No, Deficit Spending Isn’t the Problem…

The Need For It Is.

At Reason, J.D. Tuccille (“Worried About the Debt Fight? Make the Hard Spending Decisions That Politicians Won’t!”) restates a familiar refrain of the libertarian right: “it’s easy to forget that a statutory limit to federal borrowing isn’t the real issue; the real problem is that the federal government habitually spends more money than it brings in.” But Tucille and those of his persuasion haven’t the slightest clue of what would actually result from their panacea of balancing the federal budget and paying down the debt, given the existing structure of capitalism.

In discussing the unexpected revenue shortfall earlier this year Tuccille momentarily almost hit on the problem:

Government officials can’t make the American people be more prosperous than economic conditions allow (though the state is good at worsening those conditions so that jobs and profits evaporate). 

The state does, indeed, worsen economic conditions — although high profits are actually the central component of the problem. J.A. Hobson identified the problem over a century ago, in Imperialism. Because of artificial property rights, subsidies, and special privileges that shift wealth from the working classes that produce it to rentiers — essentially the groups characterized, respectively, by what Keynes called a “high propensity to consume” and a “high propensity to save” — the economy is beset by chronic tendencies toward overproduction, underconsumption, and idle capacity.

The idea that, given the already massive upward redistribution of income, using tax cuts to put more money into the hands of “job creators” would lead to more employment is ludicrous. The rich already have more money on their hands than they can find profitable investments for; they’re not going to put more money into expanding productive capacity, because working people can’t afford to buy enough stuff to fully utilize existing industrial capacity. That’s why they wind up dumping money into FIRE economy speculative bubbles instead.

Contrary to the conservative conventional wisdom that putting more money in the hands of billionaire “job creators” and removing deficit financing as a competitor for credit is the way to generate prosperity, the truth is it’s the perfect way to destroy the economy.

Given the chronic structural problems of insufficient aggregate demand, idle capacity, and surplus investment capital without a profitable outlet, both deficit spending and a large public debt are absolutely necessary to prevent the economy from falling into depression.

Capitalism is utterly dependent on waste production, financed by government spending, to absorb surplus investment capital and keep the wheels of industry turning. Government military procurement and investment in the automobile-highway-sprawl industry employ enormous amounts of productive capacity and capital that would otherwise be idle, and social spending increases the purchasing power of people who buy stuff and likewise keep the wheels turning.

And government debt is soaking up (and providing a minimum return on) trillions of dollars that would otherwise be dumped into the capital markets and make Black Friday look like the biggest bull market in history by comparison. U.S. bonds are, for capitalist rentiers, the equivalent of USDA subsidies that pay farmers to hold land out of use and thereby effectively turn idle farmland into a guaranteed real estate investment.

To show just how easy it would be to cut spending if those pointy-head gummint wonks would get out of the way, Mr. Dunning Kruger tries his hand at the Washington Post budget game:

By slashing military spending, getting the federal government out of education, raising the retirement age, and eliminating whole areas of spending, I was able to run a budget surplus starting in 2023 and move the federal government 163.2 percent of the way towards a sustainable budget.

Hmmm. Looks like I have some room for tax cuts.

Congratulations, J.D.! You’ve removed hundreds of billions of dollars worth of demand from the economy (particularly would-be retirees who’ll wind up in the labor force either unemployed or driving down wages), dumped it in the laps of rentiers who already can’t find profitable things to invest in, caused the value of investment assets to collapse, and caused another Great Depression. Last time around, the only thing that saved American capitalism was a world war; let’s just hope they don’t use nukes in this one.

There’s a real solution that will make deficit spending and public debt unnecessary, but I don’t think J.D. will like it. It would involve abolishing all the state-enforced privileges and artificial property rights — like landlordism, intellectual property, and credit monopolies — that shift income from workers to property owners, and all the entry barriers and cartelizing regulations that shift income from consumers to business owners. There would be a lot less idle capital and idle industrial capacity, and a lot more demand for labor from the purchasing power of ordinary people.

J.D. should check to see if the Washington Post has made that into a game.

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