Unemployment: The bizarre prescription of L. Randall Wray – Part 2
In L. Randall Wray’s model of the American economy, the sophisticated complexity of the economy is reduced to three sectors – a domestic private sector, a government sector and a foreign sector of exports and imports.
The government sector is further divided into a federal government component – which is the sovereign issuer of the currency – and a state/local component. The two differ because as issuer of the currency the federal government can, if required, literally print money into existence either directly, or, by issuing bonds and treasuries to borrow money from the domestic private and foreign sectors.
The federal government, therefore, effectively has no budget constraint, and can, within reason, run unlimited deficits. State and local governments have to live within their tax revenues, but the federal government need not.
This feature of the federal government – it ability to run unlimited deficits within reason – is important, because it allows the federal government to respond to imbalances in the domestic private and foreign sectors of the economy.
If imports from the rest of the world exceeds what the US exports the federal government can offset those imports by running a deficit – essentially absorbing the shortfall.
Why is this important?
When imports are sold in the economy, essentially what is happening is that employed labor in the United States is being replaced by employed labor in another country. People in the US lose their jobs, while people in China gain employment. Rising unemployment in the United States causes wages to stagnate and ultimately weakens the ability of Americans to buy groceries. Eventually, wage income cannot keep up with the flood of foreign produced goods and economic collapse occurs.
(If we are wrong here, any economist or astrologist can feel free to provide a correction.)
According to Wray, government can, in such a circumstance, intervene into the process by running a deficit to support wage income by stimulating the domestic creation of jobs. It simply employs the labor on projects like replacing the antiquated power grid, rebuilding roads, and like efforts. The wages of the people employed in these projects and purchases of the government for these projects should spur private companies to produce and hire in order to profit from the government efforts.
Eventually, people working on these government projects need their nails done, and, Voila!, the strip malls industry starts to recover.
(If there are any economists/creationists who think we have this wrong, please call your psychiatrist – your meds are off.)
Unfortunately, as L. Randall Wray shows, this is a grand fairy tale, but completely inaccurate historically.
As Wray writes:
*Historically, the private sector usually runs a surplus—spending less than its income …
*Before Reagan the foreign sector was essentially balanced—the US ran trade surpluses or deficits, but they were small. After Reagan, the US ran growing current account deficits, so that today they reach about 6% of GDP …
*Finally, the US government sector taken as a whole almost always runs a budget deficit. This has reached to around 5% under Reagan and both Bushes …
Please correct us if we are wrong (Hint: we are not wrong): Although Wray asserts that government must run a deficit to offset foreign imports in actuality both government deficits and domestic excess savings occur before foreign trade deficits emerge during the Reagan administration.
This leads us to the somewhat astonishing conclusion – astonishing because L. Randall Wray also came to this conclusion but chose to bury it under a mound of gibberish and lies, or, worse still, completely missed it, altogether, because he is worthless, sniveling, apologist for Washington and Wall Street – that it is not government deficits that offset foreign trade deficits, but foreign trade deficits which have financed Washington’s decades long profligate spending rampage.
In Wray’s timeline, the Reagan budget deficits emerged before the current account deficit!
Further evidence along these lines is provided by Peter Dorman, whose work we have previously cited, and who states:
There is an alternative and far more likely explanation for the same phenomena. After the debt crisis of 1982, the major industrial countries established a policy regime that permitted, and to some extent required, debtor nations in the developing world to transform themselves into export platforms for acquiring hard currencies. Central to this regime was an opening of consumer markets in the wealthy countries and the deregulation of cross-border production and finance. Following the example of Japan, first other smaller east Asian countries and then China took advantage of this institutional environment to generate very large trade surpluses primarily through an effective set of industrial policies.
As an apologist for the Washington-Wall Street axis, Wray assumes we will overlook these historical inconsistencies with his pet prescription for unemployment – but we will not. If Peter Dorman is to be believed, the American foreign trade deficit which opened up in the aftermath of Reagan’s massive deficit spending was not an accident, nor a cause of those federal deficits. They were part of a deliberate policy to move manufacturing offshore.
A move that made it possible for Washington to run deficits at an ever increasing rate, funded, in large part, by the inflows of dollars from countries which had been encouraged to become export platforms for that purpose. For the purpose, in other words, of replacing expensive American wages with cheap foreign wages.
Nor will we overlook the close connection between debt, excess savings and Washington’s decades long spending spree on our tab – which we will examine next.