High employment deficit or surplus key to understanding how deficit finance can work to promote growth and lower unemployment: How to escape deficit hysteria .

The orthodox dogma about deficits is that they are “always very bad witness Greece”. This is the claim of the austerity obsessed fiscal conservatives. But what a lot of the advocates of this position seem to ignore is that this austerity free market approach is identical to what was foolishly followed during the great depression of the 1930s and which led to a much worse depression, the rise of fascism and eventually to world war.It is remarkable how little the establishment has learned from history. There is a scientific rebuttal of this argument available in the literature going back to Abba Lerner and John Maynard Keynes. More recently economists like myself, Robert Eisner, Ruben Bellan and other Keynesians have tried to explain this logic to both professional economists and  the general public. But apparently to no avail. So I am republishing below a post from 2011 on exactly this subject. Much misery can be avoided by the use of reason instead of ideologically driven ignorance in solving our economic problems. But it takes courage to do so.

One of the best Keynesian economists in the U.S. was the late Robert Eisner who taught for many years at Northwestern University and who was at one time president of the American Economics Association. I had the pleasure of spending a day with Eisner when he came to Montreal at my invitation in the late 1980s to speak to my students about Keynes and macro policy. His book How Real is the Federal Deficit (1986)is still an essential text in understanding this theoretical and policy question.

Around the same time a much less well known Canadian economist who taught for most of his career at the University of Manitoba Ruben Bellan had published in Canada a work on lowering unemployment through stimulus and appropriate monetary and fiscal policy with the apt title The Unnecessary Evil:An Answer to Canada’s High Unemployment(1986). Bellan also approached the issue from a Keynesian perspective and grounded his argument in the success of the wartime policies of full employment through investment and government expenditure that had successfully ended the great depression in Canada. I had published my monograph The Deficit and Debt Management :An Alternative to Monetarism in 1984 that made quite similar arguments to both Bellan and Eisner but Eisner because of his prominence received considerable attention from both the New York Times and the Wall Street Journal as I recall but after a brief flurry of interest his argument was forgotten.

Bellan was subject to several nasty dismissive reviews in the conservative business press and my own work received some attention most of it critical and like the others relegated to obscurity. The fact was and remains so all three of us were largely correct in what we had argued. It is now 25 years later and the time long overdue to reconsider the arguments in detail so as to help perhaps prevent another great depression from coming about due to the triumph of ignorance and ideological bias over rational inquiry.

Bellan put the issue rather well in the opening paragraphs of his book.

” for the entire decade of the 1930s the Canadian economy wallowed in the worst depression in history. the unemployment rate averaged about 15 %; in 1932 it was a catastrophic 22%. World War II…brought a dramatic transformation. By 1941, once the war effort had reached high gear, severe unemployment was replaced by a critical labour shortage…This galvanization of the Canadian economy from sluggishness to hyperactivity was achieved by the federal government’s enormous spending…The government could have spent money on this scale previously; war did not provide it with financial capability that it had not possessed in peacetime. It had refrained, however, forbidden by an economic orthodoxy that warned both that it was impossible and that the results would be catastrophic. first declared the experts, Canada simply didn’t have the money; it would have to be obtained from foreign sources-and they would no doubt refuse to supply it. secondly, a large addition to the country’s monetary circulation would inevitably cause a ruinous inflation. finally, the burden of debt assumed by the government in borrowing the money would oppress the country ever after.” (pp 9-10)

Bellan goes on to detail how the experts of the day insisted that only private sector activity and new investment could do the job and how it would be” ruinous folly” for the government to undertake public spending to accomplish the task.

It is quite simply amazing how all of these discredited arguments have come back in contemporary times. Bellan concluded the opening chapter of his book with a plea for a ”more humane -and less wasteful-economic policy” and pointed out that he had ”greater respect for the free enterprise system than did those champions of free enterprise who insist it is incapable of providing useful employment for all …who seek it.” (p.11)

Eisner would not have disagreed with the thrust of Bellan’s argument . Because he was much more of an econometrician and macro theorist he established his argument in a different more theoretical fashion. One of the key tools in his approach to crunching the data to prove his case was the concept of the high employment budgetary deficit(or surplus) which he defined as follows;

”it is calculated from a budget that presents estimates of what expenditures and receipts and hence the deficit would be if the economy were at a level of activity independent of cyclical variations in employment, output and income. Since the cyclical variations in output and income are closely associated with those of employment and unemployment the budget has usually been defined for a constant rate of unemployment.” (p.83)

That rate of high employment was originally defined as 4 % unemployment but was raised over time in stages to 5.1 % by 1975.(See Eisner, appendix C, section E p 215). Once one makes this adjustment in the data Eisner shows that deficits have a strong positive impact on the economy. What this approach also shows is that nominal deficits once adjusted for the cyclical component often turn into surpluses which explains the mystery of why a cyclically induced deficit not sufficiently treated with stimulative fiscal policy can accompany high unemployment and not appear to work to cure the problem. This is so because the apparent deficit is actually a contractionary high employment surplus or a much smaller deficit than is necessary to overcome the cyclical downturn’s impact on employment and growth.

To use deficit finance properly you need to have a high employment deficit when you are suffering from excessive unemployment.

All too often the deficit that prevails is the consequence of the rise in unemployment rather than deliberate counter cyclical spending. This cannot correct the problem ,particularly if most of the automatic stabilizers have been damaged or diminished by years of neo-con policy.


Ruben Bellan, The Unnecessary Evil:An Answer to Canada’s High Unemployment, Toronto:McClelland & Stewart, 1986.

Harold Chorney, The Deficit and Debt Management:An Alternative to Monetarism, Ottawa:The Canadian Centre for Policy Alternatives, 1984.

Robert Eisner, How Real is the Federal Deficit,New York: Free Press ,Macmillan, 1986.

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The new imperial order in Europe: financial gunboat diplomacy and the decline of European civilization

The diktat imposed by Germany and its neo-con vassal states upon Greece in these recent hours conjures up correctly I think the days of imperial excesses in Asia in the nineteenth and twentieth century by the western powers where servitude to the imperial powers was delivered quite literally on the barrels of the British and American gunboats that penetrated these waters.This time the gunboats have been replaced by the abstract but very real weapons of the financial asphyxiation powers of the ECB and its ability to destroy the Greek banking system and it must be said the lack of proper preparation on the Greek side to launch and defend a parallel currency as a viable alternative to what has transpired.

The former Greek Syriza finance minister, a professional economist has described the terms of surrender to Germany as another punitive crushing treaty of Versailles The Slovak finance minister has admitted that the terms are designed to crush the popular democratic uprising in Greece. Economists of many stripes concur that the crushing terms can only destroy the Greek economy and ultimately greatly discredit German leadership of the EU. Germany has behaved in a shameful manner which raises very serious questions about the viability of the Euro zone and the spectre of the collapse of the European project. When Robert Schumman,Jean Monnet and the early pioneers of the European Coal and Steel Community envisaged Europe and the common currency they had in mind an idealistic project that would replace Prussian and Teutonic authoritarianism and militarism by a peaceful movement meant to enhance the European values of humanism and mutual aid. They would be appalled by what has transpired. The immoral and amoral members of the governing councils of Europe and of the institutions like the European Central Bank and the IMF have betrayed the principles on which the original union was predicated. Greece and its poor will be wrecked further by these measures and the stain on European history will be large.The extremists in Greece of the neo-Nazi kind will be emboldened and strengthened. Sparta not Athens may emerge triumphant.

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The Terrible Return of Financial Authoritarianism:US and Canada have a role to play in Overcoming It.

It may well be that a third “bailout” pact will be successfully negotiated over the weekend with Berlin and the European conservatives as usual calling the shots forcing the Syriza Government to discredit itself in the eyes of its voters by accepting another austerity oriented package but with the promise that in future there will be consideration to restructuring some of the debt in order to make it more sustainable over the long haul . It may also contain some legitimate reforms with respect to diminishing corruption and clientelism in Greece.Nevertheless if the press rumours are correct it also involves a larger austerity package than was rejected by the Greek electorate in the recent referendum which will meet with great disillusionment and anger in Greece already wrecked by the earlier austerity loaded packages. Joseph Stiglitz has pointed out that contrary to the economic analysis that was contained in the earlier bailouts and predicted the opposite ( which it should be stressed were largely designed to rescue the Greek banks and their German and French creditors and did not transfer funds for use in Greece for Greek citizens) the GDP shrank by 25 %. Prior to the crisis Greek GDP had been growing at 3.4 % per year versus a 2.4 % growth rate for the EU as a whole. Some analysts argue that the Greek debt is sustainable since the average interest on the debt is 2 %  and if austerity were lifted and stimulus substituted a growth rate of more than 2 % could easily be accomplished which would shrink the debt to GDP ratio over time considerably. The Belgian economist Paul De Grauwe who teaches at the LSE argues this position. Greece is solvent but illiqid 

The illiquidity comes about because of the policies of the ECB which has artificially and possibly illegally restricted the normal central bank function of  a bank of last resort in helping a member bank deal with a bank run. There is over 26,ooo million euros in coin and cash in circulation in Greece but because of the fear that has been spread on account of the ECB’s restrictions on supply and the capital controls the cash is being hoarded in households and businesses. The normal velocity of circulation in Greece appears to be too low to sustain the economy in such circumstances. But because of the fear people’s behaviour has altered. Some wealthier persons have been trying to spend their cash and acquire alternative stores of value in jewelry, appliances, automobiles etc because they fear a bail in of part of their bank accounts as occurred in Cyprus.  De Grauwe may well be right but unfortunately the Germans and other northern Europeans remain obsessed by the necessity of austerity despite all the scientific evidence to the contrary.

What can we North Americans do to help Greece. Well many of us live in colder northern climates and holidays in sunny Greece surrounded by classical antiquities , tavernas and music have a strong appeal. Stiglitz suggests in the absence of a more generous deal the US offer a swap line on debt to the Greek central bank to enable it to meet the needs of its clients Canada could do the same with a smaller ceiling than the US.In return perhaps both countries could qualify for more attractive holiday packages in the sun for all of our citizens.

If Greece is unable to get a reasonable deal there is a lot at stake in Europe with the danger of the rise of extremist parties .North Americans have had to rescue the Europeans once before in history at a terrible cost in lives and treasure. Indeed Germany who has been so tight fisted in its demands ought to recall the huge debt forgiveness and aid it received from the U.S after the second world war something which both Stiglitz and Piketty have pointed out. In addition to this sort of central bank help we should call an international  conference on reconsidering austerity versus stimulus as a response to crises . For Greece itself it should consider very carefully the cost involved in hanging on to the euro and weigh that against the possibility of an orderly transition to a parallel currency that allows it to escape from the suffocating  hand of austerity.

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The founding of the United States, the emergence of its currency and lessons for the Greek crisis.

Many people are unaware of the monetary and currency roots of the American Revolution. Most know about the revolt over unfair taxation without representation that inspired the American tea party incident in Boston harbour. But the revolt was also about the unwillingness of the British colonial authorities to permit the thirteen colonies to print their own currency and by forcing them to use the British pound which was in short supply and in any case controlled from London extract additional revenues from the colonies through monetary policy and restricted trade. These 18th century events have considerable lessons to teach the Europeans involved in the Greek crisis about how not to try and resolve the conflict over the euro and the needs for the Greek economy to escape from suffocating austerity and an overvalued currency. We shall know late on Sunday or early Monday the final results of the referendum that the Greek government has called on the final offer proposed by the EU to them with respect to the austerity measures and tax increases demanded in order to free up bail out funds for Greece. We already know that despite their excessive demands for continued austerity, neocon inspired market liberalization measures and tax rises the IMF’s own economists believe that the Greek debt situation is unresolvable without debt relief and a lengthening of the terms of repayment.

But the IMF refuses further negotiations without knowing the results of the referendum and in any case senior EU politicians seem very hostile to further negotiations and have stated that the referendum is a straight yes or no to Greece staying in the euro. If they vote no this is interpreted as a rejection of the euro and the immediate need for Greece to issue its own currency.Because of a bank run and the EU imposed ceiling on the supply of euros to the Greek commercial banks there is now an acute shortage of euros in circulation in the Greek economy . Clients are only allowed to withdraw 60 euros a day from ATMs and the banks are shut until after the referendum. This has exacerbated the aura of crisis in Greece and is clearly designed by the EU and ECB authorities to influence the vote in their favour. But just as in 18th century America there was a solution which Benjamin Franklin took advantage of by printing an American dollar currency approved by the continental congress the Greek government if necessary can escape the trap set for it by the European conservative leadership by re-establishing its own currency with the backing of its people and it must be said the considerable gold reserves which Greece possesses and the value of its country as a mecca for tourism and culture.

In any case the very large majority of about 61 % that appears to have voted no in the Greek referendum today may give the Greeks an alternative but only if the European leadership moves away from its hardline austerity position.

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Greek government puts EU final offer to referendum test: Unclear if it will pass but democratic option commendable

The Greek government led by Alexis Tsipras and the Syriza party has turned the tables on the austerity obsessed European union. I t has announced a referendum on the final offer presented to it by the EU, the ECB and the IMF. This offer to extend the bailout by five months but on terms that require more austerity, further cuts to pensioners and the poor and middle classes and more belt tightening overall with no parallel debt relief  would allow Greece to keep the euro but further destroy its already shattered economy that previous EU and IMF conditionality had destructively wrought in Greece. It may well be that a majority of Greeks will be willing to accept this sado -masochistic policy as a price worth paying to stay but many Greeks may well reject it on the perfectly sensible calculation that over the long haul they will be better off outside the eurozone and with their own currency and central banking system capable of financing a substantial domestic stimulus program. Freed of the onerous burden of excessive and foolishly imposed IMF conditionality with a chance to lengthen debt repayment terms and write off a substantial portion of the debt Greece could very well do much better than the high priests of fiscal orthodoxy claim. In any case whatever the outcome it will be a democratic one which considering the size of the democratic deficit in Europe is a major positive accomplishment.

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Further views on Greece as signs of domestic opposition from pensioners and others badly affected by proposed deal’s likely measures

There is no doubt that a resolution of the Greek crisis is a desirable objective but there is also no doubt in my mind that increasing austerity in Greece on the backs of hard pressed pensioners  and the middle classes is a very bad idea. As Larry Elliot and others including me have argued austerity is the worst possible policy because it undermines aggregate demand and reinforces a debt deflation spiral. It beggars belief that the creditors are still insisting on further austerity and display such extraordinary historical ignorance of the 1930s and the massive failure of such policies during the last great depression.

There are a number of voices and opinions worth reading on this question. Have a look at this article:http://www.voxeu.org/article/programme-greece-follow-imf-s-research by a Princeton based professor of international economic policy on the pitfalls of overdoing austerity. The author Professor Ashoka Mody is no radical but a very mainstream professor and although he proposes a very minimal primary surplus over the next three years of 0.5 % of the GDP,whereas I would propose running a stimulative infrastructure focused deficit, he nevertheless appreciates the importance of growing the Greek economy and also proposes substantial debt forgiveness as much as 50 % and repayment over forty years of the rest.

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Greece finance minister releases full text of his statement on Greek negotiations as deal looks more likely


By going to this address the reader will find Mr.Varoufakis’s views as he presented them to the EU negotiating group. They are comprehensive, will be controversial to some but very credible and pursuasive to many others.

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