Tuesday, November 22, 2011

Noam Chomsky on US Economic Crisis

An interesting interview here with Noam Chomsky. He is correct that the $447 billion jobs package was at least a step in the right direction. However, one could say that
(1) Tax increases are not necessary at the moment for a large stimulus. But to the extent that any tax increase is made highly progressive, the more likely it is that such government deficit spending will lead to increased aggregate demand. Why? The reason is that the taxed income of the extremely wealthy is unlikely to be spent on producible commodities: instead it gets pumped into financial asset markets and primary commodity speculation. Nevertheless, the time for a major tax increase and reform of the tax system is not now, but when the economy has been stimulated back into full employment and the issue of debt deflation has been resolved.

(2) I think that Chomsky is wrong to say that Reagan was “fiscally irresponsible.” On the contrary, fiscal stimulus under Reagan was the right thing to do: the problem was the regressive tax cuts, wasteful military spending, cuts to social spending, and attacks on labour rights. In other words, the main problem with Reagan’s deficits was the composition of government spending, not the government spending per se. Indeed, whatever one thinks of Reagan (I don’t think much of him, frankly), that senile old man was the last president who implemented a Keynesian stimulus with reasonable success, driving down unemployment to comparatively low levels. This is one of those bizarre paradoxes of recent history.


  1. What exactly is the purpose of a tax rate rise during a time when 10-year bonds have a yield of less than 2% p.a.?

    At these rates, the United States government could borrow $5 trillion right now on 10-year bonds alone, and they would be a free $490 billion for each one of those 10 years.

    The problem with literature professors, philosophy professors, or in this case linguistic professors is that they can't do basic math and they can't look at basic statistics. They base arguments on government policy over pure casuitry and personal sentiment. A tax raise in US right now would be pure political posturing. Nothing else.

  2. Or one could dispense with issuing bonds at all for the next few years and use MMT principles.

  3. Lord Keynes,

    Interesting point regarding Reagan. I sometimes think too much is made of balanced budgets. Was the Clinton era surplus such a good thing?

  4. Clinton's surpluses weren't necessary at all.

    The Clinton era without doubt saw the intensification of financial deregulation and the unsustainbale asset bubbles that have led to economic ruin now.

  5. Like what?

    The repeal of Glass Steagall, I guess. Except the result of Glass Steagall repeal was largely investment banks creating small commercial banking arms. It did not result in many known cases of commercial banks engaging in investment banking on a large scale.

    Vikram Pandit of Citibank was interviewed by Der Spiegel, and when the Der Spiegel reporter tried to be nasty to him by asking, "Have financial gamblers learned their lesson?", he corrected him by clarifying that Citibank was a strictly commercial banking business before and after the business.

    It is newspaper columnist punditry that has led to this widespread notion that commercial banks were ever involved in large scale investment banking operations. Their losses during the crisis came from defaults on loans, not on losses on derivatives market trades.

  6. I suggest reading these links on the role of financial deregulation:




    A smaple:

    "The management of risk—especially systemic risk—in the financial world was evidently deeply flawed. An important part of the problem was that core financial institutions had used a shadowy secondary banking system to hide much of their exposure. Citigroup, Merrill Lynch, hsbc, Barclays Capital and Deutsche Bank had taken on a lot of debt and lent other people’s money against desperately poor collateral. Prior to the us deregulation and uk privatizations of the 1990s, us investment banks would have been barred by the Glass–Steagall Act of 1933 from dabbling in retail finance, and Northern Rock would have remained a solid, and very boring, building society."

    Robin Blackburd, "The Subprime Crisis," New Left Review 50, March-April 2008

  7. Are Social Democrats thinking about social currency?