Jamie Galbraith’s Dog Whistle: A Dishonest Defense of Deficits
Without wasting a word of his argument, in his most recent article, In Defense of Deficits, Jamie gets right to the nub of his latest exercise in gross dishonesty:
The Obama spending freeze is another symbolic sacrifice to the deficit gods. Most observers believe neither will amount to much, and one can hope that they are right. But what would be the economic consequences if they did? The answer is that a big deficit-reduction program would destroy the economy, or what remains of it, two years into the Great Crisis.
The economy needs the federal deficit, because you aren’t digging yourself deeper into debt – you have exhausted your credit limit. If the government cuts its deficits, before you start borrowing again, the economy will crater:
To cut current deficits without first rebuilding the economic engine of the private credit system is a sure path to stagnation, to a double-dip recession–even to a second Great Depression. To focus obsessively on cutting future deficits is also a path that will obstruct, not assist, what we need to do to re-establish strong growth and high employment.
Casey Mulligan is right! Unemployment is your fault. Not because you want to sit home and watch Oprah, but because you don’t have the willingness or capacity to extend your servitude to the debt manufacturers on Wall Street. If you had run out and bought that fourth car when GM needed you too – or purchased that third 42 inch wide screen high definition television when China needed you to, we probably only would need Washington to run up its credit card to sail aircraft carriers around the Taiwan Straits.
Jamie is very slick about this proposition in that he neatly avoids actually indicting you in our present disaster. Watch how he subtly shifts the focus, from your inexplicable unwillingness to accumulate more debt, to Wall Street’s willingness to extend you the means to do this.
To put things crudely, there are two ways to get the increase in total spending that we call “economic growth.” One way is for government to spend. The other is for banks to lend. Leaving aside short-term adjustments like increased net exports or financial innovation, that’s basically all there is. Governments and banks are the two entities with the power to create something from nothing. If total spending power is to grow, one or the other of these two great financial motors–public deficits or private loans–has to be in action.
Jamie pretends banks create money when they lend, but he knows this is wrong: You create money when you borrow. To put it more accurately, your promise of months or even years of unpaid labor is what gives the bank’s ability to create money a real social value. (Steve Keen has made this argument on many occasions.) You turn a valueless piece of paper into something with value – but, only as long as you have a job. If you are unemployed, the debt cannot be serviced and Iceland disappears from the global economy, along with a significant portion of Wall Street and the European Union – all of whom based a significant portion of their economy on your ability to repay that loan.
In Jamie’s argument, Wall Street prefers that you run up debt rather than government. His argument for why Wall Street has this preference, however, is questionable – you can almost feel him grasping at straws:
Bankers don’t like budget deficits because they compete with bank loans as a source of growth. When a bank makes a loan, cash balances in private hands also go up. But now the cash is not owned free and clear. There is a contractual obligation to pay interest and to repay principal. If the enterprise defaults, there may be an asset left over–a house or factory or company–that will then become the property of the bank. It’s easy to see why bankers love private credit but hate public deficits.
It is here that Jamie is being his most dishonest: The banks don’t like government debt because they can’t repossess the White House. They can take your car or house, and leave you unable to get to work and homeless, but there is nothing they can do when Washington refuses to pay its bills. But wait just a darn minute! Didn’t Jamie just say government can create money? So, doesn’t that mean Washington could never have a problem repaying its debts? If it borrows worthless fiat paper from the banks in the treasury market, it can repay the banks with the same worthless fiat paper.
That is why the banks want to see smaller government deficits – at least small enough to avoid the possibility that government will have to print its way out of its debt. The last thing the banksters want is for the government to do to them what they are doing to you. They need government to spend just enough to get a sufficient amount of money in your pocket to get you back out on a spending spree.
And, what is a sufficient amount of money government to spend? Just enough to spur you to begin expanding your years of unpaid labor again. Since, you can’t print money – you have to mortgage your life to the bank in return for a worthless piece of paper. And, your deepening debt servitude is the entire object.
Yes. Jamie is actually arguing on behalf of the debt merchants of Wall Street, not against them. They are divided about how large a federal deficit is necessary to get you to take on more personal debt, and Jamie is speaking for the wing that thinks it will take a lot more money. Jamie knows the money is worthless; he knows you give it value by pledging a fair portion of your life to repay it. The object of this deficit game is to calibrate exactly how much government spending it will take to get you to pledge an even greater portion of your future wages to debt service than you have at present.
Most of all, Jamie knows that if you cannot be convinced to take on more debt, unemployment will hit the roof and Washington will be forced to reduce hours of work.