John T. Harvey On the Austerity War
March 21, 2011 - 11:08pm ET
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Is the Modern Monetary Theory (MMT) approach to economics beginning to crack the MSM? Well, very recently, Darrell Delamaide had an anti-deficit hysteria/austerity piece in MarketWatch, that strongly reflected MMT perspectives expressed at last year's Fiscal Sustainability Teach-In Counter-Conference (see the audios, videos and transcripts), which Darrell attended. Then just a few days ago, Bill Mitchell, one of MMT's leading practitioners published a great MMT summary article in The Nation. Then John T. Harvey followed with an anti-austerity article in Forbes Magazine, a paragon of neo-liberal virtue. And today, Mike Norman announced:
”Fox has asked me to do a regular, Friday afternoon debate segment on Bulls & Bears. I will be squaring off against Charlie Gasparino. The format will be a kind of "point-counterpoint" thing.”
I recommend all of these pieces, but this post is primarily about Professor Harvey's piece in Forbes. He begins with:
"I have been a professional economist for almost 25 years, but never have I been more concerned about the state of our macroeconomy. Yet it's not so much the current rate of unemployment or GDP growth that has me scared to death; it's the so-called solutions being pursued in Washington.
Consider this for a moment: As of January 2011, we had 13.9 million unemployed people in the United States (and note that it takes very little to count as "employed"). Recommended cuts in the federal budget have ranged from tens of billions to hundreds of billions of dollars. In practice, what do these represent? They are at the very least a reduction in the wages of Americans who are currently working, if not outright job loss. This makes them functionally equivalent to a tax increase. Ask yourself this question: How would raising taxes by tens to hundreds of billions of dollars right now lower unemployment and speed recovery? You're right, it wouldn't. In fact, it's not difficult to see that it would make it much worse. Unemployment is not reduced by cutting incomes and destroying more jobs. But that's the policy currently being pursued with great enthusiasm in Washington, and the two parties differ only in degree. We are on the road to economic suicide. The gun is loaded, cocked and aimed squarely at the American worker."
John then follows with a very readable and perspicacious analysis of the flaws of a deficit reduction/austerity strategy, which I urge everyone to read. John's analysis underscores the proposition that an austerity strategy, i.e. taking part in an international competitive austerity race amounting to a race-to-the-bottom is suicidal.
There is one error in John's otherwise very fine analysis, however. At one point in his article he says that if China cashes out its Treasury bonds, the new USD freed up “. . . would be in China.” This is in error. US currency always remains in the US currency zone. China can hold its dollars alright, but it can only hold them in its US reserve account at the Fed at nearly zero interest. It's other choices are selling the currency, buying goods and services for sale in the US currency zone, or re-investing in US bonds. Tom Hickey has a good explanation of why this is true.
John Harvey acknowledges his error, and points out the difficulty of covering complexities like this in a Forbes article given its space limitations and the need to cover so much.
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