I'm not a big fan of Dick Morris, but he does know his Clintons. In his most recent blog posted last week, he posits the idea that Hillary is beginning to position herself for a challenge to President Obama, based on some recent statements she made on our rising national debt. She said:
I think that our rising debt level poses a national security threat and it poses a national security threat in two ways: It undermines our capacity to act in our own interests and it does constrain us where constraint may be undesirable. And it also sends a message of weakness, internationally.
The contrast with her husband's presidency, notes Morris, is implicit: Bill balanced the budget and reduced the debt to the point where Wall Street fretted that there would be no more federal debt instruments to buy.
But under scrutiny, both Hillary's statement and Morris' interpretation of her husband's legacy turn out to be wrong. First of all, let's deal with the nonsensical idea that budget surpluses would ever hamstring Wall Street's ability to respond to a perceived shortage of debt instruments. Even when the federal deficits began to decline under Clinton, the world demand for dollar-denominated fixed income assets outstripped supply, and our ingenious Wall Street financial engineers happily generated new sources of supply, beyond Treasuries. The "innovation" we got largely involved mobilizing U.S. household debt, especially mortgage debt, as a portfolio substitute for more traditional government and corporate debt. It's one of the main reasons we're in our current mess. Had we not had four consecutive years of budget surpluses, our pensioners and others who rely on a stable source of income to park their money would have a bigger supply of Treasuries and far less of these toxic pieces of paper that have acted like a cancer on our economy.
As for the actual statements of our Secretary of State, it is understandable that Hillary would seek to portray her husband's presidency in the most positive light possible. But her statement on our rising debt levels illustrates that the Secretary is similarly held in thrall to the disastrous and wrongheaded legacy of Rubinomics. Whether Morris is right or not about her presidential aspirations, her deficit phobia makes one hesitant to proclaim her a logical successor to President Obama. Neither one of them gets it.
The idea that the budget surpluses of the Clinton era were a wonderful thing is in fact a destructive myth that continues to afflict most Democrats in regard to economic policy making today, including both Secretary Clinton and President Obama. It's probably the main reason why the Democrats continue to approach fiscal policy with such apparent timidity in response to today's crisis of unemployment and why voters remain angry and frustrated.
President Clinton himself used to brag about these budget surpluses and claimed that they would last for at least 15 years and that every dollar of government debt would be retired. Everyone celebrated this accomplishment, and claimed the budget surplus was great for the economy. In fact, the opposite was true: the budget surplus meant by accounting identity that the private sector was running a deficit. Households and firms were going ever farther into debt, and they were losing their net wealth of government bonds, as the surpluses continued.
Of course during the ensuing recession, the budget turned around to large and growing deficits almost immediately because the private sector became too indebted and thus had to cut back spending. And we still have large budget deficits today because of this huge resultant gap in private sector economic activity, a collapse that we refuse to address because the public is being whipped up into a hysterical frenzy about the evils of government spending.
Rational discourse about fiscal policy is not helped when our Secretary of State begins espousing the notion that our deficit represents a national security threat -- something along the lines of a financial bubonic plague or comparable to a terrorist threat. No, Madam Secretary, the Chinese can't all of a sudden "dump" our bonds and drive us to national bankruptcy. No US dollar funds that the US government spends come from foreign countries. That is a fallacy. Only the US government issues US dollars -- not China, Japan, any European country, nor Australia. These countries may buy US government bonds, but they use US dollars, which they get through trade.
The US government never loses its ability to spend in US dollars, and actions by foreign countries have no influence on that capacity. The reality is that the only thing that has supported the tepid growth we have seen in the last 12 months has been fiscal policy. Much of the shift in budget positions across the world has been driven by the automatic stabilizers that will reverse when growth returns.
So the Secretary can relax. We can buy as many tanks, missiles, and anything else we require to defend our nation. There's a reason we don't consult with Beijing when we mobilize expenditures for national defense: China doesn't possess a line-item veto on our defense budget because they don't "fund" our spending. (Of course, this begs the question: Why is "affordability" an issue when it comes to Social Security or Medicare?)
The only issue that is relevant as far as US government expenditures go is the availability of real items for purchase in US dollars. As long as there are goods and services for sale in US -- the US government has unlimited capacity to purchase them. To suggest otherwise is to misunderstand the nature of a fiat monetary system.
If and when the Secretary of State begins to understand this, she might actually represent a logical successor to the president (assuming she really does have her eye on the White House), because an understanding of modern money will help her to bring rational analysis to government policy-making. Since involuntary default is, literally, impossible for a sovereign government, we could quickly move beyond fears about government deficits and debt ratios and all the other nonsense that currently grips Washington. Can we "afford" full employment? Yes. Can we "afford" Social Security? Absolutely. What we can't afford are more economically illiterate Rubinites running our economy. Stick to foreign policy for now, Madame Secretary.
Cross-posted from New Deal 2.0.
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