haroldchorneyeconomist

The U.S. Bureau of Labour Statistics has released data that shows that the U.S. economy added a net 117,000 jobs last month and that unemployment has dropped to 9.1 %. This is not a spectacular improvement but it does beat market expectations and may help calm the markets somewhat. The number of new jobs is still far below the monthly numbers required to make a major dent in the unemployment rate. To do that we would need to see gains of 200,000 to 350,000 per month over the next 12 months. For the historical data over the past decade see the earlier post below.

Many analysts misrepresent the percentage of U.S. debt held by 
foreigners who clearly buy the debt because they view it as a 
valuable asset. The table below courtesy of the U.S. treasury 
details precisely which foreign countries hold U.S. debt.
 Note that the total of  4.5 trillion represents 
31.5 % of the gross debt.   
MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES
                (in billions of dollars)
                HOLDINGS 1/ AT END OF PERIOD

                                                                                                             New 5/  Old 5/
                                                                                                             Series  Series
                       May     Apr     Mar     Feb     Jan     Dec     Nov     Oct     Sep     Aug     Jul     Jun     Jun     May
Country               2011    2011    2011    2011    2011    2010    2010    2010    2010    2010    2010    2010    2010    2010
                     ------  ------  ------  ------  ------  ------  ------  ------  ------  ------  ------  ------  ------  ------

China, Mainland      1159.8  1152.5  1144.9  1154.1  1154.7  1160.1  1164.1  1175.3  1151.9  1136.8  1115.1  1112.1   843.7   867.7
Japan                 912.4   906.9   907.9   890.3   885.9   882.3   875.9   873.6   860.8   832.5   817.3   799.9   801.2   784.8
United Kingdom 2/     346.5   333.0   325.2   295.5   277.9   271.6   242.5   209.0   190.5   181.0   107.2    94.5   363.6   350.7
Oil Exporters 3/      229.8   221.5   222.3   218.8   215.5   211.9   204.3   207.8   215.4   211.7   209.3   210.2   216.3   228.6
Brazil                211.4   206.9   193.5   194.3   197.6   186.1   189.8   183.0   181.0   170.5   167.7   163.8   158.5   161.5
Taiwan                153.4   154.5   156.1   155.9   157.2   155.1   154.4   154.5   153.3   153.4   153.8   151.9   128.6   126.2
Carib Bnkng Ctrs 4/   148.3   138.1   154.8   169.4   166.5   168.1   158.8   146.3   157.7   172.6   164.1   178.9   165.9   166.3
Hong Kong             121.9   122.4   122.1   124.6   128.1   134.2   134.9   135.2   131.9   133.9   131.2   137.0   141.0   145.7
Russia                115.2   125.4   127.8   130.5   139.3   151.0   167.3   176.3   173.3   173.7   175.7   168.2   123.4   126.8
Switzerland           108.2   106.3   109.9   109.8   107.6   107.0   107.0   107.7   110.0   113.0   111.8   106.5   100.1    84.4
Canada                 90.7    87.7    93.3    92.9    86.5    76.7    76.7    66.1    56.5    44.9    43.0    35.9    93.7    84.8
Luxembourg             68.0    78.4    81.1    81.0    83.0    86.4    81.9    78.5    86.1    79.0    98.9    97.6    96.6    75.6
Germany                61.2    61.3    59.8    58.3    61.1    60.5    58.6    58.2    57.9    56.8    55.3    52.2    54.0    55.8
Thailand               59.8    60.7    57.1    57.6    56.5    52.0    52.2    52.7    50.4    47.3    40.8    35.7    49.3    46.3
Singapore              57.4    60.3    55.7    66.7    57.8    72.9    62.2    66.4    56.7    55.4    55.3    53.3    50.5    40.6
India                  41.0    42.1    39.8    40.3    40.6    40.5    39.7    40.1    40.0    37.9    38.4    35.4    36.4    29.3
Turkey                 39.3    37.9    36.2    34.3    32.9    28.9    29.1    27.8    27.8    29.7    26.7    25.7    25.5    27.6
Ireland                33.5    40.2    44.0    42.0    44.4    45.8    50.0    48.9    51.5    49.5    51.1    55.7    48.3    48.0
Korea, South           32.5    30.8    32.5    31.2    31.9    36.2    39.8    39.4    38.7    39.9    37.6    37.0    38.7    37.8
Belgium                31.4    31.6    32.2    32.0    32.1    33.2    33.4    33.4    33.8    51.9    34.3    34.8    17.2    17.6
Poland                 27.9    27.4    28.4    27.3    26.3    25.5    27.2    28.8    28.4    26.6    24.8    25.7    23.2    23.4
Mexico                 27.7    26.7    28.1    34.6    34.4    33.5    32.6    34.8    36.8    36.1    33.5    33.1    33.2    34.2
Italy                  25.4    24.8    24.2    24.3    24.6    23.7    23.6    23.7    24.1    23.6    23.2    22.7    20.1    20.8
Netherlands            23.7    23.6    25.1    24.9    25.4    22.7    22.1    22.0    23.1    25.1    24.2    24.7    17.3    17.6
France                 23.6    20.3    17.7    30.2    30.2    15.0    20.1    23.5    23.3    26.1    19.8    24.2    36.0    37.9
Philippines            23.6    23.9    23.4    22.7    22.8    20.1    19.2    18.5    18.5    19.3    20.3    20.0    14.3    14.4
Norway                 21.1    21.1    21.4    20.8    19.4    19.6    19.0    18.0    18.1    17.5    16.3    15.4    16.1    15.2
Sweden                 20.9    21.4    21.3    17.7    17.0    16.8    15.2    16.1    15.4    16.8    17.7    17.6    16.5    13.4
Colombia               19.9    19.8    20.2    20.1    19.8    20.2    20.3    16.7    16.3    16.5    16.4    16.4    17.0    15.7
Israel                 19.1    19.3    18.9    19.8    19.9    20.6    20.5    17.9    17.6    16.3    17.9    18.3    18.4    20.1
Chile                  18.9    18.6    16.7    16.0    15.0    13.9    13.4    13.4    13.0    13.0    13.1    12.0    12.2    12.0
Egypt                  12.9    13.6    15.3    14.9    20.7    26.0    29.8    30.5    30.6    29.2    25.9    25.0    29.4    28.0
Malaysia               12.7    12.2    11.2    11.3    11.3    11.5    11.7    11.6    11.5    11.7    11.7    11.1    11.1    10.5
Australia              12.3    13.1    10.3    12.6    14.7    14.9    14.9    15.7    18.0    15.5    19.2    18.4    14.5    14.1
All Other             202.5   204.8   200.8   197.5   194.4   193.0   200.5   201.5   204.2   206.7   206.8   199.1   171.1   174.6
Grand Total          4514.0  4489.1  4479.2  4474.3  4453.0  4437.9  4412.5  4372.9  4324.1  4271.8  4125.3  4069.9  4002.8  3958.1

Of which:
 For. Official       3239.6  3216.7  3182.0  3192.1  3183.1  3188.4  3211.6  3227.2  3192.1  3144.1  3099.2  3071.4  2690.3  2690.8
  Treasury Bills      422.8   421.5   414.9   432.4   438.9   462.3   499.2   531.3   495.4   486.9   473.5   454.4   454.4   466.9
  T-Bonds & Notes    2816.8  2795.2  2767.1  2759.7  2744.2  2726.1  2712.5  2695.9  2696.7  2657.2  2625.8  2617.0  2235.9  2223.8

Department of the Treasury/Federal Reserve Board
July 18, 2011

 1/  Estimated foreign holdings of U.S. Treasury marketable and non-marketable bills, bonds, and notes
     reported under the Treasury International Capital (TIC) reporting system are based on annual
     Surveys of Foreign Holdings of U.S. Securities and on monthly data.
 2/  United Kingdom includes Channel Islands and Isle of Man.
 3/  Oil exporters include Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar,
     Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria.
 4/  Caribbean Banking Centers include Bahamas, Bermuda, Cayman Islands, Netherlands Antilles and Panama.
     Beginning with new series for June 2006, also includes British Virgin Islands.
 5/  New series reflect new benchmark survey taken in this month.  Estimated positions based on the
     previous survey are shown for comparison.
Courtesy: U.S. treasury

Whatever the outcome of the last minute, too late by several weeks, negotiations that are underway in Washington considerable damage has already been imposed on what is supposed to the leader of the free world. The biggest damage is the massive erosion in confidence about the political viability of the American system of government and its ability to govern effectively without gridlock and damaging log rolling. But not far behind is the regression in leading circles in both parties back to a form of financial orthodoxy that appears to show that many politicians have learned little or nothing from the catastrophic events of the great depression .Most of these are in the Republican party, particularly the extreme tea party wing that it must be said appears to be partly bankrolled by wealthy industrialists who have cynically helped create a frankly extreme right of centre movement that poses as defenders of the people.

One of things that should be carefully checked out in the coming weeks is who speculated in credit default swaps against American debt and what political links, if any, they might have.

But Republicans alone are not the sole culprits. On the Democratic side blame must be assigned to those Democrats who cynically believed that there was political advantage to be gained with independent voters  by out manoeuvering the Republicans on fiscal ”responsibility” by foolishly embarking upon deficit reduction negotiations at a time when unemployment is still over 9 % and budgetary cuts or even talk of cuts in the near future are bound to cost jobs and prolong the pain. If you want to talk about balancing the budget, first lower unemployment to acceptable levels 5 % or below, repair all the damaged infrastructure and ensure people have access to health care and education and retraining and then but only then address the issues surrounding the medium and long term future of various ”entitlement” programs. Otherwise you risk what has happened and putting back the cause of social progress both in the U.S. and abroad for years to come.

There are certain statistical facts that also need to be publicized. In 1946 the Federal Reserve held 10.7 % of the American debt which was then in gross terms 121.7 % of the GDP or in net terms 98% of the GDP. In 2010 the Gross debt to GDP ratio was 93.2 % and the net debt 56.6 % and the Fed held 5.6 % of the debt. The perilous state of America’s debt situation has been grotesquely exaggerated. The Fed has plenty of additional room to help out, particularly in wartime, and contrary to the assertions of the Tea Party, once we strip out the effects of the OPEC cartel, despite the Fed’s increased holding of U.S. debt since 2008 there has been virtually no increase in prices. The economy remains far too weak for that to happen. Their assertions are simply wrong and totally driven by ideology. It is a great shame to see otherwise progressive Democrats embrace blindly some of their assertions in an effort to win votes.

Perhaps not surprisingly given the cast of bizarre politicians affiliated to the tea party wing of the Republican party who now sit in Congress a deal to raise the debt ceiling has still not been struck despite the fact that midnight approaches. A major part of the problem is the strategy of the radical right wing Republicans to try to blackmail the President and the Democrats to do lasting damage to the many positive programs that help the poor and the elderly and the moderate income access health care, retirement,  education and employment in the United States. They are determined and dogmatically misunderstand the role of government in a modern democracy as a protector of both prosperity and community in co-operation with the private enterprise system. But unfortunately President Obama apparently has also made some errors in how he has approached these negotiations. By unwisely and prematurely promoting  deficit reduction rather than job creation as his top priority he may well have trapped his administration into offering excessive concessions in order to win a deal with legislators who are only interested in damaging his Presidency and defeating him in 2012.

The veteran distinguished journalist Elizabeth Drew has written an excellent article that explores these questions which was published in the New York Review of Books on July 19, 2011 with the catchy title What were they thinking?  Based in part apparently on off the record interviews with former Obama advisors she describes a presidential strategy driven by polling that focuses heavily on re-election  in 2012 and winning the votes of centrist independents who favor fiscally conservative policies.

Winning is important but the point of winning is to implement positive and progressive policy. This is a key moment in the recovery where a great deal of harm could result from excessive budget cutting and substituting a supply side strategy when the lack of aggregate demand and liquidity trap circumstances are clearly the problem. Robert Reich has suggested that a face saving strategy worked out by Senator Mitch McConnell that raises the ceiling but permits tea party Republicans to register their disapproval without this negating the legislation will ultimately be the solution. Others have rejected this option and are now arguing a further compromise package will be necessary.

Whatever the solution under no circumstances should members of Congress assume that refusing to raise the debt ceiling won’t have  significant negative consequences. The tragedy will be that they will be self-inflicted .

A key consideration in evaluating accurately the burden of  public sector debt is to understand the distinction between gross debt-often the headline number- and net debt the true measure of the debt burden.

Robert Eisner explained this well in his work on the debt.A large chunk of the the U.S. federal debt is held by various government agencies or government trust funds like for example the U.S. superannuation fund. So the first step in assessing the true size and burden of the debt is to exclude internally held intra governmental debt. Once we do this according to Eisner and U.S. government statisticians we arrive at gross federal debt held by the public. But because of a technicality we have next to subtract U.S. debt held by the Federal reserve which is counted as part of the ”public” which these days amounts to some 1.624 trillion dollars, a substantial sum. Interest owed on this debt is paid eventually to the U.S. treasury.

Finally we should subtract from the total the value of financial and other assets owned by the U.S. government and the value of interest and debt owed by the public to the U.S. treasury. With that done we arrive at a figure that is the U.S. net government debt.It is substantially smaller than the headline rate.

In 2010 for example, according to the Budget for fiscal Year 2011 as found in table S.1 of the summary tables p.146 total debt held by the public was 9.298 trillion dollars or 63.6 % of the GDP. If we subtract from this sum the value of financial assets held by the government we arrive at the figure of debts net of financial assets of 6.647 trillion or  58.8 % of the GDP. A large number but much smaller than the misleading headline number which focuses on gross debt. The number is even smaller once we deduct the 1.624 trillion held by the Federal Reserve.

In 2006 the gross debt was 8.451 trillion. Net debt after making most of these adjustments was substantially less 4.060 trillion 31.1 % of the GDP versus 64.7 %. (The budget for  2008, historical tables Table 7.1)

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.

Bibliography:

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.