Pollin Responds to Comments

I welcome all the comments that people wrote in response to the series of interviews Paul Jay did with me regarding my recent paper, "Austerity is Not a Solution: Why the Deficit Hawks are Wrong." Here I will respond to eight key points that were raised in the various and wide- ranging comments.

In his/her first comment, Saturn_ls1 asks: "how much deficit is too much?"

I discuss this briefly in the interview series and at some length in my article. In the article, I argue that over the course of business cycles, fiscal deficits should be in the range of 2-3 percent of GDP, as opposed to the 10 percent of GDP range that we are experiencing now. I do not support the view that, over a full business cycle, large deficits are a matter of no concern. Quite the opposite: I discuss at length ways to close the deficit over the long term. But that is different than saying we should close the deficit in the short term, while we still have official unemployment hovering around 10 percent, and a better measure of unemployment being close to 20 percent. In that situation, we need to maintain large deficits to prevent the economy's floor from collapsing altogether. We also need federal deficits to maintain spending on education, health care, unemployment insurance and public services at the state and local levels. We also need to maintain fiscal deficits to finance long-term investments in traditional infrastructure and the green economy. Those deficits will likely be in the range of 7 - 10 percent of GDP until we see a recovery. But we also need aggressive credit market policies, to get banks to stop sitting on the $1.1 trillion in cash reserves they now hold. This means taxing the excess reserves of banks until they start to see the motivations to find business customers to finance job-generating investments. I also favor loan guarantees for these types of loans, to reduce the risks in the economy for both borrowers and lenders, enabling them to focus on spending for recovery.

In this same comment Saturn_ls1 also wonders whether I saw the personal debt bubble coming

It just so happens I published a monograph in 1991 called Deeper in Debt: Changing Financial Conditions for U.S. Households. More generally, I have been focused on these and related issues since I wrote my doctoral thesis in the early 1980s. This is all available for anyone interested in reading works that have been gathering dust for decades.

Saturn_ls1 says in a second comment that "Any normal feedback systems, like free markets, tend to over shoot their median (just like your home thermostat). This is a natural process. Bubbles and recessions are normal (just like the temperature swings in your home)."

I think the analogy Saturn _ls! is making here points us to the opposite conclusion than that suggested. As I see it, home heating/cooling systems are extremely effective human interventions to stabilize temperatures in homes for the most part, regardless of what the natural temperature is outside. By the same token, effective financial regulatory systems enable the economy to operate with much more stability than has occurred historically in the absence of financial regulations. This becomes clear if one looks at the Kindleberger's classic history of financial instability, Manias, Panics and Crashes. From the discussion in that book, it becomes clear that during the period between the end of World War II and the early 1970s, U.S. and global financial markets achieved a level of stability that was unprecedented in all the history of capitalism. This was not an accident: coming out of the Depression, the U.S. government established the Glass-Steagall system of financial regulations and globally, we had the Bretton Woods system of regulations. They were far from perfect. But they did achieve a lot in terms of stabilization. So I do not accept as a given that severe financial instability is just part of any natural process, just as I do not take as a given that I must sit in my house freezing to death when outside the weather is zero.

Pilot is concerned about responding effectively "as we see the previous order crumble" and how to respond effectively "to the new order being ushered in, (one that will see most of us enslaved to a new degree, unfortunately."

I agree with Pilot that the old order is crumbling-that order is neoliberalism, which has been dominant throughout the world for 30 years. But I don't think that the shape of the new order is clear. I also don't think what the new order looks like is preordained. It will be a matter of fighting for a more just, egalitarian, and ecologically sustainable new order. We might succeed in creating such a new order, but then again we may fail. In such matters, I often think of the great dictum by Gramsci, "Pessimism of the mind; optimism of the will."

Kadugen and davidpear offered opposite perspectives on whether my perspective is strictly short-run or whether short-term investments now can lead to long run benefits.

I agree with davidpear on this point and I think he expressed my view well. Indeed, I think one of the strengths of the type of thing I am proposing is that it combines short- and long-run benefits. If we invest big-time now in areas of education and clean energy infrastructure, that creates lots of jobs efficiently in the short run. But it is also providing us with the foundation for expanding opportunities long-term for our children and also insuring ourselves against a potential ecological catastrophe. The education and clean energy investments we make now are totally defensible strictly as a long-run agenda. They also happen to work really well for the short-term.

Socs thinks that I am "kidding myself, inflation is definitely occurring."

Of course some prices are rising, though mostly modestly. But across the board, inflation is negligible, maybe at 1-2 percent. I do look at such things, and I do also pay for things myself in my guise as a normal human being. I don't see the evidence that there is strong, economy- inflation occurring. This is a matter of fact, not opinion. I think I have the weight of evidence on my side.

Saturn_ls1 expresses confusion about my being opposed to austerity while still "favoring taxation, cutting military budgets and controls on healthcare," asking further, "So is he proposing stimulus for some and austerity for others?"

This is a very good question, and I am happy to clarify. My proposals about taxing Wall Street transactions, cutting military budgets and controlling health care costs are in response to the deficit hawk argument that we are on a long-term fiscal train wreck. I try to show that it would be easy to avoid a long-term train wreck by adopting those proposals for Wall Street taxes along with cutting military spending and health care costs. However, these are not part of my short-run stimulus agenda. The focus of that agenda is to maintain deficit spending to support education, health care, public services and unemployment insurance; and to push the cash locked up in private banks into productive, job-creating investments.

Kadugen thinks I am engaging in "extreme happy talk," because the US used to produce things and sell them around the world. Money was coming into the country. Now it is quite the opposite.

I agree that the world is quite different. I also strongly support strengthening U.S. manufacturing, particularly in the area of renewable energy, through industrial policies. At the same time, I don't think it is necessary for the U.S. to become a net exporter in order to move the economy to full employment. Remember we got close to full employment in the late 1990s with a trade deficit-imports exceeding exports-that was roughly comparable to today's deficit. I have written about all these issues in my regular column with the New Labor Forum. If you are interested, you can find the pieces at our website, the Political Economy Research Institute. Maybe we could even convince the Real News Network to conduct some interviews on this, if the RNN audience isn't already sick of hearing from me so much.

Thanks all for your comments...

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 books include A Measure of Fairness: The Economics of Living Wages and Minimum Wages in the US and Contours of Descent: US Economic Fractures and the Landscape of Global Austerity.

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