation could be a job-killer. By framing investments as wasted costs and relying on incomplete economic models, polluting industries have consistently tried to fight environmental standards. It’s time to change the terms of the debate. We need to move beyond fear-mongering about the costs and start capturing the benefits.

My Center for Popular Economics Institute Experience: “Does your head hurt? Are you confused? Good, that means you’re learning”

By Leticia Medina, Deputy Director of Media Justice League (part of the MAG-Net delegation participating in the CPE Summer Institute)

“Does your head hurt? Are you confused? Good, that means you’re learning.” My classmates and I heard the preceding on a daily basis from Dr. Hector Saez at the Center for Popular Economics Summer Institute. The Summer Institute was a special track titled Media, Democracy and the Economy. For five days, Hector Sáez and Michelle Rosenfield dedicated themselves to opening up the world of popular (read: of or carried on by the people as a whole rather than restricted to politicians or political parties) economics. We talked about how economics inform all aspects of our lives and what exactly it means to live in a society that has built itself on a capitalist framework.

Capitalism as an ideology is embraced by many as an economic structure that allows for social mobility and consumer freedoms. In practice, however, capitalism seems to benefit merely a fraction of the population while it is harmful for the overwhelming majority. We must find a way to shift the economic infrastructure that governs us to better fit a worldview rooted in social justice. As it is, those in control of the nation’s riches do not, in effect, represent the interests and concerns of the American people. What does it mean for a very small group of people to own so much of the nation’s wealth? According to this cool infographic published in Mother Jones, the top 10% control over 2/3 of the nation’s wealth. The implications are astounding.

The Smith College campus (one of the Seven Sisters liberal arts colleges) in Northampton, MA is an idyllic blend of manicured grounds and Victorian architecture. The Center for Popular Economics put us up in sweet dorms at Chapin House which abuts Paradise Pond. From Monday, July 25 to Friday, July 29, we met with Hector and Michelle from 8:30am to late afternoon to learn from them all about our complicated and tangled economy. Because they were essentially condensing one semester’s worth of material into one week the pace was fast and the sessions intense. Nevertheless, our teachers managed to convey the most important and fascinating bits of their course content. From the inception of capitalism to the current-day debt ceiling fiasco, they walked us through important timelines and developments worth studying.

Hector and Michelle stressed over and over that the subject of economics should not be discussed or explored only by a small group of learned academics or finance experts; rather, economics should be accessible to every single person participating in and contributing to that economic structure, hence popular economics. Our instructors focused on the benefits of a participatory populace, one that is involved with its economy on many levels, from working and living in it to helping shape the direction the economy takes. For too long now, the study of economics has been relegated to the classroom and shrouded in undecipherable legalese. The popular economists at the CPE 2011 Summer Institute work to strip away those layers and generate conversations in clear and straightforward language.

I was especially heartened by the focus on media and media justice issues as they speak to the state of our economy now. We have come to realize that responding to media content by creating our own is one of the most effective ways of telling our stories in order to rewrite the narratives that shape our lives. Those in power have been extremely clever in framing their messages and flooding our means of communication with their prefabricated stories. Their tactics are insidious, self-serving, and utterly successful. The Center for Popular Economics recognizes that practicing critical analysis of media content, responding by creating our own, and demanding media policy that will ensure equity are essential steps in bringing about a shift in paradigm.

The classes, sessions, plenaries, and workshops that the CPE generously and thoughtfully organized for us left me feeling brain-fed, exquisitely exhausted, and nothing less than inspired. Exploring the different intersections between media, democracy and the economy was illuminating and, at times, frustrating. Frustrating in the sense that there are clear parallels in inequalities. Inequalities in media translate directly into inequalities in the economy which further translate into inequalities in our democracy. Being able to clearly understand and articulate those connections has amplified and enriched my analysis of those structures that I navigate on a daily basis.

If Hector and Michelle hoped that their students would be galvanized to continue researching and learning about popular/progressive economics on their own, they should be congratulating themselves on their resounding success. I for one plan on continued research of Keynesian economics, the problematic metrics of our GDP, and a better understanding of capitalism as an ideology. I know I will have many allies on this new journey because my amazing, unforgettable fellow classmates all expressed the same desire to continue learning. This is one of the major reasons I LOVE what I do and who I do it with. The fight continues.

CWGL Employment Opportunity: Program Coordinator

The Center for Women’s Global Leadership has begun a formal search for a Program Coordinator for its work pertaining to violence against women (VAW) and women’s leadership.  The intersection of VAW and militarism in its various forms will be a major component of the work.  CWGL encourages the applications of those with knowledge/experience in areas such as the impact of war and conflict, peace building processes, small arms proliferation, political violence, violence against women committed by state agents, and the ideologies derived from militarism.

For more information: CWGL Program Coordinator Description


Wrong Deficit: Jobs, Deficits, and the Misguided Squabble over the Debt Ceiling

Tim Koechlin, Vassar College, International Studies, July, 2011

These are obviously very grim economic times.    One in six Americans who would like full-time work is unable to find a full-time job.  Millions of Americans have lost their homes, and many millions more are “under water” – they owe more than their homes are worth.   The pain has been felt by nearly every household in the US.   Some have been hit harder than others.  The unemployment rate for African Americans is double the rate for whites; since 2007, the median wealth of Black and Hispanic households has fallen by more than half.[1]  The distributions of wealth and income in the US –the most unequal among industrialized countries before the crash of 2008 – have become more unequal.

In the midst of all of this suffering, US corporate profits are at an all-time high.   In 1980, the richest 1% of income earners in the US claimed about 12% of all income; in 2008, they earned nearly one quarter of all income.    The share of the top .1% has increased even faster.[2]

The US economy and the human beings it ought to serve are suffering, first and foremost, from a jobs deficit.   Closing this gap – creating and facilitating the creation of good jobs — should be the very top priority of Congress and the White House.  At this point, it is not.   Indeed, Republicans (enabled by President Obama) are currently doing what they can to make things worse.

The absurd squabble over the debt ceiling and the national debt is distracting, destructive, and almost entirely beside the point.   The budget deficit is not the most pressing economic problem facing the US – not by a long stretch.  Whatever comes of these negotiations, it will not address the jobs deficit, and it will not improve the lives of the overwhelming majority of US families.   Indeed, it is likely to make things worse.

Let’s be clear: the Republican approach to the economy and the budget is deeply misguided, wrong-headed, mean-spirited and irresponsible.   Their approach is as familiar as it is appalling:  more tax cuts for the rich; more tax cuts for corporations, and cuts in social programs, including Medicare and Social Security.   This tack is unconscionable.  It is also bad economic policy, that is, it will not promote growth and it will not create jobs.   Nobel Prize winner Paul Krugman is exactly correct when he concludes that “the G.O.P… has gone off the deep end.”

President Obama’s approach is less troubling for sure, and clearly preferable to the appalling Republican strategy.   But this is a very low bar.   President Obama has, unfortunately, embraced the faulty premise that deficit reduction should be a top priority.  As a result, the President is prepared to make substantial spending cuts at precisely the wrong moment – when the economy needs demand, and people need help.  And, alas, Mr. Obama has demonstrated a disturbing willingness to pursue cuts in Medicare and Social Security.

An intelligent response to this crisis has to reflect an understanding of its causes.    Cutting spending during a recession is like blood-letting an anemic patient, or invading Iraq in an attempt to disempower Osama Bin Laden.

Our best hope on this issue is that the President and Congress will be forced to “kick the can down the road.”   We can only hope that whenever we re-encounter the can, saner heads will prevail – or, more to the point, that the balance of political forces will have changed enough that we won’t have to endure a repeat performance.

Some good ideas and some bad ideas about the economic crisis, economic policy, and the federal budget

  1. Cutting spending in the middle of a recession is a terrible idea.  It will destroy jobs, and undermine the economy’s already feeble momentum.  Intelligent spending — extending unemployment benefits, block grants to states and municipalities, spending on green infrastructure, and keeping college affordable, for example — will create jobs today, lighten the load of those who are in the most economic trouble, and facilitate growth and competitiveness in the long run.   Serious, enforceable, well-funded efforts to liberate home owners from their enormous debt burden would help to re-ignite consumer spending and the housing market.

This is indeed the worst crisis since the Great Depression. How did and why did the Great Depression finally come to an end?  After nearly a decade of mass unemployment (peaking at 25%), the US government increased its debt financed spending massively to pay for the War; that is, it ran enormous budget deficits.  War spending put people to work; these newly employed workers spent their income, and this spending created jobs for others.   In fact, during the war, the US economy suffered from labor shortages.  The US government and corporations actively recruited women into professions and trades that had previously been off limits – women in large numbers “manned” the factories and shipyards.

An implication of this argument and this history is that the primary problem facing the US economy is not the budget deficit.   Indeed, in the short run, substantial budget deficits are likely to accelerate the recovery.

The National Debt is often characterized as “a burden to future generations.”  In fact, deficit spending – and the long run growth and opportunities that it can facilitate – can be a gift to our children and grandchildren.   Debt financed investments today can leave them with a more prosperous, productive, sustainable economy, an economy that can provide them with educational, economic and personal opportunities that would not otherwise have been possible.

Notice, also, that, during a period of economic stagnation, budget deficits and government spending can be good for business.    Rising demand means rising revenues, and this provides businesses with an incentive to hire workers.  With adequate demand, it will be profitable for many businesses to increase hiring.

  1. The current debt ceiling “crisis” is utterly unnecessary; it is an irresponsible political maneuver by the Republicans.  Since 1962, the debt ceiling has been raised 74 times (including 18 times under President Reagan).   With one exception – Newt Gingrich’s government shut down in 1995 – this has been trivial and routine.    If Congress simply voted to raise the debt ceiling – allowing the Treasury to pay its bills, as it is mandated to do by the Constitution — there would be no crisis.   If the Republicans want to make changes in economic policy or shrink the federal government that is their prerogative.   But this is not a reasonable or responsible way to make policy.  It is especially irresponsible to make major decisions about the government’s long standing commitment to provide health coverage and minimal economic security to elderly Americans.
  2. The Republicans do not care about reducing the deficit.  Their objective is to cut taxes – especially for the rich – and dismantle what’s left of the New Deal.   Indeed, they have a long history of enthusiastically supporting enormous budget deficits and squandering surpluses (see the presidencies of Reagan and George W. Bush).  Representative Paul Ryan’s proposed ten year budget – which got unanimous support from House Republicans in April – proposes trillions in tax cuts (over ten years), cuts which will overwhelmingly benefit corporations and the rich.   Note: tax cuts do not reduce deficits!   Ryan’s plan also includes massive cuts to programs that benefit the poor and the middle class (most notably the gutting of Medicare and Medicaid).  According to the non-partisan Congressional Budget Office (CBO), Ryan’s plan would reduce the deficit by $155 billion over 10 years — a meager $15 billion per year.   The Republican plan is rooted in politics, ideology, and mendacity.    There is no evidence at all that it is rooted in a commitment to “fiscal responsibility.”
  3. Taxes in the US are extraordinarily low. Taxes in the US are lower (as a share of GDP) than any other industrialized country.  As a share of GDP, US corporate taxes are lower than every industrialized country but Iceland.   Tax rates for corporations and the wealthy have fallen substantially over the past 30 years.   In the three decades following World War II – when taxes on the wealthy and corporate profits were considerably higher — the US economy performed better: higher average growth rates, lower average rates of unemployment, and a much more equal distribution of income.  Tax cuts for the rich are unfair, and trickle-down economics – the notion that giveaways to corporations and the rich will stimulate growth and employment – simply does not work.[3]
  4. If political pressures compel us to focus on the deficit at this moment, our first step should be to tax the rich more heavily.  Refusing to extend President Bush’s tax cuts (which will expire in 2013) for the top 5% income earners would raise government revenue by more than two trillion dollars over ten years.   Spending cuts (if we must) should be back loaded – that is, they should occur disproportionately down the road, so that they do not undermine our efforts to get out of the current economic malaise.
  5. The US federal budget deficit (and the National Debt) is not analogous to overspending by a household.   The US government – despite a National Debt that is $14 trillion and growing – will not go bankrupt.   Budget deficits can be problematic for sure; but at this moment, the benefits of debt financed government investment overwhelm the costs.  (More on this below.)
  6. Republicans have been working diligently to disempower the Government’s ability to regulate Wall Street’s excesses, and protect consumers.    Their current target is the brand new Consumer Financial Protection Bureau.  If they are successful, another financial crisis is inevitable.
  7. This economic crisis is a devastating indictment of neoliberalism, the free market ideology that has framed economic policy debates since Ronald Reagan.  The financial meltdown of 2008 revealed (yet again!) that financial markets do not regulate themselves.   The deep and ongoing recession that followed reflects the fact that depressed economies do not have a reliable mechanism for restoring full employment, prosperity and growth.   The “Invisible Hand” cannot do it alone.  In early 2009, many of us imagined that this ideology was on its last legs.  Even Alan Greenspan – the once legendary Federal Reserve Chairman, the “Maestro” of monetary policy, and a devoted protégé of the libertarian icon Ayn Rand – acknowledged before Congress that the model on which his worldview and policy recommendations had been premised – the view that unfettered markets (including financial markets) are efficient and stable – had failed.  Of course it had!  How could anyone continue to argue that laissez faire works?    How indeed!  But bad ideas can be resilient – especially when they are promoted by well-funded think tanks.

The Logic of a Recession: What happened to all of the jobs?

The catalyst to this current economic disaster was an unregulated financial system that ran amok – as unregulated financial systems inevitably do.   Financial panics and crises are a chronic part of let-it-rip capitalism.  If financial markets are not regulated adequately, this tendency will eventually manifest itself.  The historical record is overwhelmingly clear about this.

The financial system crashed in October, 2008 – although the strains had been mounting for years.  Major financial institutions failed; housing prices collapsed and foreclosures spiked; the Dow Jones Industrial Average fell by nearly half, and banks stopped lending money.   Investors panicked – with good reason.  Consumers, spooked by shrinking retirement accounts, plummeting home prices, layoffs, a pervasive sense of economic chaos and, of course, declining incomes, cut their spending.  The US economy shed nearly two million jobs over the last third of 2008, and another four million in 2009.

The essential logic of a recession is not terribly complicated.  When businesses experience declining demand, they shed workers (or decelerate hiring).  These laid-off workers in turn cut their spending, because they must.  In some cases, their increasingly nervous neighbors begin to reduce their spending also — they put off buying a new car, taking a trip, or re-modeling the kitchen.   This thus the process accelerates – car dealerships, airlines, hotels, and contractors (etc.) are forced to lay workers off.   These newly unemployed workers spend less, and so on.   Tax revenues fall, forcing state and local governments to fire teachers, cops, and to cut social spending when it was needed most.  At some point, apparently healthy businesses begin to worry that their demand projections are overly optimistic; many decide to put off investment in plant and equipment.   Because of this “multiplier” process, “shocks” to the economy have the potential to accelerate.   According to a recent Wall Street Journal article:

The main reason U.S. companies are reluctant to step up hiring is scant demand, rather than uncertainty over government policies, according to a majority of economists in a new Wall Street Journal survey (Phil Izzo, “Dearth of Demand Seen Behind Weak Hiring,”  WSJ,  7/18/11)

Insufficient demand explains the Jobs Deficit, not “high” corporate taxes, not regulation, not immigration, not “uncertainty” about taxation and regulation, not President Obama’s health care plan, nor his allegedly flawed leadership.   Spending by the private sector – consumers and businesses – is not, at this moment, up to the job of ensuring full employment.    So the government needs to provide demand.

The Federal Reserve can facilitate private spending (demand) by keeping interest rates low.   The federal government can generate demand by (a) spending (including grants to strapped state and municipal governments); (b) working to reduce the debt overhang constraining homeowners, and/or (c) lowering taxes on the middle class and extending unemployment benefits (the middle class and the poor spend a greater share of their income, and so tax cuts for the middle class are more effective than tax cuts for the rich).

Again, the US economy emerged from the Great Depression because the Government spent like mad.  “Future generations” (Baby Boomers, their kids, and their grandchildren) benefited enormously from this debt financed spending, because they inherited a more prosperous, productive economy, an economy that provided them with educational, economic and personal opportunities that would not otherwise have been possible.   Deficit spending – and the long run growth that it can facilitate – can be a gift to our children and grandchildren.

Let me be completely explicit: an intelligent response to this crisis will lead to larger budget deficits in the short term.    Budget deficits and government debt are potentially problematic but, at this moment – as in 1939 — the benefits of deficit spending overwhelmingly exceed the costs.

Burdening Our Grandchildren? Why a Smart Deficit is a Gift to Future Generations

The commonplace assertion that budget deficits are a “burden to our grand-children” is both vague and deceptive, in large part because it fails to acknowledge that deficit spending today can – if done wisely – provide enormous benefits to us, our neighbors, our children and our grandchildren.

The US government finances its deficits (the difference between revenue and spending) by borrowing.   Generally speaking, it borrows by selling bonds – which are essentially IOUs (with interest) from the US Treasury to bondholders (lenders).   The Government borrows from many sources – individuals, pension funds, banks, foreign governments — and it pays these lenders back with interest.

There is a tendency to think that borrowing is inherently problematic, that it implies that we are “living beyond our means.”  But this is a dangerously narrow understanding of debt.   Individuals borrow money all the time – to finance homes, cars, appliances, and college educations.  Businesses borrow money to finance investment in equipment, technology, and research and development; many businesses have lines of credit with their suppliers, and this often works for both parties.  Municipalities commonly undertake “bond issues” to finance school construction and other “capital” projects.

Sometimes, of course, borrowing is a bad idea.  But borrowing can also allow a family, a business, or a government to make useful and/or productive purchases that otherwise would not be possible.  Is borrowing a problem?  It depends on what the borrowing is for, and it depends on the capacity of the borrower to repay the debt.

Government spending can improve the quality of our lives.  Government spending pays for schools, environmental protection, parks and other public spaces, food and drug safety, public colleges and universities, fire and police protection, infrastructure, consumer protection, and health and income security in old age, to name just a few.  Beyond the provision of these beneficial services, the government can create (and facilitate the creation of) jobs.   When the economy is stagnant, an important benefit of borrowing is that it can lead to job creation.

So, we have a choice.  We can limit the growth of the national debt by firing school teachers, cops, firefighters and mine inspectors; cutting health care coverage for the poor and elderly; ignoring our long run energy issues, defunding our public schools, and forcing states to raise tuition at our public universities… and destroying millions of jobs.   Or we can borrow money to support these services while, at the same time, preserving and creating jobs.   The Republicans pretend that cutting the budget is a magic bullet – more jobs, and less debt.   But this is utterly wrong.

In 1939, the US National Debt was about $40 billion.   By 1945, it had grown by a factor of six to $259 billion dollars.   The benefits of this borrowing were enormous.   First, it allowed the Allies to defeat the Nazis (something that would have been more complicated if Congress were constrained by a Balanced Budget Amendment).   Second, this debt financed increase in government spending facilitated economic growth and employment.  The US economy was more productive by far in 1945 than it otherwise would have been.  A rich country with a moderate debt burden is, by any reasonable measure, preferable to a moderately rich country with no debt.    Deficit spending allowed the US to avoid six more years of massive waste – that is, unemployment.   This was undoubtedly a very wise investment.

This does not imply that budget deficits are always wise.   Again, it depends on what the government does with the money.    For example, budget deficits soared under President George W. Bush.   This stunning increase in debt was a terrible mistake, in my view, because the borrowing was used to finance massive tax cuts for the rich, and two expensive, ill-advised wars.   (President Bush’s policies, by the way, have had a much larger effect on the deficit than President Obama’s time-limited fiscal stimulus.)[4]    In contrast to Bush’s folly, borrowing for job creation and mortgage relief during an historic economic downturn is a good idea.

Government debt can be problematic, for sure, but it is not analogous to household debt.   The US government will not go bankrupt – it has never missed a debt payment and, unless Congress impedes its ability to meet its obligations for political reasons, it never will.    That is, the US government’s “capacity to repay” is enormous.  No one who understands the basics of government finance believes that bankruptcy is an issue for the US government (although deficit hawks often suggest that it is, sometimes disingenuously, sometimes out of ignorance).   The US government has run budget deficits in all but five years since 1961 (four of them under President Clinton).  Sometimes it made sense, other times it did not.[5]

Why are budget deficits problematic?  Deficits can cause inflation.   They can also put upward pressure on interest rates, and these higher interest rates, by making borrowing more expensive, can restrict the accessibility of capital to businesses and households, which can be a drag on investment and growth.  Over the long term, this sort of chronic under-investment can be substantial, as can its effects on our living standards down the road.  (For the wonks and/or economics majors among you, economists refer to this as “crowding out,” as in government borrowing may crowd out private borrowing and investment).   It is worth worrying about, for sure.

The “good news” is that, in this depressed economy, interest rates are extraordinarily low.  Inflation is also a minor concern; indeed “deflation” is arguably a greater threat.[6]   At this moment in time, borrowing is especially easy and cheap because there are lots of potential investors sitting on big piles of cash and, further, in a depressed economy there are relatively few attractive alternatives – especially for risk averse investors.

All of this is to say that the potential benefits of deficit spending during a recession are great – it is by far the most effective way to address the jobs deficit; and borrowing can help us to deliver the goods and services on which many Americans depend, especially during a recession. [7]    And at this moment in history, the “costs” of the deficit – its potential effects on inflation and interest rates are all but non-existent.

When the economy recovers sufficiently– when the Jobs Deficit has been resolved –relatively large budget deficits will probably no longer make sense.   But until then, cutting spending is a terrible idea.   I repeat: cutting spending during a recession is like blood-letting an anemic patient.  The Republican “jobs program” starts with massive dismissals of teachers and other public sector employees.   That won’t work.

The content of this spending is important, of course.  A detailed proposal is beyond the scope of this short paper, it is clear that Congress should pass another economic stimulus package – several hundreds of billions of dollars at least.   This package ought to include generous grants to state and municipal governments, investments in green infrastructure, urban jobs programs, extended unemployment benefits, and more generous financial aid for poor and middle class college students.  Readers who are interested in what this might look like should look at Robert Pollin’s excellent “18 million Jobs by 2012.”[8]  .

The great John Maynard Keynes was (and is) right: unregulated, let-it-rip capitalism is prone to financial crises; capitalism has no reliable mechanism for resolving a jobs deficit, and the free market generates intolerable levels of inequality.   In contrast, the Republican Party, the Neoliberals, the “Efficient Market” theorists and other fetishizers of “The Market” are wrong.   Please spread the word!

References and Related Readings:

A few excellent sources of information and commentary on the economy:

Appendix: The National Debt is not like your credit card debt

A government that issues bonds (i.e. borrows money) denominated in a currency that (a)  it has the power to create and (b) is recognized as a reliable currency, does not need to worry about default (as a household or business does).

The US Treasury can borrow from a long line of willing lenders, who are happy to lend to the US government because there is so little risk.   Indeed, raising the debt ceiling is important because it might undermine investors’ confidence that US government bonds are essentially risk free.  At this moment in time, borrowing is especially easy and cheap because (a) there are lots of potential investors sitting on big piles of cash and (b) in a depressed economy, there are relatively few attractive alternatives – especially for risk averse investors.

Unlike households and businesses, the US government has no problem finding lenders because (a) it has the authority to tax and (b) it has the authority to create money and thus (c) it has little trouble finding willing borrowers.     When investors have lots of other alternatives, the Treasury will likely have to pay a higher interest rate on its debt.  But, again, they can always find a borrower.

And further, about half of the US debt is owed to the Federal Reserve, which buys government bonds (i.e. lends to the government) with money that it creates.  The Fed does not literally “print” money, but it does create it — essentially out of thin air.   If I had the authority to tax my neighbors and, in a pinch, to print dollars, my credit limit would be higher.

This story generally surprises and troubles my students, in part because they have a notion that “printing money” leads to “hyperinflation.”   As noted above, deficits can indeed cause inflation, and overly exuberant money creation will surely make inflation more likely.   Thankfully, the Board of Governors of the Fed understands this, and so the Fed uses its power to create money with caution; indeed, sometimes too much caution.  The proof of the pudding is in the data: over the past 30 years – during which time large deficits been common, and the Fed has routinely used its power to “monetize” debt (by creating money) – inflation has been low and stable (in 2009 prices actually fell slightly; in 2010, the inflation rate was 1.6%).

I understand that this can be a little hard to accept – creating money to facilitate a government’s borrowing appears to be irresponsible and unsustainable.   But in the US case – and for most of the world’s rich countries — it has not been a problem.  In fact, it has played a key role in facilitating prosperity and growth over the post-World War II era.

I also understand that “money creation by the Fed” feeds into a theme in the Conservative narrative.  Governments spending without limit! Creating money out of thin air!  Imperiling future generations (and the value of the dollar)!   I accept this intellectual discomfort – but this does not change the fact that these concerns are essentially unfounded and wrong.  And this understandable misunderstanding should certainly not be the basis of economic policy – any more than discomfort with Darwin should lead schools to teach our kids that the earth is 6000 years old… I suppose that is an essay for another day.

The US national debt is also different from the “foreign debts” that have regularly thrown many countries into financial and economy crisis (forcing many of them to run to the IMF because they are unable to pay their debts.   These debts, generally, are denominated in dollars and other hard currencies.   Banks (and the IMF) require repayment in hard currencies.   A government in hock to Western banks cannot raise the money it needs by taxing its citizens; nor does it have the power to create dollar.  And these “limitations” make it harder to attract private lending on reasonable terms.   In cases like these, default is a very real and dangerous possibility.


Media, Economy Topics for Series

Saturday, July 23, 2011

NORTHAMPTON – Lectures and workshops looking at the media and its influence on society will be the highlight of a six-day summer series put on the Center for Popular Economics.

The series launches Sunday with a talk by John Nichols, foreign correspondent for The Nation magazine, and Libby Reinish of the Florence-based Free Press, at 7 p.m. in Seelye Hall at Smith College.

Nichols’ appearance is part of the Summer 2011 Institute for the Center for Popular Economics, which this summer is titled “Media, Democracy, and the Economy.”

“Media is important on so many levels,” said CPE director Emily Kawano. “It shapes not only the news, but culture. Economic policy shapes the media, and the media in turn shapes the economy. There are so many connections between our economic system and media justice.”

Among the issues that will be covered at this year’s institute are Internet access for poor, rural, and minority communities, and corporations that consolidate ownership of many media companies, leaving the public without a diversity of options for news sources.

Several of the events will feature speakers from local organizations such as Northampton’s Media Education Foundation, and Free Press in Florence.

The evening events are all free and held in Bass Hall or Seelye Hall at Smith. The series is cosponsored by Free Press, the Smith Association for Class Activists, and the Center for Media Justice in Oakland, Calif.

CPE was established in 1978 to advocate that “another world is possible – one that puts people and planet front and center,” according to its website.

The organization aims provide “progressive economic analysis to activists and educators who are organizing for social change.”

“We make up the economy, not the stock market,” said Kawano.

The series closes Friday at 3 p.m. with a “solidarity economy tour,” which is a walking tour of sustainable business and nonprofit models in Northampton. Among the tour stops are the Hungry Ghost Bakery, where participants will hear about the local grain-growing “Wheat Patch Project,” the community arts space in Thornes Marketplace, and a meeting with representatives of Valley Time Trade, who will talk about time-based barter.

Protect Medicare, Medicaid and Social Security

Come hear Gerald Friedman explain why Medicare, Medicaid, and Social Security should not be part of the budget debate in Congress.

On Thursday, July 21, 6 to 7:30 p.m. at the Forest Park Library, 380 Belmont Avenue in Springfield, Gerald Friedman, Professor of Economics at UMass Amherst and CPE staff economist, will show why competition and the profit motive are the problem with American health care, not the solution, and why we should be expanding Medicare, to cover more services and more people. These programs provide help to people—young AND old. They serve as excellent models of what good government can do.  Most of all, they don’t add a single penny to the deficit, and therefore, should not be part of the debate.


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