Most economies around the world have been in the doldrums since the Global Financial Crisis of 2007/8 and the Great Recession that followed. Unemployment in some European nations has been at levels not seen since the Great Depression. Although the situation is not as dire in all nations, economic activity remains well below potential virtually everywhere. The result is needless human suffering.
The crisis undoubtedly had multiple causes, but the most obvious catalyst was excessive private debt, especially mortgage debt. For a decade or so leading up to the crisis, private spending exceeded income in many countries. As long as employment remained high, this was just about manageable. Unfortunately, once the crisis hit, many people lost their jobs. Debt commitments became difficult or impossible to meet. By necessity, many households cut back spending, trying to get private finances in order.
This, of course, caused another problem. A drop in customers is bad for business and private-sector employment. Unless another employer steps in to hire workers, or somebody “gifts” us more spending money, or a large customer appears on the scene to purchase output, the economic gloom and doom continues.
We need sustained fiscal expansion
There is really only one other employer capable of stepping up to the plate when the private sector is in the doldrums: the government. And there is really only one entity that can gift us extra spending money: the government. As far as large customers go, there are two that can partly take our place in the market. One is the government through public consumption and investment. The other is the “rest of the world”. Foreigners provide a market for our exports. This looks promising until it is realized that not every country can rely on export demand to trade themselves out of trouble. The exports of one country are the imports of another. For the world as a whole, there is no net impact on demand or employment.
The implication is clear:
When the private sector is unable or unwilling to spend, the only employer, bearer of gifts or reliable large customer waiting in the wings is government.
Unfortunately, most national governments have been reluctant to implement the spending measures and tax cuts – expansionary fiscal policy – needed to rebuild the economy. Initially, some governments did respond positively, though not to the extent required or for long enough. But, before long, members of the powerful “1 percent” – in reality, the 0.01 percent – and their mouthpieces in the media were actively and openly opposing the policies. They made a series of claims that have since proved to be false. We were told that budget deficits would drive up interest rates. We were told that inflation would run rampant. We were told that our children and grandchildren would be weighed down by crippling public debt. We were told that doing the opposite of what is required – referred to as ‘austerity’ – would boost business confidence and lead to higher private spending. None of these claims were true.
Why do the 1 Percent oppose sensible fiscal policy?
It is not always entirely clear whether opposition to sound fiscal policy is due to vested interests or ignorance. One possibility, sometimes voiced, is that the 1 percent believe they benefit from high unemployment. When unemployment is high, those of us still with jobs have very little bargaining power over pay and conditions. It is easier for employers to replace one of us with another when many remain jobless and desperate for any position at all. This makes it hard to win pay increases. In real terms, meaning once inflation has been taken into account, pay levels can even decrease. This is not a new story. For much of the past forty years, known as the ‘neoliberal’ era, government policy has been used to keep unemployment high by historical standards. Real pay levels for most of us have barely risen since the mid-1970s. Material living standards for the majority have improved mainly because there are now a lot more two-income households.
While vested interests may be part of the story, ignorance is probably also at play. Contrary to a common misconception, a reduction in workers’ pay does not automatically translate into higher levels of production. To do so, somebody has to take up the slack in demand caused by the weaker consumption of underpaid workers. Otherwise, businesses will find there are less customers for their products. Either government, foreigners or businesses themselves need to pick up their spending to drive stronger economic activity. Theory and experience both indicate that this is not automatic. It is quite possible for demand simply to remain weak, and economic activity not to revive, despite lower pay for workers.
Even so, it could be argued that the wealthiest individuals and largest corporations do not necessarily mind production stagnating if their share of the pie increases. Recession causes many smaller and mid-sized companies to go bankrupt. The result tends to be a concentration of profit income in the hands of the most powerful corporations and their financial backers. In this way, the financial interests of the 1 percent may actually be served by austerity, even though it hurts the rest of us.
It’s time to take the initiative
Ultimately, it doesn’t really matter whether the bad policy decisions are due to ignorance or bad motives. Either way, the result is pointless suffering. The way out of this is for the rest of us – the 99.99 percent – to recognize what is going on and exert our own political pressure on governments. We have to prompt them to act responsibly on our behalf.
But this might be thought to raise another question. Even if we do have the political will to bring about meaningful changes in government policy, are the desired policies actually feasible? Can the government really afford to spend more money into the economy? Can it really afford to cut taxes on middle and low-income households? Won’t this create problems down the track?
Given the tenor of the policy debate in most countries, it is entirely understandable that many people would wonder about these and similar questions. We are subjected constantly to threatening talk by politicians and media personalities about budget deficits and public debt. Budget surpluses, or at least balanced budgets, are touted as fiscally responsible, whereas deficits are painted as irresponsible. In reality, there is nothing inherently responsible in balancing the budget. To the contrary, at a time of high unemployment, efforts to balance the budget are the height of irresponsibility.
Here is a simple but important truth:
Most national governments can never run out of money. As currency issuers, they are the original sources of the money they spend.
Member nations of the European Monetary Union are an important exception. Governments of these nations are users of a common currency, the euro, rather than issuers of their own currencies. They cannot simply issue currency as desired. Even here, though, the European Central Bank, as currency issuer, cannot run out of euros and will always be able to play backstop.
It is also important to recognize the limitations of local and state governments, who are mere users, not issuers, of the national currency. But here, also, currency-issuing central governments always have the capacity to fund lower levels of government.
The fact that a currency issuer can never run out of its own money does not mean that any level or type of government spending is okay. But it does mean fiscal policy should be thought about in a different way than many politicians and journalists would have us believe. Above all, it means that real resources are the only hard constraint on government spending. Political constraints also come into play. But money should never be considered an obstacle.
Take a moment to reflect on the present situation in many parts of the world. Governments are cutting back social services supposedly on the grounds that they are “unaffordable”. To take just one small example, imagine a government that reduces opening hours of public libraries in a supposed attempt to “save” money. What possible purpose could this serve other than the unnecessary hardship of laid off library staff and a less informed public? Is there a shortage of librarians? No. Is there a shortage of books, shelf space, reading areas or computers? No more so than before the cutbacks. So how could it be “unaffordable” to provide normal library services? There are librarians willing to work. There are books that could be read and computers sitting idle. Yet, we are asked to believe that in such a case it is somehow impossible to keep the social service operating normally. The government has supposedly “run out of money” it alone can create. The very idea is senseless.
The same goes for infrastructure such as roads, public transport systems or utilities. Is there a shortage of engineers and trades people? Not at all. They are more available now than before the crisis. The same goes for schools, universities and technical colleges. Is there a shortage of teachers? Fewer students wanting to receive an education or learn a trade? A problem of vanishing school buildings and facilities? No more so than before the cutbacks. The same goes for hospitals. Are there shortages of doctors, nurses and healthcare administrators? Patients? Hospital equipment? No. And the list goes on.
For government, resources are the true constraint, not money
If machines and plant are lying idle, workers are unemployed and raw materials are available on the market, there is nothing to stop us putting them to good use. Stated simply:
A currency-issuing government can always afford to buy whatever is for sale in its own currency.
Wherever there are idle resources, a currency-issuing government has the capacity to pay for their continued use. Whenever some of us cannot find a job or obtain as much paid work as we want, the government always has the capacity to hire us. If our spending is too low to sustain normal levels of demand for consumer items, it is always possible for the government to provide us with extra spending money through appropriate ‘transfer payments’. These may take the form of additional family allowances, unemployment benefits, pensions or a flat cash payment (or series of payments) to all taxpayers. All such actions would help to maintain demand, production levels and employment.