← Economic Update with Richard D. Wolff
Economic Update with Richard D. Wolff
Government Deficits; Why They Happen, Who Benefits From Them, and MMT
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Economic Update returns next week to its regular schedule! This week's episode was recorded in June this year and covers topics our viewers have written to us and requested. Professor Wolff explains what deficits are and why the capitalist system...
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Before we get into today's updates and.
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Discussion, there are some upcoming events I think may interest you. The first is a joint collaborative project between the Left Forum and Democracy at Work. We are now partner organizations. The Left Forum has a long history, going back at least 40 years, of providing annual conferences bringing together academics, activists and others. It really stopped functioning for a couple of years because of the pandemic, which gave it the time to reorganize and rethink its progress in the world. And it's come up with a new plan. It's called the Left Educational Project and I think you'll be hearing a lot about it in the years to come. But right away, one of their first activities is a course. It's a four session, four week course meeting every Monday called Critically Understanding Capitalism. And it's designed to give interested people, activists and others a deeper understanding of the system and the critical situation it finds itself in. Now it will be taught by three collaborating professors of economics, Clara Matei, who's a professor at the University of Tulsa, Shahram Azhar, who's a professor of economics at Bucknell University, and me. We are collaborating because we want to do this kind of education and I think you'll find it very, very interesting. If you want to register or find out more, just go to www.LeftForum.org lep left educational product project. Our second event has to do with a brand new book just released by or publishers. It's called from the Flag to the Fascism American Style. It's got a collection of essays, Christopher Hedges and a whole bunch of others, myself included, trying to talk about what is happening and to what extent fascism is on the agenda in in this country. I think you'll find the book worthwhile, but we're here particularly to invite you to a launching party if you like, when the book comes out. That will happen on September 24th at 6pm at the Francis Kite Club in the East Greenwich Village at 40 Avenue C. And again, you can find out more about it by going to www. Democracyatwork.com finally, the third event of the many that I could be telling you about is, I think, one that you will also find worthwhile.
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This is the release of our Understanding.
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Book series that includes Understanding Marxism, Understanding Socialism and the new one, Understanding Capitalism. These books will be on sale together from August 30th to September 29th. To take advantage of this opportunity, simply go to www.democracyatwork.info books. You will be having words from me about other events as they come down the Pike. We are very excited by these new departures for Democracy at Work, for the Left Forum, and, and of course, for all of you. And as the magic of the Internet works, all of these things are available to you, no matter where in the world this message comes to you.
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Welcome, friends, to another edition of Economic Update, a weekly program devoted to the economic dimensions of our lives and those of our children. I'm your host, Richard Wolff. As usual, before jumping in, I want to remind you that Charlie Fabian is awaiting your comments, suggestions, criticisms. They're very valuable. We use them to plan this program. You can reach him, as always, at charlie.info438mail.com and likewise, a reminder that a companion volume for these programs is Understanding Capitalism, a book that I wrote and that Democracy at Work released earlier this year and that I recommend for people who want to go into the topics we cover here in greater depth for a better understanding. And that leads me nicely into today's program, which is being produced in response to many of your requests that we really kind of go into one of these topics with some extra depth, the way we do in that book. Today's topic is deficits. What exactly does it mean when you hear all the talk about the government running a deficit? And by that I mean, of course, the federal government. It's another matter what state and local governments do. They do that, too. But it's a different situation. And the deficit mostly talked about is the one run by the people in Washington, the federal deficit. So let's really look into it. It's a very important topic. It is much of what agitated people around Mr. Trump's bill that just recently passed to Congress and that is being implemented as we speak. So it's something that affects everybody. And it's important to understand, even though I must say, as a teacher of economics all my life, that the job done by the mass media in teaching about this is somewhere between awful and abominable. That's how bad it is. And it's really not even the fault of the media, although they should be held accountable. It's because so much nonsense is spewed by so many politicians and business leaders that, that it's not so surprising that young people, including journalists, have a very hard time getting it straight. Okay, so let's begin. A government deficit is a very simple thing. It simply means that the government didn't raise enough taxes to pay for all the spending its doing, or to say the same thing, in other words, it spent more than the taxes it raised. It's very Silly to blame the one or the other, because it's only the relationship between the two that makes a deficit. For whatever reason, if the taxes are less than the spending, then there's a gap. And the simple name of that gap is the deficit. And how does the government go about doing it? How can the government spend more than it raises in taxes? And the answer, which you already knew, and I'm just confirming it, is that the government does what you do. It borrows the money. That's how it can spend more than it raises in taxes. So, for example, if it raised $10 in taxes and it spent $15 on whatever the government does, well, then the deficit would be 5, and they'd have to borrow 5 to cover that deficit. Or in the language of economics, to finance the deficit, you borrow money Mr. Trump's latest budget schedules has planned, because, remember, he can't have a budget that he knows every detail of, because it depends on the money coming in from the taxes we all pay, which will continue through the rest of this year. And it covers the spending that the government will do, some of which it will hold to its plans now, but others will be adjusted as we go along. So there's a constant process of adjusting the relationship between the taxes raised and the spending to figure out what the deficit is. But these days our deficits are huge and are counted in trillions of dollars. Trillions of dollars. We spend trillions and we tax our people trillions, and we borrow trillions. We're a big rich country, and that's what goes with that. Now, some of you have ideas, strange ones, that somehow the government isn't necessary, that the government is some kind of extraneous, excessive, unwanted bodies burden. By the way, it may well be all of those things, but that's not why we have it. We have it because every capitalist country in the world, and before that, every feudal economy in the world, and before that, every slave economy in the world had a government. Government is something human beings have felt the need to create. And even when there have been revolutions that overthrew governments, even proud ones that raised their hands and said, we want no government at all, pretty quickly erected the next government. Are there arguments against having a government? Yes, they are. The most serious ones are those that come from a tradition of thought called anarchism. But anarchism is frightening to a lot of people, and so frightened by it. Americans have done the thing Americans do a lot, pretend it isn't there, make it awful, evil and terrible, and repress it so you don't have to see it. They do very similar things with Marxism, socialism, communism. Indeed, those are all swept away, which is why Americans think they're all kind of the same. If you listen to President Trump, he puts them all together as if they were synonyms. They aren't. They're very different. Communists and socialists usually are in favor of government. They're not anarchists. Anarchists are often agreeing with socialists and communists to be critical of how government works in capitalism, but they're also critical of how it has worked, at least so far, in socialist and communist economies. So there's all kinds of very important differences. If I had more time, I'd be glad to talk to you about those. But that's not what we're doing now. We have always had governments because human beings have conflicts and they want the conflict somehow to be resolved. And having an institution that's there for that seemed reasonable. And. And we call that the state. Likewise, we have often felt endangered by people in other parts of the world, and we have a government to protect us. And then if we are economies that use money, we've had very bad experiences when we allow money to be created by anybody who wants to in their basement or any bank that feels like it. So we don't let them. And we say the government alone has the authority to print the money, just like it says right there on the bill. The Federal Reserve, which is de facto an agency of our government, prints the money. So you understand, we've always had the government, and the government therefore has to raise money. The people who do everything I just described, whether it's adjudicate disputes in our courts or protect us from foreign dangers or run the money system, they have to get a salary, they have to have an office, they have to have a desk. Nowadays they have to have a computer. Where's all that going to get paid from? The answer is the government always taxes? Not now. Whom does it tax? Employers. In our capitalist system and employees, the employer pays a tax on their profits mostly. And we pay taxes on our incomes, our salary and wages. We employees. And together these two sources of tax revenue fund the government. But of course, we all have things we want the government to do. The employers want the government to have a navy and an army that will make sure nobody in the world interferes with what our corporations want to do to make money. Wow. They also want there to be a military to threaten anybody. A little while ago, the brics, which is now a group of countries that is more than half the population of this planet, had their Meeting in Rio de Janeiro, and President Trump denounced them and threatened to impose tariffs on any country that was either in the BRICS or aligned his word with the BRICS. The United States has 4.5% of the world's people. The BRICS have over half. It's a little bit of the mouse roaring against the elephant. But in our country, with the hostility to the government, that is always there, because, remember, employers know they need the government, but they don't like it. They're afraid that in a society like ours, with universal suffrage, where everybody gets to vote, the employees, that's the majority, and the employers, that's a minority, According to the U.S. census, employers are 3% of our people. The other 97% are not. And we might vote against them to tax them, to limit their profits. All kinds of. They don't like the government to have the power for fear of what that might mean when the majority are employees. So you get from them libertarianism a philosophy, kind of a thin philosophy, that wants to make the case that government is. Is always the problem and less government is always the solution. That never goes very far. Those folks are always dissatisfied because the need for the government has outweighed them and their arguments from time immemorial. The borrowings of the government become the national debt. And if you wanted to know what the national debt is, it's simply the sum of. Of all the deficits from which we subtract whatever portion of all those deficits the government has paid back. Because when the government borrows to finance a deficit, it has, of course, the legal obligation eventually to pay that money back. The US treasury borrows on behalf of the federal government and promises to pay back in 10 years, this bunch of borrowing, in 30 years, this much borrowing. And so there are different maturities of the national debt. Here's the most important thing, though. Why does the government go up and down? Why doesn't the government just borrow debt just enough to pay all the salaries? And in fact, why isn't taxes enough to do what we want a government to do? Is it because of some crazy tendency for the government to just get bigger and bigger, as if it were obsessed by some demon? You get that out of the libertarian story a little bit. I found that a very dissatisfying and inadequate answer. As I watched the government spending go up and down, as I watched the government taxes go up and down, varying from one presidential regime to another, from one Congress to another, it became clear that there was something going on in the economy that made deficits happen. When we come back after the break, since we're close to the end of the first half today, I'll be talking about what exactly makes the deficit go up and down and why that matters in your life and mine. Before we jump into the second half of today's show, I wanted to thank you for your very generous response to our fundraising efforts this year and in particular in the last couple of months. And in part responding to that, we are extending the availability of our limited edition, linen covered hardcover version of Understanding Capitalism, the book I wrote and that we have been making available now for quite a while. If you are interested, I will be signing copies of that hardcover and they will be available to you as they have been over the last few weeks. Just simply send an email to us@infodemocracyatwork.info and put in the subject line limited edition. We will send you all the information you need to order and receive your copy signed copy of Understanding Capitalism in its hardback. And thank you again for for your kind attention to the fundraising dimension of what we do. Welcome back, friends, to the second half of today's economic update devoted to deficits. Okay, let's jump right into the key issue here. Why do we have them? And here's the answer. As best I can tell, we have an economy in which money goes around and around. We earn money by working and then we spend it to live. And when we spend it, it makes an income for other workers who use it to live, which means they spend it on what we help to produce, so we get a wage in our job. In other words, the money goes around and around and we all buy and sell from one another. It's crystal clear, all the evidence shows it, that if you take all working people together, all employees, they spend what they earn. Are there a few who actually save money don't spend out of what they earn? Yes, but those are offset by the people who spend more than what they earn. And the banks handle that. If you're a worker who saves, you put in the bank and the bank just lends it out to the person who uses checks or credit card. And so when you put it all together, employees are very regular. They earn, they spend, they earn. They go through life like that. Employers, completely different. Employers are the people who have enough money for themselves that that's not an issue for them. They get enough and they spend it on their food, their clothing, their shelter, their luxuries. But they have something else called the profits of the enterprise, not what they pay themselves for whatever Executive job, they may have no the profits. And what they do with the profits is the issue. Because they have the right, even though they're only 3% of the people, they have the right to decide whether to spend those profits, perhaps build the company or not. And why might they not? Well, if it looks like the economy isn't in good shape, if it looks like people are buying somebody else's product and not yours, you'd be nuts to invest your profit in your own business to produce more goods when you know you can't sell, even those you've already produced. Businesses who think that they are not good situation for them hold back. They don't spend, they don't invest their money. They hold it in cash. Why? Because that's a smart thing to do. What they do with their profits depends on what profits they can make with them. So we have the problem in an economy that when corporations decide to hold back, it means people who expected to have jobs from what those corporations spend don't have them. And if they don't have them, they don't have income. And if they don't have income, they can't spend. And if they can't spend, other workers who used to be able to have an income because those other first workers spent on them wouldn't be able to do so. In other words, what corporations do when they hold back, which they do all the time, whenever they see fit to do it, they are free enterprises, free to spend their profits or not. But if they don't, if they decide in their freedom to not invest their profits, it starts a chain reaction which means you won't keep your job, you won't get a job, you won't have a freedom. Capitalism means that the free enterprise only is free so long as you, the worker, are, are not. You ought to think about that. But we have a big problem. Because if corporations start to hold back out of their own profit calculations, which they're free to do, we could have a collapse of our economy. Now you're going to get the answer about deficits. Deficits are the government's way of fixing this problem. And they're going to fix it in a way that puts the burden on the rest of us and helps the very people who cause the problem. Corporations cause the problem because they're free not to invest. And when they hold back, here's what the government does, and we do it. Governments do it. Thanks to the analysis of a critic of capitalism named John Maynard Keynes. I mean, he liked capitalism, but he said, wow, riding in the middle of a depression. This is a system that can do really badly. And so here's what he proposed and which we all in this world now, when the corporations decide to hold back and when that threatens all kinds of other people and businesses who won't get the spending on them that the corporations could have and in the past did do because the corporations don't want to. For the moment the government steps in, the government spends the money on the economy that the corporations held back. It does for the corporations what they cannot, will not, and need not do, do for themselves. But it's better. Where does the government get. Where does it borrow the money to spend to fix this problem that the corporation's freedom set up? The answer is, and you're going to love this from the corporations, it says to them, hey, if you decide you're free to do, not to invest your profits, or at least not all of them, we have an offer for you. Don't lend the money you chose not to spend to us, the government, and we will spend it on your behalf. We will make sure the economy keeps going by spending the money you chose not to spend. We fixed the problem. And we'll hold the money for 30 days, 90 days a year, 5 years, 10 years, 20 years, whatever you want. We have treasury bonds we'll make available to you in return for your lending us the money you weren't going to spend anyway. And we'll spend, we'll fix the economy. And the only cost here to our doing this is that the government, of course, goes into deeper, deeper debt. Because our capitalist economy, yeah, our American capitalist economy quite frequently gets into a situation where major corporations are holding back. This happens all the time. So we have a growing national debt. Is that a problem? Eventually, yeah. Why? Because the corporations who hold back the money and that forces the government to come in and borrow may get so far into debt that the companies who held back the money causing the problem are no longer willing to risk lending to the government because they're not sure the government will ever pay it back. Wow. Now that takes a certain amount of courage. I'm being polite. The people who caused the problem that drives the government into debt are now saying, you got too much debt. The government answers, but we did it for you. Yeah, we don't care. We're not going to lend it to you. The credit rating of the United States government used to be aaa, the highest you can. It's not that anymore. All three of the major credit rating agencies, Standard and Poor, Moody's and Fitch, have Downgraded the credit worthiness of American debt. Cause we've borrowed so much. Wow. Is there an alternative? Could we have done something else? I'm hoping most of you have that question in your mind. Sure, we could have. We could have said to those corporations, if you don't spend that money, well, then you forfeit it. We're going to take it from you. We're going to tax whatever you don't spend out of your profits and we're going to use it for socially useful things so that money gets spent. That's what we're doing by borrowing it from you. But if we borrow it, of course we have a big debt. If we taxed it away from you, there'd be no debt to you and we wouldn't have to worry about our credit rating. But that's off the table. Taxing the corporations because they cause a social problem by withholding their profits from reinvestment, we can't do that. That violates our capitalist religion. So we don't talk about it. You'll notice there's hardly ever talk about raising taxes across the board. Mr. Trump's budget that we're all living under now, that was passed a few weeks ago, has, as I told you, trillions in deficits. Do they have to be there? No. You could have taxed American corporations, you could have taxed the rich. And let me remind you who they are, lest some of you have the idea that they don't have the money. They have it all that we need. The poorest half of Americans together own 2.5% of the wealth of this country. So the bottom 50% get along with 2.5% of the wealth. The next 40% have about 30, a little over 30% of the wealth. What does that mean? 90% of our people, the bottom 90% that you and I are in together have about one third the income of this country. The top 10%, they own the other two thirds. Those are the ones you could go and tax. Then you wouldn't have a deficit and none of the problems I talked to you about would be in our minds and on our headlines and plaguing us at every moment. The deficit run by the government is a bizarre, odd mechanism to solve a problem caused by the employer class in capitalism. And it's bizarre because it rewards them by borrowing rather than taking the taxes from them. That could keep the economy rolling without all of this unnecessary deficit finance. No wonder, then, a new economic theory was developed over recent decades by progressive minded economists. It's called modern monetary Theory, and its basic argument is society does not have to have this government borrowing arrangement. The government could short circuit this process. Don't have the Federal Reserve, an odd half independent agency, deciding about printing money and then using it to buy the deficit treasury bonds created by the government and try to make that work out to meet the monetary needs of the economy. That wastes money, wastes time, wastes everybody's attention, and is patently unfair. Their approach of modern monetary theory is to say, let's have our monetary system in the hands of the government where it belongs and where we as the voters can vote if we're dissatisfied with how it's being run. The government would then print the money, use it to do what it needs, and pull the money if there's too much of it out of the economy by taxing. Simple, straightforward, none of this deficit nonsense would be necessary, and we wouldn't be facing a situation where we have pretense, where the people who run this economy, the employer class, try to present themselves as hamstrung. Nothing we can do. The market, you see, for government debt, the capital markets, they're dictating what happens as if the market was some live animal that had a will of its own. This is a market set up and arranged by employers for them. As long as we let it stay that way, we will be oppressed and told it isn't them, it's this thing, this market, that somehow has to be there. My answer, my conclusion, don't be fooled. Thank you for your attention and as always, I look forward to speaking with you again next week.