It struck us this morning, after re-reading this series of posts, that none of our arguments need have been made against Wray, since the logical fallacy of his views can be exposed with one question:
How are the federal budget, and the current account deficits being funded right now?
The answer is obvious: From a pool of excess savings that cannot be otherwise profitably invested.
It is these excess savings that are the source of both the federal budget deficit and the current account deficit. L. Randall Wray knows this, or should know this.
The flip side of this pool of excess saving is the excess capacity existing in the United States, and all other nations in general, which result in the slow economic growth we have been experiencing for more than a decade.
Thus, Wray’s suggestion of using government deficit spending to increase the rate of job creation is little more than a phony option, which attempts to take the cause of the crisis and turn it into the solution.
The trade deficit represents a leakage of demand from the US economy to foreign production. There is nothing necessarily bad about this, so long as another source of demand exists for US output, such as a federal budget that is biased to run an equal and offsetting deficit. Indeed, as elementary trade theory teaches, in real terms, exports are a cost and imports are a benefit for the nation as a whole. A trade deficit generates net real benefits, with real costs resulting only if the nation refuses to put resources made redundant by trade back to work.
In this short paragraph, Wray runs so much bullshit past his reader, he has to have a ranch somewhere!
Let us examine it more closely.
The trade deficit represents a leakage of demand from the US economy to foreign production: This is only a polite way of saying American corporations are exporting manufacturing and other jobs from the United States to low wage countries in order to fatten their bottom line. Of course, Wray cannot say this in plain language without letting the cat out of the bag – and you are the bagholder.
Moreover, Wray avoids asking the tough question: How does a low wage, low productivity, country like China manage to out-compete a high wage, high productivity, country like the US, when it has neither the internal market to absorb what it is producing, nor the technical productive base to produce products as cheaply as the US? The answer, obviously enough, is that Chinese wages must reach such depths of poverty as to turn the entire nation into a massive sweatshop, and the product is then exported to the higher income US to be sold at a fantastic markup.
There is nothing necessarily bad about this, so long as another source of demand exists for US output, such as a federal budget that is biased to run an equal and offsetting deficit. Wray begin with a lie – There is nothing necessarily bad about this. It is a bald unvarnished lie. The kind of lie for which your mother would have washed your mouth out with soap and sent you to bed without supper.
He then qualifies that lie, but never explains why nor how he qualifies it. It is not bad for US output, so long as another source of demand exists. Why is this true for US output? Because the United States owns the World Reserve Currency! Let almost any other country try to run a trade deficit for even one year, and watch what the currency markets do to its money!
Thus, he never has to explain how it happens that the US can run sustained trade deficits for thirty years without watching it economy collapse, when a nation like Argentina could not do it for even 30 months.
Indeed, as elementary trade theory teaches, in real terms, exports are a cost and imports are a benefit for the nation as a whole. He then throws in this nonsense phrase which is absolutely meaningless in this context except to make his next point.
Why is it meaningless? Because no one questions whether trade is beneficial. But, having said that imports can benefit an economy, Wray is now free to advance what is quite possibly the most dishonest and bizarre argument in economics today:
A trade deficit generates net real benefits!
If imports can benefit an economy, running a trade deficit for thirty or forty years must be the equivalent of hitting the lottery every day for a month.
Priceless! L. Randall Wray missed his calling.
The man is a true pimp – the Mack Daddy of economists!
Wray’s argument, thus, hangs on a single thread: We can continue to run deficits to stimulate the creation of jobs, because, and, as long as, the very wealthiest in society and nations like China buy US debt. To sustain the massive inequality and indebtedness generated by a continuous flood of excess savings, and cheap imported goods, the United States federal government must continue to accrue equally massive deficits with no clear idea when such deficits can or should come to an end.
This crisis, of course, has rendered this argument moot: International trade has broken down, the financial industry has collapsed, gold is rising, and countries like China are screaming for a new reserve currency.The trade deficit is not caused by the federal government budget deficit, nor can it be fixed by an ever growing budget deficit. Both are caused by a glut of savings among the very wealthiest members of the nation. And this savings glut can only be fixed by a reduction in hours of work.
Like the conversation of a smooth talking pimp, many are beginning to realize it was all just a slick line from apologists for Washington and Wall Streets – they have been used and are now being discarded.
The question, of course, is not whether the Reagan budget deficit produced the foreign trade deficit, or whether the former was required once the latter emerged. The question is how it became necessary for the United States to run both a continuous federal budget deficit and a current account (trade) deficit?
Wray knows that the idea of permanent and growing federal budget deficits are unpalatable politically. And, if he has ever left Kansas, he also know that a good portion of the nation has devastated by the country’s chronic trade deficit – hence the difficulty the Democrats are experiencing in battleground states like Ohio, Michigan, and other Reagan Democrat bastions.
The Democrats are trying to sell the voters bull shit, and have taken to calling it Hamburger Helper.
An example of this bull shit is the following statement by Wray:
The trade deficit represents a leakage of demand from the US economy to foreign production. There is nothing necessarily bad about this, so long as another source of demand exists for US output, such as a federal budget that is biased to run an equal and offsetting deficit. Indeed, as elementary trade theory teaches, in real terms, exports are a cost and imports are a benefit for the nation as a whole.
I would like to see Wray go to a union hall in Detroit, Michgan and offer that explanation to the gathered members. Indeed, he would also have to make Galbraith’s argument that just because their lives have been turned into a miserable pile of shit, the idea among those members that decades of trade deficits had anything to do with this is naive:
Reducing the US current account deficit means that Americans would forego the real benefits of a trade deficit (obviously, the view is different from the perspective of the rest of the world, however, this is mostly because they view exports as a benefit and imports as a cost—what J.K. Galbraith would call an innocent fraud).
Yes, such real benefits as the collapse of an American city filled with abandoned homes that sell for $7,000.
We all should experience such benefits – and we will, if Wray gets his way!
But, mind you, this argument is a complete fraud – advanced solely to distract you away from inquiring about what has been happening in the domestic private sector during this time!
Above all, you must not ask, “What the fuck is going on in the domestic private sector of the economy?“, if Wray is to sell you his Hamburger Helper!
You must not ask how the domestic private sector is both the scene of such massive excess savings as to require the federal government to run continuous offsetting budget deficit, yet, simultaneously, this is also true:
What has been truly amazing is that after a short-lived surplus during the Bush recession, the private sector balance returned sharply to negative territory. In spite of a relatively lack-luster recovery, there was no significant private sector retrenchment of spending—while previous recessions had led the private sector to run surpluses of about 6% of GDP (and nearly 9% of GDP after the 1974-75 recession) as balance sheets were strengthened, the present “recovery” has occurred as balance sheets have deteriorated.
Indeed, Wray admiots this contradiction requires further discussion, but he states:
Much more could be said to document the growing private sector indebtedness and the financial precariousness of the recovery, but let us return to the argument that leakages constrain aggregate demand.
To cover his stank ass, Wray hints that the domestic private sector is a bit more complicated than his kindergarten crayon modeling suggests, but this complexity is not important to his purpose: which is to effectively portray the federal budget deficits as primarily an offset to the foreign trade deficit.
Of course, if you focus on the foreign trade component of the economic imbalances in the economy, you probably won’t ask how it comes to be that some significant portion of national saving does not get taken up into private investment – that it remains superfluous to investment, and, therefore, must be offset by a federal government deficit.
As Wray knows, the pool of national savings has to equal total new private investment in the economy. If it is otherwise, bad things happen – things like, unemployment or sub-par jobs creation, financial speculation in the casino on Wall Street, or the persistent lack of improvement in the productivity of labor. This is because profits can not be profitably reinvested in industry, so they tend to flow into unproductive pursuits.
And when you have low productivity sub-par jobs growth, and financial speculation, assets prices – like homes – are inflated, while wages stagnate – generating indebtedness and poverty among the working class.
In other words, what happens is all the things Wray pretends can be fixed simply by running ever larger budget deficits!
However, as this crisis demonstrates, the federal budget deficit does not address the underlying cause of the crisis – even when the deficit is accompanied by the wholesale slaughter of Iraqis and Afghans – it actually becomes the basis for the further expansion of this crisis – makes possible its continuation for longer than would otherwise be feasible.
If government expands its deficits, it produces inflation, household debt, and forces more and cheaper imports. If government does nothing, wages stagnate and fall, which will create increasing household debt, and force more and cheaper imports.
Finally, as Wray points out, if government reduces its deficit, it will also leads to more household debt and more and cheaper imports:
…[W]hat is important to note about this chart is that the private sector always generated a leakage as it accumulated net financial assets. However, since 1997 the private sector has been in deficit every year but one, and that deficit climbed to more than 5.6% of GDP at the peak of the boom. This actually drove the federal budget into surplus of about 2.5% of GDP (the overall government balance reached 1.65% in the beginning of 2000) and the current account deficit to about 4% of GDP. At that time nearly everyone thought the Clinton budget surplus was a great achievement, never realizing that by identity it meant that the private sector had to spend more than its income, so that rather than accumulating financial wealth it was running up net debt.
The reason that all the outcomes of government intervention lead to more household debt and more and cheaper imports is that both household debt and imports have nothing to do with government spending. They are a product of excess savings in the economy – savings in excess of what can profitably reinvested in industry.
Wray should know this – it is elementary Keynesian economic theory.
But, as we stated previously, he either is deliberately concealing this from his audience, or is nothing more than a worthless, sniveling apologist for Washington and Wall Street.
In either case, his work is worse than useless: It is an impediment to an actual analysis and the development of a real solution to chronic slow jobs growth.
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.
In 2005, L. Randall Wray published a working paper critical of Alan Greenspan, and, by extension, of the Moron’s economic policy. The criticism can be just as easily extended to the present policies of the Messiah, and, indeed, has been advanced by Wray – and, with some modification, by Krugman, Galbraith and Delong. Since the argument forms the core of the liberal and progressive economists’ flawed response to the current crisis, we thought it reasonable to subject it to some analysis here.
According to Wray, insufficient government deficit spending “…has generally been too low to allow for adequate growth of both the labor force and labor productivity.”
This is because, since both the supply of labor as well as the productivity of that labor are variables that are highly responsive to deficit spending, when Washington’s economic policy prevents the running of large enough deficits, it also limits the creation of new jobs and productivity growth.
Slow economic growth undercuts the incentive to invest to improve productivity, and when insufficient government deficit spending reduces investment incentives, low productivity growth produces the kinds of growth that generates even more low productivity growth.
By not running even larger deficits than Washington already does, Wray believes successive administrations have been causing both slow jobs creation and hurting productivity.
Wray’s argument is simple, even if ultimately flawed and useless: Since the overall growth rate of an economy is merely the mathematical result of an increase in the number of people employed and the increase in the productivity of the labor of those people,
“Given a growth rate, there is a tradeoff between employment growth and productivity growth: if the US grows at only 3% and if our employment rate grows at 2% it is mathematically impossible for productivity to grow at anything other than 1%.”
Chronic slow jobs growth results from leakages in the economy – “the portion of income received but not consumed.”
These leakages happen, when:
- people hoard a portion of their income rather than investing or consuming it;
- when governments run a surplus from its tax revenues; and,
- when the country as a whole imports more than it exports.
Wray says overall the total income of a country must be spent or invested to avoid chronic underperformance. Thus, if a country imports more than it exports, then either private individuals must spend or invest more than their income, or, government must run a deficit to offset the leakage caused by the imports, or both. However this is resolved, the overall balance sheet in the economy must equal zero.
Over the past two decades, in the US economy, these leakages have taken these forms
- The private sector usually runs a surplus— it saves or accumulates net financial wealth of about 2-3% of GDP
- The foreign sector runs a current account deficit of about 6% of GDP.
- The US government sector runs a budget deficit of around 5%
Since the total of the current account deficit plus private savings are equal to 8-9 percent of GDP, Washington should have been running a deficit closer to 8 or 9 percent of GDP, not its actual deficit of about 5 percent.
Washington wasn’t accumulating debt nearly fast enough to prevent the economy from stagnating.
Worse, it was not even spending enough to prevent the private sector from becoming increasingly mired in debt. And, when the Clinton administration congratulated itself for producing a federal surplus, things really went off the rails:
“[S]ince 1997 the private sector has been in deficit every year but one, and that deficit climbed to more than 5.6% of GDP at the peak of the boom. This actually drove the federal budget into surplus of about 2.5% of GDP (the overall government balance reached 1.65% in the beginning of 2000) and the current account deficit to about 4% of GDP. At that time nearly everyone thought the Clinton budget surplus was a great achievement, never realizing that by identity it meant that the private sector had to spend more than its income, so that rather than accumulating financial wealth it was running up net debt.”
Wray offers this conclusion, which can probably be applied to the Messiah’s deficit-phobic approach today:
“[T]he only way to sustain a combined domestic private sector and foreign sector leakage of 8% of GDP is for the overall government to run a deficit of that size. Since state and local governments have to balance their budgets, and on average actually run surpluses, it is up to the federal government to run these deficits … We are left with the conclusion that if the US household sector is to improve its balance sheet and increase its saving, the federal budget must be biased toward larger deficits.”
Bullshit! We call bullshit!
We call Wray’s prescription bizarre because, even in its most simple form, as a household budgeting problem, it fails the bullshit test: To an American family that finds itself simultaneously saving so much, and adding so much debt to its People’s Bank of China credit card, that it is unable to pay its grocery bill, Wray suggests they borrow even more money, with their rich uncle as a co-signer this time, to cover the shortfall.
This criticism, of course, has been made by any number of people, and Wray probably would counter with the argument that the American economy is not, and cannot be likened to, a household budget. It is far more complex and works in ways that are somewhat counter-intuitive.
Having taken such pains to simplify exactly how the economy works – to reduce it to three sectors of economic activity (domestic private, government and exports) – and so conceal its actual complexity, Wray might now claim that it is, in reality, so complex that such simplification is misleading.
It’s one of those On-the-one-hand-and-on-the-other-hand kind of doohickeys that economists do so well.
But, as we stated, this was only the initial bullshit test of Wray’s prescription, so let us turn now to de-simplifying his model of the economy to find the actual hot creamy core of his steaming pile of bullshit.
From Mish’s Blog:
To stimulate lending, the bailout plan will attempt to recapitalize banks. The method of recapitalization is best described as robbing Taxpayer Pete to pay Wall Street Paul. In essence, money is taken from the poor (via taxes, printing, and weakening of the dollar) and given to the wealthy so the wealthy supposedly will have enough money to lend back (at interest) to those who have just been robbed.
All this talk about Strategy, Implementation, Recruitment, Procurement, operations, compliance, and other details masks the essence of the plan. And even though “A program as large and complex as this would normally take months — or even years — to establish“, the Secretary for Financial Stability is going to ramrod something through as quickly as possible.
Unfortunately, no matter what seat of the pants strategies they come up with, I can guarantee in advance that the unforeseen consequences of whatever decisions they make, simply will not be any good. Besides, it is axiomatic that plans to rob Peter to pay Paul, can never really work in the first place, regardless of how much time is spent crafting them.
We received an email from Tom Walker, a leader of the Work Less organization in Canada, who has provided further evidence of the consequential moment which may be upon us:
[S]ubstantially reducing the hours of work is a NECESSARY, not an optional or “wouldn’t-it-be-nice” response to the current financial crisis. That necessity, however, is no guarantee that it will occur. People have to organize to demand that it happens. The reason it is necessary is spelled out plainly but densely in a few lines contained in Marx’s Grundrisse, “Capital itself is the moving contradiction [in] that it presses to reduce labour time to a minimum, while it posits labour time, on the other side, as sole measure and source of wealth.
Hence it diminishes labour time in the necessary form so as to increase it in the superfluous form; hence posits the superfluous in growing measure as a condition — question of life or death — for the necessary.”
Each individual capitalist firm must find ways to cut costs through the introduction of labor saving techniques. But value continues to be measured in labor time expended. Productivity increases the quantity of wealth produced with an hour’s labor but not the quantity of value. So economic growth requires the expenditure of ever more labor time even those ever less labor time is required for the production of socially-necessary wealth. In the 19th century, this contradiction could be “resolved” through periodic crises that devalued capital. But with the advent of state interventionist policies in the 20th century, the escalation of the scale of the productivity overhang and the immensity of the consequences of a full self-correction, including the very real possibility of a revolutionary response to the crisis, it has become constitutionally impossible to “let events run their course.”
It cannot be emphasized too strongly that the root of the crisis lies in the nature of abstract labor time. Solutions to the crisis involve either “buying time” — which is to say not solving the problem but putting off the solution to a future date — or transforming SUPERFLUOUS labor time to disposable time. Unemployment is not disposable time but the failure to transform superfluous labor time into disposable time will result in the massive displacement of labor to unemployment.
The choice is that stark: freedom or unemployment. It sounds like it should be a no brainer. But people are SO afraid of freedom that they might let unemployment creep up on them while they’re wracking their brains trying to think of some other resolution to the crisis than freedom! We can’t let that happen. We’ve seen where it leads: fascism and war.