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Tom Ferguson: Stimulus too small; increasing money supply won’t work; austerity will raise unemployment

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. A couple of days from now the election will have been held, and if everything holds to what the polling seems to indicate, the Republicans will have probably taken the House, maybe even the Senate, and one way or the other not very likely to see any more stimulus spending out of Washington over the next couple of years. What will that mean for the economy and the lives of ordinary people? Well, now joining us to help us answer that question is Tom Ferguson. He’s a professor at the University of Massachusetts, Boston and a senior fellow at the Roosevelt Institute. Thanks for joining us, Tom.


JAY: So what do you think? Given where this is all headed, whither the economy goes?

FERGUSON: Well, it’s very likely to go in the near-term future where it’s been going in the near-term past—that is to say, not very well. You know, there’s almost one bet I’m willing to make. And you’ve got to understand that we’re living in a world that’s going to hype a tiny decrease in unemployment as a sort of economic victory on the scale of the Battle of Gettysburg or something, but in fact there’s probably not going to be very much of any improvement at all in unemployment for a good long time.

JAY: Essentially what we’re seeing is a process of austerity, the austerity regime that we’ve been hearing about in the UK and in Europe and the G-20 agreed to, this idea of everyone should halve their deficit by 2013. We’re likely to see that rather than stimulus. And we know that the stimulus money to a large extent’s been preventing thousands of layoffs from state governments and municipal governments. What do you think we’re going to see in terms of unemployment numbers over the next couple of years?

FERGUSON: If I had to guess, I’d say they’d stick pretty close to where they are now, with maybe the very slightest dip in a year. I mean, when I last looked, it was about 9.6 percent or so, and frankly—and in some places much higher, and that is, of course, just the average of—you know, the narrow count of people looking for work. The real number of unemployed sitting out there is, you know, almost double that. But this is a bad scene, and it’s not going to get much better any time soon.

JAY: So the argument we’re hearing from the Republicans and from Tea Party Republicans is that there needs to be this short-term pain, there needs to be some kind of catharsis, and if the government is way smaller and taxes are cut, then the economy will get going again. So do you agree with that?

FERGUSON: Look, there’s no reason to run, you know, the real depression economy under Herbert Hoover again in the 21st century. That’s what you’re actually talking about there. Now, in fact, they’re not going to do that. I do think that very [inaudible] the day after the election you’ll suddenly hear talk about the lame duck session and how Social Security and maybe a big tax cut in the corporate rates for business will be on the table. But, you know, it’s not clear to me that they can actually put that stuff across, although you can see the big head of steam building up for both of those. What I think you’re actually going to see is pretty close to a political stalemate in Washington. And that is to say, these folks got—they do have to do something if they don’t want the taxes to rise at the end of the year. The estate tax will kick back in and things like that. So these guys have some incentive to actually do a deal. But in general, waving, you know, the—maybe some extension of the Bush tax cuts, they’re going to have a hard time getting agreement on much else. And I think what they’re going to do instead is stalemate and you may pretty fast. When the bill that comes up to extend the ceiling on the national debt (I think that’s due in about February), I suspect you’ll play some more games where people will threaten to shut down the government. How’s that for an exciting recession program?

JAY: If the Bush tax cuts, especially on the wealthy, are extended, that adds to the deficit. So there [is] going to be enormous pressure to actually cut spending, rather than stimulus.

FERGUSON: This is all sort of a basic hypocrisy here. I mean, these folks are going to turn around both the super-rich tax cuts. And, I mean, you can see a big movement for that, although the president proposed not doing that for the top 2 percent of American income earners, the people who’ve just won enormously under the last 30 years and who own the banks that just got bailed out more or less at our expense. In fact, there’s a powerful movement, I mean, not only among the Republicans, where it’s an irresistible tidal wave, but among the Democrats, to extend those tax cuts for the super-rich, too. You know. And then the sheer errant hypocrisy of talking about cutting the deficit. I do think that’s likely to produce something of a popular revulsion. I mean, I think for a lot of people that one’s going to be a tax cut too far, but I may be wrong.

JAY: Now, a lot of this is being done in the name of, you know, strengthening small business. What’s likely to happen to small business over the next couple of years?

FERGUSON: They’re going to have the same problems they’ve got now trying to get loans. I mean, you have to remember, all the noise about TARP and the way we are supposed to have saved the banking system—and I hear the president and a lot of Democrats making that claim—in fact, all they did was save the banks. They haven’t got them functioning again. These banks are basically existing under a policy of regulatory forbearance. They’re not in the business of making loans, really. These guys are still trying to sort of stay solvent. They’ve got a lot of bad loans that they haven’t declared. These folks are not looking for new worlds to conquer in lending, and they’re not going to find any anytime soon. And I think, actually, that that will eventually force some form of federal action. I think you’ll see proposals for, I don’t know, infrastructure banks or other types of direct credit interventions, ’cause the private banking system is simply not going to pick up the slack [inaudible]

JAY: What do you make of what the Fed’s—is saying—is—the quantitative easing, they’re going to increase the money supply, I guess, in some way, to deal with the fact that they can’t get any stimulus spending out of Congress? So what will the effect of that be?

FERGUSON: Well, this is a hotly debated issue. My view is it’s probably not going to work here any better than it did in Japan, and it simply did not work in Japan. The Japanese finally improved their situation by doing it the old-fashioned way, that is to say, plain old fiscal stimulus spending on a large scale. When they did that in 2003, 2004, that worked. Nothing else worked. Quantitative easing didn’t work. I do think that since the dollar’s the world currency—and I would add, despite all the noise you’ll hear about how, you know, there’ll be some threat to it, it’s going to stay the world’s currency for the foreseeable future, meaning five years—when you do that with the world’s currency, there’ll be a strong tendency, I think, for that money to leave the United States, and it’ll probably bid up both commodities prices and financial assets around the world. You know, there’ll be some kind of a mini-boom in, I don’t know, New Zealand bonds or something like that. The so-called carry trade will flourish. I don’t think it’s going to do very much for the US economy. It didn’t in Japan. In particular, the notion that just by stuffing some more money into banks that are already flush with cash in terms of bank reserves, that you’re going to induce these guys to make loans, no, that’s not what you’ve got here.

JAY: That’s what I don’t get about this. This quantitative easing, in the final analysis, the only way to get the money into the economy is, unless you’re going to do it through direct government spending, which seems to be off the table, given these elections, is you’re essentially putting it back into the banks, and you’re right back in the same situation, as the banks won’t loan it to anybody.

FERGUSON: That’s right. Yeah.

JAY: In which case, they’ll take the money and go buy T-bills or whatever it is somewhere in Brazil, where they’re making more points on their money.

FERGUSON: That is exactly what I hope I just said. Yup. That’s right. Yeah. I don’t think this is going to work. And I would add, I think it’s likely to terrify a lot of people. I think, you know, when you sort of flood systems with that level of liquidity that really aren’t designed for normal functioning in it, you’re going to see some very strange things happen, and it’s going to unnerve a lot of folks. I don’t think this episode is going to end so happily. I’m rather expecting the Fed not to do an enormous amount of purchases early on. And I also think that they’re going to run into a lot of trouble from Congress. It’s clear that Republican victories in the House, for example, assuming they take control of the House, and, you know, a fortiori, if they take control of the Senate, you will see real efforts to put more restrictions on the Fed. I don’t think there’s any doubt about that at all. I mean, the audit of the Fed that passed in the Dodd-Frank financial reform bill was a one-time affair. I suspect you’ll see an effort to permanently audit the Fed. And I also think you’ll probably see efforts to bring [Ben] Bernanke and others before Congress on the quantitative easing.

JAY: Why do you think this argument about, you know, smaller government and no stimulus spending and all of this, why do you think it’s been so effective in this campaign? ‘Cause you would think a lot of the people that are voting for it are going to be quite negatively affected by this policy.

FERGUSON: The fundamental problem is that the Obama administration came into power and blew it. I mean, that is to say, they asked for too small a stimulus. Now, Paul, you know, I wasn’t the only person saying this, but I remember doing an interview with you very near the inauguration day, and, you know, it was obvious that the stimulus was too small. And there’s nothing worse than telling everybody you’re going to deliver a real fastball and then just sending a sort of pathetic slowball pitch that can’t help anybody do anything except strike out. It’s a plain failure on the administration’s part. If anybody on earth is going to complain about money and politics, it’s going to be me, but it’s a mistake to blame fundamentally the media or sort of poor presentations or something like that by the White House or anybody else for their problems now. The truth is their economic policy is a close to total failure for ordinary people. They did nothing serious on housing. You know, they didn’t stem foreclosures. Their stimulus was too small. Unemployment is actually higher now than it was when the president came to office. (That’s simply because it hadn’t risen to its peak then, yet, for which he was not responsible—it was the Bush administration.) And when you have an economic record like that, you are going to be massively repudiated, and there’s just no point in, as the vice president might say, whining about it. I mean, these guys failed. They rescued only the banks. And, you know, they’re going to pay for it.

JAY: Well, unfortunately, I think a lot of other people are going to pay for it as well. Thanks for joining us, Tom.


JAY: Thank you for joining us on The Real News Network.

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Thomas Ferguson is Professor of Political Science at the University of Massachusetts, Boston and a Senior Fellow of the Roosevelt Institute. He received his Ph.D. from Princeton University and taught formerly at MIT and the University of Texas, Austin. He is the author or coauthor of several books, including Golden Rule (University of Chicago Press, 1995) and Right Turn (Hill & Wang, 1986). Most of his research focuses on how economics and politics affect institutions and vice versa. His articles have appeared in many scholarly journals, including the Quarterly Journal of Economics, International Organization, International Studies Quarterly, and the Journal of Economic History. He is a long time Contributing Editor to The Nation and a member of the editorial boards of the Journal of the Historical Society and the International Journal of Political Economy.