Economist Michael Hudson takes on the mythology surrounding government budgets and explains how the term ‘stability’ has been used as a cover for financial fraud.
SHARMINI PERIES: It’s The Real News Network. I’m Sharmini Peries coming to you from Baltimore. I am speaking with Michael Hudson in our studio in Baltimore about his new book, “J Is For Junk Economics: A Guide to Reality in the Age of Deception”.
Thank you again for joining me.
MICHAEL HUDSON: Good to be here.
SHARMINI PERIES: So, Michael, one of the concepts that you deal with is about balancing the budget, the whole mythology surrounding that. That is your myth number 17, where you say, “Government budget deficits are bad. Balanced budgets are good. And budget surpluses are even better.” What’s wrong with this?
MICHAEL HUDSON: The popular press acts as if governments should act like a family. And just as families have to balance the budgets, governments have to. But this is a false analogy, because if you personally spend more than you earn, you can’t just write an I.O.U., which everybody else can spend as if it’s real money. You have to pay the I.O.U. at some point, usually with interest, to the bank. But that’s not the case with sovereign governments. When a government runs a budget deficit, it can do so in the way that Abraham Lincoln funded the Civil War: You print the money. You print it into the economy by spending it.
Almost every year until the 1990s, the United States, like every other country in the world, increased its debt by running a budget deficit, by spending money into the economy for infrastructure, schooling, and roads. This is what enables economies to grow. That stopped during the Clinton administration in the 1990s. At the end of the administration he fell for neoliberal theory that you should balance the budget, and he actually ran a budget surplus. So the government stopped spending money into the economy.
The result was the economy had to depend on banks to create the money to expand. If the government doesn’t create it, who will create the spending power? The answer was the banks.
Clinton did what he was told to do by the Secretary of the Treasury, Robert Rubin. In effect, his policy was: “Let the banks create all the money and charge interest instead of the government creating money by spending it like the greenbacks were spent.”
The advantage of governments creating money is you they don’t have to pay interest, because the spending is self-financing. Bank lobbyists cry about how large the government debt is, but this is debt that is not expected to be repaid. Adam Smith wrote that no government has ever paid its debt.
I think it’s easiest for most Americans to understand this by looking at Europe. Under the Eurozone’s rules, central banks are not allowed to create much money. As a result the economies of Europe are shrinking into austerity. Greece is the most notorious example. Here you have unemployment among youth up to 50% as the economy for the last five years is suffering from the worst depression since the 1930s. Yet the government is not able to spend the money needed to rebuild the economy. The banks won’t let them do it. The aim of neoliberals is to prevent governments from spending money to revive growth by running deficits. Their argument is: “If a government can’t run a deficit, then it can’t spend money on roads, schools and other infrastructure. They’ll have to privatize these assets – and banks can create their own credit to let investors buy these assets and run them as rent-extracting monopolies.”
The bank strategy continues: “If we can privatize the economy, we can turn the whole public sector into a monopoly. We can treat what used to be the government sector as a financial monopoly. Instead of providing free or subsidized schooling, we can make people pay $50,000 to get a college education, or $50,000 just to get a grade school education if families choose to if you go to New York private schools. We can turn the roads into toll roads. We can charge people for water, and we can charge for what used to be given for free under the old style of Roosevelt capitalism and social democracy.”
This idea that governments should not create money implies that they shouldn’t act like governments. Instead, the de facto government should be Wall Street. Instead of governments allocating resources to help the economy grow, Wall Street should be the allocator of resources – and should starve the government to “save taxpayers” (or at least the wealthy). Tea Party promoters want to starve the government to a point where it can be “drowned in the bathtub.”
But if you don’t have a government that can fund itself, then who is going to govern, and on whose terms? The obvious answer is, the class with the money: Wall Street and the corporate sector. They clamor for a balanced budget, saying, “We don’t want the government to fund public infrastructure. We want it to be privatized in a way that will generate profits for the new owners, along with interest for the bondholders and the banks that fund it; and also, management fees. Most of all, the privatized enterprises should generate capital gains for the stockholders as they jack up prices for hitherto public services.”
The reason why the European countries, the United States and other countries ran budget deficits for so many years is because they want to keep this infrastructure in the public domain, not privatized. The things that government spends money on – roads, railroads, schools, water and other basic needs – are the kind of things that people absolutely must obtain. So they’re the last things you want to privatize. If they’re privatized instead of being publicly funded, they can be monopolized. Most public spending programs are for such natural monopolies.
The guiding idea of a well-run economy is to keep natural monopolies out of private hands. This was not done in Russia after 1991. Its disaster under the neoliberals is a classic example. It led to huge immigration rates, shortening life spans, rising disease rates and drug use. You can see how to demoralize a country if you can stop the government from spending money into the economy. That will cause austerity, lower living standards and really put the class war in business. So what Trump is suggesting is to put the class war in business, financially, with an exclamation point.
SHARMINI PERIES: You talked about the implications of cutting government spending and, in fact, your myth number 18 deals with this. You describe this myth as saying that cutbacks in public spending will bring the government budget into balance, restoring stability. And you just demonstrated through the Russian example that this is quite misleading and in fact has the opposite effect and destabilizes the population. So this policy Trump seems to endorse – the cutback in public spending – give us some examples of how this could affect society.
MICHAEL HUDSON: You used the word “stability” and this is often a slogan to prevent thought. George Orwell didn’t use the term “junk economics,” but he defined what doublethink is. The function is to prevent thought. “Stability” is akin to the “Great Moderation.” Remember how economists running up to the 2008 crisis said, “This is a Great Moderation.”
We now know that it was the most unstable decade in a century. It was a decade of financial fraud, it was a decade where economic inequality between wealth and the rest of the economy widened. So what made it moderate? Alan Greenspan went before the Senate Committee and gave a long talk on what was so “stable”? He said that what’s stable is that workers haven’t gone on strike. They are so deeply in debt, they owe so much money that they’re one paycheck away from missing an electric utility payment. So they’re afraid to strike. They’re afraid even to protest against working conditions. They’re afraid to ask that their wages be increased to reflect their productivity. What’s stable is the wealthy people, Greenspan’s constituency, the five percent or the one percent get all of the income and the people get nothing. That is stability according to Alan Greenspan.
Words like “stability” or similar euphemisms are used to make people think that somehow the economy is stable and normal. The reality is that it is being slowly squeezed. That’s basically what happened in the Great Moderation. The government was cutting back spending on social programs, dismantling the New Deal array of consumer protection agencies, which Trump also wants to get rid of. The first thing he wanted to get rid of, he said, is Elizabeth Warren’s Consumer Financial Protection Agency. The problem for Republicans serving their bank lobbyists is that it’s trying to prevent fraud – and that limits consumer choice. Just like we let people go to MacDonald’s and buy junk food and junk sodas to get obese, we have to let them have the free choice to put their pension funds in Wall Street companies that are going to cheat them.
These are the Wall Street firms that have paid tens of billions of dollars for the financial fraud they’ve committed. The Republicans want to dismantle all of the penalties against financial fraud, against cheating consumers. That would reduce the amount of money that sector can extract, and these people are what’s driving the economy. But they’re driving the economy largely by debt leveraging bordering on fraud. That’s the kicker in all this.
By dismantling government spending on the Consumer Financial Protection Agency, the public news agencies, the National Endowment for the Arts, you’re stripping the economy away and making the American economy like what Margaret Thatcher did in England. You make it less dynamic, a less lively place, and above all a poorer economy. That is the aim of these “reforms,” which mean undoing what reforms used to mean for the last century.
These words and the vocabulary used in the press dovetail into each other to paint a picture of a fictitious economy. The aim is to make people think that they’re living in a parallel universe, unable to use a vocabulary and economic concepts to explain just why life is so unfair and why they’re being squeezed so badly.
Above all, the aim is to dissuade them from thinking about how it doesn’t have to be this way. There is no natural law that says that they should be squeezed by debt, monopolies and fraud. But that kind of thinking requires an alternative program – and an alternative program requires recapturing the language to explain what it is that you’re trying to create as an alternative.
SHARMINI PERIES: Perfect. This is a good place to stop and continue into our segment five with Michael Hudson. We’re talking about J Is For Junk Economics: A Guide to Reality in the Age of Deception. Thanks for joining us.