We should all have seen this coming.
For the third time since the beginning of Obama’s presidency, the GOP has resisted calls to raise the ceiling on borrowing by the U.S. Treasury. At each instance, the motive has been slightly different: the first time around, in 2010, a tidal wave of fresh-faced Tea Party Republicans that swept through the House was determined to limit the president’s reign to a single term. The second time around, in 2012, the GOP could smell a shot at the presidency, and insisted that federal spending be “brought under control”—despite the fact the federal deficit was already diminishing at an historic clip. Now, we find ourselves in the throes of Round 3, entailing the first (partial) U.S. government shutdown since 1996—and the primary motivation of the Tea Partisans this time, is to obstruct the introduction of President Obama’s signature Affordable Care Act.
But although it’s easy to identify the party that bears the greatest immediate responsibility for the present situation, to place all of the blame on GOP congressmen would be a mistake. That is precisely what Obama wants us all to do—and it’s a tactic he has deployed with relative success throughout his presidency. When House Republicans—who no doubt have become increasingly reckless and extreme in their demands through the years—yank yet again at the levers of power at their disposal, Obama the statesman, Obama the centrist, Obama the perennial advocate of bipartisanship, seems to take veritable delight in the art of compromise.
The tragedy of his line of reasoning, however, is that there is no virtue in a compromise between misguided policy and disastrous policy.
The U.S. debt ceiling “crises” are contrived, unnecessary, and completely avoidable—yes, Obama himself has the power to prevent what has become an annual standoff against congressional Republicans, but for some reason, perhaps due to a lack of understanding on his part of the realities of the U.S. monetary system, he has consistently failed to exercise it. (This is an issue I’ll return to later in the post.)
The consequence, sadly for Americans in need, pensioners and public employees, is that President Obama consistently finds himself in a prison cell of his own device, with his Republican counterparts holding the key to his release.
Canada and the U.S. share a great deal of history, and both countries find themselves in comparable positions in the second decade of the 21st century. Both are in the midst of wobbly “recoveries” from the depths of the economic collapse of 2008-’09. Both national governments arranged historic rescue packages for their big banks, along with inadequate, ill-apportioned fiscal stimuli, in an effort to avert the worst effects of the recession. And both countries’ leaders have since been persuaded, however erroneously, that despite the ruinous effects of austerity policies in Europe and the impossibility of “cutting one’s way to prosperity”, reduction of the federal fiscal deficit through substantial spending cuts should be their foremost domestic priority.
But as is always the case in the event of such belt-tightening, the cuts have not been distributed equally.
In Canada, a project ostensibly designed to reduce federal government spending has been accompanied by unnecessary and unhelpful reductions in the corporate tax rate, an enlargement of the federal public service, and investments of tax dollars in costly propaganda campaigns for the government and its associates in the oilsands industry. In the U.S., Wall Street bankers have continued to enjoy the benefits of quantitative easing by the Federal Reserve, transferring their toxic liabilities to the central bank’s balance sheet, while recipients of food stamps, medicare and medicaid have stood in the crosshairs of further efforts to scale back their already paltry benefits. Both governments have taken steps to curb their regulatory bodies, in the vain hope that by “liberalizing”, and unfettering the powers of the corporate-dominated “free market”, their economies will soar to dazzling heights.
History has repeatedly demonstrated the failure of unfettered, unregulated capitalism. But even through the worst economic crisis since the Great Depression, the economic religion of neoliberalism has proven largely impervious to factual debunking.
Although the regimes of our respective countries appear ideologically distinct, their policies have aligned like the iron rails of a train track. Obama, derided by his more strident critics on the right as a “liberal”, or even a “socialist”, has presided over record wealth inequality, a foreclosure crisis, an unemployment crisis, and record corporate profits. Honey-tongued, he extolls the values of American progressivism, while inculpating his political opponents for his most virulent domestic economic decisions. The government of Stephen Harper, meanwhile, though possessing a majority in the House of Commons, is constrained in the court of public opinion by the relative social liberalism of most Canadians; it is for exactly this reason that it invests so heavily in its endeavours to mould public opinion, spin political talking points to its advantage, and boorishly denigrate its most visible political adversaries.
Despite their differences, the agendas of the respective governments have produced remarkably similar effects on the ground: namely, to undermine, repress and render increasingly unsustainable an already fragile domestic economy, while promoting increased fossil fuel extraction in the face of increasingly ominous warnings from climate scientists.
The wrong priorities
Why did our respective governments decide austerity was the best policy, at a time when the global economy is limping along, wealth inequality is rising, the ecosystem upon which all life depends is in peril, and so much of our infrastructure is badly in need of upgrading? Why, in an epoch of unprecedented total levels of net worth, are we locked in a false discourse of scarcity? And why do our leaders—both political and financial—seem to possess such a dismal understanding of economics, credit, and debt?
Since the release of a fallacious 2010 study by Harvard economists Carmen Reinhart and Kenneth Rogoff, it has become fashionable for policymakers to fixate on the level of public debt a country carries, in both absolute terms, and relative to GDP. Consistently cited as an impending potentiality if we fail to “rein in spending” is the crisis in Greece, where unwieldy levels of public indebtedness forced the national government to seek repeated bailouts from the European Central Bank.
But the Chicken Littles of the economic world are, needless to say, omitting vital components from their analysis.
First of all, there is a crucial distinction between European countries like Greece, Spain, and Ireland, and nations like Canada and the U.S.: Unlike the aforementioned Eurozone states, both of the latter countries are issuers of sovereign currencies, over which our respective central banks and treasuries exert a great deal of control through taxation, spending, manipulation of interest rates, money “printing”, and in the U.S.’s case, the various stages of the quantitative easing program.
As long as our governments issue their own sovereign currencies, they are able to transfer funds to the accounts of their creditors, and fund their liabilities, simply by striking a few keys on a computer. In other words, it is almost impossible for either federal government to default on its dollar-denominated debts, and any situation (such as the current U.S. government shutdown) that appears to portend a “catastrophic” default, does so for political, and not financial, reasons.
In other words, Canada and the U.S. are not Greece, nor are our respective countries in danger of ending up in a severe recessionary spiral, of the sort currently experienced by Greece, in the near future.
On the list of challenges Canada and the U.S. face, the federal deficit is trivial compared to global climate change, biodiversity loss and the specter of mass extinction, crumbling infrastructure that will place our economies at a long-term structural disadvantage against our competitors if we fail to invest in upgrades, and some of the highest levels of household debt in the history of our respective countries. At present, we find ourselves in a zero-sum game of untenable private debt, hefty mortgage payments, and housing and asset bubble inflation, stemming in part from a long period of artificially low interest rates, courtesy of the misguided monetary “stimulus” policies of our respective central banks. And we needn’t remind ourselves of what happens if an economy become overleveraged, debtors begin to default en masse, and large credit bubbles burst…
We know how the Eurozone, Canada and the U.S. are handling their sovereign debt situations. But what about China?
Long redoubted as an engine of the world economy, China has recently experienced a slowdown in its economic expansion, partly because of foreign weakness, but also as the result of a conscious decision by Chinese policymakers to retard growth in order to limit inflationary pressures within the domestic economy. Since August, however, the Chinese economy has resumed strong growth.
How has China achieved this despite the economic ‘headwinds’?
Other than through currency manipulation (which is hardly the wont of China alone), and the suppression of wages and union organizing in its factories through what I call the CINO loophole (i.e. Communist in Name Only: China still fancies itself a communist country, and hence its workers “own the means of production,” which—purely in the realm of fantasy, of course—”obviates” any necessity for the formation of unions and demands for better wages and working conditions), China has invested in some of the most grandiose public infrastructure projects in human history. Beyond this, the world’s second-largest economy has maintained robust GDP growth through massive and continuing stimulus programs at the federal, provincial, and local level, largely in the form of direct government spending, as opposed to tax cuts for the wealthy and multinational corporations.
In other words, China’s macroeconomic strategy has been more or less the opposite of those embraced by technocrats in Europe, and the economically misfeasant governments of the U.S., Canada, the U.K., and elsewhere.
All of this is not to say, of course, that China does not have asset bubbles and other serious problems of its own, including severe environmental contamination, institutional corruption and the virtual absence of anything resembling the rule of law in many parts of the country, poor food, transport and workplace safety standards, the persistence of child labour, a lack of basic freedoms and civil liberties, and the regime’s apparent contempt for human rights. But China’s progress in multiple areas is undeniable, its macroeconomic indicators are strong, its employment-to-population ratio much higher than that of most Western economies. And although the material standard of living of the average Chinese citizen is inferior to that of the average American, or Canadian, China is rapidly catching up—with significant implications for the world’s supply of non-renewable natural resources, and the viability of global capitalism itself.
President Obama’s failure to avert conflict with his GOP adversaries
Contrary to what you may have been led to believe by those of Democratic inclination, President Obama is not merely a victim of the GOP’s debt ceiling tactics (which clearly amount to extortion). He has long had a pair of options available to him to rightly deprive the GOP—which has already lost a congressional vote, a federal election and a Supreme Court challenge over the ACA—of its bargaining power in this costly, unnecessary and unpopular showdown over healthcare reform. Unfortunately, he chose to exercise neither of them.
Option 1—Issue a platinum coin of the denomination of his choosing: The U.S. Constitution vests in America’s Congress the power to create money, and delegates this capacity to two federal agencies: the Federal Reserve, and the U.S. Mint. As explained in this article in the New York Times, in 1996, congressional Republicans passed a statute that permitted the issuance of platinum coins, of any denomination. If President Obama so chose, he could instruct his Secretary of the Treasury to request the minting of a platinum coin, with a face value of [insert number], which could then be deposited at the Federal Reserve. Thereafter, the Federal Reserve would simply credit the account of the U.S. Treasury, effectivley obviating any discussion of the “debt limit.”
Are you still following? No? Oh well, you can take my word for it. The trillion-dollar coin is a gimmick, of course, but so is the debt ceiling itself. Which brings us to
Option 2—Unliaterally raise the debt ceiling by invoking the 14th Amendment to the U.S. Constitution:
Aside from possessing the ability to order the minting of a coin of any denomination, President Obama can also invoke his executive powers to raise the debt limit without the approval of the extortionate Republican-dominated House, but has refused to do so.
Either option would be the next-best-thing to outright abolition of the debt limit, which numerous economists and informed commentators have rightly identified as a cumbersome anachronism.
However, with Obama having declined to exert either of these powers, the realistic outcome is predictable. The GOP and the Democrats will unite, over the next few days, to iron out the details of a “deal” that would enable them to avoid running up against the borrowing limit. The result will be further austerity and “streamlining” of the government’s regulatory agencies, at a time when the last thing the U.S. needs is more of either of those economic toxins. Meanwhile, in the U.S.’s neighbour to the north, our prime minister will continue in his misguided efforts to “balance the budget”—even if it comes at the expense of social cohesion, human rights, the economy, the environment, infrastructure, and Canada’s valuable stock of non-renewable resources.
What our countries actually need
“We should realize that the [quantity of] resources in our economies—the United States and Europe—is the same as it was five years ago…What has happened is, we’re having a fight over claims, claims to resources…and the fight over claims, is interfering with out use of these resources.
“If we could only get our resources back to work…to use the creativity of the citizens of Europe and America—then we will have unprecedented prosperity.” -Professor Joseph Stiglitz, 2001 Nobel laureate in economics, speaking at the World of Business Ideas forum in 2012
The notion that the most pressing issue facing the U.S. and Canada right now is their respective federal deficits, is the peak of folly. Both countries’ economies are anemic, and both are running trade deficits—that is, importing more goods and services than they export. As their manufacturing bases decline, both federal governments are striving to increase exports to foreign markets in the form of fossil fuels—coal, oil, diluted bitumen, shale gas. Both nations have the means and the imperative to develop more advanced, energy-efficient economies as soon as possible, but neither government is making adequate efforts to do so.
On the economic front, policymakers in Canada and the U.S. would do well to take a page out of China’s book—invest heavily in upgrades to our dated infrastructure, develop renewable energy, and put an end to most fossil fuel subsidies. Rather than concentrating so heavily on corporate-friendly, secretive “trade” deals like the TPP and CETA, with the potential to introduce draconian intellectual property provisions that will protect pharmaceutical companies, potentially criminalize innocuous online copying, and allow for more outsourcing and offshoring of jobs, both countries need to focus on building a more productive, efficient, sustainable domestic economic base, and promote local economies.
If relatively wealthy countries like Canada and the U.S. aren’t prepared to dramatically reduce our reliance on fossil fuels, invest heavily in renewable energy, do our part to bring the global ecological crisis under control, give up on self-destructive austerity policies, and eradicate poverty and food insecurity within our borders, we have no right to expect cash-strapped developing countries to do so.