Mr. Coburn, July 7, 2011
I was thrilled to receive your phone call on Monday, June 18. I reported our discussion to many friends, and, whatever their political opinions, they were all impressed that a sitting United States senator would engage a constituent as you have done.
I appreciate the Hayek recommendation. I am working my way through “The Road To Serfdom”. His opening sentiment, that extreme collectivism can lead to totalitarianism, is certainly something I can sympathize with. Surely both extreme socialism and libertarian anarchism are destined to end this way when put into practice. Such is human nature. I will write another letter when I finish the book.
Because of the ongoing debate about raising the debt ceiling, I thought I would write another letter with a few points that might help to further a discussion on these macroeconomic topics. Also, although I am enjoying the Hayek (and I hope you may have found time to browse “The Seven Deadly Innocent Frauds of Economic Policy” by William Mosler), ultimately what is compelling in a discussion is to argue the points themselves. Great thinkers have laid the groundwork for us all, but to appeal to them is to appeal to authority rather than to the ideas themselves. I would be very interested in being presented with faults in my reasoning below. I doubt any of us is perfectly right, so hopefully we can help each other correct and refine our thinking.
This letter is a little longer than I had hoped it would be. But I have organized it into five points so that each point can be considered separately. In addition to sending it to you, I am publishing the letter on my blog at www.stevenstarkmusic.com, so I hope that this organization will make it easier on readers who are quite busy.
POINT ONE: We must asked ourselves if everyone wants a better economy and higher employment right now.
Republicans will surely benefit from a high unemployment rate in the 2012 elections. This is not a personal indictment of anyone’s integrity, rather it is an acknowledgement of our human nature. We want to win.
Also, corporations have been able to lift profits while sales remain low. All the articles I have read attribute current corporate profits to making do with less - working existing employees harder, keeping wages from rising, and squeezing more profit margin out of low volume. And the threat of the long unemployment line keeps employees from having other options. The Labor Department reports that annual average productivity rose by 3.9 percent in 2010. But unit labor costs fell during the same time period by 1.5 percent. Compensation is not rising with rising output. Here is a recent quote from the chief economist of the US Chamber of Commerce.
"We've been able to generate record profits on very, very low volume and very weak economic growth," - Martin Regalia.
And corporations who are hiring are doing so abroad. But why? Here is an interesting quote from Jeffrey Immelt, GE's chief executive. In a recent speech in Washingon he said, "We've globalized around markets, not cheap labor. The era of globalization around cheap labor is over. Today we go to Brazil, we go to China, we go to India, because that's where the customers are."
In 2000, 30% of GE's business was overseas; today, 60% is. In 2000, 46% of GE employees were overseas; today, 54% are. In short, demand in the US remains low, while corporations are leaning on foreign markets and higher domestic productivity. And workers have few options, giving large firms more leverage over their workforces.
However small businesses are not sitting on the cash reserves that major corporations are. They maintain high levels of debt by historical standards and need more customers pronto. Remember that small businesses employee over half our citizens, and they are responsible for over 64 percent of new jobs created from 1993-2008. In short, they have been the engine of our economy, and many of them are running out of gas because of low levels of aggregate demand here at home.
POINT TWO: Only more spending can raise employment.
We agree on this, and we agree that more spending in the private sector will occur when there is more confidence in the economy. However, if we reduce federal deficit spending now, we reduce sales, and therefore we reduce jobs. How will even higher unemployment (the immediate result of any decrease in spending, federal or otherwise) stimulate confidence and more investment? If businesses are worried about a weak economy, how will making it weaker make them less worried?
The private sector is reducing its debt levels, but it can only do so as long as the public debt rises. If the two attempt to deleverage at once we will see the aforementioned drop in aggregate spending (even lower demand) which will decrease sales and jobs.....and confidence.
POINT THREE: We should not put the private sector into deficit right now.
And this would be the logical result of eliminating the government’s deficit. Remember, the government’s deficit is the private sector’s surplus, and the government’s surplus is the private sector’s deficit. The third wheel in this is international trade, but that has been in deficit for a long time, so it is not adding financial resources into the mix (although it is adding real resources).
But is there a danger in more deficit spending by the United States government?
First of all, we often hear the phrase, “We’re spending more money than we’re taking in!” when describing federal deficit spending. But since the federal government has sovereign control over its own currency, a better way to describe deficit spending is, “We are creating more money through spending than we are destroying through taxation.”
I believe we agree on this description of how net financial assets enter the economy. And we agree that the risk of too much deficit spending is inflation. I think the common explanation for inflation is “too many dollars chasing too few products around”. But the key word here is “chasing”.
Dollars must be spent for inflation to enter the equation. Too many dollars sitting around, but not chasing around products, will have little effect on inflation. We have seen evidence of this over the last few years. Bank reserves are high, yet inflation has remained low. So inflation, the demand-driven kind that people fear from too much deficit spending, is not caused by too many dollars but rather by too many spent dollars (demand). And demand is low right now.
Imagine that another trillion dollars has just entered into the economy. Will it be inflationary? Perhaps. But now imagine that it has entered the bank account of one miserly trillionaire (J.P. Rockefeller Scrooge) who will not spend a dollar of that money. And remember, bank reserves are already high. This money will not be lent because the problem is a lack of credit-worthy customers for loans, not a lack of money to be lent out. So the money will sit. Surely prices will not react to adding to this stockpile of unused bank reserves. Now replace “J.P. Rockefeller Scrooge” with U.S. corporations.
What would be the difference?
Dollars are simply IOU’s, not commodities in themselves, and if they are sitting disproportionally in the hands of those who do not need to spend them, then as far as inflation goes, they may as well not exist.
So what happens if people do start spending all these dollars? What if the government spends more and then corporations gain confidence because of rising demand (more customers) and rising employment, and they start spending more? Would inflation start to creep up alongside rapidly rising employment and strong GDP growth?
Perhaps it would, if our economy is restored to its full productive capacity and the demand for products begins to exceed our ability to produce them.
But this does not sound like a nightmare at all. It sounds like exactly what we all want to happen. And if inflation starts to get out of hand, the Fed can manipulate interest rates or the government can raise taxes to drain excess demand out of the economy.
To be clear, we are probably in for some inflation because of rising worldwide demand for finite fuel sources and corresponding speculation. But surely we would rather approach this oncoming plight with a vibrant economy rather than a stagnant one. Maintaining high levels of unemployment to fend off potential inflation makes little sense in real terms.
And of course, fears of hyperinflation are unfounded. It’s usually just presented as a slippery slope argument. If more deficit spending right now makes hyperinflation more likely, then running a surplus makes the complete drying up of all dollars and the collapse of the United States economy into a deflationary spiral more likely.
Balance is everything.
POINT FOUR - Long term unemployment is the real tax on future generations.
Sustained high unemployment is costing us investment in our future. Our human capital, our time and our energy, are not being fully utilized to solve the problems of tomorrow. For example, can we really believe that underinvesting in efficient energy, better roads, science and education - in the name of deficit reduction - will put us in better shape a generation from now?
I am not advocating for big government per se, but I am advocating for the government to simply do its job of providing the necessary fuel to facilitate a vibrant private sector. I am speaking of protection for people and their businesses, education for tomorrow’s work force, roads to allow movement of goods and resources, and other public goods. And of course, the private sector must have enough financial resources in the right hands to keep aggregate demand at the required level to facilitate our economy’s full productive potential.
We also must also consider the societal effects of long-term unemployment. Those who go without jobs for long periods tend to have diminished skills, and when they do finally find a job, it may not be one that matches their skill set. This results in a loss of human capital. Chronic unemployment is also very difficult on the family unit, causing depression, money problems, health problems, etc. Crime rates can also rise alongside the growing desperation associated with long-term unemployment. Nourishing environments for raising children become more fragile.
POINT FIVE - If more direct public investment in the infrastructure of the private sector is off the table right now due to the political climate in Washington, then why not a huge tax relief package targeted at every single working American?
I am speaking of a payroll tax holiday. The payroll tax is regressive, proportionally affecting lower income workers much more than higher income workers. This sweeping tax relief would lead to more money in the pockets of people likely to spend it. This would assist families in need and provide a huge boost to the current level of aggregate demand. More spending would create more sales which would create more jobs.
The rich and the corporate leaders sitting on mounds of cash can afford for the economy to be in a lull. But adults in unemployment lines and children in soup kitchens cannot afford it so well. High unemployment drives economic inequality in society and exacts a large toll on our nation’s families. Let’s give our citizens, and our nation as a whole, a greater chance for success through the largest tax relief plan in decades targeted to those who can and will use it the most.
Thank you so much for your time and energy. I wish you the very best.
Your concerned constituent,