US Economy Contracts – More Cuts Will Mean Even Less Growth
John Weeks: The idea that smaller government leads to more private sector investment is a fairy tale
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay. And welcome to this week’s edition of The Weeks Report with John Weeks, who now joins us from London.
John’s a professor emeritus at the University of London School of Oriental and African Studies. He’s the author of the forthcoming book The Economics of the 1Â Percent: 1Â Percent Economics, 99Â Percent Ideology, and he’s the founder of JWeeks.org.
Thanks for joining us again, John.
JOHN WEEKS, PROF. EMERITUS, SCHOOL OF ORIENTAL AND AFRICAN STUDIES (SOAS): Well, thank you for having me. It’s always a pleasure.
JAY: So what caught your attention this week?
WEEKS: Well, two things caught my attention. The more pressing thing is thatâ€”the report that the U.S. economy contracted. Everyone had assumed that it would expand in the last three months of 2012, but it contracted, in fact. The U.S. economy had been growing at a quite respectable 3Â percent. There was a problem about generating employment and so on, but at least it was growing. And it contracted in the last three months, the last quarter.
What was going on? I think that most rational people say what happened is that the budget cutsâ€”even though the budget cuts were in the military part of the budget, which is not necessarily a bad thingâ€”it’s probably a good thingâ€”still, budget cuts are budget cuts. And what happens is the military was ordering fewer things from the factories, and the people who supply the military were laying off people, and the people who were laid off had less money to spend, and so on. So as a result the U.S. economy contracted.
Okay. So I would say we’re being sent a signal there, and which I hope President Obama and his advisers recognize that signal, namely, that if there’s a so-called compromise in which there are budget cuts to go along with raising the debt ceiling, then we’re going to contract again.
JAY: Now, you get an argument from the conservatives in Congress in the United States that this will only take some time, that if you have smaller government and less government spending, eventually the private sector is going to pick all of that up. What do you make of that theory?
WEEKS: Well, I’ve always had a preference for fairy tales, but not that particular one. I mean, it is amazing how much nonsense that you hear, the idea that if the government were just smaller, then the private sector would expand to fill the gap, you might say.
There is a bit of truth to it. If the government contracted, the financial interests would be able to appropriate what formerly had been the taxes that we were paying, so instead of us paying to the federal government, we would be paying to the big banks in the United States. I mean, there might be some people that prefer that their money go to the big banks than go to the government. But to be serious, no, there is absolutely no sign that the private sector will expand in the absence of a government stimulus, kickstart (if you want to use a cliche), to get it going.
There isâ€”interest rates are close to zero. How would a contracting public sector, how is it supposed to expand, give a stimulus to business? The way it’s supposed to happen is the government stops borrowing, it reduces the deficit; that reduction in the deficit brings the interest rates down, ’cause before, the U.S. government had been competing with the private sector to borrow money, pushing interest rates up.
I think you can see that that story is absolutely madness now. I mean, the U.S. Treasury rate, short-term borrowing rate is below 1Â percent, below 0.5 percent. The long-term U.S. borrowing rate is barely above 1Â percent. So, therefore, if there were any businesss out there that were eager and panting to borrow money and expand, just waiting for the government to contract, why didn’t they do it by now? They gotâ€”the money’s not going to get any cheaper.
JAY: And certainly for the big banks, money’s virtually free right now from the Fed. But that doesn’t seem to be inducing them to be lending it out.
But there’s a critique of this that you can say comes from the left, which is that if there’sâ€”government does matter, deficit funding does matter, some day rates will go up, and then people are going to be paying extraordinary amounts of their national wealth towards paying off this loan, and that it’s better to have much more taxation than more borrowing.
WEEKS: Well, I wrote a little bit about this in The Real News last week that’s still up. At the present time, of theâ€”about 6Â percent of the federal budget goes to interest payments. In 1991, the lastâ€”well, 1992, actually, the last year in which George Bush senior was president, the percentage was 15Â percent. So what we’re paying now is far less than it was then. And if interest rates were to triple, it would still be below that peak in 1992. So what I would say is, let’s worry about that problem when it comes around. Right?
Another aspect of it is, as the economy recovers, the deficit’s going to get smaller, and it will be less necessary to borrow, because as the economy recovers, more taxes will be paid, there’ll be moreâ€”more people will have higher incomes, more people will be employed, businesses will be making larger profits (bless ’em), and the government will have more revenue, and the deficit will go down.
In fact, that has been happening over the last 18Â months. It’s actuallyâ€”the deficit has been going down, and the ratio of public debt to GNP is becoming smaller. Sure, it hasn’tâ€”no, it hasn’t dropped tremendously, but the deficit, for example, has gone down to about 6.5Â percent. It partly depends on how you calculate it. But, you know, however you calculate it, the deficit is less now than it was twoÂ years ago, and that has nothing to do with the cuts. As a matter of fact, the cuts have probably made it worse, because they slowed down the rate of growth.
So if the deficit is getting smaller, then we’ll be borrowing less.
And in any case, there is another way to do it, for the government to do it, that doesn’t bother any of us, and that is for the government to borrow from itself. And what that means is for the federal government, for the Treasury, which pays out all of these things and actually, you know, pays for them with checks and money and so on, to go along to the Federal Reserve system and say, give us a line of credit, whatever it is, you know, $100Â billion orâ€”sounds like a lot of money, doesn’t it? Whatever it happens to be, $1Â trillion. And then you don’t have to borrow in markets.
And there’s noâ€”when we pay our taxes to pay off the debt, where are those taxes going? The federal government itself is holding that debt. Where are they going? I’ll tell you where most of them are going. Most of them are going to the Social Security fund. Twenty-fiveÂ percent of our debt is held by the Social Security fund. So, therefore, when the debt goes up, 25Â percent of it more or less, if your taxes go up to pay more debt, part of it’s going to the Social Security fund. Another part of it’s going to private pension funds. I saw a recent estimate that said that the part of the debt which is held by the private sectorâ€”and you might say the private profit-making sectorâ€”including foreigners, is probably about 48Â percent of the debt, slightly less than half.
JAY: So ifâ€”but if you look at from President Obama, who talks about the need to deal with the debtâ€”and certainly on the conservative side they find it the number-one priority, and not just in the United States; you see the same debates in Canada and in Europe and most other countries. But the elites certainly believe you have to pay down the debt. And I assume it’s because they think their assets are going to get devalued if that isn’t done. What’s wrong with that? I mean, it’s not just propaganda. These guys do seem to believe it has to be done.
WEEKS: Well, I think it’s aâ€”it’s not easy to explain. Many people say, or in the past people have said, well, banks don’t like debt because it might provoke inflationâ€”which I think in the current context is complete rubbish, but let’s say it did. And so, therefore, the banks don’t like the deficit, they don’t like spending, because it might provoke inflation, and then the loans that they made will be devalued by inflation.
Well, I think that’s no longer true, because banks don’t make their money from lending out anymore. I wish they did. And if you look at the financial sector profits, then they’ve actually been going up while the rest of us have been not having such a happy time of it. So it appears that the banks can make money when things are bad. They make money when things are good. And it’s no longer [crosstalk]
JAY: But there’s a lot of people other than banks that would be affected if it became inflationary, I mean, from people owning houses to people on fixed incomes to anyone that owns some physical asset. They’re worried about it depreciating.
WEEKS: Let me come back to that, that issue, ’cause that’sâ€”you ask, you know, why are theseâ€”why are the wealthy, why are the rich, why are the 1Â percent, why they’re against deficits and want the debt to be brought down. I think for the rightâ€”for the Tea Party people in Congress and for the right wing all over Europe, they see a historic opportunity before them that they haven’t had in 50Â orÂ 60Â years, and that is to destroy the welfare stateâ€”in the case of the United States, to destroy what’s left of it, and so they can say, look, we’ve got to get this deficit down, we’ve got to do something about the debt, because all of those future generations would like to pay it off, and all of those arguments, and we might have inflation, and we’ve got to get it down, and the only way to do it is to cut social welfare. Because what are the biggest programs in the United States? Medicare and Social Security benefits. And so, I mean, you know, my heart bleeds, but we’ve just got to get those down, ’cause otherwise America is going to go deeper and deeper in debt. I think that that’s their basic agenda.
JAY: And why?
WEEKS: Andâ€”you mean and what should we do about it?
JAY: No, no, I said why. Why? Because the alternative is higher taxes.
WEEKS: Because they want to redistribute income. See, currently people pay taxes. It goes to the government. The government makes expenditure. Increasingly, those expenditures areâ€”directly or indirectly affect the 99Â percent. What the 1Â percent wants is to get rid of that, is to get taxes down and say to people, look, you should be happy your taxes are lower.
But what will be happening in that process is there will be a redistribution of income towards the wealthy, just as has been going on for the last 30Â years. I mean, it’s not accidental, if you look at the statistics, that the decline in the size of the federal government has gone hand-in-hand with the rise in the incomes of the 1Â percent. And I think that that’s what they have in mind.
JAY: Alright. Thanks for joining us, John.
WEEKS: Well, thanks for having me. It’s always a pleasure.
JAY: And thanks for joining us on The Real News Network.
DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.