ABC Rear Vision: The US Economy post the 2008 Crash

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The ABC Radio Nation­al pro­gram Rear Vision is a cur­rent affairs pro­gram that presents “con­tem­po­rary events and peo­ple in their his­tor­i­cal con­text”.

I was recent­ly inter­viewed by Rear Vision for a ret­ro­spec­tive on the cri­sis, enti­tled “Here we go again: A look at the US econ­o­my post the 2008 GFC crash” which debat­ed why the cri­sis is still with us today.

Oth­er speak­ers were Ed Har­ri­son from Cred­it Write­downs, with whom I’m very much in agree­ment, eco­nom­ic his­to­ri­an Richard Syl­la from New York Uni­ver­si­ty, and Steve Han­ke from John Hop­kins with whom I almost com­plete­ly dis­agree. Han­ke does­n’t even dis­cuss the lev­el of pri­vate debt, puts the stan­dard neo­clas­si­cal argu­ment that gov­ern­ment debt is the prob­lem, that a stim­u­lus is con­trac­tionary (the so-called “reverse Ricar­dian Equiv­a­lence” argu­ment) and so on, ideas which I regard as total non­sense.

Fol­low the link above to hear the pro­gram via the ABC web­site, or click below to lis­ten to it here. I’ve also repro­duced the tran­script below, and cor­rect­ed a few errors in the ABC orig­i­nal.

Steve Keen’s Debt­watch Pod­cast


The Transcript

Jour­nal­ist [archival]: One of the top three cred­it rat­ing agen­cies, Stan­dard & Poor’s, has down­grad­ed its rat­ing of US debt from AAA to AA+. It’s the first time the US has been down­grad­ed since it first received a Triple‑A rat­ing from Moody’s in 1917.

Jour­nal­ist [archival]: John Cham­bers said S&P’s deci­sion to reduce US cred­it­wor­thi­ness was because for too long it’s been spend­ing when it should have been sav­ing.

John Cham­bers [archival]: Instead of stor­ing our nuts for the win­ter, we ate out nuts and now we’re in a posi­tion where we have very lit­tle fis­cal room to manoeu­vre with an econ­o­my that’s tak­ing a sec­ond leg down.

Annabelle Quince: Just over a week ago, Stan­dard & Poor’s down­grad­ed the Unit­ed States cred­it rat­ing from AAA to AA+. The down­grade sent shock­waves through stock mar­kets across the world and raised the spec­tre of a dou­ble-dip reces­sion.

Hel­lo, I’m Annabelle Quince and this is Rear Vision on ABC Radio Nation­al, Radio Aus­tralia, and via the net. Today, we’re going to try to piece togeth­er how and why it is that the Unit­ed States of Amer­i­ca, the largest econ­o­my in the world, has end­ed up in such a mess.

While there’s a debate about how to fix Amer­i­ca’s eco­nom­ic woes, most econ­o­mists and com­men­ta­tors agree that the main cause of the cri­sis is debt-both pri­vate and gov­ern­ment debt.

Accord­ing to Steve Keen, asso­ciate pro­fes­sor in eco­nom­ics and finance at the Uni­ver­si­ty of West­ern Syd­ney, debt in the Unit­ed States has been accu­mu­lat­ing for decades.

Steven Keen: You need pri­vate debt to finance prop­er invest­ment, but what the banks make mon­ey out of is financ­ing Ponzi schemes. Right from the get-go in Amer­i­ca and from about the mid-60s in Aus­tralia, pri­vate debt to income has been ris­ing. And Amer­i­ca’s gone from 45 per cent of GDP in 1945 to 300 per cent of GDP by 2009; that’s when it peaked out.

Now, all that’s been financ­ing spec­u­la­tion, and when you finance spec­u­la­tion what you’re real­ly doing is gam­bling on ris­ing asset prices. The gam­ble itself dri­ves the asset prices up and then at some point, of course, it has to fall over, because when you’re bor­row­ing mon­ey to gam­ble on ris­ing asset prices, you’re not actu­al­ly increas­ing the num­ber or the pro­duc­tiv­i­ty of those assets. So you’re increas­ing the debt bur­den on soci­ety with­out actu­al­ly increas­ing soci­ety’s capac­i­ty to pay.

As soon as peo­ple start to try to reduce their debt, you go from ris­ing debt boost­ing the econ­o­my to it slash­ing demand. Go back to 2008: the GDP in Amer­i­ca was rough­ly $14 tril­lion but the increase in debt that year was rough­ly $4 tril­lion. So that means total spend­ing in the econ­o­my was about $18 tril­lion. Sim­ply slow­ing down the rate of growth of debt; that means you went from hav­ing an $18 tril­lion econ­o­my to a $12.5 tril­lion econ­o­my in two years. That’s what caused the cri­sis.

Jour­nal­ist [archival]: A year ago, those who pre­dict­ed that giant invest­ment banks would fail were dis­missed as mad­men. Today, in the ear­ly hours of the morn­ing in New York, the ven­er­a­ble firm Lehman Broth­ers announced that it would file for bank­rupt­cy.

Steve Han­ke: Towards the end of 2002, one of gov­er­nors of the Fed­er­al Reserve Bank gave an impor­tant speech in Novem­ber-now Chair­man Bernanke, he was a gov­er­nor at the time, but he’s now the chair­man of the Cen­tral Bank.

Annabelle Quince: Steve Han­ke, pro­fes­sor of applied eco­nom­ics at John Hop­kins Uni­ver­si­ty.

Steve Han­ke: He said the main dan­ger we faced in the Unit­ed States is defla­tion and he con­vinced the then chair­man of the Fed­er­al Reserve, Alan Greenspan, that he was right and Greenspan con­clud­ed that defla­tion was the num­ber one prob­lem fac­ing the Unit­ed States.

They start­ed press­ing on the mon­ey sup­ply accel­er­a­tor as fast as they could at the cen­tral bank and they reduced inter­est rates down to one per cent by June of 2003. Now, at the time that was a record low and this start­ed and enabled all the bub­bles to be cre­at­ed-the hous­ing bub­ble and com­mod­i­ty price boom was asso­ci­at­ed with this. Loads of liq­uid­i­ty all over the world and a falling dol­lar, and the falling dol­lar was the cause for rough­ly, in my esti­ma­tion, between about 55 and 65 per cent of all the com­mod­i­ty price increas­es. All these things were start­ed with the Fed. So that’s how we got all these bub­bles that start­ed expand­ing and even­tu­al­ly popped.

Jour­nal­ist [archival]: And so what is the feel­ing? Is the feel­ing that bank­rupt­cy is inevitable now, is that the con­cern?

Inter­vie­wee [archival]: Yeah, I think so and there’ll be more, there’ll be more.

Jour­nal­ist [archival]: Hours ago Mer­rill Lynch also con­firmed it has fall­en vic­tim to the bear mar­ket.

Steve Han­ke: They saw noth­ing com­ing. The Fed and all the estab­lish­ments all over the world, the estab­lish­ment politi­cians, they saw none of this com­ing. The Inter­na­tion­al Mon­e­tary Fund, they had not a clue that any­thing was amiss. It did of course real­ly hit the fan in Sep­tem­ber of 2008 when Lehman Broth­ers col­lapsed and then the US offi­cials in par­tic­u­lar went into kind of a pan­ic mode, indi­cat­ing that if there was­n’t an enor­mous bailout pro­vid­ed that the whole finan­cial sys­tem would col­lapse.

Jour­nal­ist [archival]: The US gov­ern­ment has launched a takeover of the nation’s two biggest mort­gage com­pa­nies.

Hen­ry Paul­son [archival]: Fan­nie Mae and Fred­die Mac are so large and so inter­wo­ven in our finan­cial sys­tem that a fail­ure of either of them would cause great tur­moil in the finan­cial mar­kets here at home and around the globe.

Steve Han­ke: And the sec­re­tary of trea­sury, Paul­son at the time, had sent a three-page let­ter up to the con­gress request­ing hun­dreds of mil­lions of dol­lars in bailout money-$700 mil­lion in bailout mon­ey-you know, close to a tril­lion dol­lars. And just in a three-page let­ter with no back­ground or any­thing. And of course they turned him down and no one paid any atten­tion to it. And he said, ‘Well, if you don’t give me the mon­ey every­thing’s going to col­lapse.’

Hen­ry Paul­son [archival]: This tur­moil would direct­ly and neg­a­tive­ly impact house­hold wealth from fam­i­ly bud­gets to home val­ues to sav­ings for col­lege and retire­ment.

And Paul­son, the sec­re­tary of trea­sury, pan­icked. He was a for­mer head of Gold­man Sachs and had a fine record as an invest­ment banker but no qual­i­fi­ca­tions what­so­ev­er for oper­at­ing in the pub­lic sphere and as a sec­re­tary of trea­sury.

And he pan­icked, he total­ly pan­icked. That’s the gen­er­al prob­lem. You had per­son­al­i­ties in there that were ama­teurs who had no idea of what they were doing and no idea that they were cre­at­ing pub­lic pan­ic. It was­n’t the reces­sion or depres­sion of 2009; it was the pan­ic of 2009 that we’re talk­ing about here.

Steve Keen: The rea­son we’re in this cri­sis-many, many rea­sons, but one essen­tial rea­son is extreme­ly bad think­ing. Bernanke was pub­lish­ing papers with titles such as ‘The Great Mod­er­a­tion’, talk­ing about how won­der­ful­ly the econ­o­my was going and con­grat­u­lat­ing him­self for his good mon­e­tary man­age­ment, right up until 2006–2007. So they just basi­cal­ly saw sta­bil­i­ty. They were com­plete­ly ignor­ing the lev­el of debt.

So the cri­sis took them com­plete­ly by sur­prise, they had no idea it was com­ing, and because it was so dev­as­tat­ing they went into total pan­ic mode. Now if you read Hank Paulson’s account, On the Brink, at one point he’s explain­ing that $700 bil­lion injec­tion he got the con­gress to give, which he actu­al­ly gave to the banks. And explain­ing what was going on he said, ‘I did­n’t dare men­tion a tril­lion dol­lars, that would cause sheer pan­ic, but I had to men­tion a large num­ber and I said $700 bil­lion,’ and then he said, ‘I was then asked, “What would hap­pen if you did­n’t sign it all over?“ ‘ His answer was, ‘May God help us all.’

Jour­nal­ist [archival]: ‘Des­per­ate’ is a word being used a lot in the Unit­ed States at the moment, and ‘cri­sis’. Both are apt descrip­tions of what’s going on. The Amer­i­can Con­gress failed to pass the bailout bill and the col­lapse of the finan­cial res­cue plan has sparked a huge sell-off on Wall Street.

Jour­nal­ist [archival]: Well, there’s dis­be­lief at this death blow for the bailout bid. After all, let’s not for­get Pres­i­dent George W. Bush was pre­dict­ing a deep and painful reces­sion for the US if it’s not passed.

George W. Bush [archival]: I was dis­ap­point­ed in the vote with the Unit­ed States Con­gress on the eco­nom­ic res­cue plan. We put forth a plan that was big because we’ve got a big prob­lem.

Annabelle Quince: The Emer­gency Eco­nom­ic Sta­bi­liza­tion Act, or Bank Bailout Bill, did even­tu­al­ly pass, in Octo­ber 2008. The aim of the bill was to shore up the fail­ing banks by pump­ing $700 bil­lion into the sys­tem.

Edward Har­ri­son is an eco­nom­ic ana­lyst and the founder of eco­nom­ic web­site Cred­it Write­downs.

Edward Har­ri­son: Basi­cal­ly what they were try­ing to do was put a floor under­neath the sys­tem, because all hell had bro­ken loose and there was utter pan­ic. And all of the oth­er insti­tu­tions were imper­illed at that time: Gold­man Sachs, Mor­gan Stan­ley, those were the two remain­ing insti­tu­tions that were invest­ment banks and they were both in jeop­ardy of going bank­rupt. AIG had to be res­cued. We also saw a very large bank, Wash­ing­ton Mutu­al, which went out of busi­ness and was bought out by JPMor­gan.

So real­ly what they want­ed to do, they want­ed to put a floor under all of that. And what they had orig­i­nal­ly planned to do was to buy up a lot of these assets-these dodgy assets-which had been caus­ing these banks to fail and had been caus­ing the pan­ic. But as time went along they realised it would be bet­ter for them to inject cap­i­tal into these insti­tu­tions to shore up their bal­ance sheets, as opposed to buy­ing the cap­i­tal, and so that’s what they end­ed up doing. And that’s what the bailouts were all about in the Unit­ed States. So all of the largest insti­tu­tions received cap­i­tal from the US gov­ern­ment.

George W. Bush [archival]: I believe in the long run this econ­o­my is going to be just fine.

Jour­nal­ist [archival]: US Pres­i­dent George Bush-‘Everything’s just fine.’ It’s been a few days since the con­gress passed that mas­sive bailout pack­age for the Amer­i­can finan­cial sys­tem. How soon is it going to be up and run­ning?

Inter­vie­wee [archival]: Well, the Bush admin­is­tra­tion has select­ed a for­mer Gold­man Sachs exec­u­tive, 35-year-old Neel Kashkari, to be the inter­im head of this mas­sive res­cue effort.

Annabelle Quince: What was the kind of polit­i­cal think­ing? Because clear­ly there was a lot of sup­port, espe­cial­ly from the US pub­lic, to actu­al­ly let some of these banks go under, and yet the polit­i­cal will did­n’t seem to be there.

Steven Keen: Who are you try­ing to get to say “let the banks fail”? The peo­ple who actu­al­ly run the Amer­i­can polit­i­cal sys­tem are the financiers. The same thing hap­pened back in the 1930s, when you had this incred­i­ble growth in the pow­er of the finan­cial sec­tor over the 1920s in par­tic­u­lar, the JPMor­gan firms of the world and so on, and then Roo­sevelt came along and his inau­gu­ra­tion speech-which I rec­om­mend you read­ing-said that we’ve hand­ed over con­trol to the mon­ey lenders, prob­lem caused by debt, their only solu­tion is to say yet more debt. And he then led to the shut­ting down the banks, the bank hol­i­day, reor­gan­is­ing them all and then destroy­ing the polit­i­cal pow­er of the banks.

So when the Sec­ond World War end­ed, the size of the finan­cial sec­tor, or called the ‘non-bank finan­cial sec­tor’, their debt lev­el was about two per cent of Amer­i­can GDP. It since rose to 120 per cent. Now, iron­i­cal­ly, when you bor­row that much mon­ey you have that much polit­i­cal pow­er. So you’re try­ing to tell peo­ple that they should com­mit harakiri for the bet­ter of the sys­tem-well they’re not going to do it.

Annabelle Quince: Not every­one agree that the bank bailouts were wrong. Richard Syl­la, pro­fes­sor of the his­to­ry of eco­nom­ics at New York Uni­ver­si­ty, argues that with­out the bank bailouts the Unit­ed States might have fall­en into anoth­er depres­sion.

Richard Syl­la: Ben Bernanke, who’s the chair­man of the fed­er­al reserve sys­tem, was a great schol­ar. He was a Prince­ton Uni­ver­si­ty pro­fes­sor, stud­ied the Great Depres­sion a lot in his aca­d­e­m­ic work, and he had writ­ten arti­cles and books on that the Great Depres­sion got to be as bad as it was because they allowed the many banks to fail, which caused a defla­tion­ary spi­ral, which caused even more bank fail­ures in a weak­er econ­o­my. So his stance was he was­n’t going to allow that to hap­pen again, and so he would cre­ate a mass amount of liq­uid­i­ty, which was not done in the Great Depres­sion of the 1930s.

Ben Bernanke [archival]: Cred­it is the lifeblood of the econ­o­my. If the cred­it sys­tem isn’t work­ing, then firms can­not finance them­selves, peo­ple can­not bor­row to buy a car, to send a stu­dent to col­lege, to buy a house. That’s not just an incon­ve­nience, because if that is true gen­er­al­ly, it’s going to cause the econ­o­my to slow marked­ly.

Richard Syl­la: Of course I think that staved off anoth­er Great Depres­sion, but it pro­duced what’s called a ‘great reces­sion’ now and a lot of peo­ple are not used to that and so they’re very crit­i­cal of both Fed­er­al Reserve pol­i­cy in bail­ing out banks, which I think was prob­a­bly a good thing, and they’re not quite under­stand­ing what Bernanke did. But I think when this is all over and things get to be more nor­mal again, we’ll look back on it and say, ‘Well, Bernanke did­n’t turn things around right away, but he pre­vent­ed some­thing much worse from hap­pen­ing.’

Steve Han­ke: The mon­ey ulti­mate­ly comes from the taxpayers‑I mean, it was financed by debt, of course, because the deficit went up and the amount of debt issued by the US Gov­ern­ment went up, so the imme­di­ate source of the mon­ey was debt.

We went into the cri­sis by being over-indebt­ed with no cush­ion and then we decid­ed to ramp up the debt and even go into fur­ther debt to bail some of these insti­tu­tions out. The ulti­mate result has been a very bad result in terms of the struc­ture of the finan­cial insti­tu­tions.

Annabelle Quince: So you think with­out the bailouts that actu­al­ly the finan­cial insti­tu­tions that were able to sur­vive would have come through stronger and fit­ter?

Steve Han­ke: Yes, because they would have them­selves gone on to mend them­selves, shall we say. It would have been like Bear Stearns. Bear Stearns, it was vol­un­tar­i­ly gob­bled up by oth­er finan­cial insti­tu­tions and they hard­ly missed a beat, shall we say. And that would have occurred with oth­er finan­cial insti­tu­tions if, if-there’s a big if, here-if there had­n’t been a pan­ic, Annabelle. Once you get into a pan­ic, then the ball­game starts chang­ing on you.

Annabelle Quince: Since the cri­sis hit in 2008 there has been a num­ber of inves­ti­ga­tions into the prac­tices and reward sys­tems of the invest­ment banks in the Unit­ed States.

US Con­gress­man Hen­ry Wax­man [archival]: You have been able to pock­et close to half a bil­lion dol­lars and my ques­tion to you is, a lot of peo­ple ask is that fair for the CEO of a com­pa­ny that’s now bank­rupt to have made that kind of mon­ey? It’s just unimag­in­able to so many peo­ple.

You have a $14 mil­lion ocean-front home in Flori­da, you have a sum­mer vaca­tion home in Sun Val­ley, Ida­ho, you and your wife have an art col­lec­tion filled with mil­lion dol­lar paint­ings, your for­mer pres­i­dent Joe Gre­go­ry used to trav­el to work in his own pri­vate helicopter‑I guess peo­ple won­der…

Annabelle Quince: Has there been any sig­nif­i­cant change in the way those banks work today?

Steven Keen: No, they’re still doing the same stuff. They still basi­cal­ly finance merg­ers and acqui­si­tions and share mar­ket spec­u­la­tion. And they’re not doing as much hous­ing spec­u­la­tion any­more, for obvi­ous rea­sons-that bub­ble’s over-but fun­da­men­tal­ly they look for bub­bles to finance.

Edward Har­ri­son: We’re back to square one. The banks are… they’re pret­ty much oper­at­ing as they did before. The big dif­fer­ence, how­ev­er, is that it’s like­ly the banks will need to have more cap­i­tal in order to func­tion; that is, that the cap­i­tal buffer will have to be larg­er; and that’s going to make them less prof­itable going for­ward.

I think you may have seen that HSBC, a British bank, just today, in fact, said that they were going to lay off 30,000 employ­ees out of their near­ly 300,000. And the rea­son they’re doing this is basi­cal­ly even though they earned $11 mil­lion in the first half of the year, giv­en their enor­mous cap­i­tal base that was­n’t a very good return on cap­i­tal. And they know that they’re going to have to increase their cap­i­tal, and so what they want to do is cut their costs so that they can have a high­er return on cap­i­tal.

So real­ly, noth­ing’s real­ly been done except for the cap­i­tal, and per­verse­ly the increase in cap­i­tal over the short-term may have the effect of caus­ing these banks to try to cut costs in order to make a return on cap­i­tal that their investors are look­ing for.

Annabelle Quince: You’re with Rear Vision on ABC Radio Nation­al, Radio Aus­tralia, via your MP3 play­er or the inter­net. I’m Annabelle Quince and today we’re piec­ing togeth­er how and why it is that the US econ­o­my is in such a mess.

The cri­sis in the finan­cial mar­ket led to an eco­nom­ic reces­sion-house prices fell, the num­ber of unem­ployed rose, and US con­sumers stopped spend­ing. Barack Oba­ma won the US pres­i­den­tial race in Novem­ber 2008 and in at the begin­ning of 2009, he intro­duced a huge stim­u­lus pack­age in an attempt to kick start the econ­o­my.

Jour­nal­ist [archival]: The US pres­i­dent, Barack Oba­ma, has signed his mas­sive eco­nom­ic stim­u­lus pack­age into law. Mr Oba­ma hopes the $1.2 tril­lion-worth of new spend­ing and tax cuts will help steer the US econ­o­my out of reces­sion.

Barack Oba­ma [archival]: I don’t want to pre­tend that today marks the end of our eco­nom­ic prob­lems. Nor does it con­sti­tute all of what we’re going to have to do to turn our econ­o­my around. But today does mark the begin­ning of the end, the begin­ning of what we need to do to cre­ate jobs for Amer­i­cans scram­bling in the wake of lay­offs.

Richard Syl­la: I think Oba­ma did­n’t quite realise the extent of the prob­lem as much as Roo­sevelt did in the 1930s, but of course the prob­lem was much big­ger for Roo­sevelt, so maybe it was eas­i­er for him to under­stand it. Now, Oba­ma pushed through a stim­u­lus pack­age and it turned out to be, what, sev­en or eight hun­dred bil­lion dol­lars, which is quite a bit and added a lot to the gov­ern­ment deficit. That was prob­a­bly the right thing to do, but maybe there was­n’t enough of it.

Prob­a­bly half of the Unit­ed States-you know we are a fed­er­al sys­tem, I think Aus­tralians prob­a­bly under­stand that‑a lot of the spend­ing of the fed­er­al gov­ern­ment was off­set by reduc­tions in spend­ing by state and local gov­ern­ments. So the net effect of Oba­ma’s stim­u­lus was zero. But of course things would have been much worse had he not had that stim­u­lus pack­age. It just turns out that what we’ve done here in the Unit­ed States for the last cou­ple of years, in terms of gov­ern­ment spend­ing to alle­vi­ate the down­turn in the econ­o­my, what was done at the fed­er­al lev­el was off­set by cuts in state and local spend­ing. So the net effect of all gov­ern­ment spend­ing in the Unit­ed States has been effec­tive­ly no stim­u­lus.

Annabelle Quince: Pro­fes­sor Steve Han­ke argues that the stim­u­lus pack­age rather than kick start­ing the econ­o­my has actu­al­ly pre­vent­ed its recov­ery.

Steve Han­ke: A lot of the stim­u­lus pack­age was spent bail­ing out these finan­cial insti­tu­tions and some of it did seep in in shov­el-ready pub­lic works projects and gov­ern­ment projects of one sort or anoth­er. That did­n’t real­ly amount to too much in my opin­ion and it cer­tain­ly did­n’t stim­u­late any­thing because, para­dox­i­cal­ly, it slowed the whole econ­o­my down. Because when you run a great big deficit, peo­ple get very anx­ious about it and it puts the brakes on things because peo­ple are afraid. They know even­tu­al­ly they’re going to have to pay more tax­es, or there’ll be more infla­tion-one way or anoth­er, some­thing has to be done with the debt that they’re run­ning up.

And you have just the oppo­site of what, you know, many peo­ple are taught in eco­nom­ics text­books-that if you have a big­ger gov­ern­ment deficit, you have a so-called Key­ne­sian fis­cal stim­u­lus, you stim­u­late the econ­o­my. No. You con­tract the econ­o­my. It’s a con­trac­tionary pol­i­cy. So the stim­u­lus pack­age actu­al­ly is one rea­son that the econ­o­my has been so retard­ed.

Edward Har­ri­son: It was some­what effec­tive in terms of get­ting the econ­o­my back by… Basi­cal­ly when Lehman Broth­ers went down, that was at the end of the third quar­ter of 2008. By the mid­dle of 2009, the econ­o­my was back into a tech­ni­cal recov­ery. And so basi­cal­ly, in con­junc­tion with the stim­u­lus, the econ­o­my moved into a tech­ni­cal recov­ery and it stayed there ever since.

So in a real sense it did pro­vide the nec­es­sary kick to get us through at least a year or so, but already by 2010 you could see that the effects of the stim­u­lus had start­ed to fade and the econ­o­my had sort of been in this low-growth phase for about a year now.

US Con­gress [archival]: The yeas and nays are ordered and the clerk will call the role. [Woman starts call­ing role of names]

Jour­nal­ist [archival]: After so many months and so much doubt, final­ly a vote.

US Con­gress [archival]: If not on that ques­tion, the ayes are 74 and the nays are 26…

Jour­nal­ist [archival]: And with that, the US stepped back from the brink. It end­ed what many regard­ed as an unprece­dent­ed polit­i­cal strug­gle. The vote in con­gress gives the US Trea­sury imme­di­ate access to $400 bil­lion in new bor­row­ing and cuts the deficit by a lit­tle over $2 tril­lion over ten years. And it’s not over. The hard choic­es about addi­tion­al sav­ings have now been put to a spe­cial com­mit­tee, which must report back by Novem­ber.

Sen­ate Minor­i­ty Leader Mitch McConnell [archival]: We need to quit doing what we’ve been doing. Quit bor­row­ing, quit spend­ing, quit try­ing to raise tax­es, quit over-reg­u­lat­ing, and let the pri­vate sec­tor flour­ish.

Steve Han­ke: It will start bring­ing the gov­ern­ment spend­ing as a pro­por­tion of the total econ­o­my-this so-called GDP mea­sure-it’ll bring that down from around 25 per cent to 23 per cent, or some­thing like that. But I do not think what they have done today, as we speak, in Wash­ing­ton DC, is going to change the over­all mood and the over­all lev­el of con­fi­dence in the econ­o­my and con­fi­dence in eco­nom­ic pol­i­cy or vision.

Richard Syl­la: The Unit­ed States of Amer­i­ca is a coun­try that has always been bailed out by eco­nom­ic growth. I mean, it’s been a coun­try that’s been grow­ing since the begin­ning, since the 1790s. Gen­er­al­ly, when the coun­try has prob­lems they aren’t always solved right away, but high­er eco­nom­ic growth gen­er­ates more gov­ern­ment rev­enue and the prob­lems seem mag­i­cal­ly to go away as the econ­o­my becomes big­ger. I sus­pect that’s what will hap­pen this time, or at least that’s what we can hope will hap­pen based on past expe­ri­ence.

Steve Han­ke: The name of the game is, restore con­fi­dence you’ve got to shrink the size of the fed­er­al gov­ern­ment dra­mat­i­cal­ly and talk about things like hav­ing a sta­ble dol­lar is impor­tant, hav­ing less reg­u­la­tion. You’ve real­ly got to go back and repro­duce some­body like Rea­gan or-in your con­text-like Lee Kuan Yew in Sin­ga­pore. Go back to 1965, when Lee Kuan Yew came in, and Sin­ga­pore was a com­plete bas­ket case after lit­er­al­ly being thrown out of Malaysia. And you came in with a leader who had a vision and he said, ‘Look, we’re not going to waste our time pass­ing the beg­ging bowl, we’re going to have a com­pet­i­tive free mar­ket econ­o­my and have civ­il ser­vants that are first class and pay them first class wages.’ And you know the rest of the sto­ry. It worked.

Edward Har­ri­son: Real­ly you need to put every­one back to work. You need to take the max­i­mum pro­duc­tiv­i­ty that you can out of your econ­o­my. And so instead of con­cen­trat­ing on cut­ting gov­ern­ment spend­ing, real­ly the Unit­ed States should be con­cen­trat­ed on real­lo­cat­ing resources to areas of the econ­o­my that have prospects for growth going for­ward. And that would auto­mat­i­cal­ly cut the deficit.

To the degree that the deficit’s a prob­lem going for­ward, it’s large­ly a ques­tion of mil­i­tary spend­ing in the Unit­ed States, which is much larg­er than the rest of the world, and also the enti­tle­ment spend­ings; that is, pen­sions for retirees-state pen­sions-and health­care for retirees. Those are the only real ques­tions in terms of the deficit over the long term. All the oth­er stuff is insignif­i­cant by com­par­i­son.

So basi­cal­ly what we’re doing now is only going to cre­ate prob­lems that will make the deficit worse over the short to medi­um term.

Annabelle Quince: So how do you see the next cou­ple of years for the US and the US econ­o­my?

Steve Han­ke: Well, two years is quite a long peri­od of time for an econ­o­mist to be giv­ing a fore­cast, Annabelle, but I would say for the next year I’m very com­fort­able with the tack I’ve been on and been writ­ing about. Ever since this fias­co of 2009 occurred, I have said that at best we can expect what’s called a growth reces­sion, and that is we’re grow­ing-there’s pos­i­tive growth-but the growth is actu­al­ly at a low­er rate than the over­all long-run trend rate of growth of 3.1 per cent that we’ve realised in the Unit­ed States over a long peri­od of time.

So very slug­gish growth and a very bad state of affairs, eco­nom­i­cal­ly. I just don’t see a lot of light at the end of the tun­nel right now in the Unit­ed States-and Europe is even worse.

Edward Har­ri­son: What I think is like­ly to hap­pen is that we’re going to have some cuts-they’re not going to be enor­mous cuts, but they’re going to be large enough. The Unit­ed States is at stall speed right now. Man­u­fac­tur­ing is near as a con­trac­tion point. We also have mon­e­tary pol­i­cy which has become less accom­moda­tive in the US and we are start­ing to see a lot more job cuts.

So what that means is any sort of shock that we get to the econ­o­my will cause the Unit­ed States to tip into reces­sion.

So I would say that at this point we’re look­ing at, say, a 30 per cent like­li­hood of reces­sion. It could be high­er going for­ward, depend­ing on how things progress. And this is exact­ly the same sort of thing that we saw in Greece when they went to aus­ter­i­ty; we saw the exact same thing in Ire­land when they went to aus­ter­i­ty; that aus­ter­i­ty that tipped the econ­o­my into reces­sion increas­es the deficit as opposed to decreas­es the deficit. And so the Unit­ed States would be in a worse sit­u­a­tion as a result. This is exact­ly what hap­pened in Japan in 1997 and also what hap­pened in the US in 1937.

Annabelle Quince: Today’s guests were Edward Har­ri­son, eco­nom­ic ana­lyst and the founder of web site Cred­it Write­downs; pro­fes­sor of applied eco­nom­ics at Johns Hop­kins Uni­ver­si­ty, Steve Han­ke; Pro­fes­sor Richard Syl­la, eco­nom­ic his­to­ri­an at New York Uni­ver­si­ty; and Steven Keen, asso­ciate pro­fes­sor in eco­nom­ics at the Uni­ver­si­ty of West­ern Syd­ney.

Announc­er [archival]: Chief Jus­tice Hugh­es will admin­is­ter the oath to Franklin Delano Roo­sevelt.

Franklin Delano Roo­sevelt [archival]: This great Nation will endure, as it has endured, will revive and will pros­per. So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself.

Annabelle Quince: And if you’re inter­est­ed in eco­nom­ic his­to­ry, check out the web­site for a pro­gram that traces the events that led to the Great Depres­sion and the his­tor­i­cal argu­ments sur­round­ing Roo­sevelt’s New Deal.

Judy Rap­ley is Rear Vision’s sound engi­neer and I’m Annabelle Quince. Thanks as always for join­ing us.


Steven Keen
Asso­ciate Pro­fes­sor in eco­nom­ics and finance at the Uni­ver­si­ty of West­ern Syd­ney and author of Debunk­ing Eco­nom­ics: the naked emper­or of the social sci­ences.

Steve Han­ke

Pro­fes­sor of Applied Eco­nom­ics at Johns Hop­kins Uni­ver­si­ty

Edward Har­ri­son

Eco­nom­ic analy­sis and the founder of eco­nom­ic web site — Cred­it Write­downs.

Richard Syl­la

Pro­fes­sor of The His­to­ry of Finan­cial Insti­tu­tions and Mar­kets and Eco­nom­ics, at New York Uni­ver­si­ty.


Title: Debunk­ing Eco­nom­ics: the naked emper­or of the social sci­ences
Author: Steve Keen
Pub­lish­er: Plu­to Press & Zed Books, Syd­ney & Lon­don 2001


Annabelle Quince


Annabelle Quince

Radio Nation­al often pro­vides links to exter­nal web­sites to com­ple­ment pro­gram infor­ma­tion. While pro­duc­ers have tak­en care with all selec­tions, we can nei­ther endorse nor take final respon­si­bil­i­ty for the con­tent of those sites.

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.