By Joe Firestone, Ph.D., Managing Director, CEO of the Knowledge Management Consortium International (KMCI), and Director of KMCI’s CKIM Certificate program. He taught political science as the graduate and undergraduate level and blogs regularly at Corrente, Firedoglake and Daily Kos as letsgetitdone. Cross posted from New Economic Perspectives
Just as every Spring we can count on the Peter G. Peterson Foundation (PGPF) to do a supportive press release when the CBO issues one of its budget outlook 10 year projection reports, we can also count on being treated to public statements by Maya MacGuineas joining in the Peterson Army choir, warning about the coming debt crisis, and singing about the glories of deficit and debt reduction. And this while completely ignoring the real and sad consequences of deficit and debt reduction policies throughout the world since the crash of 2008, as well as previous applications to Latin American, Asian, and the nations of the disintegrated soviet empire, most notably Russia itself. Let’s look at Maya MacGuineas latest effort; her testimony to the Senate Budget Committee.
She begins by identifying herself as president of the Committee for a Responsible Federal Budget (CRFB) and head of the Campaign to Fix the Debt, which she describes as “non-partisan” organizations “. . . dedicated to educating the public about and working with policy makers on fiscal policy issues.” She then emphasizes that the Boards of her two organizations include past directors and chairs of various agencies within the Executive Branch and Congress, and leaders from business, government, policy and academia.
I know these types of introductions are standard for people testifying in front of Congress, and that there is nothing out of the ordinary in presenting them. But, perhaps, we should occasionally ask what they mean from the viewpoint of what they’re intended to convey which is the authority and credibility of the person testifying on the subject she/he has been called upon to testify.
So, my point is that what I see in these organizations is a lengthy list of individuals who have previously performed with what passes for success in governments and large organizations, but I also see that many of have them have been influential throughout a period when the United States became a place characterized by increasing extremes of inequality, due to their unfailing support for private and public partnerships, along with increasing subordination of the public sector to private sector business interests.
I also don’t see a diversity of viewpoints in this group with respect to ideas about federal budgeting and public finance. All I see are partisans, here, not partisans of the Republican vs. Democratic variety; but a partisanship of deficit/debt reduction vs. public purpose as the goal of fiscal policy.
The supporters of CRFB and Fix the Debt are all on the side of deficit/debt reduction regardless of the consequences for most of the American people, and so since Maya MacGuineas represents them and particularly Peter G. Peterson, I’m afraid, the only expectation one can have is that she is a representative of that view, the view of neo-liberalism and the Washington Consensus, and not a neutral witness at all.
So, Maya MacGuineas, as a partisan spokesperson for the groups and interests she represents and the correctness of the Washington Consensus made a number of primary points.
1. Our deficit and debt problems are far from solved
2. Having a fiscal goal is a key part of budgeting
3. There are many advantages to getting the debt to more manageable levels
4. Policymakers should avoid backward steps that add to the debt.
I’ll address each one.
First, she assumes that the current level of US debt and the projections made by CBO show a problem both with the debt level and the level of the debt-to-GDP ratio. She presents the usual frightening numbers to show that this is true. However, I don’t agree that there is any economic or financial debt level problem at all, provided only that the United States retains its present monetary regime of a non-convertible fiat currency, with a floating exchange rate, and no debts owed in any foreign currency.
That’s because for such a currency issuer, whatever debt level exists and falls due at any point, that debt can always be repaid because it is denominated in the currency the debtor nation can issue at will. All repayment takes then, is the willingness of the issuer to issue the money needed and to use it to repay the debt due.
Insofar as one may say that the US has a debt problem of any kind, that problem is one of politics created by people who keep repeating misinformation about the US public debt causing financial insolvency, if we allow it to grow any higher than it, or at least the debt-to-GDP ratio is now. That kind of insolvency can’t happen to the US because, in the end, there are no international or domestic constraints on our ability to create money to spend on repaying what we owe.
We can see this if we look the at the situation from a simple accounting perspective of assets vs. liabilities. The US government has many valuable financial assets, which, by the way, deficit hawks like Maya MacGuineas never talk about and compare to US liabilities, and among them the most valuable financial asset is its constitutional authority to create money whose financial value it can specify at will (which under present legislation is delegated to the Federal Reserve System and its member banks, and to the Treasury). Now, how much is that asset worth compared to whatever level of debt is in question?
What is the value of the federal money debt to federal money asset ratio, when the denominator of that ratio, is, in effect, infinity? From where I sit that value always = zero, whatever the level of debt may be at any point.
So, there can never be any diminution or increase in the capacity of a fiat sovereign government like the US government to repay its debt instruments regardless how small or large the principal value of those debt instruments is. Whether that value is $50 million or $50 quadrillion the value of the federal money asset ratio is still zero.
It’s also true that if no level of debt can represent a financial problem for a sovereign, it’s also true that no debt-to-GDP ratio can be a problem. But Maya MacGuineas states both that “having a fiscal goal is a key part of budgeting,” and also that “. . . the most important metric of a country’s fiscal health is its debt‐to‐GDP ratio.” And that means that she must view that metric as measuring progress towards the fiscal goal she favors, namely a balanced budget or at least a minimum level deficit.
But, surely, a fiscal goal whose metric may indicate no improvement or worsening with respect to improving one’s fiscal condition, has to be a meaningless fiscal goal accompanied by a meaningless metric. And the truth is that for fiat sovereigns like the US the fiscal goal of a balanced budget has no obvious interpretation as something desirable, improving our fiscal condition.
Of course, one can claim that running a balanced budget can increase government solvency the more it is done. But in fiat sovereigns like the United States, the goal of solvency has already been reached, since for reasons given above degree of solvency does not vary with the level of US debt, or with the level of the debt-to-GDP ratio. And since solvency is always there, then all that remains is to go beyond it to fiscal goals that are meaningful to people.
I think the fiscal goal that ought to replace either increased fiscal solvency or balanced budgets in nations like the United States is “public purpose.” Of course, “public purpose” is an abstract notion and measuring it will require a complex set of social indicators. Any single metric of whether fiscal policy is bringing us closer or further away from public purpose will certainly distort reality. However, fiscal metrics have to be dictated by proper fiscal goals. So, the goals must come first and the metrics problem solved later.
Also, Maya MacGuineas’s opposition to deficits is based on her identification of high and rising deficits with rising debt. But, there is no necessary connection between the two.
The deficit is the current negative value of the gap between federal tax revenue and federal spending; while deficits are financed through the sale of debt instruments subject to the limit. So the identification has been correct, in terms of current practice. But it is not mandated by current law, which allows deficits to be financed by the Treasury using platinum coin seignorage (HVPCS). I’ve explained the details in my e-book, along with background and history of the proposal, its theoretical context, and addressed a variety of objections in the legal, economic, political, and institutional, categories.
Maya MacGuineas next goes through “advantages” of bringing the national debt down to “a more manageable level.” She believes that lower public debt will produce: greater investment and economic growth; higher income and wages, lower interest rates, declining government interest payments, thus freeing up resources, increased ability to respond to problems, and reduced risk of fiscal crisis. I could take the time to go into detail about how silly each of her arguments are on each of these. However I’ll content myself with the following quick points.
First, if the debt really produces these results, then the remedy is just not to issue is anymore and pay off the old debt with seigniorage, while funding new deficits the same way, Second, if economies grow faster when deficits are reduced, then why is it that both in fiat sovereign and non-fiat sovereign nations, alike, we always see government cutbacks associated with recessions and depressions after the cutbacks occur? Where is the empirical evidence that, in the absence of bank-blown credit bubbles which we saw in the US towards the end of the Clinton and Bush 43 Administrations, economies grow faster when deficits are reduced?
Third, if there’s no evidence that there is faster economic growth when government is cut, then how can one argue that wages will rise due to this non-existent growth? Fourth, I agree that government cutbacks might produce lower interest rates, but only because the downturns resulting from the cutbacks would persuade central banks to keep those rates down. Fifth, declining government interest payments doesn’t free up resources. It just adds financial contributions to the non-government sector from the government sector.
Sixth, cutting back on federal borrowing won’t increase the government’s ability to respond to problems, because the “crowding out” theory of federal borrowing is nonsense. No matter how much money the federal government borrows, private credit worthy borrowers are able to borrow money if banks are willing to lend, simply because bank loans create deposits, and bank needs to fulfill their reserve requirements are always accommodated by borrowing reserves from other banks, or by the willingness of the Fed to always back bank after they issue loans, if they need additional reserves over and above what is available in repo markets. The Fed must provide this backing to the banks, because it is necessary to maintain stability in the financial system.
And seventh, lower debts and deficits will not reduce the risk of a financial crisis in the banking system, simply because “investors” in the market have no real choice when it comes to buying Treasury Securities. The rates of security offerings follow the federal funds rate, and the Fed can always maintain that rate though its open market operations, and its quantitative easing programs. IT can face investors with the choice of buying Treasury securities and earning something on their money, or sitting on their reserves and earning the minimum interest on reserves (IOR), offered by the Fed.
Also, no matter how high the debt is, it will be hard to persuade traders that the Government of the United States cannot make its payments. Remember, Greenspan, and Bernanke have explained to them that we always can, and the slightest exercise of the high value platinum coin seigniorage power by Treasury will produce a clear demonstration that this can always be done. Actually, the only possible cause of a crisis is a political one caused by the Congress’s failure to understand its own powers under the constitution as well as its own obligations.
But again, that is a political crisis, not a fiscal one, and if it were to occur, a large part of the blame would lie with Peter G. Peterson and the various groups he’s funded to generate the misinformation they’ve provided to the Congress for many years now.
Maya MacGuineas finishes her statement with an appeal not to add to the debt, while at the same time she says we don’t have to end deficits immediately, but should do so in concert with the business cycle. There are a few implications of that advice that are worth noting.
First, it is very possible that the fragile expansion underway now will falter, and land us in another serious recession. If that happens, it is very likely that increased safety net spending, even without deficits from discretionary stimulus will be result in increasing debt even if we don’t engage in stimulus. If that happens however, what can we do do about it?
If we practice austerity, the recent European record, as well as much else around the world, tells us that will only deepen the recession, and lead to even greater debt, which is what the debt hawks are trying to avoid. So what choice do we have: more deficit spending using increasing debt, more deficit spending using money creation as in seigniorage, or deepening recession?
And second, there is, in this advice, a failure to understand the sectoral financial balances accounting identity. Put simply, it is true that the balances of government spending, private spending, and foreign sector spending must equal 0, during any period of spending flows.
As it happens, the United States has been running a trade deficit (that is, the foreign sector has a surplus in its dealings with us), for many years. Those who want us to balance the budget during good times are really saying, that they want the federal budget to be more or less in surplus as it was under Clinton’s Administration.
That means that their prescription for good times is to force the private sector to absorb aggregate losses the size of the trade deficit. If that’s 3% of GDP, then the Maya MacGuineas, Pete Peterson, Paul Ryan crowd is appealing for the private sector to take those losses for as long as good times last. Now let’s imagine that the economy looks like it is booming due to a banking bubble, and good times last for 7 years or so. What will be the eventual result when the economy crashes? A sudden tanking of paper profits when people have to face the reality of a 21% loss in the net financial assets of the private sector over that period? That’s a disaster, waiting to happen.
That’s what MacGuineas is really offering. A false notion of fiscal responsibility that will deliver periodic disasters, increasingly impoverishing most Americans and completely subordinating them to the FIRE sector represented by Peterson and his allies.
There hasn’t been “fiscal responsibility” by our government, nor its people for decades. The public & private debts incurred are simply never going to be paid. The detriment of doing so will be passed on for generations.
I see the case against private debt, but public debt? Public debt can’t be passed on to future generations…our children and grandchildren will always be able to consume what they produce. If public debt was a future burden we might have seen some evidence over the past 235 years or so. Future growth makes past debt small by comparison, so small as to be inconsequential.
The future itself is an unfunded liability…more so the less we invest in it.
Can’t have compound interest without compound spending.
Obligations are passed on to future generations. That is all. Whether or not they repay them is up to them.
The US can always pay off its debt by printing. Wonder what $18 trillion or $50 quadrillion would do to prices, however. Would the government and Wall Street Rentiers still have their heads? History says, “Most likely.”, as revolutions by the poor are the very extreme exception and not the rule. Even Mugabe in Zimbabwe survived hyperinflation by adopting the dollar. Pick your currency to supplant the dollar: Ruble or Yuan?
The article seems to be an attempt to justify budget deficits in lieu of actual economic activity – such as manufacturing – which would benefit the few over the many. Given that The US has hollowed out its industrial base, upon which super power status – and not just military strength – rests upon. If you can not produce the bombs without foreign parts, the country has a problem.
What about interest payments on the debt? In 2014, the interest payments on the debt totaled $430 billion dollars. Enough to practically erase last years budget deficit. Deficits can be good. Too much deficit is bad.
Bank loans create deposits. If the borrowers can not pay the bank loans in the first place, which many in The US can not due to the abysmal nature of The US economy, economic activity is curtailed. Banks resort to blowing bubbles, as we witnessed with the housing bubble. Which The Federal Reserve is so desperate to re-blow. Which has ended in failure. 90% of the country’s population is a write-off as far as bank loans go.
It is simply not a worker’s economy anymore. Not with The Rentiers around, desperately seeking new sources of revenue – such as in public-private partnerships. Or eyeing what little remains of public wealth such as is found locked away in Social Security, which Wall Street would like to gamble with.
The article explains the basics. And then ignores all the little details that belong to the devil. The Devil is always in the details.
As someone down below mentioned, the problem is that economic activity serves the enrich a few.
“Obligations are passed on to future generations”
No, they aren’t. If you die, and don’t have assets to cover the liabilities, the bank takes a loss. Your debt doesn’t get passed on to your children or grandchildren.
Public debt obligations are obligations in name only…those holding bonds can either hold dollars (that don’t pay interest) or the bonds. Either of which only the government has the power to create, and neither of which is constrained by anything other than its not possible to buy more than is for sale.
“The US can always pay off its debt by printing”
If it tried, those holding bonds would squeal like stuck pigs. Unless the money is needed for spending (which is always an option anyway via the secondary market) no one is his/her right mind would rather hold dollars than dollars that earn interest. There will always be more demand for bonds than can be satisfied.
The idea that bonds are less inflationary than direct money creation has been debunked so many times since 1918 its hardly possible to keep track. Some zombies never do die.
And please give up on the Zimbabwe (or Weimar) hyperinflation as an argument…both were caused by a sudden collapse in production, not a sudden increase in money printing. Money printing was a consequence of, not the cause of the hyperinflation, because of the simple law that no one seems to understand or chooses to ignore…it’s impossible to buy more than can be produced (is for sale). If you try, you drive up prices.
Printing money and storing it in a warehouse won’t cause inflation. It has to be spent.
I wonder if it would be possible for the government to focus on creating wealth, and leave money-creation to the people?
No they’re not. They are passed to the US Government which has the authority to create whatever money is needed to meet them. Note this carefully, there is nothing in a Treasury bond that makes you or I responsible for the debt it represents. The Government is legally responsible, but not you as an individual.
Depends on the timing of the payoff. I propose it be paid off as it falls due, which would happen anyway, even with further borrowing. So, there’s no reason to expect it would be more inflationary that rolling over the debt with new debt, which is what do now. Why do you believe it would be more inflationary? Or is that just a talking point?
Don’t know where you get that from. There’s no attempt to do that. Instead the attempt is to clear the way to use deficits to solve our problems, including, of course, the decline of manufacturing in the US.
Did you read the post. I’m saying use seigniorage to pay off the debt and cease issuing more debt. That’s going to drive interest payments by the Treasury down to zero over time. Of course the Fed will end up paying Interest on Reserves (IOR) in order to hit its target FFR, but what it pays in interest doesn’t count against the debt.
I agree.
I agree on this too, except for what little remains of public wealth stuff. Since the government can create whatever money it needs to it follows that public financial wealth is limitless. And that is why we must make sure that it is used for public purposes and not for enriching the rising oligarchy.
The article explains the basics. And then ignores all the little details that belong to the devil. The Devil is always in the details.
As someone down below mentioned, the problem is that economic activity serves the enrich a few.
I’m not sure what you mean by decades. When Bill Clinton left office in January 2001, he left the incoming Bush administration with a projected federal budget surplus of $5.6 trillion dollars over the next 10 years. This surplus essentially would have eliminated the national debt at that time. The reason for this budget surplus was the tax policies adopted by Congress in 1993, passed by Democrats and signed by Clinton, with no Republican support.
There was never any surplus, Treasury “debt-to-penny” during his tenure shows this. Then of course we can all use rhetoric as far what actually impacted the budget, SSTF, intergovernmental debt, accrual basis, etc. Both Party’s use financial/accounting wizardry to justify their spending, which BOTH Party’s love to do.
You’ve got that right. Clinton left them a projected surplus of $5.6 Trillion. The only problem was that the projection wasn’t worth a damn.
The problem is that government surpluses result in the destruction of private net financial assets. This is indisputable. It’ a consequence of the sectoral financial balances.
As long as one has a trade deficit, Government surpluses must result in private sector negative balances. If the Bush Administration hadn’t continued down the Clinton road, the recession of 2000- 2002 that Clinton also left Bush would have deepened into a far worse recession than that one.
As it was Clinton’s foolish surpluses prepared the way for the crash of 2008, because Bush’s cure for the intensifying down town was to work with Greenspan to blow the real estate bubble of the 2000s, resulting, of course, in the crash of 2008 and the Great Recession. One of the implementers of the Clinton surpluses was Jack Lew, and now he’s managing the current funding crisis. He will get the present situation as close to surplus as possible, and the private sector will suffer balance sheet losses again. In fact, we’re probably already in a loss position.
‘The most valuable financial asset is its constitutional authority to create money. Now, how much is that asset worth compared to whatever level of debt is in question?’
If that sovereign authority ever gets challenged owing to its gross abuse, it’s worth nothing. Gov-worshippers assume that the public can swindled indefinitely without provoking a counter reaction. History says that ain’t so.
Cheat the little people long enough, and they’ll smash your printing press and burn your worthless scrip.
Do you believe in Quetzalcoatl? Does Quetzalcoatl believe in you?
Do you bow before Shiva? Does Shiva bow before you?
Do you worship Mammon? Does Mammon worship you?
It’s always easer for 10,000,000 people to support 10,000 lords.
It’s harder for 10,000 people to support 10,000,000 lords.
Lord 1: I rule over 200,000,000 imperial subjects.
Lord 2: I am greater. I rule over 1,500,000,000 dragon sons. I wish we had ever more. It will make me even greater.
When democracy came along, it said it was ‘democratic’ but it kept the structure of 10,000,000 people supporting 10,000 lords. But it was a government for the people…
if the government wanted to really ‘serve’ the people, with government officials public ‘servants,’ if it REALLY, REALLy wanted to do that, then, the government can grow food, drive trucks, babysit kids, manufacture furniture, make clothes, etc.
AND the people can come along and say, hmmm, that’s pretty good. I like the way you grow your organic vegetables…
By the way, you are doing a little too much, so, I will,…uh, tax you. To slow you down, of course.
Except robots.
It’s possible to have 10,000 robots support 10,000,000 human lords.
Not if they are robots like HAL.
Conversely, Jim, if you serve them with the authority to create money, then then they will legitimize that. The problem isn’t with “the printing press. The problem is that it’s ot being used for public purpose, but for private gain.
Money whatever, but real resources, how long will the U.S. be allowed (and I don’t mean morally, I mean practically) to consume vastly disproportionate amounts of the world’s resources? Yes we’re told we can have everything we have now and twice as much, but even slightly more equal distribution of the world’s resources would probably preclude it (and I’m not even getting into environmental issues here). What if that happens? However what there is could be more evenly distributed in the U.S. and resources could be used more efficiently and allocated better.
Why is this seeming inability to understand our sovereign monetary system so difficult for these individuals to understand? More importantly, given their nonsensical viewpoint, why are these individuals extended any credibility by policy makers and the media whatsoever?
Thank you for answers to these questions in the last two paragraphs of this piece, Joe Firestone. There is a reason why monetary literacy is not taught in our schools and we are instead treated to a constant diet of propaganda and persuasion regarding a set of monetary and fiscal spending policies that work to our detriment and the benefit of a very small segment of the population.
People like Maya have built an echo chamber over the past 40 years. Congress listens to them, because most Congresspeople are part of the echo chamber.
Can the economy grow (meaning growth in real GDP) without concurrent growth in the money supply (i.e. spending)?
It never has and it never will.
So where do these people (including some of the commenters) think the growth in the money supply will come from?
I think they believe that the Fed will increase the high-powered money supply in order to back the private banks who will be expanding the credit-based money supply created by themselves. This means no expansion of net financial assets in the private sector, but continuous destruction of them as the surpluses destroy existing net financial assets. The end result will be periodic booms based on credit alone, matched by periodic bust, the eventual extinction of the middle class, and the creation of a plutocracy, ruled by an oligarchy. We are moving very fast down that road already.
True, but where does the erroneous belief that private credit (expansion) doesn’t have a functional limit come from?
The ability of private debt to expand, assuming prudent underwriting, Is limited by the debtors debt service-to-income ratio. Obviously at some point debt service will overwhelm the ability to service the debt without starving.
Since credit expansion only accounts for a small fraction of overall spending based on historical data, it doesn’t make sense that we can expect credit to drive future growth…at best it will create unsustainable bubbles, which are evident throughout history. The biggest expansion took place post-2000, deviating from the mean by a huge amount, and look where we are now.
Every financial crisis has been debt crisis…i.e. private debt related to banking (assuming a currency sovereign). And Greece is more like a private debtor than a sovereign, so it holds for them too. For Eurozone members public debt is transferred to the private citizens. It doesn’t take much of a leap to see where that is headed. Credit reduces future income over the longer term for 99% of the population, transferring wealth in the form of interest and profit to the top side of town.
When did people start believing they could borrow from Peter to pay Paul? Answer, when the teevee told them they could.
Their banking model assumes loans are made with the savings we put in our banks. Credit is therefore simply a transfer of spending power from a saver to a borrower and debt can never exceed aggregate savings. Folks like Krugman therefore state that there is no such thing as too much private debt.
I agree, Paul. There’s a limit to “bubbleisciousness.”
This is why people like Maya are so successful at what they do in getting educated intellectuals tied up in knots. The author writes an essay challenging her.
And then at the end the author agrees with her premise that debt/deficits matter, that quantity of money is the criterion by which we should judge policy choices.
I never said debts/deficits don’t matter, only that the debt doesn’t matter for solvency, and that the government deficit needs to match the sum of the trade deficit and savings desires.
Actually, I think the debt does matter a lot because using it as a wedge issue distorts our politics and pushes it to the right. That’s why I want to get rid of the debt by using reserves derived from platinum coin seigniorage and paying it back as it falls due, without issuing any new debt.
Of course, my book deals with this in great detail.
Deficits only matter in the sense that they tell us where we’ve been, not where we’re going. Deficits are an ex-post picture of what has already happened. Can’t do much about that without a time machine.
Instead of obsessing over deficits, maybe we should be wondering about why we have high unemployment, crapified lives of quiet desperation for the bulk of the employed with little hope of anything getting better because mathematical dunces are in charge of the kitty.
I think the problem is that when people do wonder about that and come to the conclusion that jobs programs can help us solve that problem, the first thing people do is say: “how we gonna pay for that? And then they bring up the ‘teh debt” and “we’re broke.”
The point of using PCS with a high value platinum coin to eventually take care of the debt, is to get by the debt obsession without having to educate people about why the debt doesn’t matter. Talking past doesn’t help because so many share her assumptions. I don’t agree with her that the debt is a financial problem, but I can hardly not share the idea that it is a political problem The difference is that I thin SHE and her allies are the political problem.
Exactly. You claim that they matter quite a bit. You participate in her debate. She says deficits are bad. You counter that they are good.
The better explanation, I would propose, is to observe that they are irrelevant.
The budget deficits of the past couple decades have been squandered on horrific waste and abuse, from tax cuts for the rich to the most oppressive police state in the world to the most wasteful healthcare system in the world to the most expensive academic system in the world to the most imperialistic military in the world. Mortgage guarantees and student loan guarantees and auto loan guarantees are what is wrong with our financial system, not what is right with it.
The sector financial balances equation doesn’t say that public sector deficits are good. It simply observes that in order to have private sector looting of the domestic economy combined with net imports, government has to pay for it. Which is exactly what we’ve been doing, plundering public resources to fund private interests.
Sure, one mechanism to solve the equation is to print money to fund the looting.
But another option is to reject the looting.
She says deficits are bad. You counter that they are good.
This is incorrect. MMT teaches deficits are neither “good” nor “bad”. They are reflections of the non-government sector’s liquidity preference and cannot be judged in a moral framework.
Firestone is claiming quite directly that deficits are good. He goes so far as to call a world without them a disaster. He says there are only two options – run deficits, or deepen the recession.
So you agree with me. Deficits are neither good nor bad.
That’s a fine statement of academic gobbledygook. Deficits are the difference between tax revenue (currency destruction) and spending outlays (currency creation). To say that they reflect nongovernmental preferences is to confuse cause and effect. The government, not the private sector, controls currency issuance and destruction.
So you agree with me. Deficits are neither good nor bad.
Firestone is claiming quite directly that deficits are good.
No, he is arguing deficits in the current context can deliver a desirable outcome.
He goes so far as to call a world without them a disaster.
Joe writes that Maya recommends a world in which “periodic” disasters result from non-government financial losses.
So you agree with me. Deficits are neither good nor bad.
I’ve been saying deficits are neither good nor bad for years; others for years before that. If you want to characterize this as agreeing with you, fine.
That’s a fine statement of academic gobbledygook. Deficits are the difference between tax revenue (currency destruction) and spending outlays (currency creation).
Which is the effect of the non-government sector spending less than its income.
To say that they reflect nongovernmental preferences is to confuse cause and effect.
See above.
The government, not the private sector, controls currency issuance and destruction.
But it does not control non-government efforts to save. You’re only looking at half the equation.
Yes, I know that’s the academic concept.
But you mean looting. That’s the more descriptive term. That’s what we’re talking about in American political economy.
Systematic public sector support of the top 20% or so of American households at the expense of the bottom 80% or so.
But you mean looting. That’s the more descriptive term.
No, that isn’t what I mean and “looting” is not only grossly inaccurate but a value laden term you’ve snuck in to try and control the discussion.
The sectoral balances equation describes the logical relations among the Government Balance, the private sector balance, and the foreign sector balance. Now whether, a particular deficit is good or bad depends on its context related to other two balances and also whether the deficit is being spent on the right things or not. Some deficits are good, some are bad.
For example, let’s say Government policy targets a 1% of GDP deficit in the context of a 2.5% trade deficit and private sector savings desires of 6% of GDP, and let’s say the Government does whatever is necessary to enforce the target. That’s going to mean that the private sector balance for the time period will be negative 7.5%. For most people in the private sector, that’s going to be a very “bad” deficit indeed.
Moving on to Maya, it doesn’t do any good to refuse to engage in the debate, because that’s just to leave her position uncontested. You can say all you want that the debt is irrelevant, but it will take years to get people to agree. The best way to get them to agree is through seigniorage, because doing that successfully will show the, after the fact to be sure, that it didn’t matter because the financial problem was trivial to solve, in this way making it plain that it was another political distraction from the real issues.
Where is that kind of nuance in the original post?
Okay, what is the value of such a statement? What do percents of GDP have to do with financial fraud and war crimes and the drug war? And why talk abstractly about this? Why not use your specific recommended government policy target? What is that, by the way? Surely it’s higher than 1% of GDP. The government has been running a greater than 1% of GDP deficit for years.
So? You jump from aggregates to distribution with no link whatsoever. What is the connection from the private sector balance being negative to this harming “most people”?
Most people have no meaningful ownership in the American system of political economy. Depending upon exactly how we count it, the top 20% of American households control something like 80-90% of all the net worth in the private sector.
Our situation today is a distributional problem within the private sector. It is not a matter of insufficiently large net transfers from the public sector to the private sector.
What are you talking about? You have built up this debt bogeyman that doesn’t exist. Everyone in Washington knows they can print however many currency units they want to, regardless of how many other currency units they destroy.
When’s the last time the debt ceiling wasn’t raised? For goodness sake, Democratic President Obama supported the Republican President Bush’s tax cuts. This is about as widely accepted as any idea gets. The Fed itself has directly printed over $4 trillion to buy treasury and mortgage backed securities.
What do percents of GDP have to do with financial fraud and war crimes and the drug war?
The subject is sectoral flows, not fraud and crimes and war. Please stop attempting to drag comments off-subject.
And why talk abstractly about this?
If Joe is giving numbers, it isn’t abstract.
Why not use your specific recommended government policy target?
The subject is not Joe’s Plan For America.
What is that, by the way?
What is what?
Surely it’s higher than 1% of GDP.
If you say so.
The government has been running a greater than 1% of GDP deficit for years
Yes. And?
You jump from aggregates to distribution with no link whatsoever.
No, Joe is still discussing aggregates. You’re the only one who made this rather odd leap.
What is the connection from the private sector balance being negative to this harming “most people”?
You mistakenly claim Joe moved from discussion of aggregates to distribution, hurling this as some sort of accusation. You follow this with your own statement, in which you move from aggregates to distribution with no link whatsoever. Good for thee but not for anybody else, eh? Or is it that you go around accusing others of engaging in your own behaviors?
Most people have no meaningful ownership in the American system of political economy.
Off-topic again. If this is what you want to talk about feel free to submit your own essay to Yves, but don’t drag this discussion out of bounds because it isn”t what you want to talk about. You aren’t the Most Important Person Ever.
Our situation today is a distributional problem within the private sector. It is not a matter of insufficiently large net transfers from the public sector to the private sector.
And yet you continuously pound the podium demanding a basic income, which by definition must come from larger net transfers. Your positions are not logically consistent.
You can say all you want that the debt is irrelevant, but it will take years to get people to agree.
Well gee, if it will take years. . .
What are you talking about?
You type out a wall of text and then, after we wade through three-quarters of it, you admit you don’t understand anything Joe has written. That’s time well wasted, thanks.
You have built up this debt bogeyman that doesn’t exist.
Follows from your admission of not understanding. Joe wrote an essay on Maya’s debt shenanigans, explaining the bogeyman does not exist. You muat read more carefully.
Everyone in Washington knows they can print however many currency units they want to, regardless of how many other currency units they destroy.
Not in evidence.
The Fed itself has directly printed over $4 trillion to buy treasury and mortgage backed securities.
No dollars were printed for the purpose of acquiring securities.
First, the post is very clear that public spending including deficit spending should done for public purpose. Another way of saying that is one spends on the right things and not the wrong ones.
Second, you ask what the value is of my example of macroeconomic sectoral balance relationships showing that a 1% of GDP deficit, along with a 2.5% trade deficit implies 7.5% aggregate private sector loss.
I think the value of it is to show that there is a very low likelihood that most Americans can avoid financial losses in such an economy, given the likelihood that the economically powerful will monopolize what gains there are in the private sector, and leave the 9% to bear the burden.
As for my deficit target, I don’t use one. MMTers would manage the economy by targeting full employment, price stability, reduced inequality (in my case minimal inequality), and a number of other goals I’ve specified in other writings, which together identify public purpose. Responsible Fiscal policy should be used only to accomplish public purpose, not to hit deficit targets. So, deficits should be allowed to float while we attempt to hit these other targets.
Your comment shows that you’re a prisoner of the current frame which says that one manages fiscal policy with particular deficit goals in mind. We say ignore deficit goals work for other goals; let deficits float.
On going from aggregates to distributive consequences, my conjecture is just that. It’s not a deductive consequence of the balances. So what? Given the power relationships in our society, isn’t it likely that the aggregate 7.5% losses in the private sector will be distributed so that the powerful will suffer much less and most of the people much more?
I agree, but changing the power structure is, in part, a matter of getting new net financial assets to the people who need them. Government programs using deficit spending can greatly accelerate this process. So, we need to make sure that government inputs into the private sector are highly positive and also that this spending on the right things.
I don’t know how many in Washington know this, and how many do not, and neither do you. And if you think you know then let’s have some empirical evidence on the subject. In any case however, less important tan how many DCers have a clue, is how many voters know that the Government can do this and the debt is a faux problem. Public opinion polls show that very few Americans know what you say is obvious and it was to people in general that I was referring in my statement.
When’s the last time the debt ceiling wasn’t raised? For goodness sake, Democratic President Obama supported the Republican President Bush’s tax cuts. This is about as widely accepted as any idea gets. The Fed itself has directly printed over $4 trillion to buy treasury and mortgage backed securities.
Thanks for the more detailed response. You seem to be saying that deficit spending has a higher probability of circumventing the power structure problem than balanced budgets or budget surpluses. That distinction is what I’m rejecting. I’d say Dick Cheney and the deficits don’t matter crowd have shown quite clearly that deficit spending can be a rather powerful tool of the existing power structure. If anything, they seem to prefer that method in our contemporary post Bretton Woods period.
Not just theoretically – in practice. I’m not sure why you’re asking for evidence. It’s what has been happening for a decade and a half. Cheney was describing sector financial balances when defending tax cuts. EESA specifically increased the debt ceiling, rather than levying taxes, to fund TARP. On and on, this is what budgeting has been like in the 21st century:
https://www.whitehouse.gov/omb/budget/Historicals
No, I’m not saying that. I’m saying that the general spreading of the view 1) we can always deficit spend without solvency problems, and 2) deficit spend to the point of full employment without that spending causing demand-pull inflation, would free up progressive politicians to aggressively pursue sorely needed domestic discretionary programs and social justice, and safety net spending without worrying about the charge that they are fiscally irresponsible. That’s a key change in the political context, and one we sorely need.
On Cheney, we have to keep in mind that his “deficit don’t matter” was in defense of proposals to cut taxes and engage more defense spending, but he always felt perfectly at home calling social spending fiscally irresponsible. In contrast, our “deficits do matter, just not in the way you think” is about pointing to the possibility that even though they don’t matter for solvency, they can certainly be too large or too small for the economic context, and also that there are “good deficits” and “bad deficits” depending on whether on what the spending is for,
As far as Cheney’s understanding sectoral financial balances is concerned, I’d like to see some quotes about that because I doubt that he knows anything about them.
So you acknowledge that deficit spending is just as likely to be abused by our existing system as balanced budgets or budget surpluses?
Of course we can deficit spend without payment problems. The debt ceiling and associated debates are kabuki theater, not substantive concerns.
As far as freeing up Democrats, that’s a good laugh. Democrats don’t represent working Americans or the public good. And the public isn’t opposed to social insurance. The Social Security Act’s various activities are some of the most broadly popular and effective parts of the entire government. Where it doesn’t work well is generally where a large governable majority of Americans wish the government had a simpler, national, universal program.
If you’re making a public opinion point on inflation, who cares about what kind of inflation is happening? The cost of a middle class standard of living has risen so enormously that most people can’t afford it. Creating academic debates about what kind of inflation it is just makes people laugh at economics. This is a large blind spot I have seen in how MMT ideas are used for political advocacy. There seems to be a lack of understanding amongst more comfortable and educated leftists of how expensive almost everything in our society has become relative to median wages.
Of course Cheney used the Reagan proved deficits don’t matter quote to advocate for tax cuts and authoritarian spending. That’s my point. There is no opposition to sovereign money. The disagreement is not about payment logistics. It’s about who should get the money.
For you to then ask for evidence of describing SFB suggests you aren’t seeing this. Cheney defended tax cuts on the grounds it would put money in the pockets of people earning it. That’s called using public sector deficits to increase private sector savings.
We agree there are good deficits and bad deficits. Which is why it’s pointless to talk about deficits or to deride the idea of balanced budgets and fiscal responsibility. That’s the framework the Mayas of the world want MMTers to take so they sound silly in the wild, outside the careful walls and assumptions and definitions of academia.
Raising taxes on rich people would cause a smaller budget deficit. That doesn’t mean a balanced budget is a goal. It’s just a consequence, an outcome, of doing something where the benefits outweigh the costs.
And on printing to continue looting, I certainly don’t advocate that. What I do advocate is solving our problems, where necessary with deficit spending that will be used for programs that fulfill public purpose.
Now that I agree with. Who disagrees with that?
The discussion is about what is public purpose.
Here’s my current view.
Everyone’s theory of public purpose will differ, it’s up to the people to decide on what versions of public purpose they most favor.
Absolutely, that’s where we agree. My point is that debating national health insurance, for example, has nothing to do with deficits or the logistical capability of the government to finance operations.
Indeed, the healthcare system is so bloated at this point that a national system would actually be contractionary. It would decrease public sector support of private sector institutions like hospital franchises and drug dealers and medical schools.
It would. And, most importantly it would decrease private spending on healthcare by $900 Billion per year, assuming we could be as efficient as Canada’s system is.
“That’s because for such a currency issuer, whatever debt level exists and falls due at any point, that debt can always be repaid because it is denominated in the currency the debtor nation can issue at will. All repayment takes then, is the willingness of the issuer to issue the money needed and to use it to repay the debt due.”
Worked for the Weimer Republic, why shouldn’t it work for us? What could possibly go wrong?
The worst aspect of this sort of thinking is that it validates inequality. Why should the 1% pay more taxes when MMT or a platinum coin can solve all our problems? Sounds like Pie in the Sky to me.
The situation is not remotely comparable. The Wiemar Republic had to repay it’s debt in hard currency, not Marks. They wouldn’t have had a problem if their debt was denominated in Marks.
The debt* wasn’t offered to them on the condition they pay it back in Marks. Same as lenders aren’t clamoring to lend Greece Euros on the condition that Greece gets to pay it back in Drachma. I know, it’s a strange world…
* I generally don’t go the “W” analogy direction for numerous reasons – WW1 losers have crappy credit, German coal was hard currency, War reparations are debt – hard to productively deploy this borrowing?!….etc…
I’ve certainly tired of this MMT lesson drilled into my stupid skull. If I could only absorb the fact that debt holders really aren’t looking for a real return on lending and would be satisfied with the proper number of decimal points added to their account, then I would be an enlightened person too!
It doesn’t matter what we value on any given day; it only matters that we value something.
I think you’re missing the point. When lenders provide money they do so on condition of getting a particular payback. If they get that payback then the contract is fulfilled, whether the fulfillment gives them the real return they’re looking for or no is the risk they take.
When bond traders are acting rational (not seen lately in the QE world*) they try and gauge their risk vs reward. This includes credit risk(default), currency risk, inflation risk, opportunity risk, and maybe some I don’t recall at the moment. This is not an exact science. Closer to dart throwing and pulling numbers outta your butt, as far as I can tell. But we do have a thing called “inflation expectations”. For instance, King Dollar has a low one. Brazilian Real, not so much. Ergo, Brazilian Real Debt pays a significant higher interest rate than US Treasuries. I shit you not.
* This is called “financial repression”. Envision Central Bankers sticking their jackboots in “savers” faces. Credit cards are still 12-22% interest.
** saver – something the current world requires you to be if you don’t want to drop dead 3 days after not working for any reason.
I believe you. So what?
“real” return. But this is when you tell me MMTers are sovereign money printers and are anti-inflation, or something. The economy has a precision dial on it and someone sets the inflation rate at exactly where it needs to be – and the inflation flows to all the good places and none of the bad places (same as in all flavors of econ.) Keynesians have the fiscal spending thing covered already.Not trying to be generally adversarial here, but call me very skeptical. I also think MMTers would be better off dumping MMT – it is just not quite right on a number of points and the silly explanations get in the way of any social objectives you may have. Trying to explain to everyone your ideas of how money flip flops around the economy is a distraction. There is plenty of other things to spend the bandwidth on.
Everyone’s entitled to skepticism, but I tend to be very skeptical about continuing to follow strategies that have failed progressives for many, many years. When old-style Keynesians get into power they rely too much on monetary policy to make things happen,and once the economy gets going they back off deficit spending because it’s “good times,” even though that spending may be needed due to trade deficits and savings desires that are driving down demand. That just re-creates the cycles we’re trying to moderate.
Also, keynesians still continue to do fiscal policy as if deficits should be managed rather than allowed to float with savings desires and trade deficits. That’s just the wrong kind of budgeting. You’ll probably see an example of this in just a few days if the CPC comes out with a budget. It will have more taxes and spending, but it will also have targeted deficits that one can immediately see are too small to maintain robust full employment over time.
“When old-style Keynesians get into power they rely too much on monetary policy ”
There you go. But we do need to define old. This was not the case in Galbraith Sr.’s heyday. The emergence of neo-liberalism coincided with brow beating the Ks into monetarists!
So I would call that much more a poly-sci thing than econ theory. Then all I need to do is preach from the old Galbraith Good Book, and refer people to it to read more of Saint Gs teachings. Most people won’t care one way or another if loans proceed deposits, or what Krugman thinks about loanable funds. But they may be interested to know that you are all wrong ever since banks stated securitizing their loan books.
Then there is taxes don’t fund spending. That is pandering to somebody. It’s a true observation ever since Reagan, but it’s a sign of a broken system – not a system that needs a theory created.
This century, if we look at factors excluding the GFC, that have been the largest cause of an imbalance between taxes and spending, it is the Bush Tax cuts and Medicare Part B. Prior to the GFC I saw charts with these factors backed out – and the US looked like the paragon of fiscal responsibility. I think it was Menzie Chen who did those.
The other thing MMT seems to get wrong is that somehow the world caves in without adequate deficit spending. This really needs to be examined in three cases – because there are three basic “uses” of the deficit (besides getting some money to spend), or more accurately, the accumulated national debt.
There is a need in the current (worldwide) “central banking separate from the Treasury scheme” for the central bank to buy government bonds. This is how the CB “creates money” and pays for the bonds, thereby injecting liquidity into the economy. So when you start up a brand new country, the Treasury prints up some bonds and the CB prints up some money, they swap, and a country is born. This transaction is recorded on the CB balance sheet. They may do it again to grow the money supply consistent with a growing economy-population. It’s done with short term bonds so the CB can take the economies temperature, then vary the quantity of money in circulation. The size of the Fed balance sheet prior to GFC, ZIRP, QE 1-4 was $900 Billion. So that how much “money” or “liquidity” the economy needed.
Then Wall Street prefers to use short term US treasuries as collateral to fund “shadow banking” and who knows what else. The jury is still out on whether we should care or not.
The other thing MMT seems to get wrong is there needs to be enough government bonds to support savings desires, and some weird conclusion that if the government pays off bonds and doesn’t issue an equivalent amount, ie reduce the national debt, that this somehow would destroy our savings. hahaha. Um, when the bond comes due, the USG gives you money for it and you put it in your bank account. If you want to pull it out, the Fed will backstop the bank in order to let you have all the cash you want. So at this point you have your money and may want to reinvest it. If there were no more gov bonds to buy, you would have to invest in something else. So there is nothing catastrophic that occurs – but it is a low risk investment, so it probably does mean you alternatives will push you into higher risk – which you may not want.
so, that’s enough typing for now.
Then there is taxes don’t fund spending. That is pandering to somebody. It’s a true observation ever since Reagan, but it’s a sign of a broken system – not a system that needs a theory created.
No, it is a true observation at all times, for “all” monetary systems (as if there were more than one!). To think that taxes have ever funded spending anywhere, could ever fund spending is to believe in time travel. How can a state repay a debt (tax someone) before it incurs it (spends)? It takes time and patience to look at things slowly, carefully, in fine-grained enough detail to make sense, and realize that understanding such “obvious” trivialities is of the highest importance. [Knowing the power of trivialities in other sciences is very helpful.] Because almost everyone gets these things very wrong these days.
The other thing MMT seems to get wrong is there needs to be enough government bonds to support savings desires, …. M.
Huh??? This paragraph is the opposite of MMT, which not only says none of those thing must be done, but that they don’t mean much whichever choice is made.
Well then, I guess governments have never had a problem with debt in the history of world, and deficits don’t matter then That’s a relief.
The other problem is that MMT doesn’t seem to have the abridged Cliff Notes of MMT anywhere that MMTers can refer to before telling the rest of us about MMT.
Somewhere in these copious comments Joe did say that there needs to be enough government bonds to support “savings desires”, which I’ve read elsewhere numerous times and prompted me to summarize my “3 uses of government debt besides getting money to spend”.
The other fine point is MMT and other economists whom are aware that there could be such a thing as sectorial balances also state that a trade deficit does/must result in excess foreign dollar reserves being re-invested in Treasuries. Not so. It’s a preference again. They can buy anything “Dollar denominated”. Stocks, corp bonds, real estate, whole companies… it’s just that Congress may get involved and block deals if, say, China wants to buy Exxon or Lockheed (please, please) or whatever else we hold dear.
So an alternative to selling more Treasuries to satisfy foreign dollar needs is to just sign over the entire country to them.
But then there is the power of Fiat – our government can always tell them no, you’re not getting our country. Cheney was a neo-chartalist.
I guess I’ve an opportunity to have a happy ending to this story.
If foreigners ever complain that we won’t let them buy whatever they want with their dollars, and in exasperation exclaim “What are Dollars good for then?”, we can reply “paying taxes”.
That would be cool.
Well then, I guess governments have never had a problem with debt in the history of world, and deficits don’t matter then That’s a relief.
That does not follow from anything I said, which is just about “running the movie in the right direction” – which has become unusual. This is the really important thing, not worrying about central banks and bonds etc. I would recommend Wray’s books, and above all, Mitchell-Innes papers, and the book on them.
a trade deficit does/must result in excess foreign dollar reserves being re-invested in Treasuries. Not so. It’s a preference again. They can buy anything “Dollar denominated”. Stocks, corp bonds, real estate, whole companies…
MMT doesn’t say this. This is saying that trade deficits and current account deficits are different. True. But when trade-acquired dollars/bonds are used to buy those “anythings”, someone else, maybe in the USA, will have those dollars/bonds. They don’t disappear into thin air.
weird conclusion that if the government pays off bonds and doesn’t issue an equivalent amount, ie reduce the national debt, that this somehow would destroy our savings.
This is not something that MMT concludes, or says “will destroy our savings”. If anything, MMT says, do that – pay off all the “bonds” with currency. No “bonds” at all.
But it wouldn’t do much. Government bonds, government debt is government money, and government money is a government bond, a government debt. They’re the same thing. You are clearly misunderstanding something Joe said.
The basic problem here is not that debt holders want a real return on lending; it’s that we have failed to understand the lesson that they’ll get what we give them and they’ll like it.
Just because a bond holder doesn’t *want* his x%-interest bond repaid with 0%-interest cash doesn’t mean we aren’t entitled to do just that. Doing so would be great, because a) it plugs a big leak by which the money (which has distributional value for our economy, if nothing else) gets handed over to wealthy elites, and b) it proves that public spending–on social programs, on infrastructural investment, etc.–doesn’t have to come with an oligarch’s ransom attached.
If debt holders want a real return on lending, they can lend to a venture and take on actual risk. That would also be to the better, as it stands some chance of stimulating actual economic development.
Sounds like nonsense to me. The Weimar Republic had foreign debts in currencies they couldn’t issue: namely gold, in their case. The burden involved was initially 50% of their GDP. They issued more and more paper to get the gold reserves they needed to pay the war debt, but international markets responded by quickly devaluing Weimar’s currency, making it harder and harder for Weimar to get the gold it needed.
In contrast, fiat sovereign currency issues like the US has no external debts in foreign currencies. That’s one of the conditions for being a fiat sovereign.
Briefly, because the Finance Industry has built up 11 Gross Global Products worth of alleged money by using the MMT principles for themselves instead of for us. This is enough to swamp any real market, and makes money useless for many purposes. The market can’t decide what should be produced because all that money just shouts “Produce everything!”. There would be the same problem deciding what to consume, except that would-be consumers have practically none of the money, otherwise the answer would be similar. Most of our usual Geldspielen get bollixed up in similar ways. People who work on MMT have paid a lot of attention to this — just the critics haven’t.
The Platinum Coin is there to resist the people who claim that all the money they have cornered is all the money there can be. If you look around, you see Euro-American society collapsing by following those rules. To survive, we need to make some rules that work for us.
You have the point! And platinum coin seigniorage is one set of rules that can work for us.
MMT is not the solution.
It is the problem.
Depends on what you mean by MMT! I don’t think the MMT approach has been used to guide public policy to any great extent anywhere quite yet!
Then why go thru the charade of debt issuance at all, Joe? Why borrow from others and pay interest, when we can print it up just as easily for free? If our position as the dominant currency is inviolable, we should just print money and distribute it directly to our citizens. Right?
That’s one of those seemingly very basic questions that I ask as well.
I have always assumed the reason is that certain people make fortunes buying and selling “national debt”, not that it’s necessary.
Why collect taxes? If the treasury can print an infinite amount of money with no negative effects, why do they need to take money from the citizens?
Taxes drive money, meaning you need a certain amount of taxation to ensure that people still need the currency. There are also many other reasons for taxing: see Randy Wray: here.
So in other words, taxation still funds any spending not paid for by a decrease in the purchasing power of the currency. We just call it ‘driving money’ instead of ‘paying for spending’.
Wray has a very intriguing analogy in that post.
After taxing the run away from Boston, New York is better off. No runs have to be added to New York. The mere removal of runs from Boston helps improve New York’s position in the game.
Taxes do drive money, but there’s no one-to-one correlation between tax revenue collected and spending capability. No one knows just how much taxation is necessary to support currency value. Our best guess is enough to make people and institutions feel that they need the currency to pay their own taxes.
So in other words, taxation still funds any spending not paid for by a decrease in the purchasing power of the currency.
Not at all. This can be (quasi, metaphorically) true – in the way that wheels can appear to be going backward under a flashing light – but it hardly ever is in modern capitalist societies. They are almost always run in an insane way that simultaneously decreases the currency’s purchasing power AND spends too little for any sane notion of public purpose – evidence of this is that there is one person unemployed, that the insane society does not have a JG.
Then why go thru the charade of debt issuance at all, Joe?
For the purpose of corporate welfare. The wealthy wan a risk free place to earn interest so that’s what they get, romantic tales about brave risk-takers aside.
In fact, we don’t have to issue debt. As far as helicopter drops of money in return for nothing are concerned however, those need to be strictly limited for variety of reasons related to preventing inflation and ensuring the smooth working a modern economy. However, creating money to fund Job Guarantee programs or many other activities that produce is desirable.
Sounds like you’re backpedaling, Joe. “That’s because for such a currency issuer, whatever debt level exists and falls due at any point, that debt can always be repaid because it is denominated in the currency the debtor nation can issue at will.” If this claim is true, why do you worry about inflation? Face it, Joe, the Fed’s goal is to push the nation’s currency as close to hyperinflation is possible. Otherwise, we’re leaving potential debt-fueled growth on the table, right? Just as nobody knows how much taxation is needed to “drive” the currency, as you say, nobody knows how much money printing is needed to initiate the jump to hyperinflation.
Vito Corleone to fruit vendor: I see you have a lot of money here. I offer protection.
Fruit Vendor quite, head down.
Vito: I will protect your money…for a fee.
Fruit Vendor shaking a bit.
Vito continued: It’s called negative interest. You have no better, safer place to park it. Lend to me…check that…park it in our secured household…our family… for a reasonable fee. What do you say? An offer you can’t resist?
Mark Blyth, Brown University economist, eviscerated these Fix the Debt ideas earlier this week in a 5-minute presentation before the Budget subcommittee (his presentation can be viewed on The Real News Network, and his written remarks to Congress can be found in a PDF online). His opening lines: “You don’t have a spending problem. You have a revenue problem.” His closing lines: “Austerity doesn’t fix debt. Growth fixes debt.” In between, his charts show that our taxes on high wage earners are way below OECD countries; that the only reason for the increase in debt was, as he put it, “You decided to bail out the entire global financial community,”; and, that since the late 1800s, every time an austerity program has been instituted, either a recession or a depression followed immediately.
Blyth is one of the most no-nonsense economists I’ve ever heard, and he’s one of the preeminent voice on anti-austerity. I’m surprised NC doesn’t give him more coverage.
He’s a political scientist, as am I, writing on political economy. His book is excellent in many respects, but it is still within the old paradigm, and his writing reflects the idea that public debt is something negative, from a public finance point of view.
I haven’t read his book yet, but I’ve read many of his articles and listened to his talks via YouTube. The only thing “old paradigm” about him that I’ve been able to distinguish is that he still believes in capitalism, albeit a more heavily regulated system. Everything he writes suggests that he is a believer in government debt to promote growth and minimize economic inequality, so I don’t understand your comment.
I hope he answers you directly, but I understand your confusion.
To summarize, Firestone is concerned for the savings desires of the private sector (in the sector financial balances model). Blyth’s primary sin appears to be explicitly talking about taxes. Firestone doesn’t like taxes because taxation represents the destruction of those private sector savings he likes.
The confusion comes from the uncomfortable truth that most of the private sector savings are controlled by the top 20% of American households (and especially the top 10%, and especially the top 1%…), so to use the sector financial balances model as a defense of government deficits is tantamount to embracing, or at least tolerating, a certain level of systemic, policy-induced inequality.
Oh, I like taxes alright. But not for revenue. I like ’em to recoup “sinful gains.” I like ’em to discourage bad behavior. I like ’em to make the economy less unequal. I like ’em to cool over-heated economies. Just not because I falsely claim that they pay for anything, because I don’t think they do.
I also don’t like ’em when they interfere with other goals. Suppose, we have a very progressive sweep into office and a free hand to pass a Job Guarantee, enhanced Medicare for All, a student debt jubilee with free education through graduate school going forward, doubling SS benefits, the infrastructure we need, the new energy foundations we need, and a really great climate change-ending program. Would I be willing to hold up such a program because I couldn’t get further taxes on the rich? No, I’d say, we do the rest and then after we’ve fulfilled the hopes of the public and gained political credit we then take on the job of increasing taxes for a variety of purposes.
Right, because in your system, there is no such thing as revenue. But that’s an issue of semantics, not substance. The concept of purchasing power, no matter what we call it, is still there.
Your notion that taxing the rich is unpopular and generally unrelated to good policy is what I’m pointing out here, and your answer supports and explains that preference.
God, I don’t see how you can read that into my answer. I never said that taxing the rich was unpopular and that it wasn’t good policy. I just said it wasn’t needed for revenue, and also said that it was good for getting to many important goals.
Did you not post the comment you meant to? I sympathize that happens sometimes.
You specifically created a framework where raising taxes is some ancillary side issue rather than one of the core policy choices. One of the best environmental policies we could implement, for example, would be to reclaim progressive income taxation and rethink our approach to infrastructure. Just the home mortgage interest tax deduction and special tax treatment of capital gains are responsible for enormous environmental devastation, from habitat destruction to GHG emissions.
He believes that the debt to GDP ratio matters for the US and the UK and their governments with sovereign fiat currencies. So he subscribes to the view that eventually debt levels in such nations can affect the capacity to deficit spend.
Being free to spend public money for public purposes has never been part of American Freedom. Our freedom has always preferred that we risk everything to make a living. We don’t even have single payer health insurance. Its funny how people – whose jobs were being sent to Asia in a Wall Street blitzkrieg against labor – did risk everything in real estate as the only way left way to grow their tiny share of American wealth. And in the course of 3 decades had created that wealth, but created it by inflation and on credit. This is what our irrrational economic system demanded; there were no other options. And people did it, trusting that this was the way things were done and real estate would therefore remain a stable industry. Realtors who couldn’t afford health care and had to rely on donations from other realtors, still believed this was the American way. Makes me wonder if the housing industry was brought down because it achieved exactly what the system needed – a bubble – because without a bubble there could be no crash, and etc. But the system itself finally imploded along with all of its nonsense. If we had fiscal choices, here in the land of the free, would we frantically create other bubbles?
Thank you for an excellent comment, STO. Only thing I would add are the lost and impaired lives of our young people who “volunteered” for the military to preserve Bucky’s global role on behalf of the few.
This is incredible nonsense.
To state that the ratio of debt to GDP has nothing to do with solvency simply encourages our lawmakers to continue piling on deficits which we cannot repay.
IF we cannot repay our debts, we are insolvent.
If we could pay off our debts, we would have done so through your magical idea of seigniorage. It has not been done, apparently, because it cannot be done.
Is seigniorage even in the dictionary?
Jim Deal
That’s not a criticism of my point as much as it of what you, debatably, think would be the consequences of its adoption. So let’s get real. I’ve said that for fiat sovereign governments, only, with the authority to create their own currency at will and in unlimited amounts at any time, how would a high debt-to-GDP level constrain them? Is there any legal barrier reducing their capability to spend? Is there any any financial reason why they could not spend further to pay their debts as they fall do? The answers to these questions are obvious. The debt-to-GDP ratio is irrelevant because the incapacity to create new currency is zero.
Did you read the post? It says that fiat sovereigns can always pay their debts, so, it follows that they can never be forced into insolvency.
Well first, the seigniorage legislation enabling use of this power wasn’t passed until 1996. Then the first proposal pointing that the legislation allowed platinum coin seigniorage appeared only in 2010, and became widely known only during the summer of 2011. In order to implement it, you need a president willing to do so. This president wasn’t willing to do it. Personally, I believe he wasn’t because he was angling for a political situation that would produce a compromise on his beloved “grand bargain” with Republicans during 2012 or later. Also, he governs like a Republican, so he wasn’t much interested in showing people that “money was no object” when it comes to progressive economic legislation.”
Google it: You’ll find 254,000 hits and a number of definitions.
Will politicians ever stop using Reinhart-Rogoff as a justification for austerity?:
Unfortunately, Sessions has apparently learned nothing over the last two years.
Is he not familiar with Herndon, Ash, and Pollin? What about Lof and Malinen? Or Panizza and Presbitero? You think he knows about the work of Pescatori, Sandri, and Simon? Markus Eberhardt? Égert? Dube? Proaño, Schoder, and Semmler? Tica et al.? Kimball and Wang?
And that’s not even including (more) heterodox voices like Palley or Nersisyan and Wray.
I posted this a few days ago, but I thought it may be relevant since Sessions was attempting to bolster MacGuineas’ case via an appeal to the writings of Reinhart-Rogoff.
I forgot to include Bell, Johnston, and Jones.
Thanks for the list!
No problem. Although on the shorter side, there is also Amann and Middleditch & Calhoun.
Fiscal choices? Prudence? Those only mean anything to the very few who’ve positioned themselves, or fallen into position, to choose. The few braggarts here who claim success as self made financially secure babe magnets, they’ve found a few leaks in the dam. What about the prudent very hard working increasingly slave- driven billions, who have maybe at best my grandparents’ mantra as their only fiscal policy or monetary theory: ” Eat it up, wear it out, make it do, do without”? Lots of ideas here, some decent, some pernicious. No prescription s for any medicine of which the side effects aren’t worse than the disease…
Doesn’t matter of course. Greed and self pleasing and self advantage make it near impossible for 8 billion of us to agree to support a ” genteel sufficiency” for all of us. Via platinum coins or budget surpluses or the froth that apologists for the incipient train wreck eject.
I admire the political objective of trying to save the safety net. But if progressives really want a just world with a fair distribution of the wealth, promoting MMT is not a long term solution. Look at what has happened to the world since we adopted a pure fiat system. Power over the monetary system got super-concentrated. The whole world financial system now takes its cue from the Fed. The entire economy has become over-financialized. Capital has crushed labor. The rich poor gap has expanded. ZIRP make it impossible for the average person to save for retirement. We spend gazillions of dollars funding the NSA, American adventurism overseas, drone wars, torture black sites, overseas military bases in more than 100 countries. Yet whenever someone suggests that maybe we cannot afford all that, Dick Cheney just laughs and says “Deficits don’t matter.” And MMT advocates agree with him!
The only real solution is to undo the concentration of financial power and the debt based pure fiat system that enables it. Like the One Ring, the only way to break its power over the masses is to throw it into the volcano. But no! Like Boromir, out MMT friends insist that we should use the One Ring for good, that we should fully embrace this new modern monetary system and proclaim that there is now enough money for everything, including a few crumbs for the people. I say hogwash. I admire the political objective, but I give it zero chance of success over the long run.
Power over the monetary system got super-concentrated. The whole world financial system now takes its cue from the Fed. The entire economy has become over-financialized. Capital has crushed labor. The rich poor gap has expanded.
So, a continuation of what was happening on the gold standard.
We spend gazillions of dollars funding the NSA, American adventurism overseas, drone wars, torture black sites, overseas military bases in more than 100 countries.
So, a continuation of what was happening on the gold standard.
Yet whenever someone suggests that maybe we cannot afford all that, Dick Cheney just laughs and says “Deficits don’t matter.” And MMT advocates agree with him!
No, MMT does not agree with Dick Cheney. Nice try with the lie.
So, a continuation of what was happening on the gold standard.
Correlation does not necessarily imply causation, but look at what happened to real wage growth in the first half of the 1970s.
http://en.wikipedia.org/wiki/Real_wage#/media/File:US_productivity_and_real_wages.jpg
So, a continuation of what was happening on the gold standard.
Correlation does not necessarily imply causation, but it sure looks to me like military spending in real terms has about doubled since the 1970s.
http://tinyurl.com/bkcg2mx
No, MMT does not agree with Dick Cheney. Nice try with the lie.
Not a lie at all. That’s the entire argument of MMT: “Austerity is bad. Deficits don’t matter.” Or even: “Bring on the deficits! More spending, more spending.” Not a lie at all!
So, a continuation of what was happening on the gold standard which you’ve confused with the gold window, making yourself look super silly.
And yes, you are a liar, a lying liar and liar’s lying liar who tells lies. Present an MMT economist stating “Deficits don’t matter” or report back to Fix The Debt that your talking points aren’t working.
Buh-bye!
My post referred to a “pure fiat system”, not the gold standard, so my references to the 1970s as a reference point are fully appropriate in the context of what I wrote. That event is what eliminated restraint in this modern monetary age.
Go ahead, call me “Liar Liar Pants on fire!” if you must. But oops — if I write that, you will complain that I misquoted you. Then you will correct me and say that you really called me a ” liar’s lying liar who tells lies.” Is there a difference? Perhaps you can split hairs and find one. To me it’s the same as splitting hairs in the explanation of how MMT says “Deficits matter, but not in the way you think.” Alchemy of money, and alchemy of words thrown in too.
And your suggestion that I have some affiliation with Fix the Debt . . . I am really really tempted to hurl a personal insult at you for that one. But out of respect for the site I will exercise self control and bite my tongue.
Believe it or not, Ben, there really are a few progressives out there who believe in fiscal responsibility, and who believe that the government cannot afford a lot of the things its is squandering resources on. Too bad we end up divided on issues like this. If you want to dismiss me with “Buh-bye” so be it.
I think all progressives are in favor of real fiscal responsibility, the question is what that means. I think that for fiat sovereign nations it means spending to maximize public purpose outcomes rather that in a manner consistent with reducing the debt to GDP ratio or balancing the budget. In fact, I think the latter is real fiscal irreponsibility, and I think we’ve been pursuing that since Jimmy Carter’s Administration and perhaps before that as well, with the exception of some of Reagan’s Administration, which was irresponsible for other reasons.
Believe it or not, Ben, there really are a few progressives out there who believe in fiscal responsibility, and who believe that the government cannot afford a lot of the things its is squandering resources on.
They are called conservatives. Just like you.
Amends Ben, tho it does seem quite similar to the robo signer problem, one individual with many hats.
Skippy…. whom they think they are speaking too… dictates which hat they have on… but the voice is the same regardless…
They are called conservatives. Just like you.
Hmm. I support a return of the 90% tax rate for the highest bracket. I am cheering for Syriza. I supported Occupy. I oppose the militarization of the police. I think that maintaining the safety net should take priority over American adventurism overseas. I support a single payer national health care system.
I do not think that word “conservative” means what you think it means. Your litmus test strikes me as being overly rigid and your attitude too dismissive. But given the polarization of politics in the US, I guess I should not be surprised. Shrug.
No, it is a lie. MMTers never say that deficits don’t matter. We always say that deficits do matter, just not in the way you think.
Nor can you find “deficit don’t matter” in my post. I say that debt doesn’t matter for a fiat sovereign, but I never say that for deficits.
Mr. Firestone, thank you for responding to my comment. I realize that MMT economists do not use that specific phrase, and are more careful about the way they parse words. But ultimately there is an issue of interpretation here, is there not? Especially when MMT starts making policy suggestions for increased spending? Krugman interprets MMT to take the position that “Deficits don’t matter” (in those words), so I think that the term “liar” is a bit harsh, no?
Krugman has not been an honest reporter on MMT, so citing him is disingenuous at best. He has a habit of either not bothering to understand or worse, cherry picking and straw manning heterodox theories, witness his repeated dustups with Steve Keen.
In other words, saying “Krugman says so” cuts no more ice on the subject of heterodox theories than “Fox News says so.”
MMT theorists regularly and consistently say that real resources, as in inflation, is the constraint on deficits. The onus is on you to prove otherwise.
Krugman’s not honest about this. See my previous post.
And to answer your question, no, it is not a matter of interpretation. MMTers uniformly say “deficits do matter,” for various reasons, among them that they can have inflationary consequences. Krugman never acknowledges this, or quotes any MMTers. He just makes his claim, fails to document them, and then when corrected in comments by people who quote what MMTers actually say, he just stonewalls.
If he submitted an academic article criticizing economists he disagreed with and failed to extensively quote to document his claims, then his article would be rejected by that Journal, Nobel prize or not! If a graduate student of his tried that baloney in a paper, Krugman would rightly fail that paper.
Bobbo – I agree. Whenever I come here, I feel as if I’ve arrived on another planet.
I actually agree with most of what I find at NC, and I commend Yves for all of her dedication in making this site what it has become. I admire her outspoken support for the Occupy movement, her criticism of the deep state, her criticism of Obama’s betrayal of everything the progressive movement stands for, her criticism of the TBTF banks, her frequent cross posts to Ilargi, her battle against CALPERS, her work exposing all the mortgage foreclosure fraud. I could go on and on. Great job Yves! But when it comes to the MMT posts, I see an inconguency and can only scratch my head.
I hate to tell you, but your reaction means you have not made a bona fide effort to understand MMT. It is a very clear, empirical explanation of how monetary operations work in a fiat currency. However, to understand how that functions, you have to unlearn a lot of incorrect information, which most people find hard to do, either intellectually or emotionally.
This is exactly the same problem that Thomas Kuhn discusses in his Theory of Scientific Revolutions, that the way new paradigms become accepted is not by the incumbents learning and adopting the new theory. It is by them dying out and being replaced by a younger generation that has the intellectual flexibility to examine it and embrace it on its merits.
And to add to Yves’s comment, you need to accept the possibility that Paul K. is wrong about his loanable funds market model. He believes such a thing exists in sovereign fiat currency systems, but examination of actual banking operations shows that it does not. Paul K.’s basis for saying that MMT views on deficit spending policies risk hyper-inflation are based on his interpretation of how the loanable funds market would work. But since there is no such market, there is also no such problem with MMT.
Now you may say that all this is a matter of interpretation, as shown by reference to theoretical differences. However, I’m pointing out why Paul K. thinks MMT won’t work and saying he’s wrong about that. But what he’s saying is that MMTers think deficits don’t matter when we don’t say that at all. So, that’s just a clear error.
Now, a legitimate response might have been to say MMT economists say that deficits do matter and there’s no reason to think that they do not mean what they say, however, for these reasons their models imply that deficits don’t matter and here’s why that view is wrong.
I understand and accept that MMT is a correct empirical explanation of how monetary operations currently work for the US Dollar. However, I think that this is a historical anomaly. The achilles heel is confidence in the currency manager’s power to maintain a stable value of the currency. I think tax policy is a blunt instrument in this regard. I am also ideologically opposed to a top-down oriented ultra-centralized system, as I think this will always be vulnerable to control and manipulation by the elites (which I see in the real world everywhere I look, and for which I have zero confidence in MMT to turn that tide) — and that’s assuming that it works. Just because it has worked since 1971 does not, at least in my mind, make it stable. I wonder how stable the monetary system really is when it mathematically requires growth, but growth is proving to be harder and harder to generate with more debt. By invoking the empirical results of the last 50 years I concede that your camp has the upper hand for now, but I do not expect that to continue for another 50 years. We shall see.
i don’t see the last 40 years as producing very good results either. However, I don’t think was due to the move away from the gold standard. We did that of course, but the policies implemented in Washington for most of that time showed no consciousness of the increased policy space we gained from that. Policy makers, talked, thought, and acted as if were on a limited gold standard.
You see, even if money operations over that time are consistent with MMT descriptions, this says nothing about whether MMT-based policies were followed by policy makers. In fact, the opposite was true. There was no commitment to functional finance or to full employment or to many other goals about which MMT economists write. In fact, policies were guided mostly by monetarists with occasional inputs from keynesians and supply-siders. MMTers have never been at the table.
By invoking the empirical results of the last 50 years I concede that your camp has the upper hand for now, but I do not expect that to continue for another 50 years.
That’s called useless information. Given that currencies have been issued by fiat for tbe last 4000 (not the last fifty), I’m sure if you push your prognostication out far enough it will eventually come true.
Look at the data. Adding additional debt is not stimulating growth like it once did. Just look at the data and tell me this is sustainable.
MMT = Monetary Moronism Theory – which fully describes both the utterly clueless tards who came up with it, and those who support it thinking it will somehow solve our problems..
It requires pretzel logic of incredible proportions, as evidenced by the above comments, to even attempt to make it seem like something that makes even the slightest bit of sense.
” MMTers have never been at the table.” Thank God!
At least I can have some sympathy for that, since I am totally Austerian, and we aren’t allowed near the Budget either. And I could not care less what Krugman says on any issue, being as he is the biggest idiot (besides Oblunder) to ever win that dubious prize.
Did you get the silly out of your system? It’s difficult to believe you’d have any left after a comment like that.
MMT posts sure do bring the goldbugs out in droves. The gold standard is a failed system. MMT has never really been tried, and gold lovers seem to conflate it with the keynesianism for the rich that we have now.
Pepsi: MMT has never really been tried, and gold lovers seem to conflate it with the keynesianism for the rich that we have now.
Yves: It is a very clear, empirical explanation of how monetary operations work in a fiat currency.
Me: It is hard for me to reconcile these two sentences. If MMT describes how the present system actually works, then how can we simultaneously say that it has never been tried?
One question that springs to mind is: would employing MMT in the US be congruent with the US dollar being the international trade currency? My feeling is that they may not be congruent, however relative to many here I am quite a novice in terms of my understanding of economics, so go easy on me. Thanks!
I like to refer to this discussion on MMT in Egypt. I see MMT as mainly getting the domestic house in order and better prepared for international trade on a more balanced basis. In Shock Doctrine, Naomi Klein talks about how people have gained political rights in some cases but left financial independence on the table.
http://neweconomicperspectives.org/2013/09/a-financial-sovereignty-strategy-for-egypt.html
Like many of the ‘color me skeptical’ readership here, I continue to be baffled by the cart-before-horsishness of the various MMT proposals, so let me express my take on the subject in as simple of terms as I can muster, in terms of a modest proposal to the MMT touts:
Show me that our government is indeed being run by the kind of ‘wise stewards of the public interest’ which MMT requires to have even the faintest glimmer of actually achieving its stated aims, and I will happily support issuance of as many $Googolplex-stamped Platinum coins (or whatever) as are needed to give the theory a fair chance in the real world.
Until that oh-so-happy! day arrives, I shall view MMT as simply the latest, greatest Fiatopian academic fantasy cult, a non-starter in ‘let’s try it!’ terms, and unworthy of the lengthy debates it routinely engenders – except of course among those making a career via their lengthy scribblings on the subject.
MMT doesn’t require “wise stewards”. It just wises everyone up, so that the stewards will have to wise up and obey. MMT is hyperintuitive, trivial economics that makes sense. Everybody used to understand it. The problem is that what MMT says is so trivial, that everyone said “it goes without saying”. So people stopped saying it. So people forgot it. (This happens in the sciences quite a lot too.) Unintelligible po-mo transgressive quantum hermeneutic pseudomathematical Lewis Carroll neoclassical econ took over. (Kleptocrats like Pete Peterson, the ancient Grand Wizard of Fix-the-Debt etc always understood MMT.) But the unintelligible stuff is everywhere, to the point that people really believe that eggs unscramble themselves, that governments can tax before they spend, that there ever was or could be any other kind of money than fiat/credit money etc. So it became necessary for the ancient trivialities to be made yet more trivial, understood better. That’s MMT.
The basic MMT proposal, more important than all the rest put together is true full employment – a decent living wage Job Guarantee. This is really, really easy to do, has succeeded wherever it has been even half-heartedly tried and would provide enormous, universal benefits. There is no devil in the details, but just in undeceiving oneself, in putting the horse before the cart, as MMT does, and as the deceived opponents don’t.