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Robert Pollin: Imposing ‘austerity’ at this time could be calamitous

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. At the G-20 in Toronto a few weeks ago, a lot more happened than 1,000 people getting arrested, which drew most of the attention. The country signed a document which agreed to two basic things. The countries that they called “advanced deficit countries” would march down the path of more austerity, and maybe some short-term stimulus, but they all agreed by 2013 they would halve their deficits. They said the advanced surplus countries—which more or less means China—there they wanted some spending in infrastructure, maybe some stimulus. They want even a bigger social safety net. They even talked about wages going up, something you’d never hear them talk about when it’s about their own countries. Now joining us to talk about the G-20 and their plans for austerity is Bob Pollin. He’s codirector of the PERI institute and teaches in Amherst, Massachusetts. Thanks for joining us, Bob.

ROBERT POLLIN, CODIRECTOR, PERI: Thanks for having me, Paul.

JAY: So, first of all, your take on what the G-20 decided, this idea of cuts in Europe and North America and maybe some expansion in China. And is there some alternative to this?

POLLIN: Well, the notion of imposing austerity at a moment when we may—may—be slowly coming out of the most severe recession in the last 70 years is potentially calamitous. At the very least it is highly, highly risky. I mean, what we need now, both in Europe and in North America, are continued stimulus policies, policies that will expand spending, promote employment creation, and enable the private sector to start growing as well. That has to be the basic premise. The mere fact that it is not the basic premise is what makes the policies themselves utterly inappropriate for the moment. Now, the argument as to why the European economies and the US now need to impose austerity policies is because the fiscal deficits, the government deficits, government borrowing money to promote spending, are large. They are large. They have to be large, because the crisis created by Wall Street is itself large. So we have to sustain big fiscal deficits for the moment, and that’s part of the way that we get out of the crisis. Now, the other thing going on right now, though, is that despite the very large fiscal deficits, private-sector borrowing and spending is not happening. So in my view the key is not just to talk about expanding the deficits but to start creating very large incentives to get a private credit flowing into businesses.

JAY: Okay. Well, let’s back up a sec before we get into what other possibilities [there] are. One of the reasons there’s such state deficits is because there’s been so much tax-cutting and so little taxing of the wealthy. You know the old maxim: when states need stimulus money, you can either borrow it from the wealthy or you can tax it from them. So, I mean, there are other solutions in terms of dealing with the deficits, anyway. Isn’t there?

POLLIN: Oh, sure. I mean, well, there’s two kinds of deficits, and it’s important to keep them in mind. What we would call a long-term deficit, or a structural deficit, is when on average, over the course of a full business cycle, you’re spending more than you’re taking in. And the way to close those deficits, assuming that you want to maintain your spending priorities, is to raise taxes. So, yes, the tax rates for the wealthy are too low, whereas their actual levels of income, relative income, have risen astronomically. So, yeah, the first place to start would be to raise taxes on the wealthy. One way to do that, one of the ways that I’ve promoted a lot and other people are interested in, is taxing Wall Street transactions. You can raise a lot of revenue through a very small tax that way, and it would fall disproportionately on the wealthy. So that’s good for a long-term solution. But in the moment, we don’t want to raise taxes, we want to stimulate spending, and borrowing is part of the way to do that, because we’ve got to do everything to expand the economy and not to discourage anybody from spending or investing.

JAY: There seems to be, in the G-20 documents, at least in Obama’s words, recognition of the need for a certain amount of short-term stimulus. In fact, Obama was—that was his supposed main message in Toronto to the Europeans, who were again (I don’t know how much of this was theater) resisting this. But in their documents, and also in their practice, what they seem to be saying is, yeah, maybe some short-term stimulus, but in the long term (meaning “but starting now”) let’s go after people’s retirement. So in France they want to raise the age of retirement. The same thing in Greece. In the United States they’re talking about going after people’s Social Security. So the way they’re going to deal with this deficit further out is by going after people’s retirement savings or retirement entitlements.

POLLIN: Let’s think about this in really basic terms. Yes, in Europe and in the United States, the idea is filtering through that somehow the level of social expenditure is something that we can’t afford, that we have overspent relative to where the economy is and what we can afford. But how could that actually be true if we think of this in longer-term, when average productivity continues to rise? So the point is, when the average productivity rises, that means the income pie is getting bigger. And so if the income pie is getting bigger every year, then why aren’t we able to afford things that we were able to afford 30 years ago? The answer is: of course we can afford it, but we have to distribute the shares of the pie more fairly, more evenly. So that is the simple answer here. Now, the other thing that I want to stress is the role of the financial system and the private financial markets, because this has not been focused on and it has to be; it’s the other leg of the problem here. In the US, the private banks, as of the most recent data, are sitting on $1 trillion in reserves. They’re holding cash that they’re not borrowing. By comparison, before the crisis started in 2007, they were holding $20 billion of reserves. So that’s a reversal of $980 billion that could be injected into the spending stream.

JAY: Now, is it true that most of this money is money they got practically for free from the Fed?

POLLIN: Oh, absolutely. And—now, you can tell a comparable story for Europe. Now, the problem in Europe now, what is at least recognized as the problem, is that the big banks in Europe are holding so-called sovereign debts, that is, the debts of the governments that are in trouble—Portugal, Ireland, Italy, Greece, and Spain. They’re holding these debts. And because they’re holding these debts, the answer that seems to have filtered down is that therefore those governments have to impose austerity conditions on working people in order to make themselves more creditworthy. Well, the reason they’re not creditworthy is not because of anything that has changed in terms of the underlying productivity of these economies, but because there’s been a crisis. And the crisis means that incomes have collapsed, tax revenues have collapsed, and so forth. Now, the short-term solution is for the European Central Bank to just buy up—themselves, the European Central Bank, buy a high proportion of these sovereign debt assets held by the private European banks. This would be almost part of the normal course of monetary policy operations. This would take the so-called “toxic” sovereign debts off of the books of the banks; it would reinject money into the banks’ coffers. Now, then, the banks in Europe, like the banks in the US, would then be holding massive amounts of reserves. And then the next step is to get those reserves into the spending stream, and that means that we need to create an incentive for that to happen. And what I’ve proposed for the US in a bill that Senator Sanders asked me to draft is that we tax so-called excess reserves of banks. We give them a lot of reserves—monetary policy—and then we tax the excess, and we keep taxing them until they start lending money.

JAY: So the idea is use it or lose it.

POLLIN: That’s right. That’s right. And they’ll use it. I mean, you keep raising the tax rate enough, they will start lending money. In the US, again—I just checked the most recent data—the net amount of borrowing going on by small businesses in the United States is negative. Negative. They are repaying debts. They aren’t taking in any more credit. And of course the level of spending and investment and job creation is nonexistent.

JAY: Well, we’ve talked about this before, where the US government owns, essentially, AIG, Fannie and Freddie. They have instruments where they could—instead of shoveling all of these almost trillion dollars into the private banks, through what are essentially now public banks they could be doing this kind of lending. I mean, isn’t that part of a solution?

POLLIN: Yeah. But look, let’s not ignore the $1 trillion that’s sitting there. I mean, it’s $1 trillion.

JAY: No, I mean, why not a combination? Tax it and put a vigorous program through the public institutions.

POLLIN: Absolutely. So use the public institutions that we have, that we own—AIG, Fannie and Freddie. Let them lead the way to start lending money to the private sector and getting spending back via the private sector, so that therefore—I mean, one of the arguments, of course, for the austerity crowd is, well, the government’s just, “We can’t keep burdening the future generations with these gigantic debts to China.” Okay. Fair enough, to some extent. So why don’t we start with using the other instrument of macro policy, which is credit policy, which is to stimulate private credit? That fact that we have low interest rates coming out of the central banks—which we do have, near-zero interest rates—actually means nothing if the central bank setting the low interest rates do not in turn lead to the private sector giving credit to private businesses, which leads to spending and job creation. That’s the one gigantic piece that is missing.

JAY: Okay. Well, in the next segment of our interview, let’s talk about the other big piece of this equation, which the G-20 document does recognize (although, in my opinion, has a rather odd solution to it), and that’s wages. You know, one of the reasons there isn’t more credit flowing and one of the reasons small businesses aren’t investing more is, one, the lack of credit coming from the banks, but number two, the lack of real demand coming from the economy.

POLLIN: Right.

JAY: So in the next segment let’s talk about what the G-20 had to say about wages. Please join us for the next segment of our interview with Bob Pollin on The Real News Network.

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Robert Pollin is Professor of Economics at the University of Massachusetts in Amherst. He is the founding co-Director of the Political Economy Research Institute (PERI). His research centers on macroeconomics, conditions for low-wage workers in the US and globally, the analysis of financial markets, and the economics of building a clean-energy economy in the US. His latest book is Back to Full Employment. Other books include: A Measure of Fairness: the Economics of Living Wages and Minimum Wages in the United States, and Contours of Descent: US Economic Fractures and the Landscape of Global Austerity.