Thursday, April 25, 2013

Jonathan Krajack — Guest Post: Austerity Is A Crime Against Humanity

Guest Post: Austerity Is A Crime Against Humanity
by Jonathan Krajack

In US criminal law, "means, motive, and opportunity" is a popular cultural summation of the three aspects of a crime that must be established before guilt can be determined in a criminal proceeding. Respectively, they refer to:

(1) the ability of the defendant to commit the crime (means)
(2) the reason the defendant felt the need to commit the crime (motive)
(3) whether or not the defendant had the chance to commit the crime (opportunity)

Wherever there is unemployment above and beyond Frictional Unemployment (people in the process of changing jobs) and Voluntary Unemployment (people who choose to not find work for various personal reasons), it is called Involuntary Unemployment (people who are unemployed, looking for work, but can’t find a job).

It’s important to note that just because there are a few minimum wage jobs at restaurants, Walmarts, gas stations, car washes, etc… those are not really appropriate substitutes for people that are Involuntarily Unemployed. If your particular skill set is framing homes, or handling the financial accounting of a business or organization, or teaching elementary education, and so on, then just because there are various minimum-wage jobs available does not mean “you’re just not looking hard enough for a job.”

When there are tens of millions of Involuntarily Unemployed people, as there are today in the United States, the problem is structural to the system: businesses simply are not busy enough to maintain the population near Full Employment and State/Local governments do not have sufficient tax revenue to hire enough public sector workers. There are many factors that contribute to Involuntary Unemployment, but the most important factor is the level of spending in the economy.

Spending = Sales = Jobs

And high unemployment naturally generates insufficient tax revenue for State/Local public sector. More people working = more tax revenue. Less people working = less tax revenue.

If there is insufficient spending in the economy, there will an insufficient amount of jobs being offered, both in the private sector and in the public sector, and the consequence will be Involuntary Unemployment.

In such a situation, a public policy of Austerity, i.e. increasing taxes and/or decreasing government spending, is a crime against humanity. It pulls money and spending out of the economy when the economy needs more money and spending. Austerity, i.e. pulling money out of the economy, makes Involuntary Unemployment worse. It's a policy option that specifically denies people a basic right to be able to find a reasonable paying job.

MEANS refers to the ability of the defendant to commit the crime. So, who has the ability to deny the economy sufficient money and spending to maintain near-Full Employment?

MOTIVE refers to the reason the defendant felt the need to commit the crime. So, who has a reason to deny the economy sufficient money and spending to maintain near-Full Employment?

OPPORTUNITY refers to whether or not the defendant had the chance to commit the crime. So, who has the opportunity to either directly increase taxes and/or cut spending, or influence those people that do directly have that opportunity?

Who is our Person of Interest?
Who is our Suspect?
Who has the means, motive, and opportunity?

15 comments:

JK said...
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Tom Hickey said...

Done.

Matt Franko said...

If I had to finger one person it would be Peterson...

F. Beard said...

Given the existence of a government backed counterfeiting cartel, the banking system, which only creates the principle of loans and not the interest (except as even more debt) then of course deficit spending by the monetary sovereign is needed - as a source of interest so that private debt in aggregate can be paid.

I suppose another source of interest is when a country net exports but then isn't the central bank creating and selling new currency to foreigners so they can inflate prices in the domestic economy?

Kristjan said...

"Given the existence of a government backed counterfeiting cartel, the banking system, which only creates the principle of loans and not the interest"

It really has nothing to do with that. Interest income gets spent by the banks and if It doesn't, then that's private sector savings desire just like MMT frames It. If you want to frame It like this then you cannot ignore the other agents in economy who also save and don't spend their income.

JK said...
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JK said...

Maybe a sufficiently large Current Account Surplus could negate the need for deficit spending, but really… aren't we then just shifting the responsibility from our sovereign currency issuer to a foreign sovereign currency issuer?

In the aggregate, some entity needs to be creating net net finacial assets for credit creation + interest to continue without debt deflations occurring every so often.

Tom Hickey said...

Yes, this is why I am saying to look at the global economy as a closed system. National policies that are incompatible with a closed global economy are unsustainable in the long run, although they may be appropriate in the short run through international cooperation.

For example, the developed economies could reasonably run current account deficits while absorbing the export-dominated emerging nations until the latter can build consumer economies with distributed profits. The developed countries could offset the demand leakage through even larger deficits. No problem, as long as everyone coordinates and doesn't take advantage of the system. This way the world could reach parity much more quickly.

This presents the issue of environmental sustainability at the same time, however. So the plan would also have included addressing that with conservation and innovation.

The engineering isn't all that difficult. It's coordination that is lacking.

paul said...

Debt deflation occurs because the asset side of the loan is saved downstream and the funds necessary for repayment have to come from either more debt or deficit spending. Reversing the CAD deficit is not a short-term option.

Although there seems to be much disagreement I think it should be intuitively obvious that the credit circuit has a negative feedback mechanism that keeps it from expanding without limit…unlike net spending (as long as there is something to purchase).

If the asset side tends to be saved downstream and deficit spending doesn't support the payment system then debt service will rise faster than incomes (among the consumer cohort) until further debt expansion is constrained (unless prudent underwriting is abandoned…be careful what you wish for).

This is where the banking crisis occurs…growth contracts, unemployment and defaults fall off the cliff and the system collapses…unplug your TV and see how long the picture remains.

TINA from here other than big deficits and/or big unemployment for extended periods until the ratio of debt to $NFA gets somewhwere below 2.

Still, at this point private debt is saturated…there isn't much headroom without convincing people like me to borrow and spend for consumption…and we aren't suckers which is why we didn't get bit by the credit collapse in the first place.

A CAD surplus is still money-printing…we don't allow foreign currency to circulate within the domestic economy.

JK said...
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paul said...

JK, Yes that's the point I was trying to make. Maybe debt deflation is not the right term…a solvency event for the banking system for sure, and the resulting contraction leads to debt deflation unless government investment fills the gap.

If the economy is driven by an expansion of debt that doesn't (can't be expected to) increase income amongst the cohort taking on the liabilities what else could be expected?

Debt expansion stopped pretty suddenly when all of the people that needed/wanted a mortgage and could afford the payments had one…then banks started lending money to those that couldn't afford to pay it back…in other words blowing up the bubble as far as it could go before it burst (as it had to).

That's a textbook description of an avalanche.

This is what an avalanche looks like…

https://dl.dropboxusercontent.com/u/33741/Debt_NFA%20domestic.png

This is simply a graph of domestic NFA (deficits minus NETEXP) from FRED data against CMDEBT, ie household debt which includes mortgages, (some?) car loans, student loans and credit card debt. I included business debt for comparison.

Looks like we got an initial heave around 2000 (dot-com bubble?) then kept shopping like GW suggested.

Even the "massive" deficits we've run since 2008 hasn't gotten us back to what appears to be a stable equilibrium.

JK said...
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paul said...

JK, how about "stable operating point" ie full employment with benign inflation?

JK said...

I like that.

In general redefining is probably a good idea. Can't change the language, but words Equilibrium carry a lot of bagage.

Tom Hickey said...

Good to remember that "equilibrium" applies to models in economics rather than actual states of economies, and the models only apply to the variables under consideration. Everything else is said to cet. par. Virtually all those putting forward equilibrium models admit that they are abstractions that only approximate reality.