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  • Is the "Fiscal Cliff" a Fiction?

    John Weeks: The fiscal cliff has simply been created by Congress in order to push austerity which is no solution during a recession -   November 14, 2012
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    John Weeks is Professor Emeritus of the University of London and author of the forthcoming book, The Economics of the 1%: How mainstream economics serves the rich, obscures reality and distorts policy. His recent policy work includes an supplemental unemployment program for the European Union and advising the central banks of Argentina and Zambia.


    Is the PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore.

    Well, the election was hardly minutes old when the news media was already talking about the coming fiscal cliff. Well, just what is it, and who supposedly is about to go over it?

    Now joining us from London to talk about all of this is John Weeks. He's a professor emeritus at the University of London School of Oriental and African Studies. He's an author of the books Capital, Exploitation and Economic Crisis and a soon-to-be-released book, The Economics of the One Percent. He's the founder and contributor to Thanks for joining us again, John.


    JAY: So, what is the fiscal cliff they're talking about, and what do you make of it?

    WEEKS: Well, to put it briefly, without going into boring detail, a number of years ago a law was passed in Congress requiring automatic budget cuts or automatic steps—could also be tax increases—to reduce the deficit if it got beyond a certain point. This is partly related to the famous debt ceiling.

    But at any rate—so the situation is, if by the end of December there aren't cuts or something to reduce the deficit, they will occur automatically. The fear is that these automatic budget cuts will send the economy into recession again, which they probably will.

    Now, so the question becomes: should Obama say, alright, I don't want to fall off the cliff with everybody, I'll have to make a deal with Republicans? Or does he say, no, I'm not going to cut Social Security, I'm not going to cut medical care and aid to the poor and the middle class, I'm going to stand my ground? Now, let's, you might say, do a counterfactual and assume that he really would do that. And I want to explain why he should.

    JAY: Well, it seems to me he's indicated already—I think he had an interview with the newspaper board just before the election where he said (and I think he said this other places) that for every dollar of tax increases on the rich, he wants $2 of cuts. And he seems to have already indicated he's willing to make some sort of grand bargain—some people are calling it a "grand betrayal" if he does what they think he's going to do—but that he is willing to look at a major overhaul of Social Security.

    WEEKS: Well, I think that that gets into a very specific issue of Social Security. One aspect of it is to try to reduce it by change—you know, these automatic increases every year associated with the cost of living. And one suggested way to do that is by changing the cost of living index that they use so the increases aren't so much.

    But I think the important thing is for people everywhere—for Americans, for other people, but particularly people in the United States—to realize that this deficit is not a problem. Once you realize it's not a problem, then it becomes easier to argue against cuts in it, whether Obama's for them or anyone else is for them. I mean, there are a lot of people out there on the left or whose hearts are in the right place who really do think it's a problem if the government is spending a lot more money than it's taking in. That's a problem, that we have a debt that's equal to annual GNP. But it's not a problem, and people ought to realize it's not a problem [crosstalk]

    JAY: Why isn't it a problem? I mean, one of the issues that's raised that at the moment the interest being paid on a lot of that debt is rather minimal, but interest rates could go up, and the cost of servicing that debt could be massive.

    WEEKS: Well, that's a question of the debt, and I'll say something quickly about that. The first thing to realize is almost 40 percent of the U.S. Debt is owned by the U.S. Government itself or by state governments. Another 20 percent or so is held by various private pension funds.

    So think about that for a moment. The biggest single holder of U.S. debt is the Social Security system. The interest rate goes up. What happens to [incompr.] The Social Security system has more money and is more solvent. I'm not for interest rates going up, but what I'm saying is it's not—paying this interest does not mean money down a rat hole. It's not just throwing money away. People hold those assets. And many of the people who hold them are people like you and me—I mean, particularly me, because I'm retired. So those interest payments in part are what fund people's pensions. And that should be kept in mind when you're thinking about whether or not the debt is a problem.

    So you begin with the debt by saying, yeah, it's $13 trillion, or whatever it is, but 40 percent of that is owned by the government itself. And you owe yourself money, it's not really a debt, is it? Okay, so now we're down to about, you know, only 60 percent of that, about $9 trillion, and part of that is owned by pension funds and so on.

    So the question of how big the debt is is a question in part of who owns it. And, in fact, the part that there could be speculation against or could be a problem if interest rates went up is much less than half.

    JAY: Now, there's been a lot of talk in the election campaign about how much debt China owes. Romney must have talked about that every speech—we don't want to keep borrowing money from China to do such and such. What's the significance of foreign-held debt? Doesn't that matter?

    WEEKS: Well, it does matter, because, of course, that's interest that you'll be paying outside the country. And the Chinese are not—the Chinese government has its—certainly has its own agenda, and this particular agenda is to be the strongest country in the world. And they'll probably achieve it.

    So why are they accumulating U.S. debt? It's true, I think, that there are ways to get around that and should stop selling debt to the Chinese, in as far as that's possible—it's not completely possible, because, of course, the debt's sold on the open market and you can't regulate who buys it. Problem is the Chinese, to the extent that it is a problem, them holding this debt, it's because they would use it as a lever when they have a political goal. They aren't going to say, we want all our money one day. What they're going to say, for example, is, with regard for—let's take the case of this dispute over the sea that—south of China, where they have a dispute with Vietnam and Philippines and three or four other countries, they would say something like—or they might say something like, we'll cash your debt in if you don't keep your mouth shut, and we'd really like it if you support us, but at least don't oppose us.

    So, yeah, I think there's a potential problem there, but it's not a financial problem, as such, and there is a way to get around it. The way you get around it is that—for the government to sell the bonds and sell its debt to the Social Security system and sell it to itself, that is, to borrow directly from the central banks. So there are ways to get around this. You can run a deficit, you can run a bigger debt without obligating yourself to China or any other country in the world any more than we have already.

    JAY: Some people argue there's a point—I mean, depending who's arguing, they say it's already there; others say it's somewhere off. But there's a point where this becomes such—the amount of debt and the amount of government holding its own debt, and the fact that the United States can print its own currency—so it kind of gets away with more of this than perhaps other countries can. But there's a limit before people start losing faith in just what does the dollar represent, if so much of it is based on internal government-to-government debt and, essentially, creating money.

    WEEKS: Well, I would say that faith will be lost in the dollar just before asteroid strikes Europe and destroys all human life. Governments, companies must hold their wealth, their idle wealth in some form. Okay? So private companies, governments, they have liquid assets. In what form are they going to hold them? The really—the only serious candidate for that in the foreseeable future is the dollar. I don't think any intelligent government or company is going to hold its wealth in euros. It won't hold them in the Chinese currency because the exchange controls. It might hold them in pounds, but there aren't enough British pounds around to satisfy the demand.

    One way you can tell what I'm saying is correct is, as the U.S. debt has increased incrementally each year and gone from—I think in 2007 it was about 42 percent of GNP—to 100 percent now, interest rates have fallen. Interest rates in the United—the interest rate on the U.S. debt is miniscule, alright? Now, how does someone square that with perhaps losing faith in the currency? You can't.

    The solution is to get growth going, and then the U.S. debt will decline in importance relatively to GNP. Also I might add, as many people may know or may not know, at the end of World War II U.S. debt was over 200 percent of GNP.

    JAY: Well, those people yelling about the fiscal cliff and the need to reduce the deficit and such and the debt, they must know all the same numbers you have. So why are so many people so concerned about this?

    WEEKS: Well, I think it's primarily ideological. Let me explain why. You know, there are a lot of silly and stupid things set out in the world, and I wish I could explain them, because if—I wish I could explain why people have those views, because if I could explain it, I might be able to do something about it. But one thing I can do something about is the question of the deficit. Why do we have a deficit? It's absolutely straightforward. The deficit is the result of a recession. Before the recession began, 2007, the deficit was small. Now it's large.

    Why is it large? The economy contracts, the economy grows slower, the government receives less revenue. Okay? It receives less revenue, that generates a deficit. It has to pay unemployment compensation.

    See, when times are good, money is flowing into the unemployment fund. It's a special fund with a special tax. Okay. So when the economy turns down and there's unemployment, you have to pay unemployment compensation and you draw down from the fund. That means when an economy goes into recession, expenditures for unemployment compensation and various types of welfare support increase just when revenue is decreasing. And that's why you get a deficit. And it's a good thing.

    And the reason it's a good thing (if people will think about it for a moment) is because those unemployment compensation payments and those social support payments, they mean that the income and the consumption of people falls less than the economy climbs. So that softens the decline in demand.

    So, actually the deficit is our friend. We should be glad we've got a deficit. If we didn't have a deficit, if we had tried to keep the budget balanced, the economy would have gone into a total collapse. So everyone should go to bed thinking, thank goodness for the deficit, and it will get smaller when we start to grow.

    JAY: But there must be some kind of limit to how big it can get, is there not? Otherwise, why not quadruple unemployment funds and more than that? I mean, you could hand out money to everybody to spend?

    WEEKS: Well, I mean, there is a limit, of course. The problem arises when you're running a deficit and the economy is near full employment. Running a deficit when the economy is near full employment is generating excess demand, which can be inflationary and can cause difficulties in—and that inflation will feed back in financial markets and then the prices people have to pay.

    However, we are very far from that. We are very far from that, that situation. The deficit you can run depends on how much it costs to service the debt it creates (that's very, very low) and whether or not it's likely to create an excess demand, which is inflationary. And we have so much unemployment that the chances of moving to a place where we have a shortage of some strategic resources is very, very slight.

    Okay. So what should we do? If we had a progressive president, what he would do or she would do is to increase government expenditure, make the deficit larger, stimulate the economy. The economy would start to grow. Tax revenue would begin to flow in. As the economy recovered, you could begin to raise taxes on the rich further, though I would do it at the beginning. And then you would have, you might say, a virtuous circle. You had to spin to get things going, you had to increase the deficit, but then that becomes the vehicle by which the deficit will be reduced.

    JAY: Well, that sure isn't what's being talked about in Washington.

    WEEKS: No, it's sure not what's being talked about in Washington. And that is because I think it's the control of the financial interests. I mean, I don't want to be simplistic, but I think that it's—two important things that are—there are two important things for the financial interests. One is that they don't produce anything themselves, so, therefore—. Hello?

    JAY: Yeah, go ahead.

    WEEKS: Yeah. They don't produce anything themselves. So the way they get their income is they redistribute it from the rest of the economy. How are they going to do that? Where are they going to redistribute it from? They've pretty much driven the manufacturing sector into the ground in the United States, so the only place from which you can extract it is the government itself. So, therefore, I think part of the strategy is, cut government expenditure so that the financial sector will get it instead.

    Now, the second thing is I think that the financial interests and, you might say, the grand rentiers in the U.S. economy see a unique historical moment. They were—the defeat of Romney was a setback, but in this moment they think that they can destroy the welfare state and that the vehicle for doing that is to use the deficit as an argument, you might say, a faux-technical argument, and not say, you know, everybody ought to go hungry and they're all useless—though Romney came close to saying that—say instead, you know, my heart bleeds, but the reality is we have to get this deficit down, and it is true we're going to have to cut Social Security and we're going to have to cut Medicare, but we just can't afford it—which is complete and total rubbish. Of course we can afford it. We're one of the richest countries in the world. If we can't afford it, who can? So I think that they're motivated by a desire to destroy the welfare state, what little of it's left in the United States, and in doing so, to redistribute income and wealth to themselves.

    JAY: Thanks very much for joining us, John.

    WEEKS: Well, thank you very much for having me. It's always a pleasure to be on The Real News. And let me just say people should support it, because if you look at the other news networks, you would never get the stuff you guys run. And I congratulate you.

    JAY: Well, thanks very much. And that gives me an opportunity to tell everybody that we've just begun our matching grant campaign for the end of the year. We have a $100,000 matching grant, so every dollar someone gives is going to be doubled. So I hope you'll click this Donate button, because, again, if you don't click that, we can't do this.

    Thanks for joining us on The Real News.


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