on pen-l's recommendation, I read the articles by Barry Bluestone and Alan Blinder on the US government's budget surplus, from the NEW REPUBLIC at http://www.thenewrepublic.com/magazines/tnr/archive/0899/080999/coverstory08 0999.html here are some comments: 1. Bluestone's article [adapted from a book written with the late Bennett Harrison] seems remarkably conservative (considering its source, but not the magazine that published it), preventing what might be called an early-Clintonian perspective: his basic idea is that the surplus should be spent on "infrastruture, research and development, and human capital." Though there is a lot of truth to this perspective, there are also major limitations: mainly, it assumes that the benefits of the "government investment" trickle down to everyone, rather than just the rich. It is interesting that Bluestone accepts the validity of the "new economy"/"new paradigm" fad (associated most strongly with BUSINESS WEEK magazine), i.e., that informational technology has finally paid off by encouraging more rapid productivity growth. (I'd be more hesitant, if I were he: the evidence is hardly in yet.) His tilt is that the new economy is the long-delayed pay-off of a long period of government investment in infrastructure, etc., which has since been cut back. It should be restored before "we" (the entire US public) suffer the long-term consequences of recent cut-backs in government investment. Bluestone assumes that the political balance of power is such that government investment in infrastructure, etc. would be in fruitful projects that would promote labor productivity growth rather than in pork-barrel projects (a new canal, built by the Army Corps of Engineers) or efforts to increase the Pentagon's military might. (He emphasizes the bright side of the latter.) As noted, he seems to assume that the benefits of labor productivity growth automatically trickle down to workers (an assumption belied by the high profit rates seen in recent years). He ignores the class dimension of investment in "human capital" (what's called "education" or "training" by those not infected by the dominant world-view), i.e. the critiques of Bowles and [an earlier incarnation of] Gintis, among others. (The human capital perspective is reminiscent of H.C.'s vision in IT TAKES A VILLAGE, in which children are seen as assets to be invested in. I guess my portfolio is unbalanced: I should use my son as collateral for a loan (of course without surrendering all of my equity), so I can invest the borrowings in Amazon.com... Of course, Bluestone hardly approaches such inanity.) It is interesting that (as far as I can tell) Barry never brings up Max's point, i.e., that the projected surplus is based on the assumption of real cut-backs in the services provided by the Federal government. It fits with his major themes. 2. Seemingly in line with the US Treasury's paper on fiscal policy (that Max posted to pen-l), Blinder's orthodox approach argues for "paying down the national [sic] debt." (The "national" debt (a.k.a. the "public debt") should be called the "government's debt," since most of it is owed to people in the US; it should be called part of the "people's assets." The _true_ "national debt" is the US debt to the rest of the world.) (a) His first point is that we count on future government surpluses (and thus spend current surpluses either on outlay programs or tax cuts), because we can't be sure they will actually be received. This is correct, but Blinder reveals his own blinders: the current surplus is almost entirely due to the surplus of the social security system; if we cut income taxes now, we may be forced to raise payroll taxes in the future to pay for the baby-boom generation (or more correctly, for the extended life-span, and thus extended retirements, that most US citizens will be enjoying). But why not use the surplus to cut payroll taxes now (especially since in the overall scheme of things, the payroll tax is regressive)? Or why not raise the relatively-progressive income tax in the future to help cover any future deficits of the social security system? If the social security surplus can pay for the rest of the government's deficit, why not vice-versa? (Blinder ignores the fact that Doug dug up, i.e., that the projected social-security deficits are based on extremely pessimistic projections.) The fact that Blinder ignores these questions seems to be based on his taking for granted of the current balance of political power (the balance that Bluestone ignores). (b) His second point is that if the Federal government either cuts taxes or raises its spending (lowering the budget surplus, presumably as measured at some benchmark rate of unemployment), it would stimulate the economy. Given labor market tightness, this action would evoke an equal and opposite reaction: the Fed would hike interest rates to prevent feared inflation. Ignoring the possibility of recession, he argues that this combination would (1) boost private consumption and (2) hurt private investment, which he assumes would mean "slower growth" (of labor productivity) in the future. He suggests that private consumers are "doing very well on their own" and so don't need any tax cuts, ignoring the vast inequalities in consumer experience (or else defining "doing well" in terms of spending volume rather than actual financial situation, i.e., increasing debt). This ignores (1) the unlikely possibility that tax cuts might stimulate private investment, as GOPsters argue, and (2) the more realistic Bluestone point, that spending on infrastructure, etc. promotes long-term growth of labor productivity (a point that's currently been embodied in the way that US National Income and Product Accounts are reported). It also ignores the destructive nature of a lot of private (and government) investment, as with the razing of old-growth forests. Blinder's main explanation of "our economy's marvelous performance in the '90s" (where "our" refers to the US, not to the world) by the combination of smaller government deficits and easier monetary policy, which led to "a truly remarkable surge of private investment" (a surge that Doug's article in MONTHLY REVIEW argues has been mediocre and less important than the consumption binge). He also sees only the interest-rate driven aspect of the investment surge, ignoring the way in which high profitability also encouraged it (and the rich folk's consumption splurge). He admits that a lot of the US economy's "marvelous performance" has been based on the current-account deficit, i.e., borrowing from the rest of the world, and that the US is having to pay more and more interest to them. Instead of relying on "foreign saving," he thus prefers using net domestic saving. In doing this, he prefers (a) raising government saving (by using the surplus to buy up government debt) to either (b) cutting private consumer spending or (c) cutting private investment. A key problem is that these three are not separate options but are interconnected (as Keynes might point out). A rise in government saving, all else equal, would mean a fall in aggregate demand, which would depress private consumer spending. This is especially so if it pricks the stock-market bubble (hurting rich folk's spending, the "wealth effect" in reverse, as after 1929), if rising unemployment causes working people to drastically drop credit-card-based spending, and if pessimistic expectations are encouraged. Further, rising degrees of idle capacity, the fall in corporations' net worth (due to the stock market's fall), and pessimistic expectations would sink private investment. All of this can snow-ball, in a self-feeding recession, especially if the banks rationally start raising credit standards. Blinder does make the point that we may have a recession in the future, so that tax cuts or spending hikes may be appropriate then. In theory, it might prevent or moderate a recession. But given the government's obsessions with fiscal "prudence" and the general retreat from notions of active fiscal policy, Blinder seems implicitly to be relying on faith in Alan Greenspan at the Fed to save the US bacon. (There is only one god -- Capital! There is only one prophet -- Greenspan! There is only one faith -- TINA!) Given the way that the Fed's "success" has been despite itself (the Fed tried to prevent the currently low unemployment rate from ever happening and did not expect a profit-rate-led investment boom, a debt-led consumption boom, or low inflation), this faith seems to have a very shaky basis. Further, can the Fed translate its success in an easy environment into success in an extremely difficult situation? That is, can success at allowing an economy that was likely going to expand anyway (due to rising profit rates, a result of the Volcker-Reagan war against the working class and shake-out of obsolete capital) to expand in the face of unexpected anti-inflation shocks (due to increased globalization and low import costs due to global stagnation and a relatively high dollar) be repeated in fighting a debt-deflation and possible collapse of the banking system? That is, can the Fed "push on a string," making banks that don't want to lend do so anyway and people who don't want to borrow do so anyway? More specifically, can it do so without resorting to Krugman-style active encouragement of inflation, a policy now totally tabu among central bankers? Binges are much easier to deal with than purges. More crucially, note that Blinder ignores the impact of his policies on the rest of the world. Raising US national saving (by raising government saving) means a decrease in demand for the products of the rest of the world (especially if private consumption and investment also fall), a place that's already pretty depressed. And Blinder's desired lower interest rates might encourage the dollar bubble to burst, causing the rapid collapse of the dollar that Krugman writes about. (See http://web.mit.edu/krugman/www/dollar.html.) Such a fall in the dollar would encourage a rise in inflation in the US (which might evoke knee-jerk tightening by the Fed) and also deeper stagnation in the rest of the world. (c) He ends with a grab-bag of reasonable points. He is concerned with the regressive impact of proposed tax cuts (though he doesn't ponder the issue of the possible regressive impact of "paying down the debt," something I'd like to hear more about) and suggests that more progressive tax cuts are possible (though not recommended, given his previous points). It is good to see that he does not make a fetish of lowering the government's debt. In fact, he seems to realize the way in which projections of surpluses assume real cut-backs in government programs: "spending above the [budget] caps is not only certain but also appropriate," especially in "education and public infrastructure" (Bluestone's point). But in the end he counsels caution, i.e., paying down the debt. Given the way the US government's debt is still below historical standards (relative to GDP) and the recessionary impact of the fiscal policy he recommends, I really don't understand Blinder's urge to purge. BTW, it is interesting that the US Treasury article on the government debt (that Max posted) starts its graph of the ratio of government debt to GDP in 1970. This ignores the "golden age" of the 1950s and 1960s, when the ratio of debt to GDP was quite high (starting over 100% in 1945). Jim Devine [EMAIL PROTECTED] & http://clawww.lmu.edu/Faculty/JDevine/jdevine.html
