EK: What are the policy implications of this view [that government's spending creates the bank's demand for bonds, because they want a higher return on the money that the government is putting into the economy]?
JG: It says that we should be focusing on real problems and not fake ones. We have serious problems. Unemployment is at 10 percent. if we got busy and worked out things for the unemployed to do, we'd be much better off. And we can certainly afford it. We have an impending energy crisis and a climate crisis. We could spend a generation fixing those problems in a way that would rebuild our country, too. On the tax side, what you want to do is reverse the burden on working people. Since the beginning of the crisis, I've supported a payroll tax holiday so everyone gets an increase in their after-tax earnings so they can pay down their mortgages, which would be a good thing. You also want to encourage rich people to recycle their money, which is why I support the estate tax, which has accounted for an enormous number of our great universities and nonprofits and philanthropic organizations. That's one difference between us and Europe.
EK: That does it for my questions, I think.
JG: I have one more answer, though! Since the 1790s, how often has the federal government not run a deficit? Six short periods, all leading to recession. Why? Because the government needs to run a deficit, it's the only way to inject financial resources into the economy. If you're not running a deficit, it's draining the pockets of the private sector. I was at a meeting in Cambridge last month where the managing director of the IMF said he was against deficits but in favor of saving, but they're exactly the same thing! A government deficit means more money in private pockets.
The way people suggest they can cut spending without cutting activity is completely fallacious. This is appalling in Europe right now. The Greeks are being asked to cut 10 percent from spending in a few years. And the assumption is that this won't affect GDP. But of course it will! It will cut at least 10 percent! And so they won't have the tax collections to fund the new lower level of spending. Spain was forced to make the same announcement yesterday. So the Eurozone is going down the tubes.
On the other hand, look at Japan. They've had enormous deficits ever since the crash in 1988. What's been the interest rate on government bonds ever since? It's zero! They've had no problem funding themselves. The best asset to own in Japan is cash, because the price level is falling. It gets you 4 percent return. The idea that funding difficulties are driven by deficits is an argument backed by a very powerful metaphor, but not much in the way of fact, theory or current experience.
Thanks to Nick Krafft for pointing me to this. Why the mindless devotion to reducing deficits when unemployment is at 10%? billy blog nails it, I think. Everyone understands that if they do this with their own personal finances, they are grasshoppers not ants, spendthrifts, profligate ne'er-do-wells. And so they would be (although I can't help but wish that this wave of temperance had o'ertaken households, say, 6 or 7 years ago and with regard to their own and the government's deficits). But individuals are not governments, they are households. And even households would and do run deficits to tide them over a temporary downturn.
Here's Paul Krugman on whether the US is so profligate that we're Greece. He thinks not. He's right that the US must rein in health care costs, but we should also rein in investment banks and stop creating unfettered moral hazard. Reining in bankers seems way more important and immediate to me than reining in health care costs. After all, as Galbraith points out, when we're spending 30% of GDP and everyone else is spending 12%, "we can always buy Paris and all the doctors and move all our elderly there."
I wonder if we could sell them our investment bankers? Give them our investment bankers? Pay them to take our investment bankers?