Larry Summers is Steering the Economy Towards "Structural Adjustment"
By Mike Whitney
December 08, 2009 "Information Clearing House" -- There's no fixed number of greenbacks in a vault at the Treasury which limit how much the federal government can spend. Since the US pays its debts in its own currency--it can print as many dollars as it pleases. Of course, if boosting the money supply triggers inflation, the Fed has to withdraw liquidity and raise interest rates. But that's not the problem at present. The problem is how to zap the economy back to life. The problem is how to get 16 million people out of unemployment lines and back to work. That's the real challenge. The problem is political not economic. Obama is surrounded by industry reps who are trying to scare him about the size of the deficits. But deficits aren't the problem; unemployment is. Once people get back to work and build their savings, their creditworthiness will improve, and the next economic expansion will begin. When more people are paying into the system, the deficits will come down. But the deficits won't come down if tens of millions of people are still on the sidelines and forced to cut their spending. Judging by last Thursday's speech at the "Jobs Summit", Obama still doesn't grasp this:
"But I want to be clear," Obama boomed. "While I believe that government has a critical role in creating the conditions for economic growth, ultimately true economic recovery is only going to come from the private sector. We don't have enough public dollars to fill the hole of private dollars that was created as a consequence of the crisis. It is only when the private sector starts to reinvest again, only when our businesses start hiring again and people start spending again and families start seeing improvement in their own lives again that we're going to have the kind of economy that we want. That's the measure of a real economic recovery."
This is nonsense. When Obama says "We don't have enough public dollars to fill the hole of private dollars that was created by the crisis." He's just flat wrong. The government can print as much money as it wants; it's not "revenue constrained". What keeps the Fed from printing its way out of every jam, is the fear of inflation. But, consider this: inflation fears never stopped Fed chair Ben Bernanke from hosing down the entire financial system with $11.4 trillion, did it? Also, the Fed never hesitated to bulk up excess reserves at the banks by $1 trillion so bankers could shove it into high-risk assets and make windfall profits for themselves while the real economy drifted into coma. The only time the Fed's "inflation alarm" goes off is when there's the remote chance that someone on the low end of the economic food-chain might benefit from a government jobs program. Then the trumpets blare, the lights blink red, and Bernanke scuttles up to Capital Hill with dire warnings of impending doom. It's all politics. Bernanke's world view is shaped by institutional bias, the same as Summers and Geithner. Regrettably, Obama has aligned himself with this swarm of rogues.
"Now, let me be clear. I am open to every demonstrably good idea, and I want to take every responsible step to accelerate job creation. We also, though, have to face the fact that our resources are limited. When we walked in, there was an enormous fiscal gap between the money that is going out and the money coming in. The recession has made that worse because of fewer tax receipts and more demands made on government for things like unemployment insurance. So we can't make any ill-considered decisions right now, even with the best of intentions. We're going to have to be surgical and we're going to have to be creative. We're going to have to be smart and strategic. We'll need to look beyond the old standbys and fallbacks and come up with the best ideas that give us the biggest bang for the buck." (Remarks by the President and Vice President at the Opening Session of the Jobs and Economic Growth Forum)
This is infuriating. Our resources are NOT limited. Obama is just parroting the GOP "deficit hawk mantra". Hasn't the president noticed the Fed's printing presses purring-along at full-throttle to keep the financial markets flooded with liquidity? And where does he think demand is going to come from if consumers continue to cut back sharply on spending? When consumers and businesses stop spending, the government has to pick up the slack or the economy nosedives. Fiscal expansion--particularly through government jobs programs--is the best way to put money in the hands of people who will spend it pronto. It's a way to circumvent the credit bottleneck created by insolvent banks. Surely, Obama's advisors realize this, which is why there must be a more sinister motive behind the rhetoric. Here's how economist Marshall Auerback sums it up:
"The Obama Administration continues to fantasize that it can get away with creating Potemkin prosperity of levitating asset prices via trillions of dollars of financial guarantees to Wall Street in lieu of deploying fiscal resources needed to lay the groundwork for the real thing.
The budget deficits can maintain growth in demand to keep income growing and hence support private saving. Budget deficits should aim to fill in that “hole in private savings” and not allow aggregate demand to “fall through it”, which would lead to income and employment collapses. Government spending has to rise so as to ensure that firms are willing to maximize the use of their productive capacity, which in turn generates further employment. You don’t need a job summit to figure that one out, Mr. President. The only “resource deficiency” here is one of political courage.
The only unemployment increase worth applauding would be the sacking of the President’s entire economics team, all of whom persistently regurgitate deficit myths that constrain output and employment and prevent us from recouping genuine prosperity." ("Jobs Summit Charade: Is the government out of money, or is Obama completely misguided?" Marshall Auerback, New deal 2.0)
Amen, to that. Summers, Geithner and Bernanke should have been booted down the White House stairwell long ago. Instead, Obama is still in the thrall of Chicago school "trickle down" economics. Meanwhile, the nation's most valuable resource--its people--remain idle waiting for government to do what the private sector is no longer capable of doing; create jobs. Obama's task is to fill the hole left by the sudden rise in personal spending. That means government jobs programs to redistribute wealth, rebuild demand, and get the economy rolling again. Here's how progressive economist James Galbraith sums it up:
"So long as we have people who need jobs, we should find them work. There are better and worse ways to do this, but the money isn't a limit. It's just a tool to get the job done. And if we do too much, we see it in the jobs. As joblessness falls, the private sector will pick up. Government can then ease off. Mission accomplished! Our real choice is between a large bold program that works quickly, and a slow cautious program that doesn't seem to work at all."
Unemployment is not going to bounce back like it did after previous recessions. In fact, unemployment is following the same flat-line trajectory as business investment. Too many high-paying jobs have been shipped overseas; too many businesses have moved offshore. Free trade has changed the economic landscape dramatically. If Obama doesn't take decisive action now, the wealth gap will widen, double-digit unemployment will be the norm, and a permanent underclass will emerge in America. The social unrest that this will generate, will be significant. It would be wiser to avoid potential disruptions and preemptively address the minimal needs of ordinary people in distress. That means jobs, lots of jobs. Here's what Paul Krugman anticipates if we continue along the same path we are now:
"What’s going to happen, economically and politically... I have a vision (but) It’s fairly grim..
Start with the short-term economics.... unemployment is likely to stay near its current level for a year or more.
And politically it’s hard to do anything about that. Those economic half-measures have landed the Obama administration in a trap: much of the political establishment now sees stimulus as having been discredited by events, so that it’s very hard to come back and scale the policy up to where it should have been in the first place....
The result, then, will be high unemployment leading into the 2010 elections, and corresponding Democratic losses. These losses will be worse because Obama, by pursuing a uniformly pro-banker policy without even a gesture to popular anger over the bailouts, has ceded populist energy to the right and demoralized the movement that brought him to power.
Along with this will come a process of defining prosperity down. All the wise heads will tell us that 8 or 9 percent unemployment — maybe even 10 percent — is the “new normal”, and that only irresponsible people want to do anything about the situation.
So what I see is years of terrible job markets, combined with political paralysis....as best as I can tell, the administration strategy is to insist that only a few minor course corrections are needed, and to wait for the jobs to start coming in." (Paul Krugman, "Things to Come", The Conscience of a Liberal, New York Times)
Obama is deliberately precipitating another crisis on the advise of his chief lieutenants. Summers and Geithner are steering the economy back into recession so they can implement the same austerity measures and "structural adjustment" programs which have been used throughout the developing world. It's "starve the beast" all over again. As the stimulus dries up, revenue-depleted states will be forced to auction off public lands, resources, parks and other assets to the highest bidder. The banksters and robber barons will feast on the country's treasures while the middle class is crushed by the freefalling dollar, lost home equity, and persistent high unemployment.
Government jobs programs can help to avert another tragedy, but time is running out.