The Republicans have successfully changed the main emphasis of the economic debate from job creation to deficit control. Why the urgency for balanced budgets? After all, this anemic “recovery” has set itself apart from all previous post-war turnarounds precisely by its manifest failure to generate jobs. Economic growth needs to considerably exceed 3% per annum if the private sector is to make any significant headway in reducing unemployment. Instead growth is actually trending downward from its post-Great Recession peak. The intractability of long-term unemployment now exceeds the duration experienced in the 1930s. Combine this with the fact that economy-wide wage gains in the past decade have lagged behind that of the Great Depression, when adjusted for deflation, and one can easily appreciate why workers’ portion of the national income has continued to drop consistently even after the official end to the recession was declared nearly two years ago.
Yet the Congressional Budget Office released its 2011 Long Term Budget Outlook which suggests that politicians will continue to regard the management of public debt, rather than the regulation of aggregate demand, as the paramount issue confronting the economy. This will effectively lock millions of workers into long-term unemployment and entrenched poverty. One of the two scenarios presented in the CBO report — the one touted as the more realistic of the two — finds federal spending to rise from 24.1% of GDP in 2011 to 75.9% in 2085, unless the problem of debt is effectively tackled now. From this, the report concludes, “large budget deficits and growing debt would reduce national savings, leading to higher interest rates, more borrowing from abroad, and less domestic investment — which in turn would lower income growth in the United States.”
The report also warns against “(i)ncreased government borrowing [that] generally draws money from (crowds out) private investment in productive capital, leading to a smaller stock of capital and lower output in the long run than would otherwise be the case. Deficits have that effect on private investment because the portion of people’s savings used to buy government securities is not available to finance private investment.”
There is a kernel of truth to these concerns about the prospective enlargement of the public sector and its effect on accumulation, but that truth is buried under a mountain of erroneous reasoning which buries other possibilities. Worse still, it has become the platform to invoke the specter of a Greek-style sovereign debt crisis, fears of which are used to justify a renewed attack on the remaining social safeguards that undergird the system. The Obama administration has, in fact, fully accepted the premise that the budget deficit is an imminent flashpoint and has offered a program for reducing the debt by $4 trillion, while placing all social programs “on the table.” Even AARP has given the green light to throw Social Security under the bus. The difference between liberal and conservative in this debate now revolves around the preferred mixture of taxation and “entitlement” cuts and their sequencing.
If we accept the dominant narrative, the conclusion flows from the premise. And yet this entire line of reasoning — which encompasses the omnibus of alternatives from A to B — is utter nonsense. Borrowing or taxing, the prior appropriation of funds, in order to finance government spending, is a self-imposed system constraint. So too are government-imposed debt ceilings. They are not operational constraints. The ability of a society, including a capitalist one, to provide a decent existence for its elderly and disabled as well as for its working-class wealth producers is not based on the ability of capital to finance state activities out of private revenues. Capital’s ability to keep economic demands held hostage to its priorities alone is the reason for such prior constraint. Society’s actual ability to provide a decent and secure existence is only limited by its accumulated productive capacity, a capacity that is currently unused to the tune of approximately 25%. Even under the best of times 15-20% of capacity lies fallow. No economy can be said to be living beyond its means as long as there is excess capacity — unused offices and factories, idle machines, and unemployed labor. So, while the mainstream debates the level of austerity and sacrifice “we” should be willing to accept being imposed upon ourselves — naturally, for the sake of our “grandchildren,” the accumulated surplus labor extracted from the working class has produced a sufficient and ever growing productive structure that, if fully tapped, could readily be the source of more generous social benefits, including universal health care, deep anti-poverty programs, and ample Social Security remunerations.
Capital is unwilling to unlock that capacity simply because it lacks current profit potential and because the resulting tight labor markets would embolden the working class to abandon its habits of submission and subservience to power. It has therefore constrained the system through legal encumbrances from operating beyond these limitations.
The overriding fear is that the output of idle capacity, once consumed by the state as a result of deficit spending, can no longer functions as capital in process. Or worse still, if used by the state for commodity production, such production would introduce a form of competition that would enjoy an enormous inbuilt advantage against the private sector. The bailout of the auto industry — which represented a crimped, anti-working class microcosm of this possibility — generated howls of fear and outrage on the part of the broader business community. Either way, if consumed as revenue or put to use in state production, excess capacity pressed into state service would be largely lost to the private accumulation process. Taxing idle balances (or borrowing, which assumes future taxes) and rechanneling them back to the private sector in the form of state purchases will, it is true, have a multiplier effect that will expand economic activity. But unless the additional profits generated through that activity exceeds the taxes needed to finance the process, the exercise has little attraction for capital beyond the immediate beneficiaries of state contracts.
And this is the crux of the matter. These are the constraints that paralyze the public debate leading to an inevitable showdown over the debt ceiling limit.
What is not appreciated by the public is that current state operations are in no way operationally dependent on the prior withdrawal of funds from the private sector. Whatever may have been true when currencies were backed by a fixed metallic content, modern money is a state-issued, state-enforced fiat currency. It is no longer commodity money and is not exuded by the system through the spontaneous functioning of the private sector. The historic function of the capitalist state, when currencies were gold-backed, was to guarantee convertibility and thereby preserve the “soundness” (the commodity integrity) of its currency. This meant that the issuance of currency was constrained by the supply of gold in the state’s treasury. This tied the hands of government, requiring it to appropriate funds (gold) from the private sector before undertaking or continuing any activity. The gold standard effectively subordinated the state to the needs of private accumulation and prevented the outsized growth of the state for fear of strangling the source of its revenue. A state which did not toe the line and debased its currency would ultimately face the prospects of insolvency. It would be compelled to transfer state properties to the financial system, thus allowing private capital to put such properties to profit-making use, before it could regain its ability to access credit markets. This reestablished the “proper” equilibrium between the state and capital.
But fiat currencies shatter and invert the inherited logic of the metallic-based monetary system. Fiat currencies are not a byproduct of private commerce. They are a creature of the state, which has a monopoly on its issuance. Of course, the point of reference here are political entities that are sovereign, not in the juridical sense, but with respect to the issuance of currency. Greece, Ireland, Portugal, and Spain for instance are no more capable of issuing fiat currency than are California or Wisconsin. Given that understanding, fiat money-issuing entities — such as the US, Britain, China, and the EU — have to spend in order to inject liquidity into the system in sufficient quantity to accommodate the interests of commerce. They have to spend, that is, prior to their ability to tax, reversing the polarity of economic causality. With the advent of fiat money, taxation and borrowing no longer exist as necessary adjuncts of state appropriation.
That is, payment due for state wages, for the rental of state buildings, for the purchase of infrastructural products, to fund Social Security and Medicare/Medicaid, to finance the interest due on the national debt, to share revenues with local governments, or, unfortunately, to fight imperialist wars does not require the state to mobilize funds, either in the form of additional taxes or by selling state bonds to the private sector — or foreign governments — prior to meeting its obligations. These obligations can be met simply by computer-generated entries from the state into the ledgers of its private-sector customers or its own self-administered trust funds, its private and foreign bond holders, and its employees’ payrolls. This adds to the budget deficit in a way that never has to be repaid, or paid down, and does so at a zero rate of interest. There is no “crowding out” — no competition with the private sector for loanable balances — simply because there is no need to fill the gap between spending and taxes with borrowed funds. It is with this recognition that wars are, as a practical fact, “financed” until they become so unpopular or counterproductive that politicians conveniently awake to the discovery that the treasury is “out of money.” All of which suggests that even mainstream politicians can with the proper motivation come to recognize that there is no functional requirement to maintain the fiction that a complex network of taxation and borrowing is the precondition for the state to function. The modern state cannot go bankrupt. The interest owed on the trade deficit is an accounting problem, not a social crisis waiting to happen. The state does not have to sell bonds to run a deficit. It does not have to tax its populace or borrow from them to pay the interest. The entire idiotic kabuki performance of haranguing over debt ceilings, debt defaults, or government shutdowns, or of acquiescing to mass unemployment, or of negotiating down social benefits to keep the state afloat can all be dispensed with. Once fiat money replaced commodity money, the genie of state financial reorganization was already released from the bottle.
This is not meant to suggest that there is no further need for the state to tax and borrow. It is rather that these activities properly fulfill different functional requirements: namely to cool down an overheated economy by draining excess demand for consumption and assets that may have been induced by additional state spending. Functionally, these should be tools not for the appropriation of operating funds, but for the regulation of aggregate demand and the adjustment of interest rates needed to preserve price stability including an access to investment capital commensurate with cyclical moderation. The size of the government budget, in short, should only be determined by the shortfall of aggregate demand at levels that would otherwise accommodate full capacity utilization, with the understanding that there are no intrinsic financial constraints on federal spending, beyond those artificially imposed by capital and the political inertia yoked to it. Were these shackles not in place, resources idled by the lack of adequate profit potential could readily be translated into additional decommodified public goods and services with no cost to the consumer. Within this context, the struggle over budget priorities would take on an entirely different cast.
The shortfall of aggregate demand is primarily a function of an insufficient rate of capital formation due to the chronic lack of adequate profitability. The Bush-era boom masked this by means of a massive speculative housing bubble. This, like other financial bubbles, imparted to the falling rate of profit — the developmental trend of capitalism — a wave-like character. But, the collapse should have been entirely predicable. The boom was based on asset-stripping of the American working class, rather than on the buildup of productive capacity. Home equity was exchanged against surplus value so that declining wages could be offset and supplemented by debt-fueled consumption. What remained was canalized into small-business expansion and stock-market purchases. The profit crises remained latent by the injection of an estimated $2.3 trillion in supplemental demand extracted from the housing market between 2003 and 2008. When this deflated, that is when the issuance of financial instruments outstripped the ability of capital to extract sufficient surplus value to service the accumulated pyramid of obligations, the financial system was forced to the brink of collapse. The hastily cobbled TARP program — a stunning exemplar, if there ever was one, of the state’s ex nihilo money creation abilities — recapitalized the hemorrhaging banks. But the restored financial system had no further interest in injecting capital back into a failing system of private production. The expansionary potential of almost half of the stimulus was thereby neutralized at inception.
Consider what might have occurred if the state had stimulated the economy from the bottom up: if the state had, for instance, abolished all taxes on the working class, including payroll taxes. And this is the most modest, most right-wing of populist-friendly proposals. This would have constituted a massive wage increase at no additional expense to employers. Of course, this is simply a thought experiment. No wing of the ruling class would dare do that, unless it could also exploit the opportunity to defund the Social Security and Medicaid/Medicare trust funds as a pretext to later abolish or diminish future benefits. But let us follow this through. Had the improbable happened, workers would have gained sufficient additional income to obviate a great part of the mortgage debt crisis, pay down credit cards, expand consumption out of income, and build savings. As the financial intermediaries of the private sector, the banking sector would have been indirectly recapitalized and the economy massively stimulated. The imaginary responsive state would simply credit the trust funds electronically to compensate for the engineered shortfall insuring no future sacrifices could be retrofitted on a working class as it ages or becomes infirm. And, if the recapitalization of the banking system was not deep enough to penetrate up the ladder to the investment bankers and hedge fund jockeys, a layer of social parasitism would simply have been wiped out with minimal impact on the broader public.
Consider, alternatively or additionally, if the federal government temporarily or even permanently assumed the financial obligations of state and local governments. These are entities that cannot create money. Again this would have involved a keystroke on the part of the federal government, entering a credit into the bank accounts of states, cities, and municipalities. Like the tax holiday for payroll taxes, this proposal too would further recapitalize the banks and contribute to a meaningful reversal of the mortgage crisis as knock-on effects. Demand would again be created by the fed without incurring additional tax or borrowing liabilities. There would be no loss of services, no layoffs, and no pension shortfalls. No raison d’être for the Christies, Walkers, Kasiches, and Cuomos. No answerability to Wall Street bond traders. The current capital strike would have been very effectively broken by the avalanche of additional aggregate demand that would compel idle capacity into play.
The state has the ability not to prevent but to radically reshape the character and impact of capitalist crises. But this requires in the first instance making proper use of the economic latitude accorded by the state monopoly over currency. It is this monopoly that fundamentally alters the mechanism of state operations. It liberates the state from the constraints of revenue, breaking the functional parallel between itself and the private sector where the necessity of financing its spending remains an inescapable constant. It is elite interests working their way through the political process that saddles that restraint on the system, long after its functional necessity has expired. And these interests exercise that restraint highly selectively and cynically: wars, bank bailouts, and other capitalist emergencies create funds with a computer keystroke; social programs, a prolonged appropriation process with painful tradeoffs. Wars are “off budget” items; extended unemployment benefits have to be financed by budgetary savings elsewhere. The point is to make that clear and to expose this process for what it is. The rationalization of the budget process demands a political battle for transparency and democratization.
But the rationalization of the budget process combining all the modern financial tools at the state’s disposal, even if it were to open new terrain for public participation, would not be socialism. And we should be clear about this. Production and distribution would still not be managed democratically from below by society’s rank and file. Market-generated inequalities would continue to exist, though they could to a large extent be shrink-fitted, and markets would continue to act in response to these disparities assuring that class privileges are faithfully reproduced. Neither would have capital relinquished its tentacled grip over the forces that shape public opinion and define the feasibility of social alternatives. And to the extent that political space is expanded, any vacuum not filled by greater democratic participation from below will be filled by managerial or bureaucratic “experts,” with the potential to develop and propagate their own independent class interests and to impose them on society. Though no panacea, unlocking the potential of the modern monetary system nevertheless has the raw potential for a civilizational upgrade within capitalism.
More crucially, it in no way dispenses with the need for socialism. The functional basis of the entire system still rests on capital accumulation. The state can therefore never attain full independence from the laws that govern the contradictory process of value expansion. The tendency to replace living labor with ever more automated production processes tends to drive down the rate of profit. Each unit of capital becomes associated with an ever declining base from which surplus value can be extracted. Still, as long as the rate of accumulation is sufficiently high, the fall in the rate of profit can be offset in practice by a rise in the mass of profits. When this is no longer possible, it signals the need for a purgative of excess capital values. This is the necessary deflationary function that accompanies economic downturns. It recalibrates the system by devaluing capital, allowing the aggregate production structure to recombine on a more efficient, leaner basis which leads to rationalization and the intensified exploitation of labor power. When this process works its way sufficiently through the system, it removes the previous barriers to production and reestablishes the ability to again accumulate on a profitable basis.
Effective countercyclical activity such as proposed here would paralyze that function. Removing the downward pressure on prices allows the least efficient capitals, which would otherwise first feel the brunt of the crisis, to maintain their pre-crisis values. Rather than be reorganized into a more productive capital complex, the equivalent output value of these sectors would be indirectly converted into public consumption. But capital formation is critically determined by the excess of production over consumption. The expansion of consumption without a parallel increase in productivity and capacity hinders the process of capital formation and moderates the critical rate of accumulation. And it does so in a context in which state-buttressed demand creates tight labor markets compounding further the urgency to replace living labor throughout the reproduction process.
The crisis mechanism is part of the biological functioning of the system. It is the automatic feedback mechanism, the high fever, of capital that forces upon itself the need to exude the toxic poisons of excess capital before it can be restored to health. So too, the budget crisis, as it is currently waged, is an historic outgrowth of the genetic need for capitalism to suppress nonproductive state consumption and to reconcentrate, when called upon, economic resources from the state to the private accumulation process. The modern state can temper the nature of economic crises — as has been argued here — by directly realizing a portion of produced goods outside the mechanism of the market. And it can do so effectively while dispensing with the entire labyrinthine and functionally superfluous process of budget appropriations now underway. But at length this neutralizes and reverses the service that crises otherwise perform of converting currently unprofitable capacity into conditions where its redeployment will again allow it to participate in the process of capital self-expansion.
The state, therefore, can only expand the sphere of decommodified use-values if the accumulation of total capital is not impaired by their production. If capital cannot resume accumulation on its own terms, state-induced production will lose its driving force and become an obstacle to its resumption. This means that the state cannot avoid consciously assuming responsibility for the restructuring process that the crisis mechanism now periodically performs organically with such massive social disruption and dislocation. The alternative is long-term stagnation. This of course would be a new type of stagnation — stagnation without mass unemployment, spikes in poverty and idled resources, and, therefore, from an historical perspective, a monumental step forward. But it would still be ultimately characterized by pitiably insignificant improvements in aggregate living standards — virtually a stationary state. The already low rate of capital formation in the Unites States exasperated by the claims of war, armaments production, and the meager social benefits now in place have long enticed American capital to export surplus value to where more favorable investment opportunities await. A rationalized process of restructuring that supplants the haphazard social chaos of the business cycle necessarily requires a degree of social planning, an industrial policy, capital controls, aggressive infrastructural initiatives, and a massive retraining program supported from below by an equally effective educational policy.
The question then unavoidably presents itself. If all this planning is needed to avoid the crisis mechanism of capitalism and to manage aggregate demand, while expanding the sphere of decommodified production and mass consumption, why should society continue to suffer the indignities, the inequalities, the oppression and exploitation of capitalism? Why not take democratic control over the sum total of surplus value and put it directly to social use?
Barry Finger is an editorial board member of New Politics. He has contributed to socialist journals in the US and Britain. This is a revised version of an article that appeared in New Politics on 29 June 2011.