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Austerity In The Face Of Weakness

Doug Henwood is the founder and editor of the Left Business Review; a contributing editor to the U.S. weekly The Nation; and author of several books, including Wall Street and After the New Economy.

 

Transcript below…

View part 2 here…

 

 

 

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in New York City. And it was just a few weeks ago Congress finally passed a bill to fund teachers’ jobs across the country. A great debate had broken out about it. Republicans had said it’s time for austerity; any of this stimulus program is really a waste of money, doesn’t create real jobs. Democrats are saying, well, we need some stimulus. But President Obama seems to be taking rather seriously the need for moving to an austerity program soon. He signed on to the G-20 declaration that called for halving the deficit by 2013. So the stimulus-versus-austerity debate—who’s right? Or maybe they’re both wrong. Now joining us to help us understand this issue is Doug Henwood. He’s been for almost 25 years editor of Left Business Observer. Thanks for joining us.

 

DOUG HENWOOD, FOUNDER AND EDITOR, LEFT BUSINESS OBSERVER: Good to be here.

 

JAY: So what do you make of the stimulus/austerity debate?

 

HENWOOD: Well, it’s kind of depressing. You know, we have an economy that’s really in very bad shape. It has stopped falling apart, but it really can’t get up and begin to recover in any serious way, and it does need some adrenaline coming out of the public sector. The private sector is not spending very much, the household sector not spending. Businesses are very profitable, they have a lot of cash on their balance sheets, but they’re not spending it on investment or hiring. So the government really has to take up the slack there. We also have, still, broken credit markets for the most part—they’re funding speculative activity on Wall Street but not much else. So the public sector does need to inject some juice into the economy.

 

JAY: Well, so what do you think is in their heads? [Ben] Bernanke seems to have made it clear they’re going to make money so cheap it’s practically zero interest to the banks, but the banks aren’t lending. So it’s not that there isn’t a lot of cash, it’s not that the banks don’t have money to lend, but they don’t want to take any of the risk, because the economy looks so fragile.

 

HENWOOD: Yeah, well, everybody’s very risk-averse right now. You know, we went from this insane situation a few years ago where all you needed was a pulse to get a mortgage, to now where you need a credit score of over 700 even to open the door of a bank. It went from feast to famine, or not—worse than the feast [inaudible] gorging to starvation. So, yeah, the Fed is really trying to pump—they just announced the other day that they’re going to buy long-term Treasury bonds.

 

JAY: Explain the implications of that for people who don’t get it.

 

HENWOOD: They normally just—normal Federal Reserve operations, they buy and sell short-term government Treasury bonds, the short-term stuff, to inject or remove cash from the system as they see fit. But they’re—really, by buying longer-term paper for a longer period of time, what they’re trying to do is just pump money into the economy, support the credit markets, and to be a buyer of last resort, and in very large quantities—you know, they’ve got $1 trillion of this stuff on their balance sheet. And then for—it looked like some of it was going to expire. So they had some mortgage bonds, for example, that were reaching maturity, and they had originally planned to let them just roll off as they went mature. They would then just not reinvest it, the principal, and that would be a kind of covert monetary tightening, modest but somewhat. And they’ve made it clear that they’re not going to do that. And they’re also winking to the markets that they’re willing to step in and buy stuff in large quantities if necessary, because they’re afraid that after—. The beginning of the year, it looked like the economy was staging a half-decent recovery. We saw some decent job numbers in the first few months of the year. But starting around April and May, that started petering out, and now we’re barely positive. Now, I must say that this is entirely consistent behavior with the pattern that economies take on after financial crises. The IMF [International Monetary Fund] has done a lot of work identifying financial crises over the last 30 or 40 years around the world, and this is following the pattern very closely. You have a very deep and extended recession, very large job losses, followed by stabilization and a long period of flatness, very weak recovery, not the usual textbook V-shaped thing but a real—more of an L-shaped, maybe a little bit [of] an upward angle.

 

JAY: But the predictions now are for a slow economy for years.

 

HENWOOD: That’s—I think that’s a very reasonable prediction. That is exactly the way economies behave after these sorts of crises. You know, it’s not falling apart anymore, but it’s really—as pediatricians would say, it’s failing to thrive.

 

JAY: There’s two sides to this thing, ’cause we have the crisis in the financial sector, and which had a lot to do with this out-of-control speculation, which most of the economists I’ve talked to, when they look at the financial reform legislation, this too-big-to-fail thing really hasn’t been fixed, and much of the speculative proprietary trading, it’s kind of mostly still there. So you still have this kind of danger of the financial sector going out of control again. But then go to the other side of things. You had credit-driven demand for years now. Wages have been, if I understand it correctly, more or less stable, not having grown with productivity since the early ’70s. So you have this crash that takes place partly as a result of not real demand in the economy. But that hasn’t changed; there’s still no real demand in the economy. And they want to have austerity measures, which you would think would suck out even more demand.

 

HENWOOD: Well, yeah, I think if we go back to the roots of the problem, if you want to go back to, you know, 14th century Italy and talk about capitalism—but that’s going back a little too far. But I think if we look at the roots of the problem, it’s essentially that in the 1970s the elite thought the working class had it too good. There was too much militancy, wages were increasing more rapidly than productivity, there was no labor discipline around, and the welfare state, which was never very generous in the United States, but by the standards of the American elite had gotten too generous. So the idea was to launch an attack on labor. So you had [Paul] Volcker creating a deep recession in the early ’80s, and you had Reagan come in and begin cutting social spending and setting the model for breaking unions, which was a very successful program by their own lights. It succeeded in breaking unions, cutting back on the welfare state to as it was, and changing the expectations of the working class, and keeping wages down. Profitability went on a 15-year tear as a result of that. It was very—it achieved what they’d set out to achieve. But the problem was we have an economy that is dependent upon high levels of mass consumption, and we also have a political system that depends upon high levels of mass consumption for its legitimation. American life has always been rather insecure and volatile, but the promise of getting cheap geegaws, you know, I think helped keep the social peace. But if wages are being repressed and going nowhere while productivity is rising and there’s a vast increase of wealth at the top, how do you maintain mass consumption? Well, borrowing is the answer. So that went on for a couple of decades, credit cards at first, and then mortgages. Vast amounts, about a third of the increase of increase in consumption during the middle of the 2000s, the first decade of the 2000s, was just mortgage equity borrowing, and that obviously was not sustainable. It went on longer than a lot of people thought it could, but now it really hit a wall, and it doesn’t seem like we can go back to that model. So what do we do now? And I don’t think anybody’s really figured that out. We have a broken credit system, household balance sheets still in terrible shape, corporate profits still very, very, high, but the corporations don’t want to share that with anyone else by hiring or investing. So there’s really no new model for how to run this economy, and nobody’s even, I think, thinking about that question, much less coming up with an answer. And at the same time, we have a lot of forces on Wall Street—the pundit establishment and the far right, which—the United States extends pretty far into the center—calling for austerity. And, you know, the forces of austerity have many motivations, but there’s kind of an ideological right that hates the public sector and has been wanting to, like, end Social Security and Medicare since these things were founded. So in good times they say we don’t need it; you know, we can invest in—we don’t need Social Security because the stock market will take care of us. In bad times they say, oh, we can’t afford it. But there’s always some excuse to want to cut these programs. And they always blend these two things together, Social Security and Medicare. They’re two separate problems, Social Security a very minor issue, fiscally; Medicare, health spending, still, even after this health reform bill, a very major problem. But the answer to these problems is not to hack away at them. But that is what I think a lot of people are trying to do at this point, impose austerity on a very weak economy. It just—it seems an exceedingly dangerous thing to do.

 

JAY: So what are they really afraid of or concerned about? They—at a time when people seem to be more concerned about deflation, they’re still talking about inflation.

 

HENWOOD: Well, there’s only a few people talking about that right now. The president of the Kansas City Fed, Thomas Hoenig, within the Federal Reserve, is the leading hawk on inflation.

 

JAY: Yeah, he just wouldn’t sign on on Bernanke’s recent Treasury bill.

 

HENWOOD: Yeah, he didn’t—he dissented from the Federal Open Market Committee decision [inaudible]

 

JAY: Saying inflation’s going to be the problem.

 

HENWOOD: Yeah, he’s worried about that, but he’s also just worried about too much slackness. There’s this kind of Victorian moral dimension to all of this; you know, everything’s just too slovenly or something for a lot of these people. I think there’s another set of forces that think that everything is more or less okay, the economy’s recovering, and we don’t need the short-term stimulus anymore, so we can start thinking about the long-term fiscal issues. There’s also a group of people that may be overlapping with the second one, that is worried that the United States will eventually face some sort of Greek-style or Argentine-style debt crisis. I think that’s ridiculous. The United States is not a peripheral country and not a poor country. It has huge borrowing capacity [inaudible] draw on that capacity forever, but we do have a lot more room to go. But—you know, this is not Argentina or Greece. But there are a lot of people who are afraid that that may happen. And certainly, you know, a country that needs to borrow as much as we do does have to worry about the receptivity of the credit markets to our paper. But we’re nowhere near there yet.

 

JAY: The argument, at least the way it’s presented, is a crisis of credibility, that if we don’t do this austerity plan, investors and the global investment community’s going to lose faith in the US dollar. I mean, how real is their belief in that, versus that’s a good argument to say, but what we really want to do is go after Social Security and we want to keep beating up working people?

 

HENWOOD: You know, I don’t know what they say in their inner sanctums. I think there’s a mix of things. I think there are some people who really believe this propaganda. The Congressional Budget Office has forecast huge increases in US debt levels over, like, 70 years. If you look at the fine print in their forecast, it’s because they assumed the economy is going to grow at near-Depression rates for the next seven decades. Now, if this is true, and maybe you can make this argument that it’s true, we need to be talking about that. We don’t need to be talking about the need to cut Medicare and Social Security.

 

JAY: So let me just—.

 

HENWOOD: If it’s not true, they need to say why they believe these things. But they haven’t really disclosed their reasoning.

 

JAY: So that’s a very important point, because the Congressional Budget Office is essentially saying there’s going to be no real growth for decades. What we’re—the economy we’re looking at now is going to be the economy 20 or 30 years from now. And then, based on that, they see an enormous rise in the deficit. So how real is that prediction that the economy’s going to be stagnant for decades?

 

HENWOOD: Well, you could make the argument that they have a point. The education level of the US workforce—the economist Robert Gordon had a very interesting paper on this. He’s forecasting low levels of productivity growth in the US for decades to come. His reasoning is that there are no technological revolutions of the scale of the Internet on the horizon. There are—the education of the American workforce has really gone stagnant. This is—the younger generation now has about the same educational attainment as the older generation now, which—and we’re the only First World country for which that’s true. So this is going to be a problem, that the labor force doesn’t have the skills. Gordon doesn’t mention this, but you can say our infrastructure is rotting and nobody’s wanting to bring it up to snuff. So you could say we do have a productivity problem going forward. And then, also, corporations are not really investing very much, so the capital stock is not keeping up. So you could make that argument. Also, we’re going to have slow labor-force growth. Perhaps restriction of immigration, which is very popular these days, will also keep a lid on the growth in the labor force. So you put these things together, labor force growth, low productivity growth, and maybe we will have a stagnant economy. If this is true, this is a very, very serious problem. This is not something the United States is used to. We’re not used to, you know, the kinds of slow growth rates that the European economies have experienced. Rapid growth is one of the things that takes off the edge off social conflict in the United States, and if we don’t have that, we’ve got a problem. So we either have to rejig our social structures to live with that kind of stagnation, or do something about improving the educational quality of the workforce and getting the investment rate up. But, you know, this should be the real issue, and not all this debt anxiety that is really grabbing the headlines.

 

JAY: Okay. In the next segment of our interview let’s talk more about what solutions might be good and people should be advocating. Please join us for the next segment of our interview with Doug Henwood on The Real News Network.

 

End of Transcript

 

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