by Eric Martin
Paul Krugman provides a concise take-down of the "ZOMG! Social Security is going bankrupt!!!" canard, and indirectly makes the argument that maybe Social Security/the federal government would be a little more solvent if the establishment media had spent less time snickering about the fact that Al Gore said "lockbox" several times, and more time wondering whether or not "would rather have a beer with" was the right criteria with which to choose the next President.
Specifically, Simpson has resurrected the old nonsense about how Social Security will be bankrupt as soon as payroll tax revenues fall short of benefit payments, never mind the quarter century of surpluses that came first.
We went through all this at length back in 2005, but let me do this yet again.
Social Security is a government program funded by a dedicated tax. There are two ways to look at this. First, you can simply view the program as part of the general federal budget, with the the dedicated tax bit just a formality. And there’s a lot to be said for that point of view; if you take it, benefits are a federal cost, payroll taxes a source of revenue, and they don’t really have anything to do with each other.
Alternatively, you can look at Social Security on its own. And as a practical matter, this has considerable significance too; as long as Social Security still has funds in its trust fund, it doesn’t need new legislation to keep paying promised benefits.
OK, so two views, both of some use. But here’s what you can’t do: you can’t have it both ways. You can’t say that for the last 25 years, when Social Security ran surpluses, well, that didn’t mean anything, because it’s just part of the federal government — but when payroll taxes fall short of benefits, even though there’s lots of money in the trust fund, Social Security is broke.
And bear in mind what happens when payroll receipts fall short of benefits: NOTHING. No new action is required; the checks just keep going out.
Right. When there's a Social Security surplus, the money gets eaten by general expenditures and, in the case of Bush, massive tax cuts aimed primarily at the uber wealthy. But if there's a prospect of a Social Security deficit, eventually, we can't possibly buttress the Social Security pool with general revenue (perhaps even boost said revenue by repealing some of those deficit busting tax cuts*). No, it's time to cut benefits and extend the retirement age to 70.
* (though perhaps we should hold off until we're out of the recession)
Why hold off until after the recession? Certainly keep the lower brackets where they are, but the top two brackets? I don’t see why those shouldn’t go back to where they were more or less immediately. If you’re (still) up in that income area, the recession clearly isn’t hurting you very much.
And I agree with what you argued in a previous post: why should the top bracket kick it at under $400K/year? Why not a millionaire’s bracket? Why not a multi-millionaire’s bracket? (Of course, those brackets wouldn’t do much of anything unless you also made them apply to capital gains.)
The fact that Obama appointed this commission and apparently is going along with this zombie farce is deeply deeply disturbing.
And pleas to “stop letting the perfect be the enemy of the good” will only incite me to homicidal violence.
Cutting benefits is pure theft. The last time I looked, theft is a crime.
Agreed bobbyp.
TG: I don’t disagree strongly, but I can see the argument for not even raising on those brackets in the middle of such a funky recession – unless you paired with increased stim or other cuts.
The Krug is correct here: And bear in mind what happens when payroll receipts fall short of benefits: NOTHING.
See billy blog for details.
perhaps even boost said revenue by repealing some of those deficit busting tax cuts
if HR 4213 has its way, the delicious tax loophole that makes the S-corp an attractive option would be eliminated.
Sorry cleek.
High-end tax increases would make it possible to do more actual stimulus, so I think there’s no time like the present for them. I think it’s a big mistake to make benefit & budget cuts a subject of discussion without making it clear that tax increases are part of the story.
Another reason to do them now is to head off the inevitable claims that the recovery was due to said tax cuts (by some voodoo mechanism) rather than due to the actual government spending. One of the reasons to have multiple parties with actually differing views and for those actually differing views to be enacted into legislation is so that we can see what works and what doesn’t. That is the trouble with bipartisanship – you wind up with a muddle of policy based on contradictory theories of government action without ever making it clear what might be responsible for success or failure.
There is another excellent reason to enact progressive tax increases now, and that is to get them into law before the baby boomers retire, so that the luckier boomers can (belatedly) make some contribution to pre-paying the general fund for their retirement. The boomers worked under a much less progressive tax regime than their predecessors and in particular paid very low rates for the last decade or two, which was exactly their peak earning period. Actually, what really happened was that the richer boomers (and wealthier members of the previous generation) robbed the poorer boomers by jacking up the payroll tax and using the money to issue huge tax cuts for the wealthy. But the net was that while low-moderate-income boomers have pre-paid a fair amount, the system relied on wealthier boomers also paying income tax at reasonable levels, and that hasn’t happened.
The big problem with that is the resulting chronic underinvestment in the subsequent generations who are the ones going to have to pay for the boomers retirement. And that’s in so many areas it’s hard to count – reduced funding for schools (e.g. Prop 13 here in CA), increased costs of college, reduced public spending on research and science, reduced investment in infrastructure (highways, water, sewage, rail, bridges), and increased housing costs.
All of which are going to make it more and more difficult for genx/genyers to pay for the care that the boomers need. This is not a blame-the-boomers-fest, or not intended to be, but it is a partial indictment of the failure of that generation and the one before to think through the consequences of starving the next generation of investment.
You can think of something like the battle over funding schools for poorer minorities as a classic example. Among better-off whites all the attention was paid to “How well off are my kids going to be?” or “How much property tax will I have to pay?” while the question of “How will a poorly-educated majority-minority America pay for my retirement?” never seemed to come up.
Silly Eric. Tax cuts have no mass.
First day back from vacation; this is all I’ve got.
Sorry cleek.
meh. no big deal.
i just sold the IP of my biggest money-maker and i’m considering letting the rest of it sputter out. it had a good 12 year run.
‘Silly Eric. Tax cuts have no mass.’
At least you came up with something amusing.
The only fun these folks have is playing with other people’s money.
We donn’ need no stinkin’ FACTS!
Seriously, aren’t the Shrub/Cheney/Rove tax cuts about to expire out of originalist GO[B]P stupidity?
Yeah, yeah.
You want a government that doesn’t collect any taxes? Move to Somalia. Lots of ocean front property available on the cheap.
You want to live in a society that does things like field a police force, military, fire department, roads, sanitation, etc., then people have to pay taxes.
Now that we’ve agreed on that, we must figure out who pays and how much.
Not “other people’s money” mind you, since all of us pay taxes in this country as part of the aforementioned compact.
Some of us (myself included) pay more than most others, but it’s all good because I derive a bigger benefit from a well functioning society.
And I’m mature enough to recognize that reality.
EG: I believe so, but there a big fight to keep them in place, and more estate tax chicanery and hedge fund loophole craziness.
And here I had somehow gotten the impression that Krugman was some kind of economist. But obviously not. Otherwise he would realize that a “surplus” which has already been spent on regular government operations (or tax cuts, or benefit increases, or whatever) is totally irrelevant to the financial condition of Social Security.
Now if the surplus payments to Social Security had been saved or invested (in something other than US government bonds) or anything other than spent, perhaps he would have a point. But all they have been used for is to buy US government bonds — which, since they will have to be paid for by other taxes, means there is basically nothing there without massive tax increases elsewhere.
The only fun these folks have is playing with other people’s money.
you be sure to let us know when you’ve stopped making use of all services, products and infrastructure which was built, funded or regulated, directly or indirectly, by the US government, mm k?
But all they have been used for is to buy US government bonds — which, since they will have to be paid for by other taxes, means there is basically nothing there
tell that to the Chinese.
wj: there is basically nothing there without massive tax increases elsewhere
Now you’re getting the idea.
The people who got the big tax breaks paid for with Social Security revenues were supposed to use that money to invest wisely and grow the economy so that they can pay the massive tax increases that are coming down the pike.
That’s the deal. I’d say “That was always the deal”, but actually, the part where the SS surplus got diverted into regressive tax breaks wasn’t part of the original deal, but the idea was always to overpay early and be repaid from general revenues later, which is why they printed all those Treasury bonds and put them in a drawer at the SSA. The point – one which makes good economic sense – was that the overpayment was a form of forced savings which would increase present investment and decrease present consumption so that when it came time to pay the bills the whole country would be sufficiently better-off that it wouldn’t be a burden.
Well the Bush tax cuts really screwed the pooch there, because they didn’t produce a great increase in present investment, which is what we said was going to happen, but the people who benefited from them (and their heirs) are still on the hook for the Treasury bonds they sold to Social Security. Massive tax increases or no.
wj, I think that’s his point.
There was a surplus which was absorbed by general obligations, creating a framework under which SS should not be considered a separately contained unit.
However, now that it might soon be collecting more than it’s distributing at some point 50 years out, everyone acts like it is a separate, contained unit, and to use general revenue to buttress it would be unthinkable (despite the fact that using surplus revenue from it to pay for general obligations was cool, because it wasn’t a separate unit, but now it is, etc).
It’s a bit like the attitude to big biz in this country: socializing the losses and privatizing the profits.
Either way, the working class/average taxpayer gets screwed.
Also what jd said.
Jacob:
“I think it’s a big mistake to make benefit & budget cuts a subject of discussion without making it clear that tax increases are part of the story.”
Then you’re Hitler, Stalin, Mao, and Hugo Chavez, a Chicago-style, pimping, community-organizing thug, a shake-down artist, a brown person wearing a brown shirt over his witch doctor outfit, a reason for militia-types to get up in the morning and do what needs to be done, a self-hating Jew (or maybe a self-hating Catholic or Buddhist, but whatever, rest assured, WE hate you more than you could ever hate yourself), the goat of Erick Erickson’s dreams, an anti-American elitist thief, a bowing, kowtowing agent of foreign influence, Mohammed in drag, and pretty much the type of guy for whom John Wilkes Booth would skip the second act to run an errand, and what Alan Simpson, Sarah Palin, Sharron Angle, and Grover Norquist put in their watering can to refresh the tree of liberty from time to time (well, not RIGHT now, because they have another speaking engagement to go to; we can talk murder …. uh … horticulture later, gotta run)
You still think it’s a big mistake?
The pledges have been signed.
Over their dead bodies.
Start stepping over them. While you’re at it, kick them in the head while they’re down.
I myself favor the broad jump accompanied by a shooting spree.
Funny how U.S Government Bonds have beat stock market returns over the past ten years.
I guess the vaunted markets are telling us there be more “there” in bonds than there will be in stocks.
I love it that the markets are simultaneously the all-knowing answer AND completely full of crap, to quote Alan (Mr Magoo) Simpson.
“But all they have been used for is to buy US government bonds…..”
The boneheaded stupidity of this claim would, under other circumstances, be hilarious.
Under a fiat money system with a nonconvertable currency the government cannot store away a “surplus” to “use” in the future. The government spends today. Granted, this could be physical infrastructure that has long term real economic benefits, or it could be what is typically called waste (defense spending, which see). Each dawn, the government buys stuff. Taxes are simply a way of creating demand for the currency or influencing behavior (tobacco tax, etc.), and bonds are just a sop to the financial community.
The constraints are political.
Again, see Billy Blog for the fun details.
Incidentally I actually do think that benefits will need to be cut somewhat in conjunction with tax increases, and I don’t find that entirely unfair given that the boomers collectively participated in the decision to blow the trust fund surplus on tax cuts by electing Bush. “Elections have consequences”; one of the lasting consequences of the Bush years is that, due to underinvestment and malinvestment, the country is going to be significantly less wealthy overall than it would have been if the money had been spent on education, infrastructure, research, and employment.
Unless you think that the rash of McMansions and the immense tracts of housing in the Inland Empire and Phoenix are going to pay off at 5% a year for the next 50 years. That’s what we “invested” in during the oughts – houses that are way too big for any family to make sensible use of and guzzle energy, houses in places that no sensible person would want to live, and HELOCs that got used to buy jetskis and Mercedes-Benz SUVs. In other words, we blew it, it was fun, but it’s gone now and we’re stuck with the hangover.
“The only fun these folks have is playing with other people’s money.”
Like bankers?
JD,
I agree with you as to the REAL economic effects of our lunatic past real resource allocations. The problem is folks believe that we are restricted by some kind of financial straightjacket going forward. Given current resource underutilization (i.e., 10% unemployment), this is not the case.
But for fun assume no Bush tax cuts. Then what?
Absent increased spending elsewhere, it would have meant paying down the national debt. This could also have led to ruinous economic consequences…(private sector dissaving–or deficit as it were).
“Funny how U.S Government Bonds have beat stock market returns over the past ten years.”
Nothing particularly funny about it; The returns of US government bonds are, essentially, extracted from the stock market, in as much as they’re paid from tax revenues.
Well, to be honest, tax revenues don’t even cover current spending, actually the returns of US government bonds are paid by issuing even more US government bonds…
Bellmore,
Your ignorance is well neigh total. If I own a treasury bond and it increases in value (due to decline in interest rates) this is not value “extracted from the stock market”. Is the “stock market” in any sense “poorer” when I sell the bond?
The government, by issuing bonds, injects net financial assets into the economy, and is the only actor that can do so. All private assets net out to zero (my asset is your liability). This is bookkeeping 101.
You seem to have trouble distinguishing between symbols, and the things they symbolize. The government injects numbers into the economy by incurring debt. Not “net assets”.
But the rationalizations for governments getting deeper into debt are legion, aren’t they?
2005: Bush launches an effort to privatize Social Security and Josh Marshall and TPM are an integral, enthusiastic part of the campaign to stop it.
2010: Obama launches an effort to cut the guts out of Social Security and Medicare, and Josh Marshall… is utterly silent. Not a freaking word on the whole site about the austerity commission.
‘Not “other people’s money” mind you, since all of us pay taxes in this country as part of the aforementioned compact.’
Boy, would I be happy if this were more than a half-truth.
GOB, what are you calling a half-truth?
–TP
But the rationalizations for governments getting deeper into debt are legion, aren’t they?
As opposed to your rationalizations? Tax cuts for the wealthy? Endless war? I don’t seem to recall your full throated opposition to war in the Middle East because it would be “too expensive” and “burden our children with debt”.
Why is that?
As for symbols, it is hysterical deficit hawks who can’t distinguish fact from fiction. Fact: Under our fiat currency system, only the government can inject net financial assets into the economy. Fact: The U.S. government is not financially constrained. The constraints are political. Fact: The U.S. government cannot “go broke”, but the belief, and action on that utterly insane belief could impact the real economy.
But that never stops the deficit hawks from urging price deflation and unemployment as a way to promote price stability, prosperity, and full employment.
Do tell us how such policies make any sense whatsoever. How does throwing people out of work create jobs, Brett?
Those folks out of work wondering where their next meal is coming from are all too real.
I’m interested in this concept of “net financial assets”, and in how the government creates them. Explain, please?
“Fact: Under our fiat currency system, only the government can inject net financial assets into the economy.”
Again, you’re confusing numbers, and assets. Counters, and what they count. Printing more money does NOT inject “assets” into an economy, it injects bits of paper that are supposed to denote assets.
“Fact: The U.S. government is not financially constrained. The constraints are political. Fact: The U.S. government cannot “go broke”, but the belief, and action on that utterly insane belief could impact the real economy.”
That’s magical thinking, that’s all it is. “The government can do anything so long as the people unconditionally believe in it.”
Fact: While beliefs can certainly impact the economy, believing you can fly won’t keep you from hitting the ground if you step off a roof. Economics does have SOME rules, it’s not ALL belief.
Again, you’re confusing numbers, and assets. Counters, and what they count. Printing more money does NOT inject “assets” into an economy, it injects bits of paper that are supposed to denote assets.
This is, of course, no different than banks creating money by lending more than their fractional reserves, which I’m certain you have no objection to. Basically anything that isn’t M0 or M1 is pretty much made up.
GOB, what are you calling a half-truth?
my guess says that the “half” is the %age of people who “pay taxes” in wingnut mythology.
Right cleek. Which requires one to ignore myriad taxes and only focus on federal income tax (and even then, not FICA/Medicare).
A useful canard used by the uber wealthy to distract people from the game.
Slarti,
The government deficit/surplus equals the private sector surplus/deficit. To quote Billy Mitchell:
The only entity that can provide the non-government sector with net financial assets (net savings denominated in the currency of issue) and thereby simultaneously accommodate any net desire to save (financial assets) and thus eliminate unemployment is the currency monopolist – the government.
While folks like Brett still seem to believe that we are not quite off the gold standard, we (in the US) are in a fiat currency world, the implications of which seem to confuse most.
Google “billy blog” and see for yourself. Below is one of his latest entries:
http://bilbo.economicoutlook.net/blog/?p=10384#more-10384
Brett,
I repeatedly say “net financial assets” and you keep taking the word “financial” out of it and accusing me of “being confused”. I leave the implications of this childish debating tactic to the reader.
If you do not believe that holding government issued/created fiat currency (say in a savings account) or US Treasuries is a claim on future REAL economic resources, they by all means send what you have to me.
broke: unable to meet one’s financial obligations.
So Brett, as the monopoly issuer of a nonconvertible currency that is freely floating in international currency markets, do lay out a scenario whereby the U.S. government goes “broke”.
That would be magical thinking indeed.
Brett,
If the government is spending (buying real stuff) more than it is collecting in taxes where does that money (handed over to private parties to buy the stuff) go?
Why, it goes into (private) savings, right?
I have yet to see a bonfire made from masses of folks piling up their government issued checks and igniting them.
You, apparently, have. Do tell us about it.
bobbyp,
I did some reading over at billy blog, and it’s interesting stuff. I’m not sure I fully digested it, though. My thinking thus far is that I’m not fully understanding what his actual point is or that there is some fatal flaw in what he’s saying.
I get what he’s saying about what I, not being an economist, would think of more as the money supply rather than financial assets being in the hands of the government or the non-government sector. I’m just not entirely sure about what that has to do with the real-world constraints on government spending. I’m not sure how it relates to economic growth versus money supply and inflation/deflation.
I think he admits that the government can’t simply spend without limit for more than political reasons, so I’m just not sure where it’s all going. I would guess that even Brett would agree, if pressed, that the government can’t literally go broke, but that it could devalue our currency by issuing too much, with more or less the same result. (That’s what you mean, I think, Brett, not “oh crap, we’re plum out of dollars,” right?)
Magical thinking works thusly:
Government sells bits of paper — motes of denotation — figments of imagination — the proceeds (yet more magical thinking) of which it uses to purchase imaginary weaponry assets to protect itself from Brett (who’s not sure we have the imagination to believe this, but why take chances?) and to Israel and myriad other countries (with borders — yet more imagination) all of whom make believe they now have the assets to protect themselves.
Brett believes all of this enough that he then uses bits of paper issued by aforementioned government to purchase his own weapons (imaginary cool guns, the odd denotative machete, etc) to protect himself from aforementioned government when the figments finally hit the imaginary fan.
He and his gun dealer look at each other, shrug their shoulders, and in a genuine leap of faith say, “Hey if you’re selling, I’m buying.” Maybe Brett traded a chicken, a rutabaga and four Kruggerands for the weapon, but people with no imagination would like to know what he used to buy THOSE.
Once the fan blows its ill wind of reality, all stop believing in the fairy dust of fiat dream money and nothing is left but the weapons, which turn out to have been real assets injected into the world’s economy by the will-o-the-wisp gummint fiat.
Then we all kill each other, but it doesn’t hurt much because nothing is real. We get up and shake off the imaginary wounds, because it buggers belief that weaponry assets injected into the economy by imaginary jiggerypokery could turn out to be real.
Until then, we gather at Obsidian Wings and poke our fingers into imaginary keyboards, causing electronic whizbangery to denote funny-looking symbols in the comment box (a ruse itself) — all of which are symbols which signify as long as significant belief permits (Brett can’t believe what he’s reading, but sometimes reality sucks) — but if you say the words “magical thinking” over and over again they become mere gibberish, signifying nada.
That’s pretty much where I was coming from, HSH.
I haven’t been quite able to figure out what the MMT people are talking about when it comes to taxation, but that may just be me not getting it.
As far as I understand it in fairly conventional terms, taxation is used to reduce consumer demand and private investment so that when the government spends money it doesn’t cause inflation by demanding more than the economy can produce.
When the economy is operating below “capacity” (admittedly a very hazy concept but 10% unemployment ought to be a pretty big hint) the government can spend money without causing inflation because there are slack resources, so it’s not necessary to pull money out of the economy through taxation to pay for all the stimulus spending. (Of course if you just eliminated all taxes and kept spending you would rapidly exceed capacity and cause inflation.)
In order to maintain stable prices you also need to create enough new money to keep up with economic growth from productivity increases and population growth, else you wind up with deflation. Galbraith at least is pretty clear on this: the banks don’t like deficit spending as a means of creating money because it competes with bank lending as a means of creating money. But bank lending is unreliable, as we’re seeing right now, and of course letting private entities create a lot of new money also gives them (rather than the government) the benefits from it. Since there are lots of public goods that I think are worth funding, I think the government should be doing more deficit spending. But because I do think deficits are quite large, and because I think the net effects of progressive taxation are positive, I do favor progressive tax increases even right now. There is some progress on that front, actually, with an increase in the capital gains tax for starters. I’d like a financial transactions tax as well, which ought to increase the real returns of ordinary investors by reducing the ability of banks to arbitrage every last micron of excess value from stocks through high-frequency trading.
Reading a bit further and thinking about it a bit more, I think what’s being said is that it’s not the deficit (or the subsequent accumulated debt) per se, that is a problem. It’s a matter of where resources are going, what the money is being spent on, that’s important. But I think at some point that will or won’t manifest itself in debt as a percentage of GDP.
So long as the spending, even if it increases the debt as a percentage of GDP over some amount of time, is properly placed such that it fosters future growth so that the percentage of GDP the debt represents eventually, though soon enough (I guess), goes down or at least stabilizes, it’s not a problem in and of itself. But this dynamic can create an artifical problem if it’s not appreciated both domestically and abroad.
In other words, whether or not it should freak people out is less important than whether or not it does freak people out. So I think the point is to make sure people aren’t freaked out unnecessarily by scary sounding deficits and debts, particularly if viewed through the obsolete lense of fixed exchange rates and the gold standard. But it’s a general point AFAICT, and I’m not sure how well it applies to the specific case of the US in 2010.
More reading and thinking will be necessary for me to have anything close to a strong opinion on that.
If I take this:
Since there are lots of public goods that I think are worth funding, I think the government should be doing more deficit spending. But because I do think deficits are quite large, and because I think the net effects of progressive taxation are positive, I do favor progressive tax increases even right now.
together with this:
It’s a matter of where resources are going, what the money is being spent on, that’s important.
I think I can tentatively (or not) state my position as this:
Deficit spending to fund tax cuts for richer people who tend to spend money on stupider (less necessary, if you like) stuff and to fund blowing up things and kill people on the other side of the globe is bad not because it’s deficit spending, but because it’s just bad and makes no economic sense.
Deficit spending to build useful domestic infrastructure and help poorer people by educating them and giving them a chance to be healthier (and, therefore, more productive) is good because it makes economic sense in the long run.
bobbyp, you may know that the government cannot save a surplus. And I may know it. But that puts us in the distinct minority among Americans. And Krugman’s comments suggest that he doesn’t see it either.
Thullen is usually the riffmeister around here, but I gotta say that Brett channeling Ezra Pound reading Canto 45 is pretty entertaining as well.
Here’s a quote from bill at billy blog from the comments on his deficit post:
Poorly designed deficit spending which buffers economic rents and rewards waste is not an indictment of properly targetted deficit spending.
wj,
When you say that “government cannot save a surplus” you are using the words “save” and “surplus” in a definite sense. But I’m not sure in what sense.
In real terms, neither the government nor you or I can effectively “save” by stockpiling things like electricity, medical services, or even frozen peas for future consumption. If you’re using “save” in this real sense, that’s fine.
But in the same “real” sense, what’s a “surplus”?
In the financial sense, you and I can “save” by purchasing financial instruments like stocks and bonds. We cannot eat financial instruments, but we can exchange them for real goods and services in the future. We can buy shares of stock in Ford (the company) today, and sell them to buy a Ford (the car), someday. “Financial” saving like this is more convenient than buying the car today and storing it for future use, which would be the “real” form of saving.
But the government can do the same thing, can’t it?
There’s one type of financial instrument you and I can buy that maybe you imagine the government cannot buy: government bonds. If you imagine that, today, you are of course wrong. There are trillions of dollars’ worth of government bonds out in the market, and the government can buy them like you or I can. Buying bonds is a way to “save” in the financial sense — for the government as well as you or me.
If and when we get to the point where the government has run a “surplus” for so many years in a row that it has bought up all the government bonds outstanding (or, in plain English, has retired the national debt), then we can worry, as Alan Greenspan once did, whether it’s a good idea for government to “save” by buying stock in Ford or Exxon or United Health Care.
But neither you nor I are likely to live that long.
–TP
Brett channeling Ezra Pound reading Canto 45 is pretty entertaining as well.
CONTRA NATURAM, COMMIE.
But, Tony P., what does it mean for the government to own its own bonds? The way I see it, they are retiring debt, but not really saving the way you or I would be were we to buy those same bonds. We wouldn’t owe ourselves the money.
Hairshirt,
Debt is savings with a minus sign in front. Or if you prefer, savings is negative debt. I’m talking in “financial” terms, here.
To “save” is to make your debt more negative. That’s true whether your debt is positive $15 trillion (like the government’s) or negative $1K (like yours, if you have $1,000 in the bank). If you have a thousand-dollar “surplus” next month, you “save” it by making your negative debt $1K more negative — i.e. your bank balance goes from $1K to $2K. If the government runs a trillion-dollar surplus next year, it makes it’s debt $1T more negative — i.e. takes it from $15T to $14T.
Again, this bit of pedantry applies only if we’re talking in financial terms. But financial terms are what we’re using when we talk about bonds, governmental or otherwise.
Incidentally, government “owning” its own bonds is indeed meaningless, but I was talking about the act of government buying its own bonds. Not from itself; from their current private-sector owners.
–TP
Aw, crap. As a pedant, I profoundly apologize for “it’s”. And italicized, no less.
–TP
” I would guess that even Brett would agree, if pressed, that the government can’t literally go broke, but that it could devalue our currency by issuing too much, with more or less the same result. (That’s what you mean, I think, Brett, not “oh crap, we’re plum out of dollars,” right?)”
You wouldn’t even have to particularly press me: Even if the dollar became so worthless that most government employees quit their jobs to become subsistance farmers, the President could always snag a thousand dollar bill blowing down the street, scribble nine or ten extra zeros on it, and ‘increase the money supply’. So the government indeed can’t go broke in THAT sense.
But even well short of that scenario, printing dollars does not “create net financial assets”. It, so long as people are willing to trade goods and services for dollars, very effectively transfers net financial assets to the government. But if the government tonight were to increase the money supply ten times over, we would not tomorrow be, on average, any wealthier, for all that we were using another zero to balance our checkbooks.
There would have been no ‘net creation of financial assets’ in any sense any sane person would value.
“But the government can do the same thing, can’t it?”
In the sense that the government can stockpile real resources (like the petroleum reserve), yes. However, it has to SPEND to do so.
If we all turned in all of our money (most of which is just bookkeeping pixels on a computer screen) to the government tomorrow, the government could not “save” it for some use in the future. Why would it? It can create unlimited supplies of the stuff whenever it wants to.
hairshirt,
Taxes create a demand for the monopoly currency. You have to have the currency to pay the taxes (the government will not accept chickens or gold for tax payment purposes). Taxes are also useful to shape behaviors or reinforce desired social policies (cf progressive income tax).
When the government tries to buy more than the economy can produce, then you have inflation. The fix is self evident from the way the problem is presented.
Wingers are consciously employing badly reasoned FINANCIAL arguments (“we can’t afford it”, “oh, those future generations”, yadda, yadda) to strongarm their opposition into making a POLITICAL decision.
The argument should be about the disposition of the economy’s REAL OUTPUT, not whether or not the U.S. Government is “going broke”.
Do you get this now?
Tony P,
Under Andrew Jackson the entire US government debt was retired.
Every last penny.
Did this usher in paradise on earth? Why no, this was followed by one of the severest depressions of the 1800’s.
Under a fiat currency system and no net imports/exports, a policy of conscious government surpluses means the private sector MUST be dissaving. This is an accounting identity that even Brett, in his profound ignorance, cannot deny.
Billmore,
In the private sector any financial asset is offset by somebody else’s liability. This is elementary bookkeeing 101. The private sector cannot create a NET INCREASE in private assets. Any increase in assets is inevitably offset by an increased liability somewhere else.
The government can inject NET assets into the system. It f%$^#cking creates them from NOTHING.
Thus Billy Mitchell’s essential claim that in a fiat system with a freely floating currency (unlike Greece) the monopoly issuer is not FINANCIALLY constrained.
The argument should be about the disposition of the economy’s REAL OUTPUT, not whether or not the U.S. Government is “going broke”.
Do you get this now?
Since I wrote “It’s a matter of where resources are going, what the money is being spent on, that’s important,” and that sounds more or less like “The argument should be about the disposition of the economy’s REAL OUTPUT,” I suppose I’m getting it. Whether it is the unquestionable truth or not, I’m not sure, but I think I know more or less what it is now.
Tony P., I understand what you’re saying and I expected that response. But, while we’re being pedantic, my point was more that buying government bonds is not the same kind of saving for the government that it is for you and me. I don’t need to have outstanding debt as a prerequisite for that form of saving. It’s really not that big of a deal I suppose, since I don’t really disagree with your larger point, but pedantry is as pedantry does, sir.
“….but I think I know more or less what it is now.”
damn that unrestrained exhuberence on my part, and thank you for your understanding.
“The private sector cannot create a NET INCREASE in private assets. Any increase in assets is inevitably offset by an increased liability somewhere else.
The government can inject NET assets into the system. It f%$^#cking creates them from NOTHING.”
Your use of the word ‘asset’ here is misleading because you’re using it in different senses when moving the discussion from the private to public sectors. It would be much clearer to talk about it as ‘instruments’ or ‘currency’.
Yes the private sector can’t make currency as easily as governments. (Though saying that it can’t make it at all isn’t correct either. See frequent flier miles). But suggesting that being able to create currency is the same as being able to create assets is definitely not correct. Simply adding zeros is indeed the creation of ‘currency’ but it also devalues the existing currency. That isn’t the same as creating a real asset out of nothing.
“The government can inject NET assets into the system. It f%$^#cking creates them from NOTHING.”
Indeed. But only in a trivially tautological sense; If ‘assets’ are denominated in dollars, if you print more dollars, there are ‘more’ assets.
But that’s a measure of ‘assets’ nobody in their right mind cares about, because THAT sort of ‘increase’ in assets doesn’t make you any better off. It just transfers wealth to whoever gets the new dollars first, almost always the government.
Otherwise the government could make us all freaking rich by increasing the money supply a thousand times over.
This I quote from a comment at billy blog with emphasis added because it captures something that has confounded me, as a non-economist, for years about economics:
I can’t improve on what Bill Vickrey wrote 17 years ago–
This then is the goal I lay before you. Real full employment, at levels higher than have been experienced in peace-time over at least the last century, is to be reached within two or three years and maintained thereafter, with magnificent results not only in increased output and income, but reduced poverty, iII-health, drug abuse, crime, and commitment to the maintenance of a useless military superfluity. But to do this we have to toss out our shibboleths of budget balancing, puritanical abstinence, maintaining the value of the almighty dollar and servicing a “favorable” balance of trade, and instead focus our attention on the real resources, human and material, that we have on hand and figure out how to use them effectively to produce real welfare…
For too long we have unquestioningly allowed numbers on books of account to control our lives. Such accounts have their place, but when they are allowed to compel us to tolerate the wastage of human resources and all the concomitant social problems that unemployment provokes, we must look at the “real” side of the coin. William Jennings Bryan used to conclude his stock campaign oration with “you shall not crucify mankind upon a cross of gold.” today we might say “we must stop shooting ourselves in the foot with a blunderbuss of financial rectitude.”
Seb,
“But suggesting that being able to create currency is the same as being able to create assets is definitely not correct.”
Your statement is categorically wrong. I have tried to be consistent, but let me be unambiguously clear. The claim by MMT refers to financial assets. Financial assets are claims on future output (stocks, bonds, savings accounts, mortgages, loans, etc.). T-bills, currency, and bank reserves are financial assets. Do you agree or not? Only the government can increase NET financial assets.
Now you can say these financial “assets” are not “real”, but then my counter is simple: Give me your T-bills, please.
Currently, the Fed has injected a couple trillion dollars into the money supply via reserves loaned out to banks in exchange for their crippled loans. Where is the inflation? The current deficit is a trillion dollars? Where is the inflation? Treasuries are selling for a very high price. Where is the “devalued currency”? Where is the all seeing all knowing market signal indicating the fiscal doom and final financial collapse? Just what light at the end of yon tunnel are you seeing?
Your irrational fear (of something) is utterly misplaced, but conveniently fits your politics. And that’s what this discussion is all about.
Billmore,
claim: “Indeed.”
reply: Wow. That’s impressive. Just like George Will!
claim: “But only in a trivially tautological sense; If ‘assets’ are denominated in dollars, if you print more dollars, there are ‘more’ assets.”
reply: If you hadn’t noticed, all financial assets are denominated in dollars. If you hold dollars, you have some financial assets. Only government action can inject or withdraw NET financial assets. Let’s take a simple case: If you received a mystery box full of freshly minted US dollars in the mail (real ones), there are now more financial assets. Now tell me, where is the corresponding liability?
claim: “But that’s a measure of ‘assets’ nobody in their right mind cares about”
reply: You’re detached from reality. Nobody cares about financial assets? About money?
claim: “…because THAT sort of ‘increase’ in assets doesn’t make you any better off.”
reply: Then give me the box of currency.
claim: “It just transfers wealth to whoever gets the new dollars first, almost always the government.”
reply: So are these dollars wealth or not? You don’t seem able to make up your mind. The government spends. Real economic actors do real economic things as a result (pave roads, manufacture copier machines, scream at their bond trader, etc.). These activities increase real economic output. Given this, your assertion is simply backwards, a common way of wrong thinking employed by deficit hawks as they repeatedly bludgeon their political opponents with utterly ridiculous and wrong financial nostrums.
claim: “Otherwise the government could make us all freaking rich by increasing the money supply a thousand times over….”
reply: If the spending demands of the government are greater than the ability of the real economy to produce, then you have inflation. Are you claiming we are anywhere near that point at this time? If so, I simply ask that you present a reasoned rational case in lieu of endless specious fear mongering.
Thanks.
hairshirt,
Yes, Vickrey stated an eloquent truth.
Mitchell repeats this a lot, and it’s hard to grasp at first (I still blow most of his regular Saturday quiz questions), but here goes:
1. A monopoly issuer of fiat currency that freely floats in international markets is NOT FINANCIALLY CONSTRAINED.
2. The constraints are POLITICAL (splitting up the pie).
Deficit hawks deny (1) to enforce compliance with the political constraints they advocate as per (2).
Thus we get insultingly ridiculous claims such as: “We have to throw more people out of work in order to resume economic growth.”
Specious financial claims are asserted (“public debt will be an unbearable burden on future generations” is a common one)in order to advance the political agenda that favors the wealthy (that damned pie), i.e. balanced budgets, less spending, lower taxes (for the wealthy), voodoo economics developed drunkenly in a cocktail lounge scribbled on a napkin.
Currently the private sector is trying desperately to save. Consumers are cutting back on spending, just as banks are using arbitrage and cheap federal funds to repair their balance sheets.
This, by definitional national income accounting identities, means the government MUST be in deficit (if you exclude our net trade balance).
So who are you going to believe, national income accounting identities or your lying eyes?
bobbyp,
I’m sympathetic to the point you are making, but you seem to be succumbing to the battle fever as they keep saying on the Guardian world cup reports. Specifically, I don’t think you encourage thoughtful reflection by mangling Brett’s name. If it’s accidental, no worries, but you’ve done it twice. Could you take it down a notch? Thanks.
bobbyp wrote;
Cutting benefits is pure theft. The last time I looked, theft is a crime.
.. doesn’t that depend a bit on the cut? Are you going to tell me that cutting benefits to somebody making a $million or more a year is a horror and a theft?
…and, aren’t rather alot of retirees in a bad moral position to talk about theft after having majorities vote candididates who ran up long-term debt after long-term debt into office, ever since Nixon?
That’s something that hadn’t happened before, without a REAL crisis – yeah, I looked. Of course, the GOP was worse, but even Democrats failed to reasonably START to reform benefits ’til Obama.
Jon,
The Congressional Democrats worked hand in hand with the Reagan administration to craft the ‘reform’ of 1983 which essentially doubled the FICA paycheck with-holding with the implicit promise that future benefit costs would be pre-funded. This was quite a financial hit that for some reason goes unremarked by those who make facile remarks about those oh-so-selfish boomers. Was this not the very essence of Protestant rectitude?
Please expand on your implied assertion that benefits need to be ‘reform(ed)’.
Clinton was seriously considering Social Security privatization but the sex scandal derailed that effort. Does that count as a start?
But mostly I would ask that you take Krugman’s point to heart and pick which one of the two ways you desire to evaluate the program.
A more fruitful discussion could then ensue with that basic understanding.
As for long term debt. We have just about always had some national debt. After WWII (yes, a crisis)we had a lot of it. We got over it–mostly due to the fact that economic growth was strong after the war.
Most everybody assumes that some way and some how the previous economic growth path will be restored (1945-74, pretty good; 1974-2008 not so good, but OK). If true, the massive hand wringing worry about the national debt will be a thing of the past. So you have to assume a pretty crappy future for the national debt to be taken seriously as a “major” problem. Do you share that assumption?
It is one thing to question if we shall ever experience the sustained economic growth we have had since WWII. That is a very debatable and serious proposition. It is another thing to use incorrect financial analysis and insist (falsely) that the government’s financial position is akin to that of a household, and that we will somehow “go broke” due to having a lot of treasury bills outstanding.
Dear Mr. Japonicus,
Specifically, I don’t think you encourage thoughtful reflection by mangling Brett’s name.
You’ve got to be kidding.
If it’s accidental, no worries, but you’ve done it twice.
It was accidental. If it had been done on purpose, it would have been mangled a great deal more wickedly.
Could you take it down a notch?
Why? This is a serious issue, and I need the practice.
Thanks
You are most welcome.
bobbyp,
It’s worth emphasizing that it was not “World War Two” that stimulated the US economy out of the Great Depression. That is, it wasn’t the death and destruction that ended unemployment, upgraded the industrial base, created new technology, and so on. It was massive deficit spending that did it. It was the huge increase in the national debt that did it.
It’s also probably worth emphasizing that the economic boom during WW2 was not a free-market entrepreneurial exercise. Government pretty much dictated to industry the whole time. I don’t for a minute suggest that what our current economy needs is a dose of dictatorship. I merely point out, for the benefit of our friends who worship The Free Market, that here was a case where the economy boomed DESPITE the fetters and shackles imposed on the market by Big Government.
–TP
“Financial assets are claims on future output (stocks, bonds, savings accounts, mortgages, loans, etc.). T-bills, currency, and bank reserves are financial assets. Do you agree or not? Only the government can increase NET financial assets.”
I don’t agree, and frankly you aren’t even making sense. Printing money doesn’t increase the value of claims on future output, it increases the denomination of claims on future output.
“Now you can say these financial “assets” are not “real”, but then my counter is simple: Give me your T-bills, please.”
I don’t have any T-bills. But you are asking me to give you my DOLLARS. You just want to do it by devaluing the ones I already have rather than taking them away from me physically. But we shouldn’t pretend that is asset creation. It isn’t.
“Currently, the Fed has injected a couple trillion dollars into the money supply via reserves loaned out to banks in exchange for their crippled loans. Where is the inflation?”
It is staving off deflation. Which is a good thing. I’m all for short term stimulus. Also there hasn’t been that much net stimulus because the state level spending has dropped so much.
I’m not a deficit hawk in the sense that I deny that *short term spending during a crazy recession* is bad. The problem is that people who listen to Keynes during recessions (prescription: massive government spending) are studiously non-Keynesian during the expansions (prescription: large cutbacks in government spending).
But agreeing with you on the short term analysis doesn’t mean that your long term analysis makes sense. Your “creation out of thin air” asset concept is frankly crazy. Printing money is most certainly not asset creation. Calling it a “financial asset” doesn’t change the reality. Making long term plans on that faulty basis will only lead to long term bankruptcy.
One aspect that seemingly noone has remarked on yet is that perception (and trust) of value plays a great role too. To a degree government can cheat by increasing the money supply ‘without telling anyone’*. Admittedly that is more difficult these days than in past centuries, esp. when overdone. Btw, I find the idea that gold represents real value not very persuading too. More value than printed paper** or bits in a computer maybe but modern society could do without gold***, maybe without silver but definitely not without copper and iron.
*also remember the old money forger rule: one does not get rich with the counterfeit money itself but by exchanging it for real goods (or money) before the forgery is noted.
**In practical terms empty paper could easily be more useful than its weight in gold.
***although electronics now need more of it than ever, it is not irreplacable
“Btw, I find the idea that gold represents real value not very persuading too.”
For the record, I agree with that. The chief advantages of gold as a basis for a currency is not that it’s actually worth something itself, but that it’s
1. Relatively scarce.
2. Doesn’t get stale.
3. The existing stock is very large compared to annual production, which isn’t likely to be boosted substantially.
4. Has a long history as an accepted currency basis.
1 implies that you don’t need a freight train full of it to represent a lot of value. 2 means that it doesn’t rot in your pocket. And 3 means that it’s a stable basis for a currency. Finally, 4 implies that you wouldn’t have much trouble getting people to ACCEPT it as a currency basis.
Actually being worth something itself doesn’t factor into this at all. It’s even a point against gold, as some of it’s going to be diverted into non-currency uses.
Of course, gold is never going to be revived as a currency basis, unless after a serious economic collapse. The point of using something like gold as a currency basis is indeed stability, and governments don’t want their currency to be stable, they want to be able to inflate it at will. They just want people to think of it as stable, regardless of the truth.
“This, by definitional national income accounting identities, means the government MUST be in deficit (if you exclude our net trade balance).
So who are you going to believe, national income accounting identities or your lying eyes?”
Maybe I’m going to refuse to exclude net trade balance? Give me a good reason for excluding it…
Anyway, Hartmut has a good point: Even defining “net financial assets” in your trivial accounting sense, it’s not just the government that can create them out of thin air. Anybody with a color printer can. It’s just illegal for everybody else.
Seb, it won’t lead to bankruptcy for exactly the reason Brett is happy to admit. Mass inflation (if bobbyp is wrong) and currency devaluation, but not actual bankruptcy.
bobbyp – you seem to be totally avoiding the notion that if you print more dollars, each existing dollar becomes worth less, in that there are more dollars around to compete down the value of dollars both nationally and internationally.
(Or at least, I’m too stupid to figure it out)
What have you to say on this in particular?
Brett,
“Maybe I’m going to refuse to exclude net trade balance? Give me a good reason for excluding it…”
I ask that it be excluded to demonstrate a simple accounting identity, the implications of which are the nub of our disagreement, i.e., when the private sector desires to save (S>I) by definition the government will be in deficit (G>T).
The trade deficit is what? $400 billion/year? If the private sector desires to save $1trillion/year that implies the government deficit will be $600billion/yr.
None of my many doubters here has explained to me why we do not currently have inflation given the fed’s action (injecting huge amounts of reserves into the monetary system) and the huge spending increase (fiscal stimulus).
Where is the inflation?
The government has done exactly what you all claim will “make money worthless”.
P.S.: I am not advocating this type of fiscal and monetary response under all conditions.
Billy Mitchell, a Modern Monetary Theorist, explains the “creation of net financial assets” below. It is not too long, and I hope this will clarify my weak attempts at explanation. Google “billy blog” and review his writings further:
“As a matter of national accounting, a government budget deficit adds net financial assets (adding to non government savings) available to the private sector and a budget surplus has the opposite effect. The last point requires further explanation as it is crucial to understanding the basis of modern money macroeconomics.
While typically obfuscated in standard textbook treatments, at the heart of national income accounting is an identity – the government deficit (surplus) equals the non-government surplus (deficit). The only entity that can provide the non-government sector with net financial assets (net savings denominated in the currency of issue) and thereby simultaneously accommodate any net desire to save (financial assets) and thus eliminate unemployment is the currency monopolist – the government.
It does this by net spending – that is, running deficits. Additionally, and contrary to mainstream rhetoric, yet ironically, necessarily consistent with national income accounting, the systematic pursuit of government budget surpluses is dollar-for-dollar manifested as declines in non-government savings.
A simple example helps reinforce these points. Suppose the economy is populated by two people, one being government and the other deemed to be the private (non-government) sector. We abstract from the distinction between the external and private domestic sectors here – which mostly only involved distributional considerations anyway.
If the government runs a balanced budget (spends 100 dollars and taxes 100 dollars) then private accumulation of fiat currency (savings) is zero in that period and the private budget is also balanced.
Say the government spends 120 and taxes remain at 100, then private saving is 20 dollars which can accumulate as financial assets. In the first instance, they would be sitting as a 20 dollar bank deposit have been created by the government to cover its additional expenses. The government deficit of 20 is exactly the private savings of 20.
If the government continued in this vein, accumulated private savings would equal the cumulative budget deficits. The government may decide to issue an interest-bearing bond to encourage saving but operationally it does not have to do this to finance its deficit. If the savers transfer their deposits into bonds their overall saving is not altered and it has no implications for the government’s capacity to spend. It has the advantage for savers that they now also enjoy an income flow from their saving.
However, should government decide to run a surplus (say spend 80 and tax 100) then the private sector would owe the government a net tax payment of 20 dollars and would need to sell something back to the government to get the needed funds. The result is the government generally buys back some bonds it had previously sold. The net funding needs of the non-government sector automatically elicit this correct response from government via interest rate signals. Either way accumulated private saving is reduced dollar-for-dollar when there is a government surplus.
So it is clear that the government surplus has two negative effects for the private sector: (a) the stock of financial assets (money or bonds) held by the private sector, which represents its wealth, falls; and (b) private disposable income also falls in line with the net taxation impost.
Some may retort that government bond purchases provide the private wealth-holder with cash. That is true but the liquidation of wealth is driven by the shortage of cash in the private sector arising from tax demands exceeding income. The cash from the bond sales pays the Government’s net tax bill. The result is exactly the same when expanding this example by allowing for private income generation and a banking sector.
From the example above, and further recognising that currency plus reserves (the monetary base) plus outstanding government securities constitutes net financial assets of the non-government sector, the fact that the non-government sector is dependent on the government to provide funds for both its desired net savings and payment of taxes to the government becomes a matter of accounting.”
Thanks for the discussion.
bobbyp – you seem to be totally avoiding the notion that if you print more dollars, each existing dollar becomes worth less, in that there are more dollars around to compete down the value of dollars both nationally and internationally.
I’m new at this MMT stuff, but I think it has to do with how much idle productive capacity can become employed in response to the additional spending. If we’re working at capacity, additional money leads to inflation. If there’s slack, to doesn’t. (Aside from that, it’s important that there is real value being produced in response to the spending rather than digging holes and filling them back in.)
Lieutenath asks, “….you seem to be totally avoiding the notion that if you print more dollars, each existing dollar becomes worth less, in that there are more dollars around to compete down the value of dollars both nationally and internationally.”
Disagree. Look at an extreme example: Everybody wakes up one morning and decides they are too deeply in debt. They increase their desire to save money. Sound familiar? The government prints a whole bunch of money. Will each dollar be worth “less” when they are hidden under mattresses or stashed away in savings accounts?
This is exactly what has been happening to our economy. Is a dollar a year ago worth substantially more than a dollar today?
When Krugman speaks about the “lower bound” of monetary stimulus, this is what he is referring to. Thus government spending is the effective antidote. Some of this spending is automatic (unemployment insurance, for example), and drives government balances into deficit under conditions where the private sector has a net demand to save.
Now if the government was trying to buy more than the economy can produce, you will get inflation (the “guns and butter” policy of LBJ). Similarly, in WWII, the government was demanding (i.e., spending and thus buying) just about everything the economy could produce for the war effort. To keep a damper on inflation price controls and rationing were instituted.
Strangely, there was not a great hue and cry that this spending would somehow lead to bankruptcy. Pretty amazing, huh?
Sebastian writes: “The problem is that people who listen to Keynes during recessions (prescription: massive government spending) are studiously non-Keynesian during the expansions (prescription: large cutbacks in government spending).”
The problem is that people with a political agenda are using bad economics to inflict wrong-headed policies that impose unnecessary harm (idle resources-unemployment).
Generally this is done by turning the discussion from what the real economy can and can not do (or is actually doing) to invoking fears that “we will spend ourselves into bankruptcy”, a concept that, in the aggregate, makes absolutely no sense under a fiat currency system.
Advocating policies that choke off expansions because you have made the political decision that, say 5% unemployment, is “OK” is not “consistent with Keynesian prescriptions”. It is a political decision, a self-imposed constraint.
The problem is that people who listen to Keynes during recessions (prescription: massive government spending) are studiously non-Keynesian during the expansions (prescription: large cutbacks in government spending).
Which people are they? Are any of them commenting on this blog?
The problem is that people who listen to Keynes during recessions (prescription: massive government spending) are studiously non-Keynesian during the expansions (prescription: large cutbacks in government spending).
Is this true in recent history?
Didn’t President Clinton cut back spending, creating an actual surplus, during a financial expansionary period?
“The point of using something like gold as a currency basis is indeed stability…”
Stability for whom? For economic elites and rentiers, yes. For ordinary folks….not so much.
The 19th century was rife with financial panics and depressions. Some stability.
Maybe he was talking about Bush.
“Generally this is done by turning the discussion from what the real economy can and can not do (or is actually doing) to invoking fears that “we will spend ourselves into bankruptcy”, a concept that, in the aggregate, makes absolutely no sense under a fiat currency system.
Advocating policies that choke off expansions because you have made the political decision that, say 5% unemployment, is “OK” is not “consistent with Keynesian prescriptions”. It is a political decision, a self-imposed constraint.”
Ok.
In reverse order, you first have to explain to me how you measure full employment. The reality is that, the way we count unemployment, 5% unemployment is very close to full employment which politically and economically we maintained for a very long time.
Second, “spending ourselves into bankruptcy” is certainly not technically correct, as you point out, but it is a perfectly accurate description of what happens when the currency gets devalued and your bonds become hard to sell. More than one country has gone through the inevitable inflation, reduction of the standard of living and soaring unemployment that goes with the government printing an accelerating amount of currency to cover its debts. This is even more problematic when much of the world holds your currency as if it were gold, the run on the dollar in a more dramatic default would exacerbate the problem.
Also, The attitude that we can inject 3 trillion into the economy to prop it up and there won’t eventually be repercussions is questionable to me. However, hopefully, that price will be paid over a long slow recovery so no one will ever identify it nor deal with it all at once.
Also, The attitude that we can inject 3 trillion into the economy to prop it up and there won’t eventually be repercussions is questionable to me. However, hopefully, that price will be paid over a long slow recovery so no one will ever identify it nor deal with it all at once.
Yeah, that’s the theory.
There are consequences, but there would be worse consequences without it.
bobbyp:
“None of my many doubters has explained to me why we do not currently have inflation ………”
Krugman has several recent posts explaining the phenomenon. Or, the doubters could check out Brad Delong.
As for Sebastian’s formulation regarding Keynsians, reverse it for the non-Keynsians.
The economy’s doing fine — cut spending and lay people off. The economy sucks — cut spending and lay people off.
Everyone is half a Keynsian, except those who are not Keynsian at all, but don’t like the half Keynsians.
Of course, the Keynsian haters get desperate and start calling Obama the Keynsian a Kenyan. They want “do more with less” AND “do less with more”.
How bout we do less until we get to zero.
As bobbyp has explained, it is a nearly always a “political” decision to keep surplus labor …. in surplus.
We choose folks at random and make them surplus. Good God, we can’t have wage inflation.
We then make ourselves feel better about our lofty economic theories by telling surplus labor that it is their individual moral failing that caused the surplus.
Except for Milton Friedman, who made an exception for his moral failing by working a Federal Gummint job during the 1930s. As an economist. Cripes, talk about digging pointless holes and filling them. That Friedman didn’t starve to death during the aftermath of the Crash is testimony to the fact that even he had the moral failing of falling back on fiscal stimulus when monetary expansion did not happen. Schmuck.
I then had to sit through his other welfare gig on PBS to hear why it all made perfect rational sense.
You’re fired. Get a job. I just had a job. Not my problem. F*ck off.
“Now if the government was trying to buy more than the economy can produce, you will get inflation (the “guns and butter” policy of LBJ). Similarly, in WWII, the government was demanding (i.e., spending and thus buying) just about everything the economy could produce for the war effort. To keep a damper on inflation price controls and rationing were instituted.”
An interesting note is that inflation is acclerating in the huge portion of our economy that is the service sector. In an interesting post Michael Mandel has this view supported by an interesting graph.
So there is the inflation, in industries that are labor intensive and primarily domestic.
“Aside from that, it’s important that there is real value being produced in response to the spending rather than digging holes and filling them back in.”
This isn’t an important distinction in bobbyp’s formulation. Which is why it is rather noticeably suspect. In fact according to bobbp’s formulation no actual work needs to be done, the mere printing of the money is enough.
“Which people are they? Are any of them commenting on this blog?”
So far as I can tell, all of you are. Were any of you interested in contemplating cutbacks in the size of government as large as the spending increases we are talking about today? Really? When? What were they?
“Didn’t President Clinton cut back spending, creating an actual surplus, during a financial expansionary period?”
Lots of commas there. He cut back spending, but not even a quarter of the amount that you would expect in Keynesian analysis. The cuts weren’t nearly enough to create a surplus, it was the enormous increase in revenues caused by the expansion that did that. And ‘he’ didn’t do it. Clinton and the Gingrich Republicans did it.
Btw, I’m perfectly willing to give Clinton credit for that. He isn’t and wasn’t a typical Democrat in that respect and his attempts at cuts weren’t particularly well received by Democrats at the time.
Do you really contemplate/advocate cuts *the size of the stimulus* when the economy is humming again? It seems like almost all of the domestic policy I’ve heard you discuss involves very large permanent increases in government spending.
Marty: The attitude that we can inject 3 trillion into the economy to prop it up and there won’t eventually be repercussions is questionable to me.
But what are the repercussions of not injecting 3 trillion dollars into the economy? It’s not like that would have been a cost-free exercise. Unemployment is at 10% now, how high would it be without the stimulus?
And 10% unemployment has repercussions. The long-term unemployed have a very hard time ever getting back to work. The resulting loss of productivity damages the economy as a whole. It’s not a case of choosing between crazy, irresponsible spending that might blow up the economy and doing nothing which will be benign and easy.
“But what are the repercussions of not injecting 3 trillion dollars into the economy?”
The infusion was necessary, the assumption it doesn’t have consequences is questionable at best.
Sebastian: There’s the little matter of decades of infrastructure and systemic decay created by cutbacks in private sector and government in the name of “efficiency”. There’s billions, if not trillions, of dollars in infrastructure maintenance that’s been “deferred” (not done at all).
Also, if the government can do something more efficiently than the private sector (like, say, health care), then having the government do it makes the government bigger, but is a net savings of money.
Also, we could cut huge amounts of government spending by ending the two wars we’re in and not thinking we need to have a military that can bomb the whole world at once.
“Didn’t President Clinton cut back spending, creating an actual surplus, during a financial expansionary period?”
No, he didn’t. This is a common myth among Democrats. We did, with a Congress dominated by the opposing party, (And locked in a death match with the President!) and a stock market bubble, keep spending from going UP as fast as revenue, resulting in the deficit declining. It nominally went marginally into surplus territory, but only by government accounting practices, which are specifically intended to understate the deficit for political purposes. The fact that the federal DEBT went up every year of the Clinton administration demonstrates that there weren’t any actual surpluses.
Marty:
“So there is the inflation, in industries that are labor intensive and domestic.”
The janitors and security guards certainly do the labor but their wages are hardly intensive, especially in the age of outsourcing. From personal experience (hiring), you pay their companies, some of which are publicly traded, others private, $40 to $50 an hour to provide a janitor or security guard $13 bucks an hour in wages.
Sounds like shareholder and business owner inflation to me, not labor inflation. In these two cases.
There is also the observation that “businesses” outsourced many of the services you reference … to cut costs.
Now their costs are going up. So much for outsourcing.
Btw, I’m perfectly willing to give Clinton credit for that. He isn’t and wasn’t a typical Democrat in that respect and his attempts at cuts weren’t particularly well received by Democrats at the time.
Do you really contemplate/advocate cuts *the size of the stimulus* when the economy is humming again? It seems like almost all of the domestic policy I’ve heard you discuss involves very large permanent increases in government spending.
Really? Have you not heard how I want to cut Defense spending? I know I’ve posted on that more than once, and considering that it accounts for such a huge portion of our budget, that would help.
I’m also in favor of relaxing drug laws which would save some money federally – more for the states, but still, there are federal charges/prisons/trials, etc that could be done away with. Not huge savings, but something.
I’d also scale back some DHS spending, subsidies for ethanol/corn/some other farm subs, foreign aid to Israel, Egypt and certain other states.
And regardless, the Dems, not the Republicans, are pushing paygo now. Dems now have completely adopted that fiscal restraint – for better, AND for worse.
Suppose that the minute the 2010 census is complete, the US government sends a $10,000 savings bond to every man, woman, and child in the country.
I’m talking real, full-faith-and-credit government bonds. Honest-to-goodness “financial assets”. People could hold them to maturity, or buy and sell them amongst themselves.
I think everybody here would agree to the following:
1) The “national debt” would increase by about $3 trillion.
2) The private sector’s “financial wealth” would increase by about $3 trillion.
3) GDP, unemployment, interest rates, all would be different, next year, than they would have been without this action.
If you think GDP would go down, unemployment up, interest rates way up, then naturally it would be a stupid thing to do.
If you think GDP would go up, unemployment down, and interest rates remain flat, then it would not be so stupid.
If you, gentle reader, think the second thing would happen but you oppose the idea because, well, people just plain don’t deserve a $10K savings bond, that’s fine — as long as you’re not coy about it.
–TP
John,
Certainly many of these things are outsourced, they are services costs as opposed to direct wage costs so by definition the businesses are paying a service provider.
From my alternative personal experience there has been, and likely will be, continuing wage inflation in the IT services sector that still has many areas of labor shortages.
I think the point here doesn’t address wage inflation though, it addresses that primarily domestic services industries producer costs are going up. This measures inflation in our economy more accurately than the overall PPI.
That wage inflation, by itself, is good is inconsistent with any economic theory I can fathom. If I am doing the same job today as yesterday, the market is paying the same amount for the output and the rest of the economy is growing slowly, then why would it be good for those wages to outpace the economy?
We have had an extended period of low inflation overall that gets reflected in stagnant wages, (I think 2% over a reasonably long period) but that doesn’t mean that people haven’t gotten promotions, better jobs, etc. where they make more. What it means is that the price paid for one hour of work has stayed at the inflation rate.
I am sure that if the tradeoff between relatively stagnant wages or wages chasing higher inflation the first is a better alternative. In those periods of high inflation I have lived through, wages didn’t ever catch up until the economy flattened out.
So, Seb, do you have a formula in mind that would require moving the goal post, er, I mean, previous cuts equal to the recent stimulus as part of the Keynesian analysis you mentioned? And I don’t think the point in necessarily shrinking the budget during expanions so much as running a surplus. I’m thinking that, I don’t know, not cutting taxes when you don’t need to might count just as much as reducing spending.
And what does “equal to” mean? Is that a percentage thing? If it’s a dollar-for-dollar thing, it gets a bit dicey. If the budget, say, doubled in 2010 in response to the financial crisis and recession, would that mean I would have to have advocated cutting it to less than zero previously, when the budget was smaller, to offset the 2010 increase to qualify has an honest-to-goodness Keynesian?
I guess it’s not enough to generally say “surplus during the good and deficit during the bad” when you’re commenting on a blog and not in charge of fiscal policy. And I’m sure there’s some figurin’ to do in specific cases, but I somehow doubt you’ve done it such that you can disqualify anyone as a two-halved Keynesian (or maybe give us each grades for how well we’ve met your specific mathematical definition).
Let’s not forget INCREASING TAXES during an expansion as well.. isn’t that Keynsian, too?
Also increasing taxes to fight a couple of wars would be fiscally responsible, at all times.
.. O.K, forget it. What’s the use?
See this is why, in response to Sebastian’s (not picking on Sebastian … ) request that others of us consider the other half of the Keynsian bargain, I say forget it.
Again, not picking on Sebastian (that he would run for office and get elected as a Republican, instead of the cynical crapmeisters vomited up by that enemy party now), but the experience of the past 8 million years tells me that if I agree to spending cuts during an expansion, not one member of the opposition will consider tax increases as well during an expansion or spending increases during a cyclical downturn.
I don’t want to have the conversation any longer.
They signed a pledge, the idiots, to not exercise all of the tools of responsible governing.
Screw them.
Marty: If I am doing the same job today as yesterday, the market is paying the same amount for the output and the rest of the economy is growing slowly, then why would it be good for those wages to outpace the economy?
If your wages have lagged productivity growth for a decade, it’s good because you’re finally getting a fair share of productivity improvements. And wage inflation in one sector does not necessarily translate into wider inflation: the products or services produced by higher-wage employees may not get much more expensive, instead profits may get smaller; and with so much slack in the economy, extra spending is not going to cause inflation either.
If wages had tracked productivity growth for the past decade I might be a little more concerned. But they didn’t – collectively we all got paid about the same and ran up a lot of new personal debt to pay for all the new stuff, resulting in a large net transfer to the financial sector (which was reflected in their wages). And whether or not the government can run a persistent deficit, households certainly cannot. You can’t run a household by just continually extending credit, because at some point you cease to be able to pay it off. So if you want economic expansion, wages have to rise.
“collectively we all got paid about the same and ran up a lot of new personal debt to pay for all the new stuff, resulting in a large net transfer to the financial sector (which was reflected in their wages).[…] So if you want economic expansion, wages have to rise. ”
Poor personal financial management and over leveraging at the individual level is no more excusable than overleveraging by the financial sector. I am not sure how this translates to a valid argument for wage inflation, so we should force wage inflation to bail out the individuals?
Marty: When most people’s incomes are flat, and the vast majority of GDP growth has come from “innovation” in finance, and also gone to those “innovators” who were the ones who drove the economy off a cliff, the problem is that most of us didn’t save, rather than the fact most of the growth was siphoned off to companies swapping money with each other and traders skimming off those giant flows of money to make themselves rich enough to not care what happened to the rest of us?
I am not sure how this translates to a valid argument for wage inflation, so we should force wage inflation to bail out the individuals?
Where did the forcing come in? Anyway, I think the point is that it would be better for people to make enough money to buy the things they are producing, rather than using credit. I don’t see excuse making so much as a prescription for a better economy.
“So, Seb, do you have a formula in mind that would require moving the goal post, er, I mean, previous cuts equal to the recent stimulus as part of the Keynesian analysis you mentioned? And I don’t think the point in necessarily shrinking the budget during expanions so much as running a surplus. I’m thinking that, I don’t know, not cutting taxes when you don’t need to might count just as much as reducing spending.”
Running a minor couple-year budget surplus isn’t Keynesian. Running up a debt during recessions and paying it down to near zero during expansions is. I’m not aware of anyone here who was talking about cutting enough/raising taxes enough to seriously cut the national debt during an expansion. Hell, even under Clinton/Gingrich coupled with a now clearly unsustainable tech bubble we got only momentary year-to-year surpluses.
Not cutting taxes doesn’t count ‘just as much as reduced spending’. You should be raising them enough to retire large portions of the debt. Furthermore you have to actively cut government spending during the good times specifically so that can increase it during bad times. Keynes is about balance. Lots more government spending in bad times AND lots less during good times. It isn’t stimulus if the government is spending the money all the time. That just becomes the new baseline. If you have an ever-expanding baseline, when you need stimulus you just a huge debt overhead with no legitimate way to pay it off other than devaluation. Which is why bobbyp has to defend devaluation so much.
Btw, is there a reason why only the conservatives seem to be be arguing with bobbyp?
Do the rest of you agree with his analysis?
Marty: we should force wage inflation to bail out the individuals?
How is getting pay increases that correspond to productivity growth a “bailout”?
You have in mind a picture of some crazily irresponsible borrower who now needs a handout. I have in mind ordinary people who lacked leverage at work to extract wage increases in a period of low union membership, outsourcing, and automation, who used credit at historically low rates to fill in the gaps. Using credit is not in itself a bad thing – that’s all a mortgage is – but it is something that cannot continue to expand without limit because there is a low bound to consumer interest rates and a ceiling of how much debt can be serviced with a given income.
It’s not a bailout to say that that was not the best way of sharing out the rewards from increased productivity and that higher wages would have been a fairer and more effective system.
Poor personal financial management and over leveraging at the individual level is no more excusable than overleveraging by the financial sector.
You can refuse to excuse anything you like, Marty, but there’s a difference between “individual” and “financial sector” over-leveraging.
Individuals don’t have the power to limit the financial sector’s leverage; the financial sector does have the power to limit individuals’ leverage. Individuals borrow (“leverage” themselves) from the financial sector, after all.
Individuals could not have “over-leveraged” themselves unless the financial sector, in pursuit of profits for itself, had lent them money. I don’t hesitate to mention the financial sector’s motive, because I don’t think I can be accused of mind-reading. Pursuit of profit is not some subliminal motivation on the part of the financial sector.
–TP
“Furthermore you have to actively cut government spending during the good times specifically so that can increase it during bad times.”
Unambiguously false. Under our current fiat monetary system the government does not have to do any such thing. It is financially unconstrained.
This is not to say that the government should just willy nilly spend without limit under any/all circumstances. It is simply saying that it can.
The constraints are political, not financial.
PS: The government could run just fine without ever issuing interest paying debt instruments. These instruments are issued to satisfy private demand and as part of the way the government manages interest rates.
You want to make the bond market scream bloody murder? Have the government essentially shut it down by retiring all the US public debt.
PS: Marty: Economic theory says labor should share proportionately in the rewards from productivity increases. This has not been the case since the 70’s. Why?
PSS: Thullen wins first place. Again.
Not cutting taxes doesn’t count ‘just as much as reduced spending’. You should be raising them enough to retire large portions of the debt.
Fine. Tell that to George Bush, if you didn’t see where I was coming from.
I’m not aware of anyone here who was talking about cutting enough/raising taxes enough to seriously cut the national debt during an expansion.
I’m not aware of anyone here who has farted in the last hour. Doesn’t mean no one has. Seriously, what expansion and how big? How serious is the cut? How can you be aware of something if you don’t know what it is?
Furthermore you have to actively cut government spending during the good times specifically so that can increase it during bad times.
Really? If you can pay for the spending during the good times while still bringing in a surplus, why not? But, still, tell that to George Bush and Haliburton.
If you have an ever-expanding baseline, when you need stimulus you just a huge debt overhead with no legitimate way to pay it off other than devaluation.
The baseline will always be ever-expanding. The question is whether or not the flow is surplus during the expansions to allow for deficits during recessions.
Do the rest of you agree with his analysis?
I’m still digesting it, so I can’t say whether or not I fully agree with it, but I agree with some of it.
Seb, “If you have an ever-expanding baseline, when you need stimulus you just a huge debt overhead with no legitimate way to pay it off other than devaluation. Which is why bobbyp has to defend devaluation so much.”
I don’t particulary care about currency devaluation. Since our currency freely floats in international markets, neither does my government, I guess. In fact, devaluation would be a good thing for our export industries.
I do care that we do not peg our currency to gold, bananas, the Euro, or the fetish of the day. That would unnecessarily constrain our financial freedom.
I care about having full employment and a decent standard of living, and I will absolutely not accept having my standard of living reduced to satisfy a reactionary political agenda based on claims such as “we cannot afford it” or “we are placing an unsustainable burden on future generations” which are both essentially lies given that we have a fiat currency system.
“It’s not a bailout to say that that was not the best way of sharing out the rewards from increased productivity and that higher wages would have been a fairer and more effective system.”
The problem with the productivity argument is that the economy also doubled the number of jobs available from the early 70’s. It is actually a positive reflection on our economy that we were able to sustain wage rates while incoporating 70M more workerss during that time frame. There are simply many more variables than wage rates and productivity.
“I don’t particulary care about currency devaluation.”
Yes, we know. You think that issuing money creates assets. I’d like to hear if the others here (say Jacob, Tony, and Eric) agree. And if they don’t, I’m kind of wondering why they aren’t speaking up, as it is A) radical, and B) central to how this thread is shaping up.
“PSS: Thullen wins first place. Again.
Let’s see. Would I like the prize money in the form of a $10,000 savings bond, or in BP stock?
fiat .. or Fiat? I’ll take the fiat.
The problem with the productivity argument is that the economy also doubled the number of jobs available from the early 70’s.
Unless I misunderstand the situation fairly dramatically, the change since the 70’s has not simply been a larger pie distributed across more people, with no particular difference in the size of the slice of the pie at the individual level.
The wealthiest 20% (or perhaps less than 20%) has received *proportionally more* of the increased wealth resulting from increases in productivity since the 70’s.
And where I say “proportionally more”, most analyses (including the CIA Factbook) say “virtually all”.
Virtually *all* of the increase in wealth created by increases in productivity over the last 30 to 35 years have gone to the wealthiest 20% of the population.
Seb,
Short answer, work is killing me, the topic is highly complex and I don’t have time to get into it. Maybe after work.
Money is weird. Like the fact the Banksters bet more money than exists in the world on the various kinds of derivatives. Yet the portion of that they skimmed off was used to buy real assets, and the public is stuck with the real debts they ran up when their bets went bust. Are those debts they created not real debts? Are the assets they used their skimming to buy not real assets?
I’m not entirely sure I agree with bobbyp’s position, or understand all the angles of it, but most of what he’s saying, that money only means what we say it means, is hardly controversial. And the bond markets freaking out if we paid off the US debt, which was one of the reasons Greenspan used to shill for W. Bush’s ginormous tax cuts for the rich.
And if printed money isn’t really money, can we arrest the banksters for counterfeiting?
I’d like to hear if the others here (say Jacob, Tony, and Eric) agree.
Why didn’t I make the list?
I’d say it would depend on the effect of the currency devaluation. I supposed I would agree that there are other things that should be taken into account, so currency devaluation is not in and of itself unacceptable regardless of the larger context. If it didn’t hurt the domestic economy, I don’t see why I would particularly care, either.
My guess is that bobbyp isn’t saying that there is no scenario under which currency devaluation could cause problems so much as that some amount of devaluation isn’t necessarily a problem in its own right. I think he’s stating it the way he is to push back against the prevailing notion in some quarters that currency devaluation is more important than other considerations that it should be secondary to.
Marty: It is actually a positive reflection on our economy that we were able to sustain wage rates while incoporating 70M more workerss during that time frame.
I don’t follow.
There are two sources of economic growth. One is population growth, and the other is productivity growth. Wages (as in, per-person wages, not the total amount of wages paid in the whole economy) should track productivity growth, not population growth. Population growth in itself should not have an effect on wage levels. (More people competing for jobs, but more people buying products and services creating more demand.)
Keeping wages flat with an increasing working population is not in itself a great accomplishment. The working population of the US did not start increasing in the 70s, it has been increasing for the entire history of the US, and for a long period in the 20th century wage differentials were narrowing or remaining stable with much less inequality than today. What is supposed to be different about the period from the 70s onward?
On the subject of devaluation, I think that it is not an imminent problem, it has the potential to be contained if it does become a problem, and that some degree of devaluation will help the balance of trade and therefore help employment. But for the most part I simply do not believe that spending a bunch of money will cause a significant devaluation, because that money will get soaked up in increased economic activity.
For inflation specifically, a little inflation (i.e. more than the none we currently have) would be quite useful in fixing the balance sheets of households and banks given the mess we’ve gotten ourselves into. It would not be entirely benign but neither will be another huge banking bailout as property prices drop to their long-run average – as I think they will – and destroy bank balance sheets all over again.
“Why didn’t I make the list?”
Because you said you were still digesting it.
“I’d say it would depend on the effect of the currency devaluation. I supposed I would agree that there are other things that should be taken into account, so currency devaluation is not in and of itself unacceptable regardless of the larger context. If it didn’t hurt the domestic economy, I don’t see why I would particularly care, either.”
The issue isn’t currency devaluation in the normal sense of US dollars vs. the British pound for instance.
The issue is the devaluation of all the dollars you currently hold in the bank, and all the claim to any dollars that you currently may have (say in a 401k or a pension or in life insurance or what have you).
If you cut Social Security payments in half, it would hurt a lot of retirees. If you cut the purchasing power of Social Security payments in half it would hurt them in exactly the same way.
For various reasons (most having to do with the fact that wages are stickier than the price of goods) small amounts of inflation aren’t bad because it allows companies to *effectively* pay less to some of their more marginal employees without firing them and without it ruining their lives. But that doesn’t generalize to the rule that bobbyp is suggesting–that issuing lots of government fiat money is generally asset creating.
“You think that issuing money creates assets.”
Wrong. I have consistently stated that deficit government spending (and as the monopoly issuer of the currency, they create the money to pay for it) impacts NET FINANCIAL ASSETS. The private sector cannot create a NET FINANCIAL ASSET becasue it is ALWAYS offset by a bookkeeping LIABILITY. This is pretty basic stuff.
This insight follows from an accounting identity in national income accounting. Now if you want to take on national income accounting procedures, be my guest. So far you have not. Instead we get the standard hoary assertions (totally unsupported)that government deficits will inevitably lead to financial disaster.
Then explain Japan to me, please.
Admittedly, I am new to MMT. But so far I find it to be a bracing antidote to standard memes that inevitably equate the constraints on the government’s spending decisions to that of a private household. It’s proponents have also been quite precient in their analysis of the problems in the Euro zone and Greece in particular.
There are critiques of this viewpoint. Google “chartalism”. It’s a short wikki entry.
Oh, you’re talking more about inflation than devaluation. The argument isn’t that excessive inflation is okay, rather that it won’t necessarily result from injecting money into the economy so long as there is slack in productive capacity.
“I have consistently stated that deficit government spending (and as the monopoly issuer of the currency, they create the money to pay for it) impacts NET FINANCIAL ASSETS. The private sector cannot create a NET FINANCIAL ASSET becasue it is ALWAYS offset by a bookkeeping LIABILITY. This is pretty basic stuff.”
Yes. But then you are being misled by the word ‘asset’ in the hypertechnical term ‘financial asset’. You are talking about policy as if the hypertechnical term had very much useful to say about real assets. You are talking about debt policy as if the financial assets were more than just nominal claims on actual assets. You are talking about creation of financial assets as if it didn’t devalue other financial assets. It is like you are noticing that oxygen and hydrogen are gases and then denying that you can drown in water because it is composed of 2 gases.
The problem is that you are taking an identity of financial assets equated against financial assets and then extrapolating into policy effects for non-financial assets. And that doesn’t work the way you think.
You think that issuing money creates assets. I’d like to hear if the others here (say Jacob, Tony, and Eric) agree.
I said my say @12:58. Issuing money (or, in my hypothetical, $10K savings bonds) creates “private-sector financial assets” as bobbyp uses the term. It does not change the real assets of the nation directly. It does not even change the NATION’s “net financial assets”, if you take “the nation” to be “the private sector plus the government”, for the government’s financial debt goes up exactly as much as the private sector’s financial wealth goes up.
But issuing $3T worth of government bonds on a per-capita basis ($10K to each American) would absolutely positively affect the production and distribution of real goods and services in the US economy. Just how it would affect them is something a valid economic theory would be able to predict.
A “valid economic theory” might predict different effects from this $3T “increase in net financial wealth of the private sector” if we do it when there’s 10% unemployment rather than 5% (or 20%) unemployment.
A valid economic theory might also predict different effects from sending out the $3T as $10K per-capita, or $30K per household, or $3B to each of the 1000 richest Americans.
And naturally a valid economic theory would predict the effects (on real things, like unemployment, GDP, etc.) of NOT doing this.
If we had a “valid economic theory”, we could compare the predicted effects of each approach, and select the one with the “best” effects.
But “best” would still be a matter of taste.
–TP
“If you cut Social Security payments in half, it would hurt a lot of retirees. If you cut the purchasing power of Social Security payments in half it would hurt them in exactly the same way.”
Cutting Social Security payments would be a political decision, not a financial one.
If the government printed so much money that everything went up by 1000 per cent, then, all else being equal, my measely Social Security would also go up 1000 per cent since the government is not financially constrained.
Therefore: It would still be capable of purchasing the same measely basket of real goods that it does now unless imports were a hugely significant part of the economy. Assuming relative purchasing power decline wrt foreign goods, my purchasing power would suffer.
Similarly, encouraging a high dollar raises my standard of living. I can buy more cheap stuff at Wal-Mart with my measely dollars.
But as you can see, these effects are mostly distributional in nature, i.e., my betterment as a consumer comes at the detriment to those trying to export U.S. products.
bobbyp, you seem to be hawking the financial equivalent of a perpetual motion machine. Or, worse, the financial equivalent of zero-point energy.
Sebastian: “But then you are being misled by the word ‘asset’ in the hypertechnical term ‘financial asset’. You are talking about policy as if the hypertechnical term had very much useful to say about real assets.”
People lie, cheat, and steal for these “hypertechnical financial assets”.
Not real, you say?
If you do not believe that a monopoly issuer of the currency that floats freely against other currencies (this is important) can, by its spending decisions have real effects (such as reducing unemployment), then I don’t have much to say since it appears you are throwing out Keynes’ insights into aggregate demand and the fundamental nature of fiat currency regimes…..which, by the way, we live in one…..
“People lie, cheat, and steal for these “hypertechnical financial assets”.”
Because they can be exchanged for real assets and services. If you just double the amount of financial assets through fiat, all you have done is reduced the exchange rate of financial asset to real assets by 50%. You haven’t created more real assets.
People want and in many cases need the real assets and services. The things you are talking about don’t help them get that. You are making the exact same mistake as the banks that ran this country into the ground.
“And that doesn’t work the way you think.”
Well, yes it does. Look, conservatives have been yapping about the national debt for as long as I can remember (and I’ve been around a while). We have even had an experience of unusually high national debt (WWII). Japan has a debt/GDP ratio significantly higher than ours. Are you going to claim that their standard of living is lower as a result? What is the mechanism through which this happens?
Here’s what happens in the real world. The private sector makes decisions as to savings vs spending. If the private sector decides to save (S>I), the government will be in deficit. Under a fiat currency system this will be unambiguously true whether this offends Protestant sensibilities or not (Mitchell argues the government spending is thus exogenously determined).
A political decision to try and maintain balanced budgets under this circumstance will only make matters worse.
Why is the desire to make matters worse so widespread?
If you just double the amount of financial assets through fiat, all you have done is reduced the exchange rate of financial asset to real assets by 50%.
Suppose you just increase financial assets by precisely 0.1%, does that just shift this “exchange rate” by 0.1%? I’m familiar with the doctrine that money is a veil, but how far do you think you can push that kind of reasoning in a deep recession?
bobbyp, you seem to be hawking the financial equivalent of a perpetual motion machine. Or, worse, the financial equivalent of zero-point energy.
That’s how it looked to me at first, so I can understand why you would write that, Slart. I think it’s a matter of emphasis and what bobbyp is arguing against more than what he’s arguing for that makes it appear that way. I haven’t seen a statement, say, suggesting that the government couldn’t possibly increase the money supply so much that it would result in excessive inflation. I have seen statements suggesting that, so long as there is excess capacity, this will not happen. But it does come off a bit too absolute or unqualified sometimes.
If you really want to delve into it, I’d suggest going over to billy blog, because it’s very interesting. I’ve made it one of my favorites. There a lot of people asking the kinds of questions I would ask and they’re getting some good answers. There are also some good arguments going on among the more knowledgeable commenters and Bill Mitchell (thus, billy blog) that are over my head, but fun to read.
I don’t know if I can buy the whole thing outright, but they’re definitely on to something, I think.
Slarti,
In a sense, that is true. But it is the system we have. We have a fiat currency system. Money is created by the government from nothing. The government will unhesitatingly use force to insure that it is the monopoly supplier of that currency. The government levies taxes to insure there is always a demand for the currency. You are not allowed to pay taxes in something other than the monopoly currency.
Perpetual? Yes. Since Nixon slammed the gold window and ended the Bretton Woods system. A good deal of time has passed since then. We’re still here. There has been no financial armaggedon. We have not “gone broke”.
What I am hawking is simple: Under that system, decisions such as a “balanced budget amendment” or cutting government spending when 10% of the working population is looking for work are political decisions imposing political constraints, and are not decisions that are mandated by whether or not the government has “too much” debt or that future generations will “suffer” as a result of that debt.
Those concepts are false if you are of the opinion that the government is not financially constrained.
This puts the argument back where it belongs: Who (real people) gets what (real stuff).
But thanks for putting up with me!
“You haven’t created more real assets.”
Under conditions of slack demand and underutilized resources, yes, you do. The spending substitutes government demand for real goods and services where private demand has fallen off.
Those goods and services elicited from the real economy are certainly “real” and, unless I am totally mistaken, create real assets.
But you have faithfully ignored my post above where I quoted Mr. Mitchell at length on this very subject.
“Suppose you just increase financial assets by precisely 0.1%, does that just shift this “exchange rate” by 0.1%? I’m familiar with the doctrine that money is a veil, but how far do you think you can push that kind of reasoning in a deep recession?”
As I said before, at very small margins, you can definitely do things like that. The positive effect there is likely to come from the erosion of wages without the need for firing the employees and from other sticky pricing problems.
Bobbyp is making arguments that go well beyond that. See for example: “In the private sector any financial asset is offset by somebody else’s liability. This is elementary bookkeeing 101. The private sector cannot create a NET INCREASE in private assets. Any increase in assets is inevitably offset by an increased liability somewhere else.
The government can inject NET assets into the system. It f%$^#cking creates them from NOTHING.”
[note the transposition from financial assets to normal assets in the bolded section. And if he is speaking merely of PURE financial assets the whole thing doesn’t make sense, so either he can’t be saying that, or doesn’t understand what he is saying.]
OR “1. A monopoly issuer of fiat currency that freely floats in international markets is NOT FINANCIALLY CONSTRAINED.
2. The constraints are POLITICAL (splitting up the pie).”
Here he confuses financially constrained with materially constrained. Printing more money doesn’t create more non-financial assets.
“Specious financial claims are asserted (“public debt will be an unbearable burden on future generations” is a common one)in order to advance the political agenda that favors the wealthy (that damned pie), i.e. balanced budgets, less spending, lower taxes (for the wealthy), voodoo economics developed drunkenly in a cocktail lounge scribbled on a napkin.”
Here he fails to realize that “unbearable” doesn’t have to mean default. It could also mean an enormous decrease in the purchasing power of dollars vis-a-vis goods.
“Look at an extreme example: Everybody wakes up one morning and decides they are too deeply in debt. They increase their desire to save money. Sound familiar? The government prints a whole bunch of money. Will each dollar be worth “less” when they are hidden under mattresses or stashed away in savings accounts?”
Here the answer is obviously “yes” unless we expect them to NEVER spend their dollars.
“”Furthermore you have to actively cut government spending during the good times specifically so that can increase it during bad times.”
Unambiguously false. Under our current fiat monetary system the government does not have to do any such thing. It is financially unconstrained.”
Here again he is confusing the markers with the things you spend the markers on.
And so on.
Financial assets are important only in the sense that you can exchange them for goods and services. Waving one’s hands about financial assets without worrying about the goods and services they buy and the relationship between the financial asset and the ‘real’ asset is craziness. Talking about national income accounting without dealing with the effect that printing more money has on the money’s ability to be exchanged for goods and services is crazy. And the really crazy part is that it is the exact kind of crazy that let people think that housing prices and financial instruments regarding them could go up indefinitely without hitting any real world constraint about how their prices were related to other goods and services.
Sebastian: If you just double the amount of financial assets through fiat … You haven’t created more real assets.
“Double” is silly. Doubling would be enormously disruptive for all sorts of reasons and would certainly not just double the prices of everything.
I don’t want to put words in anyone’s mouth, but I think this comes down to a basic faith in equilibrium at all levels versus a belief that things can be seriously far from equilibrium for a long time and not return to a sensible equilibrium rapidly or indeed ever.
So the idea is that printing $1,000,000 and spending it has a knock-on effect throughout the economy, raising prices in such a way that everything costs, say, GDP/1,000,000th more than it used to. And that has an intuitive appeal. But what is missing from this description is the mechanism by which such price increases occur.
If the economy is in equilibrium and every transaction is described by textbook-perfect supply/demand curves then sure, walking out and buying another $1,000,000 worth of stuff will raise prices for everyone else buying the same stuff as you. And when the economy is at full employment and capacity utilization is high that’s not a bad approximation. That’s what taxes are for, to prevent government spending from causing inflation by decreasing private spending.
But there are times when those things aren’t true. Prices and wages are sticky, as the economists like to say; they don’t adapt rapidly to changes in the price level and especially do not adjust downwards rapidly. You can’t easily introduce widespread pay cuts. And it’s not just that, but capacity can exist and be completely slack; people can be unemployed, factories can be shuttered, service businesses can be unable to find enough work to keep their employees busy.
In those cases, printing money and spending it may not cause any change in the price level. The government isn’t crowding out a private employer when it employs someone who is unemployed right now, and it’s not driving up prices when it buys output from a factory that is idle, and it’s not outbidding other clients when it employs service businesses that are slack. There is no immediate feedback to price levels. There may never be any feedback to price levels because the increased economic activity that is stimulated accounts for the money that is added.
bobbyp might be making a more expansive case than that, he has to speak for himself. I don’t underestimate the potential for damage from a loss of confidence in the dollar, but I also don’t think it’s an imminent danger. The US still has no competitor in the scale and strength of its economy, and dollars remain useful for buying oil, guns, food, US corporations, and US real estate, none of which are going out of fashion anytime soon.
“Under conditions of slack demand and underutilized resources, yes, you do. The spending substitutes government demand for real goods and services where private demand has fallen off.”
Sure. But your argument has been that you can get away with it across the entire business cycle, NOT just in a deep recession.
Which is why you argued with me on the expansion side where I suggest that you have to take drastic-to-us seeming cuts in government spending leading to large scale government debt retirement.
Jacob “But there are times when those things aren’t true. Prices and wages are sticky, as the economists like to say; they don’t adapt rapidly to changes in the price level and especially do not adjust downwards rapidly. You can’t easily introduce widespread pay cuts.”
Sigh. I’m well aware of that. If you look back in the thread *I’m* the one who introduces wage stickiness and the advantage of even small scale inflation.
But he is making an argument MUCH more expansive than that.
Seb,
The relationship between financial assets and real assets is one issue.
The distribution of real assets among the population is a different issue.
What I see bobbyp arguing is that government creation of financial assets can affect the distribution of real assets, e.g. between rich and poor, labor and capital, young and old, etc.
What I see you arguing is the same thing. Except you don’t like it.
–TP
Sure, just about anything can affect the distribution of real assets. Creation of financial assets isn’t a particularly great or direct way of doing so.
“But your argument has been that you can get away with it across the entire business cycle”
That has not been my argument at all. When the economy picks up tax receipts go up (cp) and the government’s spending position tends toward balance/surplus. This happens automatically.
What does NOT happen automatically is cutting spending during a recession. Yet that is exactly what deficit hawks are demanding right now. The European variety is especially delusional in this regard.
MMT would argue that when we are at full employment and things get overheated due to too much money out there, we could cut spending or raise taxes.
However, you seem to argue that these ideas are “crazy” because they are ‘nominal’ ‘hypertechnical’ and ‘not real’ yet you go on to argue that these ‘nominal’ instruments would have some horrible ‘effect’ that is somehow ‘real’.
Take one simple example: You argue that the ‘real’ value of dollars would be ‘less’ if we printed up a bunch of them, but people, for whatever reason, stuffed them in their mattresses. How would you know? Nobody is spending them. That is the point.
Therefore your reply to that example is simply inchoherent.
I know you know that, sorry, I was just trying to lay out the whole argument for why increased spending can be non-inflationary there.
I don’t quite understand the idea either that across the business cycle the government is not revenue-constrained, except in the trivial sense that they own the printing presses. I understand that in theory they can produce more money without taxing, but do not believe that the results would be benign if that was done to excess, but then that’s true of a lot of things. I don’t think that running persistent deficits of moderate size even during an expansion is actually harmful.
I also think a somewhat larger public sector would help stabilize the US economy, in particular I think that an increased federal share of spending would be stabilizing because state-level spending is so pro-cyclical, tending to crash and make things worse during a recession, whereas federal spending can be more balanced across the cycle and therefore moderate it.
The US has such a large share of GDP going to consumption that there is a lot of scope for switching from spending on private goods to public without impinging on personal liberty too much (and in fact given levels of inequality and especially unequal access to opportunity, there is a lot of potential for increasing real liberty through public spending that enhances access to opportunity). I don’t suggest this should be imposed by a dictator after a revolution of the proletariat, I suggest this should be the policy of the democratically-elected US government based on enlightened self-interest.
“”Furthermore you have to actively cut government spending during the good times specifically so that can increase it during bad times.”
I disagree with this because you clearly imply that the government has to “save” during “good times” in order to save for/have the financial resources needed in bad times.
Save what? Are you saying that the government should print up a bunch of money and keep it in a vault somewhere so that it can be spent during “bad times”?
Do you realize how silly that sounds? And you call my fuzzy half informed ideas “crazy”?
“I disagree with this because you clearly imply that the government has to “save” during “good times” in order to save for/have the financial resources needed in bad times.”
Yes. The printing press isn’t a financial perpetual motion machine. Ask Germany or Zimbabwe.
“Save what? Are you saying that the government should print up a bunch of money and keep it in a vault somewhere so that it can be spent during “bad times”?”
No. That is the kind of mistake made by your analysis, not by mine. Printing lots of money and putting it in a vault is NOT saving. It is devaluing. Devaluing is NOT saving.
It has to pay off debt so that it maintains the ability to usefully allow fiscal policy to change things during a recession.
“When the economy picks up tax receipts go up (cp) and the government’s spending position tends toward balance/surplus. This happens automatically.”
Or it tends to increase government spending to unsustainable levels. See for example California or New York. And before you point out that US states can’t print money (though California actually did with IOUs) you should realize that ‘unsustainable’ is not the same as “doesn’t have the printed money to ‘pay’ for”.
Sebastian,
Example of Germany. Yes, this is the usual example trotted out by naysayers. Let’s look at the record. A country loses a war and is subjected to harsh reparations. The reparations have to be paid back in gold. A foreign power occupies your industrial heartland devastating your ability to produce exports (there’s that real stuff again!) to sell abroad to get the gold to pay back the victors.
Now you could claim this is exactly the same situation we are in now, but then I would tend not to agree.
Printing money and putting it in a vault for future use is not saving. Well, I agree (see, it’s possible!). It’s also unecessary. But let’s look at it this way. The government’s ability to print money is not constrained-it can ‘print’ unlimited amounts of the stuff. One could reasonably surmise that this ability alone “devalues” the currency, but it doesn’t. Similarly, having a bunch of actual printed currency notes drying in a vault will not do it either. After all, the vault and its contents are not in any way necessary.
“It has to pay off debt so that it maintains the ability to usefully allow fiscal policy to change things during a recession.”
No. It does not. Spending is not constrained by the amount of debt out there. If the national debt was a gazillion dollars, the governmnent as the monopoly issuer of currency still has the ability to purchase whatever the economy can produce (not more). You deny this?
“Or it tends to increase government spending to unsustainable levels. See for example California or New York.”
Incorrect. I’m not sure what “it” is…prosperity? That tends to raise spending to unsustainable levels? You’re not serious.
California and New York are not sovereign issuers of their own currency (and please, do not bring up the example of Arnie’s chits–that’s not even comparable). Apples and oranges, sir.
Btw, is there a reason why only the conservatives seem to be be arguing with bobbyp?
It’s hard to follow the back and forth, and I think it is a bit excited. I weighed in earlier cause I’d prefer some calm discussion rather than people doing reductio ad absurdum with the gold standard. Plus the World Cup times are killing me.
Liberal Japonicus,
Well it could be that those liberals know bobbyp is a hard case, somewhat loony, and a bit off center, having insanely defended Bill Ayers when Hilzoy joined the pack to cast him into the nether world….
It does strike me that Seb and I are talking past each other, but really, is that unusual?
As a neophyte to MMT, I may get a bit confuse, excited, and go overboard. But I will note this, when introduced to most people (well, actually nearly everybody), they have the same reaction as Seb-amazed incredulity, and a tendency to dismiss it out of hand as “crazy”.
As for the World Cup times…sorry, I am of no use to you in that regard (I’m assuming you insist on watching it live). Since all my teams have been eliminated, just like my March Madness brackets, my incentive to keep up has evaporated.
Maybe I should crank up the printing press and lavish myself with some yummy “hyper-technicalities” to get out of the doldrums.
Time to close up shop on this one.
and best regards to you,
bobbyp
no worries, we all get wrapped up sometimes and you clearly have a passion over this.
And the question of what things are worth, well, I took a job where I didn’t have to try and figure out how much I could charge people for what I do, I prefer to just work and get paid and not worry too much. Why an ounce of gold, or a mint condition comic book or an hour of work can be worth X sometimes and Y other times but can never be Z is perpetually perplexing and so confusing that it is nice to hear how other people think about these things.
“Spending is not constrained by the amount of debt out there. If the national debt was a gazillion dollars, the governmnent as the monopoly issuer of currency still has the ability to purchase whatever the economy can produce (not more). You deny this?”
Yes.
Bobbyp is of course absolutely right about everything he says, and everyone should become a reader of billyblog and a member of the modern monetary army. There really is a known and proven way to full employment, maximal resource utilization and prosperity without inflation.
It might be hard to perfectly steer an economy when everything is going right, keeping between the lines. But when it isn’t, like now, with deflation and depression, driving off a cliff on the side of the road, it is VERY, VERY EASY – hog wild fiscal stimulation, or driving away from the cliff! Watch what will happen to Europe – a guaranteed Great Depression caused by their insane let’s drive straight off the cliff / we don’t believe in arithmetic / austerity programs.
A couple of rhetorical points: Sure printing money, big deficit spending, etc can be price-inflationary, but not in a depression, never, unless the gummint goes completely insane and hands out million dollar bills to everyone. Create just enough money to cure the giant unemployment problem, NOW! It is a “fallacy of composition” to equate the two things, to use one of Prof Billy Mitchell’s favorite phrases. MMT / Federal Job Guarantee would lower inflation – it’s an automatic stabilizer. Read Randy Wray’s Understanding Modern Money.
People should realize that government deficits = non-government surplus are the norm, a GOOD THING, while government surplus = non-government deficit are generally a BAD THING. When is a surplus, the gummint taking money out of the economy good? Well, when there is a giant die-off like the Black Plague, when all the factories are destroyed by bombs, when there is too much money chasing too few goods. And then the real problem isn’t really financial, but the fact of the die-off, etc. Or more usually and less seriously, when there is full employment and serious inflation – which the USA and other developed economies haven’t seen for many years. The virtue of MMT / Chartalism / Post Keynesianism / stock flow consistent macroeconomics is that by analysing the nitty-gritty of what happens in the financial world inarguably better than any competitor, it distinguishes between that and keeps its eye much better on what is happening in the real world of real goods and services than neoclassical / neoliberal pseudomathematical pseudoscience.
bobbyp wrote:
The Congressional Democrats worked hand in hand with the Reagan administration to craft the ‘reform’ of 1983 which essentially doubled the FICA paycheck with-holding with the implicit promise that future benefit costs would be pre-funded. This was quite a financial hit that for some reason goes unremarked by those who make facile remarks about those oh-so-selfish boomers. Was this not the very essence of Protestant rectitude?
That’d be all hunky-dory if it were more than a fifth of it were true. Yes, Reagan and the Congress did raise FICA taxes. But, there was no such promise, and of course later benefit raises HAVEN’T been paid for, longterm. The raise in FICA only was meant to last fifty years from its passage, not forever.
The fifty-year SSN projection was already based on moderate economic growth. Of course, the medical benefit real rises have been decidedly off early projections, running at 25%ish a year, 8x our economic growth rate, so, of course, Bush decided to add a hardly-paid-for and unnecessarily expensive drug benefit.
Isn’t it entirely unsurprising that inflation is happening in service industries due to Baumol’s cost disease?
To me, “known and proven” means that it’s been done before, under various conditions, with reasonably predictable outcomes. So, some examples are probably in order.
My perpetual-motion remarks weren’t intended to refer to fiat currency, so much as what Sebastian has already pointed out: that when you just put more money into the economy, that money is now worth less.
This could all be just my inadequate understanding of economics at work, here, but the net purchasing power of a dollar can only stay constant (with rising number of dollars in circulation) if people’s willingness to part with them for a given set of goods & services remains constant.
I believe Spain mined so much silver in the New World that the price of silver began to drop, and that devalued their reals. I suspect there is some kind of analogue for fiat currency, although it should be painfully clear by now that I am not an economist.
It shouldn’t matter if you don’t do something so drastic as double the amount of dollars in the economy; I’d guess (as would Sebastian, I suspect) that if you increased the number of dollars by 1%, prices would inflate by 1%, for a net advantage of zero.
It’d be interesting to know whether or not this is true, and why.
Bobbyp is of course absolutely right about everything he says, and everyone should become a reader of billyblog and a member of the modern monetary army. There really is a known and proven way to full employment, maximal resource utilization and prosperity without inflation.
I’m going to try to say this as matter-of-factly as possible, because my intent is not to insult.
I find MMT to be very interesting and illuminating as what is for me a new concept. But this sort of presentation is off-putting. In fact, when I began reading this comment, I thought it was meant as sarcasm. When I realized it wasn’t, it became, for me, a cultish-sounding statement of true-believerism (if I can make up my own words).
I would very much like other commenters here whose opinions I respect to read up on MMT at billy blog or elsewhere, if they haven’t already, because I think it’s worth consideration, and I’d like to know their thoughts on the subject. I don’t think they’ll be as likely to do that if the people urging them to do so come off as sounding a bit nutty and over the top in their fervor and certainty of their beliefs, like people trying to drag strangers into a tent revival for immediate salvation.
Slart:
“that when you just put more money into the economy, that money is worth less.”
Economics makes my head hurt, too. Accounting breaks my heart.
But I wonder if this oft-repeated statement is always true. If a huge liquidity hole is blown in the economy — plunging stock prices, disappearing equity (which was used as liquidity, unfortunately) in primary residences and other real estate, a good 16.6% (including those who dropped of the employment seeking map) of Americans out of the workforce, surely money in its various forms has disappeared in a huge way.
And what money is left stops moving — its velocity slows.
So the government prints money, along with other measures, to restore liquidity and stimulate velocity. Some of that money is spent on keeping body and soul together for the 16.6%
Corporate America is currently swimming in cash, some of it provided by TARP. If they disapprove of the U.S. Government’s socialist (fine, call ME that, but save on the Stalinist and Nazi crap* or I’ll act like them and knock you down) measures, then do something with that cash besides keeping it in the effing bank.
Buying back stock does not employ people.
Employed people buy products.
If corporate and small-business America won’t employ them, then the government should in its various ways.
*I speak here of Thomas Sowell, the renowned a*shole (apparently achieved through the special affirmative action program our Nation’s a#sholes run), who in Investors Business Daily (where as*hattery stays above its 200-day moving average perpetually) equated the BP escrow fund with Third Reich policies, and what’s his face Goldberg who believes public infrastructure projects lead right to the ovens at Auschwitz (and he seems to like a new bridge in Dubuque even LESS than he liked Auschwitz).
I’d guess (as would Sebastian, I suspect) that if you increased the number of dollars by 1%, prices would inflate by 1%, for a net advantage of zero.
It’d be interesting to know whether or not this is true, and why.
Sebastian can speak for himself but judging by his remarks about sticky prices I think you are misreading him. Anyway there’s a wealth of empirical evidence that money is not entirely neutral. An increase in the money supply typically leads to some combination of an increase in real output and an increase in prices, not inflation alone.
A list of explanations for this reads like a history of macroeconomics. Workers and employers are subject to “money illusion” (Irving Fisher); that is to say, they don’t immediately notice that the rewards they are chasing are purely nominal. Workers are involuntarily unemployed (Keynes) – they would buy more goods if only they had jobs and firms would employ more workers if only they could sell more output. That vicious circle, a.k.a. as a deficiency of effective demand, can be broken by putting more money into circulation.
There are many variations on these themes. If you’re really interested, Krugman’s The Return of Depression Economics is a very good introduction to the topic.
So the government prints money, along with other measures, to restore liquidity and stimulate velocity. Some of that money is spent on keeping body and soul together for the 16.6%
That gets at what I think the discussion of the “printing money” comes down to. It’s not just a question of whether or not there will be inflation. It’s a question of how much inflation, if any, and whether or not that inflation represents a problem worse than the ones we have without that money being “printed.” And the answer to that question depends on the real-world circumstances at the moment, not simply a dogmatic fear of “printing money.”
Under some circumstances, “printing” a given number of dollars will lead to more inflation than it will under others, and the problems to be addressed by doing so may be greater under some circumstances than others.
So the question is, how does all of that work in the US in 2010? My inclination today is not to believe that it will work the way, say, Alan Greenspan says it will, so I’m looking elsewhere.
I’ve been reading his blog, and I can’t prove it, but I think there are some serious flaws. His basic insight is that under certain circumstances government debt responds much like private savings in that it can be used to purchase things in a crisis.
That much is true.
But he gets a lot of things out of hedges. “Once we understand the accounting relationships it is easy to reject the argument that budget surpluses represents “public saving”, which can be used to fund future public expenditure. Public surpluses do not create a cache of money that can be spent later. National governments spend by crediting a reserve account in the banking system. The credits do not “come from anywhere”, as, for example, gold coins would have had to come from somewhere. It is accounted for but that is a different issue. Likewise, payments to government reduce reserve balances. Those payments do not “go anywhere” but are merely accounted for.
There is an elaborate institutional structure in place to obsfucate the true nature of these transactions. But in an accounting sense, when there is a budget surplus, then base money and/or private wealth is destroyed. The opposite is the case for budget deficits.”
This is all true, but not nearly as helpful as people think because yes, governments can pay off their debt in an accounting sense merely by printing money. Which is the point he makes again and again and again and again.
Unfortunately, the accounting sense isn’t all that matters. As he says in the comments to the post: “There is no financial problem for the US government in any of that. It is a real resource availability problem which becomes a political problem.”
So we go through all the accounting identity thing and get back to that?
What did we gain? We started at that, or at least I did.
Essentially his work seems to be premised on: “assume that the government can pay back its debts purely by printing money AND THAT PEOPLE WILL ACCEPT THAT WITHOUT DEVALUING THE MONEY RELATIONSHIP TO REAL GOODS”.
Everything he writes follows logically from that premise, but the premise looks wrong. I may be simplifying incorrectly, but I did try to analyze it fairly. So he is correct that government debt IS savings so long as printing money doesn’t deform the economy at all.
Seb,
This is from a comment I made after reading a bit at billy blog for the first time two days ago:
My thinking thus far is that I’m not fully understanding what his actual point is or that there is some fatal flaw in what he’s saying.
Heh.
Nice discussion we’ve got going here. I’m glad we had it while Keynianism was still alive.
Too bad Germany and 42 traitorus, anti-American subhumans in the U.S. Senate decided to kill it.
Warning to the 42: Next time you are in the majority, you had better reduce every single tax in this country to zero, at all levels of government. I’m not interested in paying one cent in taxes to Republican and Blue Dog gummints, at any level.
Taxes are theft? Then the first cent of tax is just as much theft as the highest marginal one cent of tax.
You arm me and then steal from me.
In most civilized countries, that doesn’t work very well.
Economics at this kind of abstract level goes over my head. If it isn’t pretty concrete, I don’t really get it.
Things I note at a concrete level include:
I’ve been paying extra into SS since 1983, basically my entire adult working life, specifically to fund the expected extra cost of the boomers retiring. If the response at this point is going to be “sorry, we pissed that away, you’re SOL” I can assure you that to the degree that I can make it happen, somebody somewhere is going to pay.
Talking about SS becoming “bankrupt” is noise. What’s going to break the bank are the health related entitlements. In comparison, and in fact in comparison to most government programs, SS is pretty well funded and run.
A lot of the reason that household buying power hasn’t gone completely in the dumper over the last 35 years is that most households now have more than one person working, and quite often each working person working more than one job.
A lot of the folks who want to pull the plug on SS want to do so not because it’s financially shaky, but because they just don’t like it. Some folks just hate the idea of the government taking their money and giving it to somebody else, period, regardless of whether that’s a good idea or not in the bigger picture.
IMVHO, the financial discussion is interesting, but it’s usually just a stalking horse for the philosophical issue. Folks who object to SS on principle rarely like to advance that argument because SS is actually a pretty well run program and most folks like it. So, we get the bankruptcy boogeyman.
As far as borrowing goes, individuals, businesses of all sizes, and pretty much any other organization that requires money to operate borrows money and carries some level of operating debt all the time. The current debt to GDP ratio is historically high, and that’s worrisome, but IMO it seems like the larger concern should be getting the private economy healthy. If the private economy is not happening, discussions of whether the government should be running a debt or not are kind of academic. And not for nothing, but Congress is specifically empowered to borrow money on the full faith and credit of the US in Article I section 8.
Last but not least, this discussion prompts me to ask if anyone’s heard from bedtimeforbonzo recently?
Seb,
My hat goes off to you for actually going to Billy Blog and reading Mitchell’s stuff. Kudu’s to you.
Now to really up your game: Try “Who Is IOZ?”
I bet Thullen drives his Fiat over there once and a while.
Thanks.
Last but not least, this discussion prompts me to ask if anyone’s heard from bedtimeforbonzo recently?
Sadly, no. I figured at some point he and I would have hit a Phillies game together.
This particular discussion had me thinking of ThatLeftTurninAlbuquerque, who I’m sure would have had some interesting input. Mikkel, too, if you remember him. They always rocked the econ stuff.
“Folks who object to SS on principle rarely like to advance that argument because SS is actually a pretty well run program and most folks like it.”
Pretty well run, aside from the whole “pissed that away” part.
There’s something fishy here…hmmmm?
MMT “assumes…..THAT PEOPLE WILL ACCEPT THAT (the government can pay back its debts purely by printing money) WITHOUT DEVALUING THE MONEY RELATIONSHIP TO REAL GOODS”.
Well let’s see…. (1.) Government spends dollars and credits your account; (2.) government creates the dollars with the click of a mouse; (3.) government collects taxes in dollars and debits your account with the click of a mouse.
All of this done without so much as one mention of gold or other immutable standards. And how do you save mouse clicks?
Now if only I knew what a “money relationship” was. Then I wouldn’t feel so devalued.
Seb quotes (and highlights) the statement that
and then says:
So we go through all the accounting identity thing and get back to that?
What did we gain? We started at that, or at least I did.
If I put two and two together correctly, Seb is pointing out that the “accounting identity” is much ado about nothing because what matters is “real resource availability”.
I agree that “real resources” are what matters. But I’d like to know Seb’s definition of “resources” in this context. Like Russell, I understand definitions much more easily when illustrated by examples. So I want Seb to tell me:
Is the idle time of 10 million unemployed people an example of a “resource”?
Surely, it’s something that can be tapped, like an oil deposit. OTOH if it’s going untapped by the free market, maybe it’s not a “real” resource. On the third hand, maybe the idle time of 20 million workers is twice as big a “resource”.
I ask this because, pending clarification, “resource” seems just as loosey-goosey a concept to me as “net financial assets of the private sector”.
–TP
In the context of the “accounting identity” real resources are the things that you buy with the money. Goods, services, land, etc. Adding zeros doesn’t hurt the accounting identity, but it generally doesn’t help you with the actual resources either.
The Keynesian concept is that in a recession government deficits can be used to help restart the economy. (The theory being that a recession happens when investors become overly cautious and/or when sectoral shifts are happening). These deficits can help ease the pain of job shifting and can start projects up that will let investors get back into investing.
The Keynesian idea is that during non-recessions, governments should pay down the debt so that they have the ability to act with massive force during a recession. MMT followers don’t think that is necessary because they think you can always just add zeros to the government bank account.
“The Keynesian idea is that during non-recessions, governments should pay down the debt so that they have the ability to act with massive force during a recession. MMT followers don’t think that is necessary because they think you can always just add zeros to the government bank account.”
Making the real question, (One of them, anyway.) whether moving from running large deficits to larger deficits really has the same stimulative effect that moving from surplus to deficit has. Or whether the stimulative effect saturates out at some point.
Current models assume the effect is linear at all levels of deficit spending. But very few phenomenon actually act like that. A cup of coffee wakes you up. Your tenth cup just makes you piss.
Yes, that’s the assumption current macroeconomic models make. But almost all professionals in macroeconomics are employed by the government, either directly, or not very indirectly. And their employers, politicians, want an excuse to deficit spend without limit.
Would you trust theories about the effects of alcohol that was paid for by alcoholics who didn’t want to sober up?
Pretty well run, aside from the whole “pissed that away” part.
I’m not sure you can lay that at the feet of the SS administration.
The economic theory stuff is interesting, but I would like a straight up debate on whether the feds are going to be in the business of addressing social problems, or not.
If they are, then they are, and we make it work. If they’re not, they’re not.
Social Security is not where the scary numbers are. The scary numbers are health care costs, and in the long term robustness of the US economy as a whole.
MMT followers don’t think that is necessary because they think you can always just add zeros to the government bank account.
From what I’ve read, this is a gross overstatement and oversimplification of what MMT allows for, particularly because of the use of “always just.” It depends on the economic conditions, and what they seem to argue against is government austerity during recessions with high unemployment for the purpose of deficit reduction. If you don’t want to issue more debt, don’t. Just “print the money” and take the slack out of the economy. Then stop.
That’s not to say that my last comment isn’t a gross oversimplification, either. I just think it’s a more accurate one.
“It depends on the economic conditions, and what they seem to argue against is government austerity during recessions with high unemployment for the purpose of deficit reduction. If you don’t want to issue more debt, don’t. Just “print the money” and take the slack out of the economy. Then stop.”
That isn’t what I read says at all. Billy was specifically talking about paying pension benefits during an economic recovery and specifically denying the need to pay down debt during an economic recovery. So he is talking about doing it at times when there isn’t much slack in the economy. He claims that debt is automatically retired due to automatically increased revenue (taxes during the recovery) and automatically decreased welfare payments. This has been observably true approximately 3 years out of the last 60. So either he thinks we’ve been in recession for most of modern economic history, or something else is going on.
Seb, for this discussion to be productive, we’d probably have to present specific quotes and argue (or agree) on how to interpret them. I’m on the fence as to whether or not I care enough to do that, so I’ll leave it to you.
One thing I would point out is that you used the word “recovery.” I’m not sure I’d disagree that there is no need to pay down debt during the recovery, if the recovery is the period of transition between recession and expansion, where employment and production are still ramping up. So it depends on what you (or Bill) mean.
Ok. In response to Krugman’s article Now and Later
Krugman writes:
Billy’s response to THAT is:
It is pretty much his mantra. There is no financial problem because the government can always print money.
But if there IS a real resource limit, which of course there is, then he hasn’t added anything useful to the discussion because we already know that, and he is just adding a confusing and unhelpful mid-step by talking about a financial asset issue that doesn’t speak to the real problem.
Yes the government *from a purely financial point of view* could always print more money. And *from a purely financial view* there is no limit to that power.
But the accounting book financial view has to correspond to the real world goods and services view. Focusing laserlike on the financial bookkeeping point of view isn’t adding value to the discussion when it avoids talking about the actual interaction of goods and services. And Billy is incredibly careful not to talk about that very much. Which is silly because that is where nearly all the hard questions are.
“I’m not sure you can lay that at the feet of the SS administration.”
Of course you can’t; The SS administration was required by law to hand over any surplus to Congress to be pissed away. If they’d done anything else with it, they’d have gone to jail. Pissing away the money was the plan from the start, it was the whole point of raising SS taxes.
It is pretty much his mantra. There is no financial problem because the government can always print money.
But, Seb, that’s the oversimplification. It’s not that the government can always print money. It’s that the government can spend in such a way that unused resources can be used and that needed resources can go where they need to go such that the long-term budget problems, that are projected based on that not happening, become irrelevant. I can’t say for sure that he’s right about that, but I’m pretty sure that that’s what he’s saying.
Here are some comments to support that.
From Bill:
“Further, it makes no sense to even focus on the public debt to GDP ratio. What exactly does it tell us? Answer: Not much. It is the history of the public deficits scaled by the size of the economy. That is all it signals. The more complete understanding comes from analysing what was going on in the real economy to generate those deficits over time.
Were they the manifestation of a government intent on expanding its share in total production and squeezing private spending out as a political strategy?
Were they a sign that private spending was weak and the automatic stabilisers were operating to provide some support for aggregate demand?
Were they are sign of added discretionary fiscal support to failing private demand?
What was happening to employment growth and unemployment?
These are the questions that need to be focused on.”
“The maths might be right or wrong – given it is based on so many assumptions that are forecast out 30 odd years or more. None of this is exact. I am sure based on those assumptions the maths are “correct”.
But MMT would just consider it to be irrelevant and advise the US government to get as many people working again as soon as possible and start investing in R&D and public education through to higher education.”
“Poorly designed deficit spending which buffers economic rents and rewards waste is not an indictment of properly targetted deficit spending.”
“I would start by employing all workers who currently have zero bid in the private market. There in an infinity of productive outlets for the valuable but unused labour. They are no earning rents now by definition. The advantage of fiscal policy is that you can target it and also reduce spending elsewhere.”
From a commenter:
“MMT’s reasoning has to do with not responding to anything other than real constraints and visible inflation in the short and long run. It is assumed that future taxation potential can overcome, not only any future inflation threat, but any threat due to what may appear to be unsustainable deficit mathematics.”
And another:
“I think that Bill’s point is simpler and mathematical. The projections are made far into the future, and are based upon many hidden assumptions. That makes them worth little, if anything. Do you ever hear of error estimates with such projections? No, because that would reveal how absurd they are. As the computer scientists say, “Garbage In, Garbage Out.”
Near term projections how persistent high unemployment. One of the hidden assumptions of those projections is the lack of a Jobs Guarantee or other government hiring. That is probably an assumption of the other projections, as well. Bill’s suggestion that the U. S. gov’t “get as many people working again as soon as possible and start investing in R&D and public education through to higher education,” makes all such projections irrelevant.”
The current failure to pass the jobs bill demonstrates exactly what I have been complaining about. Opponents of the measure claim the added spending is “beyond our means”, is “unsustainable”, or will “burden future generations”. These are all political constraints masquerading as some kind of unassailable financial “law”. Those assertions are flatly untrue.
You may assert that putting the unemployed to work via government spending is socially and morally wrong. You may claim it sends ‘wrong signals’. You may claim our resources are better directed elsewhere. That’s all fine and dandy, a good subject for more pointed discussions.
But you cannot claim some imagined financial constraint on the ability of the government to spend as an excuse to oppose the proposed spending when we have the disastrous labor market we have currently.
As far as “saving down” over the business cycle goes, I ask this: Where do the savings “go”? What is the debt constraint? Some claim it is some magic ratio of debt/GDP. Others just pick numbers out of there you know what.
After WWII we did not “pay down” the huge debt. If point of fact, it has pretty much increased over the intervening decades (as he pointed out). In Seb’s economic world, this should have untethered the “money relation” that he is so afraid will suffer a terrible disconnect. It didn’t. We outgrew the debt.
Since the onset of the financial crisis, the fed has inflated its balance sheet by some two trillion dollars (i.e., buying t-bills). There is some tussle going on now in those august halls about whether or not we are on the verge of a “double dip” recession, and Bernake is thinking it may have to go to five trillion.
Discuss.
But the current failure to pass the jobs bill is foolish in the Keynesian analysis too. No magic required.
“In Seb’s economic world, this should have untethered the “money relation” that he is so afraid will suffer a terrible disconnect. It didn’t. We outgrew the debt.”
I think you’re forgetting about the stagflation years which are EXACTLY the problem I’m talking about.
Seb,
Your fears are utterly misplaced.
http://neweconomicperspectives.blogspot.com/2010/06/europes-fiscal-dystopia-new-austerity.html
Happy 4th
Thanks, bobbyp. Now I’m really depressed. Brett referenced Rush on another thread. I’m thinking of Pink Floyd – specifically Animals.
The pigs (in this case, the FIRE sector) are convincing the dogs (politicians, and upper middle-class voters who think they’ve gotten theirs – little do they know) to do their (the pigs’) bidding in keeping the sheep (pretty much everyone else, who will lose their jobs and meager pension and health-care entitlements) in line. The album ends in a bloody mess when the sheep finally rise up.
We’ll all be tea partiers soon, of one sort or another. I’m going to have to re-watch Road Warrior to mentally prepare (since I rely on popular culture to understand the world).
I’m not at all sure how the link you provide is supposed to be a response to me. It doesn’t seem to speak much to stagflation nor the wisdom of printing money to pay pensions. Printing money to pay pension obligations has been tried, and it has been VERY ugly for the economies that try it.
Seb: “But the accounting book financial view has to correspond to the real world goods and services view”
So why don’t the deficit hawks ever frame the discussion in terms of the ability of the economy to produce real goods and services? Instead they bring up utterly false accounting arguments….as I have repeated endlessly, in order to justify an economic output and distribution paradigm that, quelle surprise (sic), exactly matches their politics.
Who should get what and why. That is the question, not some mysterious debt/GNP ratio that you have never even tried to trot out, or a theory to explain and/or predict what that limit is.
And speaking of repeated requests, you have never explained the Japanese experience.
You would not make a very good DJ.
hairshirthedonist,
I’d watch Mad Max as well, but I’d just yell at the screen repeatedly, “Are you a jieu?”, are you a joo?, are you a jeee-ou?”, and then I’d get blind drunk and pass out.
So I’ll take a pass.
Enjoy the 4th anyway. What the heck.
“So why don’t the deficit hawks ever frame the discussion in terms of the ability of the economy to produce real goods and services?”
They do. They call it money, and talk about spending, saving, and earning it.
“Instead they bring up utterly false accounting arguments….as I have repeated endlessly, in order to justify an economic output and distribution paradigm that, quelle surprise (sic), exactly matches their politics.”
No. They bring up normal everyday debt discussions about how much debt is wise to incur. You’re the one arguing that printing money is no problem.
“And speaking of repeated requests, you have never explained the Japanese experience.”
Which experience? It is difficult for me to explain things when you barely allude to them and leave us all wondering how they fit into your discussion.
They do. They call it money, and talk about spending, saving, and earning it.
Seb, money is “a financial asset” and I think you’re just “adding a confusing and unhelpful mid-step by talking about a financial asset issue” here.
Seriously, Seb, you can’t get away with writing this paragraph,
and then responding to bobbyp as you just did. “Real goods and services” is what the unemployed 10% of the workforce could be creating, if not for the absurd conceit that the government would run out of money by putting them to work.
Incidentally, when the DJIA goes up by 800 points (which it has been known to do in a day), the “financial wealth of the private sector” goes up by a trillion dollars or so — without any immediate increase in the real goods and services available to the nation. Why is it so great when The Market creates a trillion dollars out of thin air, but so horrible when the guvmint does it?
–TP
Why is it so great when The Market creates a trillion dollars out of thin air, but so horrible when the guvmint does it?
I asked this same question of Brett back on the first page and got no answer whatsoever.
So why don’t the deficit hawks ever frame the discussion in terms of the ability of the economy to produce real goods and services?
Incidentally, when the DJIA goes up by 800 points (which it has been known to do in a day), the “financial wealth of the private sector” goes up by a trillion dollars or so
Asked and answered.
The market hadn’t created a trillion dollars out of thin air. It would have if people had cashed out of their stocks and realized that gain, but that did not happen, and would not have happened had it had been tried.
Stock valuation != cash-in-hand.
Yeah, I know: for every transaction, there must be a seller.
More coffee is needed, clearly.
I guess I’d say, just prior to More Coffee, that long-term wealth “generated” by market swings, if unsustainable, results in a bubble.
Do we want to generate a public-sector bubble on purpose?
I’m wondering how good a question that’s going to look like, to me, after the caffeine infusion.
If there’s anything I can’t stand, it’s an unemployed person standing in front of me at the grocery buying a six-pack of Colt-45, a package of pork chops (thick-cut mind you), and some of that deluxe Sara Lee cheesecake with their gal-darned food stamps……
…… while they track their high-frequency trading account at Goldman Sachs and shout “Sell, Yves, for Godssake sell!” into their I-phone to their broker in Switzerland.
The Dagny Taggert in me wants to take time out from humping the Chrysler Building and do the fascist two-step on their hobo foreheads with my stiletto heels.
The market hadn’t created a trillion dollars out of thin air.
Wait, what? Surely, somebody, someplace was claiming that value on a balance sheet. And aren’t those values counted as part of the M2 measure of the money supply?
(Sorry for calling you “Shirley.”)
“Do we want to generate a public sector bubble on purpose?”
Nah, I don’t think anyone wants to do that, but when you have multiple private sector bubbles deflating all around you, the public sector needs to emit some oxygen into the atmosphere to dilute the helium escaping from the private sector.
It doesn’t matter anyway … as Krugman points out, we are in a deflationary Depression now thanks to the G-20 and the assorted Andrew Mellons among us, including the “conservatives” in the U.S. Senate whose hatred of the black man in the White House is so great that they have taken the hapless unemployed hostage.
Just to be redundant in following John Thullen’s comment with this one, I’ll say that it’s getting tiresome hearing about MMT advocating, without qualification, the expansion of the money supply. It’s stated over and over and over again that there are conditions under which this can be done without significant risk of problematic inflation. It’s not that you can always print more money.
I also think saying that MMT doesn’t consider real resources and real world effects of fiscal and monetary policies is entirely backwards. I don’t know what people are reading if they say that. What focus there is on pure accounting is in response to the excessive focus on the same by mainstream economists. The whole point of MMT is to focus on real resources being used properly and putting unused resources to work to increase real value for the people most in need of it, rather than worrying about unsubstantiated, theoretical accounting rules at the expense of that very focus.
You can disagree with MMT, but you need to know what it’s saying first.
“….out of thin air.”
This seeming miasma does have real effects. The ‘wealth’ created by the real estate bubble had real effects, and it does not take everybody ‘realizing’ their gains by selling their houses, or taking out 2nd mortgages to do so.
Please Google “wealth effect”. It is not a new term in economics.
Seb: Japan has a public debt to GNP ratio of 170%. They have engaged in huge deficit spending for years. Their interest rates are extremely low. Their currency is sound. Your take would imply massive inflation.
Where is the inflation? Where is the financial collapse?
It’s not there.
One edit: What seemingly excessive focus there is on pure accounting is in response to the excessive focus on the same by mainstream economists.
It would have if people had cashed out of their stocks and realized that gain
How about if one party sold the promise to pay another party funds sufficient to make the other party whole if they lost money on an investment? Regardless of whether (oops!) the first party was capable of doing so?
You can call it sleight or hand, or say that it’s not a real gain, and I’d agree with both statements, but somebody cashed those bonus checks.
Just to kick what may be a dead horse, I want to offer the following and, in my opinion, key quote from billy blog:
So the purpose of State Money is to facilitate the movement of real goods and services from the non-government (largely private) sector to the government (public) domain. Government achieves this transfer by first levying a tax, which creates a notional demand for its currency of issue. To obtain funds needed to pay taxes and net save, non-government agents offer real goods and services for sale in exchange for the needed units of the currency. This includes, of-course, the offer of labour by the unemployed. The obvious conclusion is that unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save.
This analysis also sets the limits on government spending. It is clear that government spending has to be sufficient to allow taxes to be paid. In addition, net government spending is required to meet the private desire to save (accumulate net financial assets). From the previous paragraph it is also clear that if the Government doesn’t spend enough to cover taxes and the non-government sector’s desire to save the manifestation of this deficiency will be unemployment. Keynesians have used the term demand-deficient unemployment. In our conception, the basis of this deficiency is at all times inadequate net government spending, given the private spending (saving) decisions in force at any particular time.
For a time, what may appear to be inadequate levels of net government spending can continue without rising unemployment. In these situations, as is evidenced in countries like the US and Australia over the last several years, GDP growth can be driven by an expansion in private debt. The problem with this strategy is that when the debt service levels reach some threshold percentage of income, the private sector will “run out of borrowing capacity” as incomes limit debt service. This tends to restructure their balance sheets to make them less precarious and as a consequence the aggregate demand from debt expansion slows and the economy falters. In this case, any fiscal drag (inadequate levels of net spending) begins to manifest as unemployment.
The point is that for a given tax structure, if people want to work but do not want to continue consuming (and going further into debt) at the previous rate, then the Government can increase spending and purchase goods and services and full employment is maintained. The alternative is unemployment and a recessed economy. It is difficult to imagine that an increasing deficit will be inflationary in a recessed economy because there are so many underutilised resources, both capital and labour.
“”Real goods and services” is what the unemployed 10% of the workforce could be creating, if not for the absurd conceit that the government would run out of money by putting them to work.”
Billy’s analysis is specifically NOT limited to 10% unemployment situations. He again and again suggests that it is a fabulous solution for budget shortfalls in economic expansions and he specifically suggests it as a solution to the government pension problems.
I am not, I repeat NOT, arguing against expansionary government spending NOW. I’m arguing against bobby and billy’s mode of financial analysis in the general case. The fact that it gets the right answer NOW, doesn’t mean it is a good way of analyzing budgets/deficits/government spending generally.
It isn’t. It doesn’t deal well with hyperinflation or even normal level stagflation. These aren’t marginal cases, these are cases that come up regularly.
You keep trying to restrict billy’s analysis to the severe unemployment case, but he doesn’t restrict himself to that at all.
“Seb: Japan has a public debt to GNP ratio of 170%. They have engaged in huge deficit spending for years. Their interest rates are extremely low. Their currency is sound. Your take would imply massive inflation.”
Thank you for finally getting to a specific case. I was wondering if you meant that, but hoped you didn’t because it means that you aren’t understanding your own theory very well. The reason there isn’t massive inflation is because the Japanese have an enormously high personal savings rate, *at interest rates which are effectively negative* (their interest has tended to be at 0% or negative real earnings). And of course if you have been paying attention recently, this is all on the verge of falling apart because the high age of the Japanese means that they have started to pull out these savings (though still maintained at a world record rate) and this is causing enormous squeezing pressure on the government’s ability to spend because they can’t do so without causing the savings to lose value.
Which is exactly what Keynes would predict.
“I’ll say that it’s getting tiresome hearing about MMT advocating, without qualification, the expansion of the money supply. It’s stated over and over and over again that there are conditions under which this can be done without significant risk of problematic inflation. It’s not that you can always print more money.”
I don’t know about MMT in general, but that isn’t what billy of billyblog which is the only place I’ve been asked to read up on it says unless you lean VERY heavily on *always*. He specifically advocates using the printing presses to pay money for government pensions throughout economic expansions. I’ve already quoted the section where he strongly disagrees with Krugman’s analysis (spend/print money in recession but THEN pay off deficit/debt during expansion). So he thinks you can do it throughout recessions AND expansions. There really isn’t much left.
If you have a better MMR source I’d be happy to read it. It isn’t well accepted by economists so I have trouble figuring out what you think counts as ‘real’ MMR. I thought billyblog counted.
What you quote at 12:57 leans too heavily on unproven assumptions.
“So the purpose of State Money is to facilitate the movement of real goods and services from the non-government (largely private) sector to the government (public) domain.”
Ummmm. No. Not entirely. Having a relatively stable unit of exchange is super useful for all sorts of completely private transactions. For a rather large portion of governmental money history that has been the dominant factor. So he is starting off on the wrong foot.
“To obtain funds needed to pay taxes and net save, non-government agents offer real goods and services for sale in exchange for the needed units of the currency. This includes, of-course, the offer of labour by the unemployed. ”
The mind boggles at this formulation–that private actors work SO they can pay taxes. So we have a probably wrong understanding of government money in general and it is compounded by a probably wrong understanding of why private actors work.
“The obvious conclusion is that unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save.”
Beware “the obvious” when people are saying things that almost no other economist believes. At the very least it isn’t obvious enough that 95% of economists can figure it out. Suffice to say that this is probably a rather oversimplistic diagnosis for unemployment in general. Delong and Krugman and Cowen wouldn’t agree that unemployment is just a lack of government spending.
“This analysis also sets the limits on government spending. It is clear that government spending has to be sufficient to allow taxes to be paid.”
Note: I *think* you are interpreting “this analysis sets the limits on government spending” as an upper limit. But the analysis ONLY sets it as a LOWER limit. He is talking about minimum levels of government spending. He is not talking about an upper bound.
“In our conception, the basis of this deficiency is at all times inadequate net government spending, given the private spending (saving) decisions in force at any particular time.”
Note that he thinks this is a complete explanation for unemployment. He says it is ‘obvious’ yet almost no other economist agrees.
Does MMR exist outside of its guru?
BTW, I’m not trying to appeal to authority here, but does MMT get talked about by any economist who isn’t a hyper billy enthusiast? Maybe my google-fu isn’t up to it but I can’t find anyone talking about it. Here is where I’ve looked:
Marginal Revolution
Brad Delong
Robin Hanson
John Quiggin
Econobrowser
Greg Mankiw
Becker/Posner
Econbrowser
Basically MMT doesn’t show up anywhere, left, right, or center where I would expect interesting and innovative economic theories to show up.
Is there anybody talking about it who isn’t a raving fan? Is there anyone talking about it who is an economist? The website and comments feel like the mirror image of gold bug websites to me.
The mind boggles at this formulation–that private actors work SO they can pay taxes.
I think you’re reading this wrong. Obviously, people generate income to spend it on things and to invest or save it. One of the things you have to spend it on is taxes. How do they generate the income necessary to pay their taxes? They offer goods and services in exchange for money. I don’t see the controversy in that.
Note: I *think* you are interpreting “this analysis sets the limits on government spending” as an upper limit. But the analysis ONLY sets it as a LOWER limit. He is talking about minimum levels of government spending. He is not talking about an upper bound.
I don’t. The key word in the quote being “sufficient.”
What does set an upper bound is the capacity for production. Once you’ve reached that, you will induce inflation with further spending, which is why he discusses unused capacity in discounting inflationary effects. You appear to be ignoring that.
Here’s the thing, Seb – I fully understand that MMT and Keynes diverge on the “surplus during expansions” side. But, from my reading, MMT says there no reason that gov’t can’t operate under some amount of deficit, even though it may approach zero (i.e. balanced budget) under certain conditions. They simply deny the need to reduce debt simply to build up future spending capacity. I’m not entirely sold on that, myself. But I think I can at least agree that deficit spending that builds capacity and grows the economy faster than the debt grows, over the long term, doesn’t bother me so much.
MMT is highly critical of the work of current mainstream economists, so I don’t know what point there is in saying they disagree on the things you point out. And it doesn’t speak to the relative merits of the arguments on either side.
It isn’t. It doesn’t deal well with hyperinflation or even normal level stagflation. These aren’t marginal cases, these are cases that come up regularly.
You should read his post on Zimbabwe. It’s not about accounting, either, which you might find appealing.
Sebastian: Is there anyone talking about it who is an economist?
The post-Keynesians are into it.
James Galbraith says things along much the same line.
“Does MMR exist outside of its guru?”
Good question.
I know that inside of its guru it’s too dark to tell.
I am so not asking.
Thullen with a sigmoidoscope in the locker room!
Jacob Davies beat me to it, only because the comment field wasn’t loading for while. There are different strands, but they are variations on the same theme.
http://en.wikipedia.org/wiki/Post-Keynesian_economics
Outside of a dog, a book is a man’s best friend.
Inside of a dog, it’s too dark to read.
I guess you could use an MRI to spot the MMR instead of the sigfreudoscope, but that would move us from the library to the locker room and then down to the imaging room.
I’ve always been a Marxist economist.
This is hilarious. I point out that in a fiat system where there is a net private desire to save, then the government (all else being equal) will run a defict, and further that this spending, in a financial sense, is unconstrained.
Seb replies that I “don’t know my theory”, and says, “yeah, sure, but that is due to the pechant for Japanese to have a high savings rate, and adds some blather about money “losing value” and that Keynes “said exactly that, and predicted the loss of “monetary value” for the Yen that, for some inexplicable reason, the international money markets have missed entirely.
That paragraph alone verged on inchoherence, demonstrated a total misunderstanding of neoclassical economics, much less Keynes, and moved the goal posts so far that it might take a sled dog team and expert trackers to find them.
Pretty soon this thread will fall off the edge of the blogosphere. It’s been fun.
Haven’t heard of MMT? Well the concept is not unknown, by any means. Here is a quote from Paul Samuelson. You may have heard of him:
“I think there is an element of truth in the view that the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked [that] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires. We have taken away a belief in the intrinsic necessity of balancing the budget if not in every year, [then] in every short period of time. If Prime Minister Gladstone came back to life he would say “uh, oh what you have done” and James Buchanan argues in those terms. I have to say that I see merit in that view.”
The point is this: He calls it (unnatural fear of deficits) a myth. Perhaps a valuable myth, but a myth, nonetheless.
Source:
http://neweconomicperspectives.blogspot.com/2010/04/paul-samuelson-on-deficit-myths.html
Jacob Davies, responding to Sebastian’s question: “the post-Keynesians are into it.”
I haven’t read much about MMT, but from what I’ve seen it pretty much is a splinter group of the post-Keynesian party, which has a distinguished history but not much political influence.
When throwing stones, always make sure that your quotes are paired off properly.
Typo, or fiendishly clever pun?
😉
Thanks, Slarti. Unlike some other blogs, there is no edit key, and I dropped a couple of quote marks.
I don’t know the why for the extra “h”. I seem to repeat that mistake all the time.
Perhaps I need to call my doctor and up my prescriptions.
As for throwing stones…..well, I’m trying to calm down, but when I point out that Japan has been fighting deflation for over a decade and run its public debt to 170% of GNP without, as predicted by Seb, experiencing runaway inflation, government bankruptcy, or a wildly depreciated currency, I was taken aback by the reply that it was due to a tendency of the Japanese to “have a high savings rate”. MMT posits that if S>I then it needs to be offset by government spending (unless you desire a decrease in economic activity), and deficits will be experienced (all else remaining the same).
Neoclassical theory does not. It merely posits a new equilibrium at a lower price level (essentially doing the hand wave wrt the paradox of thrift), something that has never happened, given the key neo-classical assumption that there is always full employment.
You have the causation direction wrong for MMT and Japanese savings.
Seb: “You have the causation direction wrong for MMT and Japanese savings.”
No. Equilibrium is S=I. When S>I, then MMT posits that for the identity to hold, something else MUST change to maintain a given level of output with a given level of resources. All else being constant, that thing that changes is the government sector’s deficit position: It will go into deficit.
Thus Mitchell asserts that the government’s net spending position is exogenously determined. I’m still trying to get my head around that one.
Thanks.
WORLD LEADERS PLEDGE TO SLASH DEFICITS IN HALF–McClatchy Newspapers, 6/28/10 as printed on p. 1 of the Seattle Times.
This will end badly.
Bobby, you’re just reciting the theory as its own proof.
S=I with nothing further interesting to add to the equation, according to billy. That is his theory.
When S>I, according to billy, the government *must* go in to deficit.
So far as I can tell, he is one of maybe 3 to 4 economists who believe that.
Japan has had amazingly high savings for the past 50 years. Many of those years included budget surpluses (1950-1964) or small deficits.
There is clearly more to economics than S=I.
Thus Mitchell asserts that the government’s net spending position is exogenously determined.
I think that’s sort of backwards. My understanding is that net private savings, in the aggregate, cannot happen without the government net spending (i.e. in deficit), and that the deficit money is exogenous to the financial system. It’s not so much determined by net private savings as it is a necessary pre-condition for net private savings.
Japan has had amazingly high savings for the past 50 years. Many of those years included budget surpluses (1950-1964) or small deficits.
But it’s aggregate savings across the entire economy that matters. Individuals can save, but the bank can lend the money back out to become investment. It’s what the banking system and households do in aggregate that matters with regard to the need or lack thereof of government deficits.
Regarding S=I, where else can net savings across the entire economy come from over a given period other than net government spending if the government has a monopoly on currency? There’s a given number of dollars at the beginning of the period. How does it go up if the government spends (dollars in) and taxes (dollars out) the same number of dollars over the period? (Maybe there’s an answer, but I don’t see it. Please come up with something good if you’re going to bother at all.)
Fractional reserve banking.
Seb,
I know we don’t pay you by the word around here, but you don’t have to be so terse. Maybe these oracular pronouncements of yours indicate profound understanding pithily expressed, but cynical readers may start to wonder about that.
What the hell is “fractional reserve banking” supposed to mean in this context?
“Fractional reserve” says that when you deposit $100 in the bank, the bank doesn’t lock the money in the vault but gets to loan some of it. The bank’s reserve is a fraction of your deposit — say $10. The other $90, the bank lends to me. If I deposit that $90 right back in the same bank, the bank can lend $81 of my deposit to bobbyp; if he does the same thing, the bank can lend about $73 to hairshirt, and so on. Keep going the same way with an infinite series of borrower-depositors, and the bank’s total deposits are $1,000, its outstanding loans are $900, and your original $100 is locked in the vault as the 10% reserve.
Do you notice any investment happening there? Has anybody in the infinite chain of borrowers bought anything or hired anybody, which is what investment amounts to? No. The magic of fractional reserve banking has turned your $100 savings into $1,000 worth of deposits on the bank’s books, but not a dime has been invested anywhere.
Well, not quite: the bank does not literally lock your $100 in the vault. It can, in fact, buy “securities” with it.
For illustrative purposes, it can buy stock in Thullen’s start-up endoscope factory. That’s an actual investment (and a good one, I say) but you’ll note that the bank’s investment exactly equals your actual savings. Even with “fractional reserve banking”, the net savings of our motley crew (the $100 you scraped together out of your income after consuming whatever it is you consume) is exactly equal to the net investment in our motley fool.
Note that if you cut out the middlemen, and you yourself take your $100 savings and buy stock in Thullen’s start-up endoscope business (thus allowing him to create a job for a gorgeous secretary, buy endoscope-making machinery, and so on) it’s even more obvious that savings equals investment.
S=I, FRB or no FRB — if I may be so terse.
–TP
Multiple deposit creation. (That’s how it’s done, Tony P.)
It’s unanimous — everyone except at OBWI — except Brett — is some sort of Keynsian.
All very well.
Meanwhile, the world’s “leaders”, like a blind proctologist, choose the buggering of Ireland as the model.
Who knew the world would end with a good reaming?
remove the first “except”, like a polyp.
Dead horse quote of the day:
The private credit markets represent relationships (depicted by horizontal arrows) and house the leveraging of credit activity by commercial banks, business firms, and households (including foreigners), which many economists in the Post Keynesian tradition consider to be endogenous circuits of money. The crucial distinction is that the horizontal transactions do not create net financial assets – all assets created are matched by a liability of equivalent magnitude so all transactions net to zero. The implications of this are dealt with soon when we consider the impacts of net government spending on liquidity and the role of bond issuance.
I’ve gotten terse because at this point I’m being asked to attack a position that MMT, at least as espoused by its guru doesn’t even hold and at this point at least 3 of the people who claim to want me to care about it are making arguments that are in direct opposition to that held by its guru.
I’m terse because long hasn’t actually gotten much analysis anyway.
I’m terse because you aren’t taking MMT seriously, at least as presented by the single economist I can find who seems to believe it.
Billy explicitly disagrees with Krugman that you have to pull back the money press in the expansionary phase. I’ve quoted it, and it is found all over his blog. He thinks his theory makes it an identity. He doesn’t even engage Krugman’s argument, he just asserts that he is wrong because of the magic accounting identity fixes it all.
Sometimes I don’t have the scientific background to complete debunk a perpetual motion machine. But I do know enough to be skeptical of perpetual motion machines. Skeptical enough that until at least a fair number of scientists are convinced that it is really working, I don’t have to think deeply about it.
That skepticism is not being embraced here. Bobbyp appears to be a believer. HSTD, whom I respect deeply, seems to want to make billy a proponent of the Krugman analysis (which is in line with nearly everything that HSTD says, so I have no idea why he wants to appeal to complete outlier billy rather than very mainstream Krugman) when billy explicitly rejects that view. And I don’t mean that I have interpreted his views as best I can and think that he would reject it. (Though I have and I think he would). He specifically rejected it by quoting his formula. So HSTD just won’t believe that billy means what he says.
And your paragraph on fractional reserve banking doesn’t even make sense. You can’t put it back in savings because the interest rate on the loan is higher than you can get in the savings. Your entire chain of borrowing and putting it back in savings is not the basis of fractional reserve banking at all. The majority of the fractional reserve lending ends up going into investment of various types, nearly none into redepositing.
So in short: I’ve looked into this particular perpetual motion machine enough to determine that its main proponent says that it really is a perpetual motion machine, that he thinks a single simplistic equation explains the entire government/private sector relationship, and that he disagrees with nearly every one in his field. I also see some rather obvious-to-me flaws (like long term inflation which actually has happened–US, Germany, Brazil).
It is theoretically possible that he is the new harbinger ushering in economic understanding, but it isn’t probable. As a layman I’ll stick to the general range of views (which range approximately from Quiggin to Delong to Krugman to Mankiw in left to right order). All of them disagree with billy on long term deficits, though all of them are fine with his short term deficit in the deepest recession in 80 years prescription.
When one of them (or someone of similar stature) takes him seriously, I’ll look again. At this point his sites seem like direct left-wing mapping of gold bug sites.
Calling Krugman’s analysis deficit terrorism and asserting hyper simplistic accounting identities as the solution to our problems doesn’t sound convincing to me.
That’s my long answer.
HSTD, whom I respect deeply, seems to want to make billy a proponent of the Krugman analysis…
I fully understand that they differ on the “surpluses during expansions” side. I explicitly stated that before. My position on that point, as stated before (Posted by: hairshirthedonist | June 28, 2010 at 02:35 PM), is this:
Here’s the thing, Seb – I fully understand that MMT and Keynes diverge on the “surplus during expansions” side. But, from my reading, MMT says there no reason that gov’t can’t operate under some amount of deficit, even though it may approach zero (i.e. balanced budget) under certain conditions. They simply deny the need to reduce debt simply to build up future spending capacity. I’m not entirely sold on that, myself. But I think I can at least agree that deficit spending that builds capacity and grows the economy faster than the debt grows, over the long term, doesn’t bother me so much.
I can see how MMT can work if there is enough economic growth over the long term to outpace the growth of the overall debt, even if the debt grows every single year (i.e. there is some deficit each and every year). The deficits may be very small provided the private economy is utilizing its capacity; perhaps there may even be a balanced budget now and then under the best of conditions. I can see how that could work. It’s a qualified acceptance of the MMT model.
I also can see, perhaps more obviously, how paying down the debt during expansions, provided that the surpluses aren’t so great that they kill the expansion, could work. Perhaps it’s a more conservative (in the general, not political, sense) approach. Perhaps it’s sub-optimal, but requires less judgment about where the government puts its money, so it reduces the risks of screw-ups.
I’m not trying to reconcile the two theories. I’m just not sure they can’t both work, if in different ways. And sometimes I describe things without necessarily endorsing them, just to clarify what my understanding is of them, so that we’re arguing about what it seems to me that we should be, if only to the best of my knowledge. (It’s a “what I think he’s saying is this” versus “what he’s saying is correct” kind of thing, sometimes, which may not always be clear.)
“I can see how MMT can work if there is enough economic growth over the long term to outpace the growth of the overall debt, even if the debt grows every single year (i.e. there is some deficit each and every year). The deficits may be very small provided the private economy is utilizing its capacity; perhaps there may even be a balanced budget now and then under the best of conditions. I can see how that could work. It’s a qualified acceptance of the MMT model.”
I guess I don’t really see that. It seems like an acceptance of the current general model that you are trying to force into MMT. According to billy, the only year to year government deficit limit during an expansion is the entire productive output of the economy. (Again this is not my interpretation, he straight up says it in the comments I read yesterday). That isn’t talking about ‘very small’ deficits. That is talking about annual deficits the size of the entire economy. That is an incredibly radical view, and so far as I can tell, only billy and his immediate followers believe it.
I guess I don’t see anything there that makes me have to think “wow, every other economist has totally screwed it all up”.
It is more like “wow, economics isn’t a very well developed field”.
That is talking about annual deficits the size of the entire economy.
I don’t see it that way. I think it’s whatever the difference is between the productive capacity of the economy and the utilization of it by the private sector. There may be times when the private sector is going full-bore, leaving very little to no excess capacity for the government to utilize. (In short, it’s only the slack that government takes up, without inducing inflation.)
Maybe, but that isn’t what billy says. I’m happy to take up the discussion in Keynesian terms, and you seem to be doing so. Why do we need to refer to MMT to do so? It seems like a complete distraction.
Maybe, but that isn’t what billy says.
Then what does this mean?
The point is that for a given tax structure, if people want to work but do not want to continue consuming (and going further into debt) at the previous rate, then the Government can increase spending and purchase goods and services and full employment is maintained. The alternative is unemployment and a recessed economy. It is difficult to imagine that an increasing deficit will be inflationary in a recessed economy because there are so many underutilised resources, both capital and labour.
And when you say “Maybe, but that isn’t what billy says” you’re confusing my description of what billy says with what you seem to think is my definitive personal prescription. So there can be no “maybe” involved. It may be my fault, again, for not making clear that I’m describing my understanding of MMT.
He is talking about a recessed economy there, but he doesn’t limit it to that elsewhere. He thinks that the solution to the European pension issue is to just print money even during an expansion. His point of disagreement with Krugman isn’t what to do during a recession. They agree on that point. The reason he has to so pointedly disagree with Krugman is because Krugman believes that you have to cut that spending and pay off that debt *in the expansion*. If he was limiting himself to the depression treatment, why is he so strenuously disagreeing with Krugman, who completely agrees with him on the depression treatment?
The reason I’m so confused, is that you seem to want to limit all these things to the recession, but billy does not. His understanding of MMT does not differ in any obvious respect to what Keynesian theory want *during a recession*. If you want to limit the discussion to those circumstances there isn’t any reason to talk about MMT at all so far as I can tell. MMT and Keynesian theory both have the same prescription for now.
They have radically different ideas about what to do during the expansion, however. So every time you want to limit it to the recession, I don’t understand why we should bother with MMT at all. And if you don’t want to limit it to recessions, it has all the radical properties that you seem to want to limit, but that billy does not.
Your entire chain of borrowing and putting it back in savings is not the basis of fractional reserve banking at all. The majority of the fractional reserve lending ends up going into investment of various types, nearly none into redepositing.
So you have saved $100. You deposit it in a fractional reserve bank. The bank lends $90 of it to me. I buy a lawnmower with the money, to earn a few bucks mowing lawns. That’s an investment. I don’t redeposit the money. That breaks the chain. The bank can’t lend $81 to bobbyp, $73 to hairshirt, and so on ad infinitum. It has $10 in reserve and a $90 loan oustanding, against $100 in deposits.
As before, the bank invests its $10 reserve in ThullenCo. Total investment: $90 by me and $10 by Thullen. Total savings: your $100. Seems equal to me. Again.
Seb, I think the main bee in your bonnet is the notion that MMT says we don’t have to run surpluses in boom times. But “don’t have to” is not the same as “must not”. In boom times, we may very well decide that running a surplus (i.e. “decreasing the net financial wealth of the private sector”) is an appropriate thing to do. Even if we don’t have to do it.
–TP
The reason he has to so pointedly disagree with Krugman is because Krugman believes that you have to cut that spending and pay off that debt *in the expansion*. If he was limiting himself to the depression treatment, why is he so strenuously disagreeing with Krugman, who completely agrees with him on the depression treatment?
The reason I’m so confused, is that you seem to want to limit all these things to the recession, but billy does not.
We must be talking past each other or something. But Tony P. captures it pretty well. And I don’t intend to limit the discussion to recessions or depressions. I’ve already stated that I can see how MMT would work if, over the long term, economic growth outpaced the growth of accumulated debt. Economic growth is what happens to a greater degree during expansions, so I guess I’m confused as to why you think I want to limit the discussion to recessions. Yes, he says you can and perhaps should defict spend during expansions. The question is how much relative to growth. How many goods and services are still available? How many people are employed? How much inflation will result? Can the automatic stabilizers provide sufficient negative feedback?
And I haven’t been able to find what he wrote regarding pensions, so, if you can point me in the right direction or provide a quote, that might help. We may well agree that he’s wrong in that particular case (seeing as we both agree that he’s right about recessions).
hairshirthedlonist,
I was mystified also by the remark about just printing money to pay Euro pensions. I can find no such claim, or most especially, the context in which it was allegedly made.
Billy disagrees with Keynesian “doves” becuase they believe as does Seb, that the national debt “simply must” be paid down over the expansionary part of the business cycle or “something bad will happen”. Other MMT theorists (Mosler, et al) pretty much say the same thing as billy, so it’s not just him.
In fact, Billy goes so far as to state that the issuance of public debt by the monopoly supplier is not necessary. It’s an artifice. Bond traders make a great living from that artifice!
Now one might say that the politicians would go crazy and try to buy everything and screw it (the economy) up and bury the nation in worthless paper. I don’t disagree. They could. I mean, the temptation is certainly there (it’s there already–but Seb just doesn’t get it). But that is a political question, not one dictated by the rules of economics or monetary finance, give a fiat currrency system.
So when Seb asserts that the debt “must” be paid down over the business cycle, I get terse, too. This is simply and flatly false. Just look at the absolute level of public debt since WWII. Has it gone up and down with the business cycle? No. It has not. The delta or rate of growth may vary over the cycle, but in absolute terms, it has gone up….just about always. No, this incorrect claim is advanced to grind a political ax…that debt is bad, spending is bad, that the government must act like a good little Calvinist dowager, and that always comes down to cutting social services, or insuring that taxes are not raised for the rich.
Further. Seb gets no points with me by baldly mischaracterizing Mitchell’s arguments.
Alas, my mischaracterizations of Mitchell’s work are mine, and mine alone.
Claim: “The majority of the fractional reserve lending ends up going into investment of various types, nearly none into redepositing.”
Money, according the usual suspects (you know, the economists who utterly missed the housing bubble) is created by the banking system based on fractional reserve requirements established by the fed and the discount rate. Consumer spending is approximately 2/3 of the economy.
Or are you saying that investments “create” money. Now there is a novel economic theory!
“But that is a political question, not one dictated by the rules of economics or monetary finance, give a fiat currrency system.”
Exactly. And it is TRACKED by the finance system.
Billy is trivially right that governments have no ‘financial’ reason not to print money out their asses.
But that doesn’t say anything useful. Of course it is a political question, because politically it is stupid to hyperinflate and ruinously indebt your economy. I’m pretty sure the reason none of the other real economists are talking like billy is because he talking about a triviality as if it was important.
There is no ACCOUNTING reason why the government can’t print more money.
Whoop de doo.
There are economic reasons why it would be stupid. Billy focuses on the accounting, and sweeps away all useful discussion on the non-accounting effects–the real effects.
When he says that it is all just a political decision, that is because he has artificially restricted the question to bookkeeping for no good reasons.
Yes. The government can add 10 trillion dollars and there is no accounting principle that would stop them.
Brilliant.
Yes it would wreck the economy with hyperinflation.
But that isn’t an accounting principle so we can’t talk about it. Wrecking the economy isn’t an accounting principle, so the only thing stopping us from doing it is politics. Wheeeee.
He isn’t saying anything edgy, so much as he just isn’t saying anything useful.
I think Yglasias and Wilkinson both wrote excellent articles which speak to the problems on this thread. here and here.
Basically, we are nowhere near the place where economics is so well understood that you can just plug in an equation and expect to get a useful answer to most questions. Have you ever seen the laffer curve cartoon where it is a huge squiggly line except for a smooth curve at the very ends? It is like that.
The fact that billy thinks he can reduce it all to a single equation, and then derive everything he wants to talk about from that single identity doesn’t *prove* that he is wrong, but it should make you very suspicious.
“And it is TRACKED by the finance system.”
Well, that is just as meaningless, I should think. In that case just what is the disagreement about? No. It is the deficit hawks who have fled reality. They use their cracked finance theories to dictate political outcomes. But when somebody comes up with a theory that demonstrates the incredibly bad thinking at work here, you scoff, throw up you hands and shout wheeee.
Mitchell claims, rightly or wrongly, that the real way the government spends, and banks loan, is different than traditionally thought, and that it frees society to make different choices that are not constrained by the usual ‘rules’ of thinking about finance.
Wilkinson? That’s rich. A libertarian criticizing those who make sweeping “idealized assumptions”? That is simply too funny. Biology is just a “grab bag” of “theories”? Krugman is dismissed as a “glib oversimplifier”? This we are to take seriously? Seriously?
But I’ll give him this, the second to last paragraph was very good–spot on. Athreya has it coming.
Yglesias is also on to something. Minsky should be taken seriously, but he’s not. I suppose since Minsky hasn’t won the popularity contest yet, you are free to dismiss him. In that instance you have forfeited all rights to niggle Mitchell about the ‘scientific method’ or philosophy of anything for that matter.
And there’s that whole “you’re looking at it backwards” thing yet again. Comes up all the time. Who’da’ thought?
Happy 4th
No, I think Minsky should be taken quite a bit more seriously than billy. He actually thought that debt, both government and private, means something. And he thought that reducing economics to simplistic equations tended to be hubristic. I’m pretty sure he wouldn’t agree that S=I was the magical formula for deriving government action.
“But when somebody comes up with a theory that demonstrates the incredibly bad thinking at work here, you scoff, throw up you hands and shout wheeee.””
No. Billy’s theories have some readily apparent holes, he glosses over well defined problems, and he doesn’t tackle well known examples of governments which followed his prescription to disasterous consequences. (See especially Brazil 1980-1995). His theory hasn’t *demonstrated* anything, you’re falling exactly into the trap that Yglesias talks about.
Brazil? Oh, you mean the country that took out massive loans denominated in foreign currency, tried several rounds of price controls, pegged its currency to the dollar, and took the bitter pill of IMF austerity strictures? That Brazil?
That sad period for that country is not, in any sense, an example of “following (Mitchell’s) prescription to disastrous consequences”.
What next? Zimbabwe? Mitchell explicitly took that one on at length. Tell me where is analysis is off the mark.
Yes. The government can add 10 trillion dollars and there is no accounting principle that would stop them.
Brilliant.
Yes it would wreck the economy with hyperinflation.
But that isn’t an accounting principle so we can’t talk about it. Wrecking the economy isn’t an accounting principle, so the only thing stopping us from doing it is politics. Wheeeee.
This is a strawman, Seb. You’re continuing, AFAICT, to grossly oversimplify what he’s saying. There are conditions under which he says the deficit can be greater than others. He’s not saying there is no upward bound on the money supply, assuming one doesn’t intend to induce excessive inflation.
Billy focuses on the accounting, and sweeps away all useful discussion on the non-accounting effects–the real effects.
This isn’t a strawman so much as just completely untrue. I honestly don’t know what you’re reading that makes you write this. I’ve quoted billy blog several times showing that the real effects are critical to what he’s saying. One of the biggest points he makes is that mainstream economics ignores the real effects AND a particular, basic bit of accounting. And you keep harping on S=I as though that’s the only thing supporting his arguments. It’s a useful introduction to the concept he’s trying to get across, not the be-all end-all of what he’s saying.
I trust you enough to assume you’re arguing in good faith, so this is very frustrating to me that you don’t argue against what he’s saying rather than continuing to miss so much of it. At least that’s how it looks from where I’m sitting. I’m giving up now.
“Brazil? Oh, you mean the country that took out massive loans denominated in foreign currency, tried several rounds of price controls, pegged its currency to the dollar, and took the bitter pill of IMF austerity strictures? ”
You might want to look at your timing. The peg to the dollar wasn’t until 1994 when they were trying to break the horrible cycle of hyperinflation which had been caused by the government printing money to pay for everything. The hyperinflation period was 1980 to early 1995. I’m relatively sure that the few months of currency peg in that period, which resulted in the end of the hyperinflation, didn’t cause the nearly 13 years of hyperinflation.
Also you appeal to Brazil’s current account deficit via foreign loans is decidedly anti-billy, he doesn’t think the CAD is a big deal.
“I honestly don’t know what you’re reading that makes you write this. I’ve quoted billy blog several times showing that the real effects are critical to what he’s saying. One of the biggest points he makes is that mainstream economics ignores the real effects AND a particular, basic bit of accounting.”
Look, I went from literally never having heard of the guy, to reading like 40 pages worth of his stuff. He is hyper-dismissive of critics, especially ones with economics backgrounds. I think you’re deeply misreading his sidenotes. He does not say that real effects like hyperinflation are critical to what he’s saying. He is saying that his formula proves that printing money won’t cause hyperinflation, that it is caused by other things. That is an assertion based on his formula, not based on real-world observation. He claims that lots of other things are the ‘real’ cause of hyperinflation, but he has to because his formula demands it. Not because the observation demands it.
But you can see that his real world caveats don’t really matter, because he insists on the same prescription no matter what. You haven’t responded to his curt dismissal of Krugman’s analysis of the long term budget problem. I’ll quote it again:
Krugman writes:
Here Krugman makes a number of very standard Keynesian points. Does billy bother addressing them directly? Of course not, his accounting identity saves the need for that.
Billy’s response to THAT is:
Because he concludes: “So America has a long-run budget problem”.
No it hasn’t. It has a long-run political problem where a particular cohort in the population will require more real resources (possibly) and that will have to be mediated by: (a) productivity growth; (b) others having less.
There is no financial problem for the US government in any of that. It is a real resource availability problem which becomes a political problem.
Of-course, they can start converting primary schools into aged care units as they become obsolete.
Which is essentially a non-response. Krugman, and every other economist from DeLong to Quiggin to Mankiw, fully understands that the US *could* print more money. They don’t need billy and his magical formula to tell them that. They just strongly suspect that it would be stupid to do so because of other, non-accounting issues. And their suspicion is well founded in evidence, because every country that has tried to print their way out of problems ends up with the same problems that they had before AND hyperinflation.
But billy does not engage that.
He is asked that question in about every other post, and he dodges it the same way: it isn’t a financial problem.
But Krugman and all the other economists know that full well in his hyper-narrow point. Yes, accounting identities don’t stop countries from just printing money, it is other things.
What billy does is translate discussions of the budget deficit, or government debt, into pure financial terms and then dismisses them.
But Krugman isn’t saying that the budget deficit and government debt are a problem in pure financial terms (that could be solved or not solved by printing money). No one is saying that. He is saying that the deficit and government debt cause tensions which can only be resolved in horribly bad ways, one of which includes hyperinflation (if the government takes the printing method out) and of which there are others (like being forced into a tax structure which stifles the private sector or cutting benefits precipitously).
So MMT isn’t adding anything to the discussion. It tells us something we already know, and in a way that isn’t any more helpful than how we already know it. And billy uses it as a way to avoid discussing the rest of the problem every single time it is raised on his blog.
I just don’t see the added value of going through MMT. In recessions it gives 100% Keynesian prescriptions. No added value. In expansions it either gives the “government debt doesn’t matter” result that I’m interpreting, which is almost certainly empirically wrong, or it is just another way of expressing Keynes (which is how you are interpreting it).
But in neither case is it adding value to the discussion. By my interpretation he is just being crazy in the expansion analysis. By your interpretation he is just being useless.
In either case, why bother talking about him? We could have been just talking strict Keynesian economics and having more fruitful discussions.
“Also you appeal to Brazil’s current account deficit via foreign loans is decidedly anti-billy, he doesn’t think the CAD is a big deal.”
Wrong. When the CAD is denominated in a currency that is not yours, that is decidedly a BIG deal. Mitchell is quite explicit on this.
“He is saying that his formula proves that printing money won’t cause hyperinflation..”
He says no such thing. This is a gross misrepresentation of his position.
“Which is essentially a non-response..”
Which is simply arguing by assertion. You have missed the point entirely.
“…because of other, non-accounting issues.”
You mean political issues? OK. Or do you mean financial issues? Then-not so much.
“And their suspicion is well founded in evidence,”
Of which you provide none.
“because every country that has tried to print their way out of problems ends up with the same problems that they had before AND hyperinflation.”
Either because: (1.) They did not have a monopoly fiat currency that was freely floating in international markets; or (2.) Because the government sector was trying to purchase more than the economy was capable of producing.
H”(Krugman) is saying that the deficit and government debt cause tensions which can only be resolved in horribly bad ways, one of which includes hyperinflation (if the government takes the printing method out) and of which there are others (like being forced into a tax structure which stifles the private sector or cutting benefits precipitously).
The issuance of public debt is not necessary in a true fiat currency system…and the other “tensions” and “others” are simply an expression of deeply seated political prejudices masking as “economic” concerns (such as pathological concern for the tender mercies of creditors over debtors, to take just one example).
By demonstrating explicitly how a true fiat currency system actually operates, MMT brings a valuable insight to discussions of government deficits and debt that is sadly lacking, even taking into account otherwise insightful economists such as Paul Krugman.
“The issuance of public debt is not necessary in a true fiat currency system…and the other “tensions” and “others” are simply an expression of deeply seated political prejudices masking as “economic” concerns (such as pathological concern for the tender mercies of creditors over debtors, to take just one example).”
Yes you are quoting the guru quite accurately there. But that doesn’t make it true. Every other economist seems to think that it is necessary.
I don’t believe in perpetual motion machines. I don’t believe that billy is adding anything to the discourse that isn’t available in non-mmt keynesian theory. I do believe that he doesn’t deal well with inflation.
If some well regarded economists take him seriously, I’ll think that maybe I was wrong and look again. Until then, I’ve looked as deeply as I can on my own and don’t see reason to worry about his opinions further.
I’m not convinced that MMT brings valuable insights to discussions of government deficits. In fact, I’m convinced that it actively obscures valuable insights on government deficits by focusing on an accounting matter that is mostly irrelevant to useful discussion.
bobbyp,
On a side note, I thought you had something backward earlier, but on futher reading, not so much. While net government spending is exogenous to the private financial system, net government spending can also be exogenously determined by the private sector, meaning that the private sector can slow down by saving, reducing government tax revenues below projections and forcing the government toward, into or further into deficit. So we each had half of it right, exogenously of each other.
Hairshirthedonist,
Google “Seven Deadly Innocent Frauds of Economic Policy” by Warren Mosler. He’s not an academic economist, but he lays out the basic tenets of MMT in a very readable fashion. The part about inflation beginning on p. 113 is particularly instructive.
His policy prescriptions strike one as fantastical, but I am determined to be of open mind on this matter and find out more.
Economic prejudices, like most others, die hard. I am sure there were many like Sebastion, who, back in the day when the world currency system departed from the gold standard, could only wring their hands and proclaim doom and inflation (goldbugs, which see). After all, if money is not “worth” anything, then it is “worthless”, right?
History has clearly revealed the “worthlessness” of that apparently logically irrefutable assertion.
We still have a ways to go to clear the remaining intellectual cobwebs out..
Best Regards,
According to his policy prescriptions, both deficit spending and tax cuts are the way to a better economy. This is the Keynesian prescription during recessions. He, like bobby, appears to hold it during recovery as well.
When I had skipped to the portion about inflation (I think you mean 11-13 not 113) my first thought was: “deficit spending plus tax cuts, Bush was following the MMT prescription”.
When I read the whole document, I find that it wasn’t just a sarcastic response in my head. According to Moser:
Now this makes sense as political rhetoric, as Mosler is apparently running for president and is campaigning at the tea parties see his website here. So he is preaching to the choir.
But I wouldn’t quote him as an authoritative source in the sense you are. Frankly I was much more impressed with billy.
Seb,
The version I was reading is, I believe, here:
http://obsidianwings.blogs.com/obsidian_wings/2010/06/by-eric-martin—-social-security-is-a-government-program-funded-by-a-dedicated-tax-there-are-two-ways-to-look-at-this-firs/comments/page/3/#comments
Mosler is a popularizer, not an academic, but he does a good job of making the basic concepts clearer.
It is the basic concepts that you deny, and the prescriptions that you stubbornly refuse to accept (that include deficits in ‘good times’, not surpluses). But look: We have generally had deficits in ‘good times’.
The fact that you ceaselessly attack the prescriptions, but not the underlying tenets is telling.
Enjoy your 4th
OOPs. Darn my fat ignorant fingers. Try this:
http://www.moslereconomics.com/wp-content/powerpoints/7DIF.pdf
MMT, apart from the Keynesian stuff which can be dealt with as Keynesian, doesn’t seem to have much to it so far as I can tell. I’ve done the research, and I have no idea which underlying tenets you think I ought to be attacking.
But to be crystal clear, do you agree with Mosler, the MMT popularizer that you referred me to, that Bush’s high deficit, tax cutting methods, are good for the economy and that Clinton was bad for the economy?
Is that what you think?
I quoted him from his own talking points.
“Is that what you think?”
It makes sense. Given the stock market bubble, the Clinton surpluses could not be sustained. Mosler’s prediction was deadly accurate, assuming the prediction was made prior to the Bush ascendancy. That would be something to verify. Or do you believe there is something George Bush did shortly after assuming the presidency that caused the recession? 9/11 effects should be seen as somewhat temporary.
Further, the Bush tax cuts were stimulative in response to the dot.com bust, but this was mostly an accident, since the GOP advocates tax cuts for the wealthy under any circumstances. Such tax cuts have limited stimulative effect, but they have some. Mostly I disagree with the political outcomes of biased tax cuts for those who really should be taxed much more. That is a political question.
Clinton’s economic policies, such as they were, did not create the boom time of the 90’s. Tax hikes did not create prosperity. The surpluses (due in great deal to the dot.com mania) were followed by a recession, exactly as predicted by MMT.
As a side issue, many of the heterodox economists saw the housing bubble coming. The mainstream didn’t.
As for those tenets:
1. Government spends first, and undertakes borrowing/taxing later. Government spending is not limited by some perceived ability to tax or borrow.
2. Deficits do not leave a “burden” to future generations.
3. Federal deficits take away private savings.
Just for starters.
But to be crystal clear, do you agree with Mosler, the MMT popularizer that you referred me to, that Bush’s high deficit, tax cutting methods, are good for the economy and that Clinton was bad for the economy?
I was going to give up on this, but I’m bored, so I might as well jump back in.
My thinking is that government net spending is always going to be simulative to some degree or other so long as the economy has room to grow to supply the needed output, so, if that’s what one means by “good for the economy,” the answer would have to be “yes.”
But there’s good spending and bad spending, regardless of deficits and surpluses. Were Bush’s tax cuts and war spending good for economy in the long run? Did they represent a good allocation of resources that would spur future growth and increase the welfare of Americans? I have my thoughts on that, but I’ll leave it to others to provide their own, if they like of course. And MMT does consider such questions to be very important, at least according to what I’ve read.
oops…#3 should read “federal SURPLUSES take away private savings”.
Hairshirthedonist,
Sorry to bore you! You are right. Politicians say dumb things and try to justify them by reference to “economic laws”….like “we have to pay the deficit down in good times”.
The Bush tax cuts did little for economy in the long run…except make rich people richer.
How are your teams doing in the World Cup?