Wednesday, July 27, 2011

Neglecting the Common Good

I agree with Thomas Bushlack from Catholic Moral Theology that our debate on the debt ceiling is neglecting a key element:
Drawing upon modern Catholic social thought and the work of Thomas Aquinas’ political thinking, the goal of law and political authority is to serve, enhance, and protect the common good of society (see, for example, Summa Theologiae I-II Q. 90). It is perhaps ironic – or tragic – that the common good is the one element that seems to be missing from the current national debate. This seems to be due to the fact that the ideology that holds the most momentum right now in our political system – and hence that controls the terms of our debate – is the far-right ideology represented most vocally by the tea-party movement (but engaged by others as well). This ideology, rather than upholding the common good as the end and goal of government and law, sees government as the very source of the problem. Therefore, those who propound this ideology are seizing upon this moment of debate over government spending, taxation and revenue creation, and the debt ceiling as an opportunity to starve government at its source by cutting off its supply of money. Some of the more extreme elements seem entirely willing to let the whole system come to a crashing halt rather than think about long-term solutions that seek to protect the common good of all involved.

What would bringing the language of the common good back into the discussion accomplish? For one thing, it would re-establish the principle that government has a necessary role to play in seeking the common good (not the only role, but still a necessary one). It would also allow us to recognize that in times of economic hardship sometimes government spending is the last resort to help spur the economy. This principle, established by John Maynard Keynes and until very recently accepted by those on the right and the left, would remind us that the time to cut programs and spending is not during an economic downturn, but rather once the economy has rebounded enough to pick up the slack currently left by the high unemployment rate.

The best of American democracy has always fostered political experimentation and pragmatic results over ideology, but in our current situation the experiment being run by the far right is playing Russian roulette with our common good, and will have disastrous consequences for our economy.

Ultimately, those hit the hardest by this experiment will be those who are already most vulnerable .

In a climate such as this, Christians – and all people of good will – have a responsibility to continue to uphold the principle of the common good as the foundation of our political life together in society, even if it appears that very few are capable of hearing the message right now.

Please pray that our politicians will reach a compromise borne out of humility, prudence, and wisdom; and one that does not neglect the common good, especially those most vulnerable in our society.

Tuesday, July 26, 2011

The Lesser Depression

Sarcasm and arrogance aside, I think that Paul Krugman is right (though I'm not sure he completely understands why he is right). Even if we do manage to agree to raise the debt ceiling, the deficit reducing measures contingent upon such an agreement won't help our economy and may make things worse. And all of this is simply because we don't understand that a government doesn't need to balance its budget like a household (or state or EU member) does.

From Krugman:
Even if we manage to avoid immediate catastrophe, the deals being struck on both sides of the Atlantic are almost guaranteed to make the broader economic slump worse.

In fact, policy makers seem determined to perpetuate what I’ve taken to calling the Lesser Depression, the prolonged era of high unemployment that began with the Great Recession of 2007-2009 and continues to this day, more than two years after the recession supposedly ended.

The great housing bubble of the last decade, which was both an American and a European phenomenon, was accompanied by a huge rise in household debt. When the bubble burst, home construction plunged, and so did consumer spending as debt-burdened families cut back.

Everything might still have been O.K. if other major economic players had stepped up their spending, filling the gap left by the housing plunge and the consumer pullback. But nobody did. In particular, cash-rich corporations see no reason to invest that cash in the face of weak consumer demand.

Nor did governments do much to help. Some governments — those of weaker nations in Europe, and state and local governments here — were actually forced to slash spending in the face of falling revenues. And the modest efforts of stronger governments — including, yes, the Obama stimulus plan — were, at best, barely enough to offset this forced austerity.

The disappearance of unemployment from elite policy discourse and its replacement by deficit panic has been truly remarkable. It’s not a response to public opinion. In a recent CBS News/New York Times poll, 53 percent of the public named the economy and jobs as the most important problem we face, while only 7 percent named the deficit. Nor is it a response to market pressure. Interest rates on U.S. debt remain near historic lows.

For those who know their 1930s history, this is all too familiar. If either of the current debt negotiations fails, we could be about to replay 1931, the global banking collapse that made the Great Depression great. But, if the negotiations succeed, we will be set to replay the great mistake of 1937: the premature turn to fiscal contraction that derailed economic recovery and ensured that the Depression would last until World War II finally provided the boost the economy needed.

It's fairly simple, really. We need more demand, which means we need more money, which means that the government should stop taking away (taxing/destroying) our dollars without decreasing its own expenditures. In other words, we need a larger deficit. I'm not seeing how this ends well, until we understand this. I really hope it doesn't take another World War for us to ignore our debt and deficits.

Response to comments

Here is my response to comments made by Darwin, on a previous post.

My replies are in red.


Thanks for your irenic reply. I'll shoot to be more verbose and less blunt (as in object) this time around. :-)

I agree that there is a reason why fringe movements remain on the fringe, though I probably disagree with you on what those reasons are.

Well, FWIW, I think there tend to be various reasons, though it seems one commonality is that partisans of fringe movements often argue that they are kept on the fringe because those in the mainstream are afraid of the disruption they could cause and are keeping them out in order to maintain their own positions. (The folks I am most often very frustrated by who think along these lines are the Intelligent Design movement, who insist that evolution is a house of cards if only anyone would notice.) In academic fields, I think this is often one of the least plausible explanations. Often, I think, the true reason is simply that the beliefs of the fringe group do not in fact have huge amounts of explanatory power, if they are not outright wrong.

Well said, I guess I am so strongly convinced by the evidence, that I do not think we (MMTers) lack explanatory power. I feel that we are up against many myths that have cropped up for various reasons, some legitimate and some not so much. My goal is to reveal those myths and present evidence to the contrary so that others may be convinced as I am. I am not seeking it for my own sake or my own agenda, but for others’ sake. I think understanding money as I do will lead to less suffering in our world at the hands of long held myths about government finance.

It is quite perplexing to me why there are so many learned economists and politicians who think that our government's finances work like a household's--namely that we can go bankrupt and that therefore we should have a balanced budget amendment. I have my guesses to why that is, but no clear answers.

FWIW, the economists and politicians are probably very different groups in this regard. Many politicians seem to have very simplistic ideas of economics, but Harvard PhDs like Mankiw, not so much.  
I agree.

From what I've read of Mankiw's stuff, I don't at all get the impression that he supports a balanced budget amendment.
He doesn’t. He seems to follow the basic consensus that in periods of economic trouble the government should run a deficit and that in good times it should move towards balance or surplus. What he does seem to hold, however, is that there is a serious limit to how large a deficit a country should run for how long, and his concern in the quoted editorial is that the US seems to be pursuing a policy of spending significantly more than it takes in long term. He is right to be concerned. I am not convinced from his arguments that he understands why, however. He seems concerned about interest rates and insolvency rather than the inflation that MMT’ers say would be the symptom of too large a deficit.

If I'm following the stuff that I've read over at New Economic Perspectives right, it seems like for many MMT folks the idea is that you never want to run a surplus
(correct, because running a surplus takes away the net savings of the private sector. If the private sector wants to run net surplus or net savings, then by definition, the government balance or the foreign balance has to run net deficit) and it almost doesn't matter how big you let your deficit get, so long as you have a sovereign currency. Sort of. There is no solvency issue so long as we have our own currency, but inflation could get out of hand if we ran deficits willy-nilly. I think Mankiw is basically staking out the ground that although we have a sovereign currency (and one which is pretty much the world reserve currency at that) we can't behave like Greece long term and expect that to work out. Shouldn’t use Greece as an example because of their lack of sovereign currency. I don’t know a whole lot about Greece’s debt run-up (what led to it that is) but their problems are mostly because they don’t have a sovereign currency and no comparison can be made to the U.S. in this regard. We can and probably should run a deficit (especially now) without any solvency issues or bond market issues, but if we went crazy then we would certainly see inflation.
Darwin said...
I believe that the the point of their seemingly overenthusiastic proscriptions (including my own) is so that others understand MMT and remove the constraints of misunderstanding (for the constraints are set not by how the money system really works, but rather by people's understanding of the money system).

I'll try to dig a bit more into this in a minute, but I think the response I want to float to this is that it might well be that one of the constraints on the money system (at least in avoiding effects that we might not much enjoy) is that those responsible for managing the currency behave in a way more or less in line with the more traditional understanding of what a currency is. In this sense, while MMT may be descriptively accurate as a method of analysis (I should be really clear here and elsewhere that being self taught and dealing with pricing, I feel comfortable with micro questions in a way that I simply don't on macro, so I tend to have an approach of trusting authorities I understand to some extent rather than arguing from first principles) if the Fed and government behaved as if it were, this might actually cause it to behave in some other way.
I think what you are saying here is that if the authorities act according to what I’ll call the mainstream paradigm, then the masses will behave as if that is how it works and this is what causes a constraint. If so, then yes we are seeing that very clearly in the debate about the debt ceiling. A needless, but voluntary constraint. That is what I am trying to remove. I am trying to show that it is only a constraint if we choose it. Completely arbitrary and not based on good economics. I argue that the money system will behave as MMT’ers describe it no matter how the authority acts. But awareness of MMT understanding could lead the authorities to act in a way that would benefit the nation instead of causing it ruin.

You didn't really address any of the theory however. ... If I missed what you meant by "the bounds of reality and expectation" then please explain further, so that I don't misunderstand you.

I'm not unconscious of the difficulties of going up against a PhD student fan of MMT in an attempt to express objections to the theory, but here it goes
: (I appreciate your attempt, I think you are well-read and wrote a great response, and I am still just a student and don’t really consider myself an expert)

Reading through the MMT Primer being put up at New Economic Perspectives and at overview posts such as "MMT Explained to Mums", it seems to me that part of the argument here is that since the government issues currency, that it doesn't need to worry about where money "comes from" in issuing currency. It seems to me that so long as there is a basic expectation that a government intends to maintain a balance between its revenues (via taxation) and it's spending, this is probably true. However, if it basically says, "Look, we control the currency and we're simply going to spend how we like, pay for it via debt, and if you ask how we'll pay for debt we'll simply print you dollars," it will pay a steep price in both the interest rates that lenders will demand on bonds and the demand for dollars in general (inflation.)  
I don’t think that is what they are saying, though I see how one could take it that way. Money is created by govt spending (and by bank loans, but lets ignore that for now, because it muddies things a bit and isn’t necessary for this explanation). Money is taken or destroyed away by taxes. It doesn’t really come from anywhere, it is simply created. Excessive creation is inflationary, destruction deflationary. Govt spending through money creation allocates resources towards what is spends its money on. Taxes make sure that it can obtain those resources by creating a demand for the currency to pay those taxes. So, they (remember, the they here is the government who we elect. I grow frustrated with those who think the government is some institution that controls us. It is an institution elected by the people for the people, though many choose to abstain from their right to vote and otherwise participate) can spend how they like, but there are certainly consequences.  They don’t pay for it via debt, debt issuances are simply another drain on reserves (to help control inflation) and offer an interest bearing savings account to holders of cash or reserves. Interest rates are mostly set by the central bank (this is something I need to do more reading on, but I can try to find you sources if you want more explanation here). Inflation on the demand side will only get out of hand when resources are used up, but as it is right now, there are lots of idle resources (unemployment, unused capital, etc). So the cue for larger deficits is underutilized resources, the cue for smaller deficits is inflation and full employment.
Darwin said...
Reading through all the talk about why things are budgeted the way they are, it seems to me there are two arguments being put forward for why we should decide that deficits and debt simply don't matter for the government:

1) Full employment will be achieved via the government employing everyone to do useful stuff, and this will create so much value that it will pay for itself.
I think that they do think it will pay for itself, but that that isn’t the most important part of employing everyone who wants to work. There are many ways to provide useful work, unfortunately many people see the government paving roads that don’t need paved. I agree with them that that is not useful and not good use of deficit spending. But simply providing an income to everyone will boost demand even if they provide a little bit on the supply side our economy will be in better shape than paying unemployment insurance to people who sit at home all day and we end up squandering potential output.

2) The wealthy are keeping a lid on inflation to benefit themselves, but if we spent like crazy without worrying about how to pay for it and inflation resulted, this would basically just have the effect of depreciating the wealth of the wealthy and making us all more equal.

Of these, 1) strikes me as engaging in some weak form of the socialist calculation problem -- in other words, it assumes that the government guaranteeing to employ everyone
(willing and able to work) would result in enough useful work being done to actually make us better off because of the value of the work done would equal the value spent in employing everyone. I would tend to think that's highly unlikely, in that I don't think any one really knows what it is that everyone is most valuably employed doing. Difficult administrative decisions are required here, but again is it better to put someone to work doing something somewhat useful or to let them produce nothing at home? As such, I think the value produced would be less than the value spent, and it might even be worse than useless in some cases in that people might be payed to do things less valuable than what they would have been doing otherwise. Here I have two questions: Is working better than not working (for those willing and able to work)? And what would these people be doing otherwise? You are also getting into the issue of ‘value,’ which is tricky because of how to define it. Do you mean in dollars? Utility? Spiritual value?

 You pose many problems here to the ELR (Employment of Last Resort) proposal and it is these things I would love our debate to be focused on. I feel that if we can get past the bankruptcy concerns and all that nonsense we can focus on “okay, so we need a deficit, how do we spend it?” I think that that should be our focus and one where conservatives make many useful arguments that many proponents of MMT would rather ignore, because they tend to be very liberal. I would love to have a conversation with you in particular on these issues (taxes, specific policy proposals, etc) sometime, because you seem full of wisdom on many of these.

On 2), it strikes me that while the kind of chaos caused by high inflation (something which seems to be denied would result if the government only spent to the point of full employment, but I have real trouble imagining would not result from the policies advocated, and is the only thing which would have the advertised effect of taking down the value of the holdings of the wealthy) does in fact hurt the wealthy, it hurts the poor a whole lot as well.

I am not as good at the inflation stuff as I need to be yet, but having read the proposals of my professors I do not think inflation will be a problem until we reach max utilization of resources. High inflation isn’t good, and so it is to be avoided. High unemployment is also not good and so it is to be avoided. Recently, however, economists and politicians are more afraid of inflation (because of “massive deficits”)  that hasn’t transpired and its been 2 years+ since deficits rose dramatically. They seem to pay little attention to unemployment (I do not consider reducing deficits as a serious attempt at reducing unemployment for many reasons) and that concerns me greatly, for it is my belief that unemployment is a bad thing in and of itself, not simply for the lost output, but also because it is part of our human vocation for it is how we create just as God created us and our world. Inflation is only bad (to me) if it causes unemployment or lost output or instability, which it can, but until it does we should worry about the real problem. And since we know how inflation works (via MMT and other bright monetary scholars) we have the tools to bring it down if it gets out of hand.

For a policy proposal that you might consider more favorable than the ELR as a means of increasing our deficit I suggest watching Mosler’s address to the Tea Party 2 years ago:

Wednesday, July 20, 2011

Debt Ceiling and Balanced Budget Amendment

What would happen if the government doesn't raise the debt ceiling in time?

To avoid default, the Treasury would prioritize interest payments, which means a lot of other bills won't get paid.

Chairman Bernanke said that this could cut 6% off of GDP and send the US into another recession with GDP going from positive to negative. How does that help boost sales or business confidence?

However, falling GDP means falling revenues which means more spending cuts, and revenues falling further.

It also means the automatic fiscal stabilizers of rising transfer payments will not be funded by deficit spending and therefore not provide the support they have provided in all prior downturns.

For the first time the US would experience an unchecked downward spiral, which could make the downturn that much more severe than the Fed Chairman suggested.

This likely would transfer to other nations for the drop in US consumer, business, and govt spending will mean a drop in sales for euro zone exporters, possibly sending that region into negative GDP growth and falling govt revenues.

This means their current solvency and funding issues further deteriorate as the entire euro zone could experience a funding barrier and general default.

While the ECB can, operationally, write any size check required to fund the entire region, it doesn’t want to do that, and can be expected to wait until things deteriorate sufficiently to the point were there is no other choice.

Ironically, the US debt ceiling, a seemingly innocuous relic of the gold standard, where it once served to protect the nation’s gold supply and should have been eliminated when the US dollar ceased to be officially convertible into gold, could now bring down the entire world economy, and threaten the world social order as well.

Paraphrased and quoted from here.

Similar effects could be expected with a Balanced Budget Amendment. House Republicans and even Senate Republicans (at least my senator, Jerry Moran, sent out an email saying he approved a BBA) are championing a Balanced Budget Amendment (BBA) as the solution to our fiscal woes.

I don't know what they think will happen if such an amendment were to pass, which is very highly unlikely, but it seems they believe that consumer and business confidence will go up and the crowding out (that they think is happening) will stop and businesses will begin to invest again; or I could be even more pessimistic and think that they are intentionally tanking the economy so as to win elections in 2012 ala Paul Krugman, but I really don't think that's the case.

Taking away a large chunk of deficit spending through a BBA would likely result in a large drop in GDP, followed by further drops in revenue, which would then require a further drop in spending...and you see how this cycle is self-defeating right? It would certainly accomplish the goal of a smaller goverment, but I don't know what good it would do for the common good. It would take away many needs of millions of people. Social order would be very difficult to maintain. Many evil regimes came to power amidst times of economic turmoil.

I also don't think that those who champion balanced budgets and deficit cutting understand that doing so would undermine their efforts to balance the budget. The government would certainly be reduced in size, but would the private sector take up the task of providing for the needs of those who aren't provided for by the market? What business invests when consumers aren't buying their products/services because a chunk of their income was taken away?

We could have a smaller government as the Republicans desire, but we can't have a smaller deficit (or no deficit) and not expect to face economic turmoil. We must have a deficit and we must raise the debt ceiling, or better yet abolish such a concept altogether (what's the point of a debt ceiling?). We can decrease government by reducing spending and taxes by more than spending or increase government by increasing spending and taxes by less than spending, and that should be the debate!. But the debate has been about how to reduce the deficit and on that note I disagree greatly with both sides.

Tuesday, July 19, 2011

Can and Can't vs. Should and Shouldn't

Greg Mankiw, an economist at Harvard known for his textbook and his blog, wrote an article in the NY Times a while back expressing his concern about the debt and the government "living beyond its means" by imagining the president's address to the nation in 2026. Despite his supposed expertise he makes many errors and overlooks key factors. Warren Mosler responded to his article by exposing these mistakes.

I am posting it because I think it's important for you to understand what almost everyone is thinking about the debt debate (Mankiw's article) and what people should be thinking about the debate (Mosler's response). If nothing else, you should at least be given a chance to understand an alternative that does not get any air time on tv or radio, and is not really even given a chance by most economists and politicians who wave it off like mere nonsense.

I have studied the arguments and believe very strongly that Mosler's arguments seem much more plausible than Mankiw's and the rhetoric we see and hear on tv; I also feel very strongly that you should be able to decide for yourself, but this is not possible if not given all the arguments.

Understanding government finance does not mean that government must necessarily be large (there is still much room for that debate), but it is so necessary to move beyond what the government can and can't do to what the government should and shouldn't do.

Mankiw's article (Mosler's comments in red):
The following is a presidential address to the nation — to be delivered in March 2026.

My fellow Americans, I come to you today with a heavy heart. We have a crisis on our hands. It is one of our own making. And it is one that leaves us with no good choices.

For many years, our nation’s government has lived beyond its means.

A rookie, first year student mistake. Our real means are everything we can produce at full employment domestically plus whatever the rest of the world wants to net send us. The currency is the means for achieving this. Dollars are purely nominal, and not the real resources.

We have promised ourselves both low taxes and a generous social safety net. But we have not faced the hard reality of budget arithmetic.

The hard reality is that for a given size government, there is a ‘right level’ of taxes that corresponds with full domestic employment, with the size of any federal deficit a reflection of net world dollar savings desires.

The seeds of this crisis were planted long ago, by previous generations. Our parents and grandparents had noble aims. They saw poverty among the elderly and created Social Security.

Yes, they decided they would like our elderly to be able to enjoy at least a minimum level of consumption of goods and services that made us all proud to be Americans.

They saw sickness and created Medicare and Medicaid. They saw Americans struggle to afford health insurance and embracedhealth care reform with subsidies for middle-class families

Yes, they elected to make sure everyone had at least a minimum level of actual health care services.

But this expansion in government did not come cheap. Government spending has taken up an increasing share of our national income.

The real cost of this ‘expansion’ (which was more of a reorganization than an expansion of actual real resources consumed by the elderly and consumed by actual healthcare needs) may have consumed an increasing share of real GDP, but with continued productivity this would have been at most a trivial amount at current rates of expansion.

Today, most of the large baby-boom generation is retired. They are no longer working and paying taxes, but they are eligible for the many government benefits we offer the elderly.

Yes, they are consuming real goods and services produced by others. The important consideration here is the % of the population working and overall productivity which he doesn’t even begin to address.

Our efforts to control health care costs have failed. We must now acknowledge that rising costs are driven largely by technological advances in saving lives. These advances are welcome, but they are expensive nonetheless.

Still no indication of what % of real GDP he envisions going to health care and real consumption by the elderly.

If we had chosen to tax ourselves to pay for this spending, our current problems could have been avoided. But no one likes paying taxes. Taxes not only take money out of our pockets, but they also distort incentives and reduce economic growth. So, instead, we borrowed increasing amounts to pay for these programs.

At least he gives real economic growth a passing mention. However, what he seems to continuously miss is that real output is THE issue. Right now, with potential employment perhaps 20% higher than it currently is, the lost real output, which compounds continuously, plus the real costs of unemployment- deterioration of human capital, broken families and communities, deterioration of real property, foregone investment, etc. etc. etc.- are far higher than the real resources consumed by the elderly and actual health care delivery. Nor does he understand what is meant by the term Federal borrowing- that it’s nothing more than the shift of dollar balances from reserve accounts at the Fed to securities accounts at the Fed. And that repayment is nothing more than shifting dollar balances from securities accounts at the Fed to reserve accounts at the Fed. No grandchildren involved!!!

Yet debt does not avoid hard choices. It only delays them. After last week’s events in the bond market, it is clear that further delay is no longer possible. The day of reckoning is here.

This morning, the Treasury Department released a detailed report about the nature of the problem. To put it most simply, the bond market no longer trusts us.

For years, the United States government borrowed on good terms. Investors both at home and abroad were confident that we would honor our debts. They were sure that when the time came, we would do the right thing and bring spending and taxes into line.

But over the last several years, as the ratio of our debt to gross domestic product reached ever-higher levels, investors started getting nervous. They demanded higher interest rates to compensate for the perceived risk.

This is all entirely inapplicable. It applies only to fixed exchange rate regimes, such as a gold standard, and not to non convertible currency/floating exchange rate regimes. This is nothing more than another rookie blunder.

Higher interest rates increased the cost of servicing our debt, adding to the upward pressure on spending. We found ourselves in a vicious circle of rising budget deficits and falling investor confidence.

With our non convertible dollar and a floating exchange rate, the Fed currently sets short term interest rates by voice vote, and the term structure of interest rates for the most part anticipates the Fed’s reaction function and future Fed votes. Nor is there any operational imperative for the US Government to offer longer term liabilities, such as 5 year, 7 year, 10 year, and 30 year US Treasury securities for sale, which serve to drive up long rates at levels higher than otherwise. That too is a practice left over from gold standard days that’s no longer applicable.

As economists often remind us, crises take longer to arrive than you think, but then they happen much faster than you could have imagined. Last week, when the Treasury tried to auction its most recent issue of government bonds, almost no one was buying. The private market will lend us no more. Our national credit card has been rejected.

As above, the US Government is under no operational imperative to issue Treasury securities. US Government spending is not, operationally, constrained by revenues. At the point of all US govt spending, all that happens is the Fed, which is controlled by Congress, credits a member bank reserve account on its own books. All US Government spending is simply a matter of data entry on the US Governments own books. Any restrictions on the US government’s ability to make timely payment of dollars are necessarily self imposed, and in no case external.

So where do we go from here?


Yesterday, I returned from a meeting at the International Monetary Fund in its new headquarters in Beijing. I am pleased to report some good news. I have managed to secure from the I.M.F. a temporary line of credit to help us through this crisis.

This loan comes with some conditions. As your president, I have to be frank: I don’t like them, and neither will you. But, under the circumstances, accepting these conditions is our only choice.

Mankiw’s display of ignorance and absurdities continues to compound geometrically.

We have to cut Social Security immediately, especially for higher-income beneficiaries. Social Security will still keep the elderly out of poverty, but just barely.

We have to limit Medicare and Medicaid. These programs will still provide basic health care, but they will no longer cover many expensive treatments. Individuals will have to pay for these treatments on their own or, sadly, do without.

We have to cut health insurance subsidies to middle-income families. Health insurance will be less a right of citizenship and more a personal responsibility.

We have to eliminate inessential government functions, like subsidies for farming, ethanol production, public broadcasting, energy conservation and trade promotion.

The only reason we would ever be ‘forced’ to make those cuts would be real resource constraints- actual shortages of land, housing, food, drugs, labor, clothing, energy, etc. etc. And yes, that could indeed happen. Those are the real issues facing us. But Mankiw is so lost in his errant understanding of actual monetary operations he doesn’t even begin to get to where he should have started.

We will raise taxes on all but the poorest Americans. We will do this primarily by broadening the tax base, eliminating deductions for mortgage interest and state and local taxes. Employer-provided health insurance will hereafter be taxable compensation.

He fails to recognize that federal taxes function to regulate aggregate demand, and not to raise revenue per se, again showing a complete lack of understanding of current monetary arrangements.

We will increase the gasoline tax by $2 a gallon. This will not only increase revenue, but will also address various social ills, from global climate change to local traffic congestion.

Ok, finally, apart from the revenue error, he’s got the rest of it sort of right, except he left out the part about that tax being highly regressive.

As I have said, these changes are repellant to me. When you elected me, I promised to preserve the social safety net. I assured you that the budget deficit could be fixed by eliminating waste, fraud and abuse, and by increasing taxes on only the richest Americans. But now we have little choice in the matter.

Due entirely to ignorance of actual monetary operations.

If only we had faced up to this problem a generation ago. The choices then would not have been easy, but they would have been less draconian than the sudden, nonnegotiable demands we now face. Americans would have come to rely less on government and more on themselves, and so would be better prepared today.

What I wouldn’t give for a chance to go back and change the past. But what is done is done. Americans have faced hardship and adversity before, and we have triumphed. Working together, we can make the sacrifices it takes so our children and grandchildren will enjoy a more prosperous future.

Okay, so Modern Money does get a little airtime. Here is Warren Mosler on Fox News a year ago (you can see the total lack of disbelief in the host):

What do you think?

Monday, July 18, 2011

Truth Deficit

Charles Clark, a well-known Catholic economist and professor at St. John's University recently wrote this for Commonweal Magazine:

Truth Deficit

Here are some highlights (my comments in red):
The recent effort by Rep. Paul Ryan (R-Wis.) and other congressional Republicans to reduce or eliminate entitlement programs has followed the same formula. The Republicans are telling voters that the country can’t afford to help the poor, the elderly, and the sick as much as it does now. They warn that Social Security, Medicare, and Medicaid are quickly running out of money, and that without cuts to these programs the federal government will soon face a debt crisis like the one now crippling Greece.

Because two of the most prominent deficit hawks are Catholic politicians (Ryan and House Speaker John Boehner), the debate about the national debt has occasioned a debate about the ethics of balancing the federal budget at the expense of those Christ instructed his followers to help (see Matthew 25: 31–46). It is therefore important that there be an open discussion about which values are guiding our collective decisions about taxes and spending.

According to Catholic social thought, this discussion should be informed by the principles of subsidiarity, solidarity, and the preferential option for the poor. But there is another value, one fundamental to most religious traditions, that also needs to be asserted in this debate —the value of telling the truth. Politicians are haggling over which programs to cut or where to find new sources of revenue, but few have challenged the dubious premises behind the debt panic.

Voters deserve to be treated like adults, not children, and this means that politicians shouldn’t say “we can’t” when they really just mean “we don’t want to.” If some members of the House and Senate don’t think the federal government should take care of those who aren’t fully able to take care of themselves—if, say, they believe it’s up to the states or private charity to do this—then let them say so openly instead of presenting their policy preference as a matter of fiscal necessity. Small-government conservatives are now using the national debt as an excuse to cut programs they’ve long wanted to cut, even when the government was running a surplus.

The biggest economic problems the United States now faces are unemployment, income inequality, and the fact that much of the financial sector still operates like a casino. Contrary to the claim of many leading Republicans on Capitol Hill, there is no reason to think that immediate cuts to government spending will help the economy—or that spending cuts can’t wait until the economy improves.

Behind the confusion on these points are four myths about national debt that have somehow become conventional wisdom in Washington and in most of the media.

The first and most basic myth is the idea that the U.S. government is about to run out of money (Modern Money!!). In fact, the U.S. Treasury can’t run out of money because it pays its bills in money it creates. If the federal government owed its debt in Euros or some other currency—or if it had, say, a gold standard, which would limit the government’s ability to create new money—then Ryan and Boehner might be right to warn of bankruptcy. But U.S. debt is owed in U.S. dollars, a sovereign currency that isn’t chained to the value of any commodity. The U.S. government could of course decide not to pay its bills (for example, by refusing to raise the debt ceiling), but it can never lose its ability to pay them. When politicians and journalists say that the United States is in danger of becoming the next Greece, Ireland, or Portugal, they are ignoring the fact that these other countries no longer have a sovereign currency. They must pay their debts in Euros, the supply of which they do not control. They are thus like California, New York, and all the other states facing big budget deficits: they can solve their fiscal problems only by selling bonds or raising taxes. They cannot create more money.

The second big myth is that deficit spending is “crowding out” private-sector spending and investment. Only when an economy is at full capacity will an increase in government spending crowd out private-sector spending.

The crowding-out argument is based on an eighteenth-century economic theory called “Say’s law of markets,” according to which supply creates its own demand and economies are always either at full employment or tending toward it. More than two centuries of experience with capitalism has shown that this is not normally the case. Periods of high (involuntary) unemployment are as characteristic of capitalism as are innovation and rising productivity.

This brings us to the third myth about the federal government’s debt: that the problem is primarily about spending. In fact, the main problem is insufficient revenue.(Here, I agree and disagree. I agree that a lot of people are too focused on "runaway" spending. I disagree with his view that insufficient revenue is the problem. It may be the reason for the large deficit along with the automatic stabilizers, which I do agree with, but taxes or revenue drain the economy of reserves and function to maintain the value of the dollar. The government doesn't need revenue to spend, as noted by the author above, revenue's main function is to create a demand for the U.S. dollar. So, though the main reason for the deficit may be a drop in revenue, more revenue is NOT the answer, because that means more drains on the economy. However, I do think that if the deficit is going to be reduced, it is better that the rich stomach the increased taxes than the poor endure the decreased welfare support). It is probably a bad idea to raise taxes when the official unemployment rate is still around 9 percent. But the fact is, Americans are not generally overtaxed. No matter how you measure tax rates, ours are among the lowest in the industrial world—as much as 20 percent lower than those in some comparably rich countries. Politicians tell us that U.S. corporations face the second-highest marginal tax rate among the major economies, but with all their loopholes and tax subsidies American corporations actually end up paying much less in taxes than corporations abroad. Taxes on corporate income in 2008 amounted to 1.8 percent of our GDP; the average for OECD (Organization for Economic Co-operation and Development) countries was 3.5 percent.

If the federal deficit is as big a problem as both parties say it is (it isn't!), then we could substantially reduce it by paying higher taxes (we could, but that isn't the answer, and may actually increase deficits by further hampering the economy).

The last big myth that distorts our discussions about the nation’s debt is the idea that only the private sector can create wealth, and that the government is essentially parasitic. This bias against public services and public employment might make sense if your only goal is to make profits for owners of capital. But the idea that the shuffling of money on Wall Street is nobler or more important than what school teachers or nurses do ought to be deeply troubling to all Christians. As Benedict XVI noted in his last encyclical, Caritas in veritate, the Catholic tradition considers wealth to be necessarily connected with well-being, and it distinguishes between creating wealth and capturing it. There are nonproductive ways to get rich. Once we acknowledge that creating wealth is not the same as making a profit, we see that governments create wealth all the time—and that without government involvement there would be very little wealth creation at all (a point Adam Smith understood much better than some of his current disciples). Governments build roads, schools, dams, and countless other things that contribute to the capital stock of the nation. Governments define and protect property rights, without which the only private wealth would be whatever you could personally defend. Most of the large accumulations of private wealth stem from government contracts, special tax treatment (subsidies), or the privatized benefits of government investments in research. Finally, some of the government’s debt is private-sector wealth (it owes that money to someone), so when the U.S. government reduces its outstanding debt, it also reduces private-sector wealth, here or abroad. We should also remember that every time the federal government has moved to sharply reduce its debt a major recession followed (which modern money theory explains quite nicely).

The church teaches us to promote the common good, to help the poor and marginalized before we help ourselves, to see in them the face of Jesus. The first Christians called this “the way of life.” The earliest manual on Christian practice, the Didache (50–150 AD), warns us against following the way of death, the way of those who “have no mercy for the poor, do not work on behalf of the oppressed…who turn away from someone in need, who oppress the afflicted, are advocates of the wealthy.”

How do we help the poor and oppressed in a twenty-first-century economy? Before we allow representatives of the Tea Party to slash government spending on programs for the elderly, the sick, and the unemployed—modern programs that were designed to meet modern needs that neither Adam Smith nor our Founding Fathers could have anticipated—we should demand solid evidence that the richest country in the history of the world really cannot afford to take care of its most vulnerable citizens. We should make sure we are not reducing our commitment to the least of our brethren so that the richest 5 percent can grab an even larger share of the country’s wealth. The urgent danger facing us now is not that America is about to drown in debt, but that discredited, ahistorical economic theories will scare us into abandoning our most important values.

Monday, July 11, 2011

Examining CV, Part 7

You can find parts 1-6 here: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6.

Examining the rest of chapter 3, we see that Pope Benedict XVI continues his discussion of morality and ethics within the economic and political spheres.
Locating resources, financing, production, consumption and all the other phases in the economic cycle inevitably have moral implications. Thus every economic decision has a moral consequence.

Hence the canons of justice must be respected from the outset, as the economic process unfolds, and not just afterwards or incidentally.

He also draws attention to the fact that economic life is a multi-layered phenomenon with three subjects: the market, the State, and civil society; and that recently the market and contractual exchange have been favored by public opinion.
[Economic life] requires contracts, in order to regulate relations of exchange between goods of equivalent value. But it also needs just laws and forms of redistribution governed by politics, and what is more, it needs works redolent of the spirit of gift.

The economy in the global era seems to privilege the former logic, that of contractual exchange, but directly or indirectly it also demonstrates its need for the other two: political logic, and the logic of the unconditional gift.

He reminds us that we all must strive for solidarity, "a sense of responsibility on the part of everyone with regard to everyone;" and that "[the pursuit of solidarity] cannot therefore be merely delegated to the State."

He also reminds us yet again that "without gratuitousness, there can be no justice in the first place."

We need what Pope Paul VI called for in Populorum Progressio:
The creation of a model of market economy capable of including within its range all peoples and not just the better off. He called for efforts to build a more human world for all, a world in which “all will be able to give and receive, without one group making progress at the expense of the other”. In this way he was applying on a global scale the insights and aspirations contained in Rerum Novarum, written when, as a result of the Industrial Revolution, the idea was first proposed — somewhat ahead of its time — that the civil order, for its self-regulation, also needed intervention from the State for purposes of redistribution.

We need more than just a binary model of market-plus-State society:
In order to defeat underdevelopment, action is required not only on improving exchange-based transactions and implanting public welfare structures, but above all on gradually increasing openness, in a world context, to forms of economic activity marked by quotas of gratuitousness and communion.

He then calls for a "profoundly new way of understanding business enterprise," noting the risks and dangers of today's common form of business enterprise.
One of the greatest risks for businesses is that they are almost exclusively answerable to their investors, thereby limiting their social value. Owing to their growth in scale and the need for more and more capital, it is becoming increasingly rare for business enterprises to be in the hands of a stable director who feels responsible in the long term, not just the short term, for the life and the results of his company, and it is becoming increasingly rare for businesses to depend on a single territory. Moreover, the so-called outsourcing of production can weaken the company's sense of responsibility towards the stakeholders — namely the workers, the suppliers, the consumers, the natural environment and broader society — in favour of the shareholders, who are not tied to a specific geographical area and who therefore enjoy extraordinary mobility.

In recent years a new cosmopolitan class of managers has emerged, who are often answerable only to the shareholders generally consisting of anonymous funds which de facto determine their remuneration.

Even if the ethical considerations that currently inform debate on the social responsibility of the corporate world are not all acceptable from the perspective of the Church's social doctrine, there is nevertheless a growing conviction that business management cannot concern itself only with the interests of the proprietors, but must also assume responsibility for all the other stakeholders who contribute to the life of the business: the workers, the clients, the suppliers of various elements of production, the community of reference.

How should the business enterprise effectively promote justice/how should we view the business enterprise?
What should be avoided is a speculative use of financial resources that yields to the temptation of seeking only short-term profit, without regard for the long-term sustainability of the enterprise, its benefit to the real economy and attention to the advancement, in suitable and appropriate ways, of further economic initiatives in countries in need of development.

And extra care must be taken into consideration by international corporations:
It is true that the export of investments and skills can benefit the populations of the receiving country. Labour and technical knowledge are a universal good. Yet it is not right to export these things merely for the sake of obtaining advantageous conditions, or worse, for purposes of exploitation, without making a real contribution to local society by helping to bring about a robust productive and social system, an essential factor for stable development.

He reminds us that "business enterprise involves a wide range of values," and that "business has to be understood in an articulated way." Because:
Business activity has a human significance, prior to its professional one. It is present in all work, understood as a personal action, which is why every worker should have the chance to make his contribution knowing that in some way he is working ‘for himself'.

"Political authority also involves a wide range of values."
As well as cultivating differentiated forms of business activity on the global plane, we must also promote a dispersed political authority, effective on different levels.

In terms of the resolution of the current crisis, the State's role seems destined to grow, as it regains many of its competences. In some nations, moreover, the construction or reconstruction of the State remains a key factor in their development.

The State does not need to have identical characteristics everywhere: the support aimed at strengthening weak constitutional systems can easily be accompanied by the development of other political players, of a cultural, social, territorial or religious nature, alongside the State. The articulation of political authority at the local, national and international levels is one of the best ways of giving direction to the process of economic globalization. It is also the way to ensure that it does not actually undermine the foundations of democracy.

And finally, Pope Benedict XVI teaches us that "globalization is neither good nor bad," and that true globalization and integration requires "a sustained commitment so as to promote a person-based and community-oriented cultural process of world-wide integration that is open to transcendence."
The processes of globalization, suitably understood and directed, open up the unprecedented possibility of large-scale redistribution of wealth on a world-wide scale; if badly directed, however, they can lead to an increase in poverty and inequality, and could even trigger a global crisis. It is necessary to correct the malfunctions, some of them serious, that cause new divisions between peoples and within peoples, and also to ensure that the redistribution of wealth does not come about through the redistribution or increase of poverty: a real danger if the present situation were to be badly managed.

Today the material resources available for rescuing these peoples from poverty are potentially greater than before, but they have ended up largely in the hands of people from developed countries, who have benefited more from the liberalization that has occurred in the mobility of capital and labour. The world-wide diffusion of forms of prosperity should not therefore be held up by projects that are self-centred, protectionist or at the service of private interests.

"In this way it will be possible to experience and to steer the globalization of humanity in relational terms, in terms of communion and the sharing of goods."

Friday, July 8, 2011

Recovery or Double-Dip?

It's still amazing how economists and politicians keep predicting a recovery, in the face of overwhelming evidence that indicates otherwise.

June swoon: Economy added almost no jobs last month

It's hard to understand why this news still "comes as a shock" to economists. They continue to ignore the explanation of modern money and government finance given repeatedly by MMT'ers.

I posted just a few weeks ago about the likelihood of a double-dip recession, or at the very least a lack of recovery given the lack of overall demand and spending. And since the government shows no signs of backing off its austerity push, I stand behind my belief that the economy will continue to remain quite stagnant with little to no gains, and quite possibly more losses, in the job market.

The government isn't crowding out private spending, which I would say will be obvious to everyone when cuts in government spending don't bring about the growth in jobs politicians say will happen, but I'm not sure they will get that message. Instead, they might call for even more cuts! Oye!

Friday, July 1, 2011

The truth is, neither side gets it...

The debate surrounding deficits is still very misplaced and our nation's understanding of government finance is so terribly inadequate. Actually, it's not inadequate, it's downright wrong.

Both sides are calling for a reduction is deficits, but in reality, the government does not need to balance its budget and there need not be any harmful effects of not balancing the budget. In fact, there are very harmful effects of attempting to balance the budget or reduce the deficit.

We have massive unemployment and underutilization of resources needlessly RIGHT NOW and are doing the opposite of what can and should be done. This is why it is so important to understand how our monetary system works.


The government can NEVER go bankrupt, to declare it voluntarily is just pure insanity. It's simply saying "I have the money but I ain't gonna pay you."

The government doesn't need our tax dollars or funds raised by bonds to spend! Our tax dollars and their bond sales drain the economy of reserves (money)! Their spending injects our economy with reserves! (If you're worried about inflation, I can explain why that won't be a problem either in another post).

Taxes function to create a demand for our currency and to allocate REAL resources to the government. Bonds simply function as a monetary policy tool, to adjust the federal funds rate to the level the central bank has chosen.

Borrowing and spending now does NOT hurt or put the burden on our children in the form of raised taxes in the future! The government does not need to ever pay off its debt! It doesn't even have to make the interest payments on the bonds (though not doing so would have an effect on interest rates).

Not deficit spending now WILL/DOES have an effect on us now, in the form of unemployment and underutilized resources, and on our children, in the form of lost potential output.

If you want to challenge me on ANY of these I welcome it and strongly encourage you to do so! Knowing all of this is so very important and teaching it to family and friends so that they can pass it on and eventually demand it from our politicians is imperative! WE DO NOT HAVE TO REMAIN UNEMPLOYED AND UNDERUTILIZED!

Here's more from Marshall Auerback:

Deficit control and deficit reduction [is the aim], despite the fact that at present, the US has massive excess capacity including millions of unemployed and underemployed, a negative contribution from net exports, and a stagnant private spending growth horizon. Yet the President marches on, oblivious to the harm his policies would introduce to an already bleeding economy, using the tired analogy between a household and a sovereign government to support his tired arguments.

Discussion of government budget deficits often begins with an analogy to a household’s budget, and the President continues that horrible pattern of misinformation. Obama challenged the view that the government might side-step the debt ceiling constraint by just paying “interest on the debt” and said:

"This is the equivalent of me saying, you know what, I will choose to pay my mortgage, but I’m not going to pay my car note. Or I’m going to pay my car note but I’m not going to pay my student loan. Now, a lot of people in really tough situations are having to make those tough decisions. But for the U.S. government to start picking and choosing like that is not going to inspire a lot of confidence. "

Let’s state it again: households do not have the power to levy taxes, to issue the currency we use, and to demand that those taxes are paid in the currency it issues. Rather, households are users of the currency issued by the sovereign government. Here the same distinction applies to private businesses, which are also users of the currency. There’s a big difference, as all us on this blog have repeatedly stressed: Users of a currency do face an external constraint in a way that a sovereign issuer of its currency does not.

Typical is this statement from the President:

"I do think that the steps that I talked about to deal with job growth and economic growth right now are vitally important to deficit reduction. Just as deficit reduction is important to grow the economy and to create jobs — well, creating jobs and growing the economy also helps reduce the deficit. If we just increased the growth rate by one percentage point, that would drastically bring down the long-term projections of the deficit, because people are paying more into the coffers and fewer people are drawing unemployment insurance. It makes a huge difference."

The President has the causation here totally backward. A growing economy, characterized by rising employment, rising incomes and rising capacity utilization causes the deficit to shrink, not the other way around. Rising prosperity means rising tax revenues and reduced social welfare payments, whereas there is an overwhelming body of evidence to support the opposite – cutting budget deficits when there is slack private spending growth and external deficits will erode growth and destroy net jobs.

Consider the comments of Senate Minority Leader, Mitch McConnell:

"What Republicans want is simple: We want to cut spending now, we want to cap runaway spending in the future and we want to save our entitlements and our country from bankruptcy by requiring the nation to balance its budget. We want to finally get our economy growing again at a pace that will lead to significant job growth."

Like the President, McConnell evidently also feels that the US government can run out of dollars or, at the very least, computer keyboards to mark up or down the numbers in our national accounts. This is the only way one could make sense of his nonsensical bankruptcy comments. This perverse inability to distinguish between issuers and users of currencies is a disease which afflicts members of both parties and largely explains the willingness to hack away at what’s left of the American social welfare net (the President unilaterally disarming his party on Medicare before securing a single concession from the GOP). Change you can believe in! And the President wonders why his base is totally dispirited!

Let’s be clear: the government creates 'money' whenever it spends; it destroys 'money' whenever it taxes. The issue, which the President should be out and front explaining, is whether or not its spending too much or taxing too little. With a rising unemployment rate, and a huge reserve of underemployed and disadvantaged workers, it is the height of insanity to cut spending overall which is what the US President is claiming is an important and urgent policy goal when there is so much idle productive capacity. Yet both the President and his Republican negotiators on the other side of this issue take it as a given that public debt per se is an unalloyed evil that should be eliminated as a long term policy goal. That is only possible if the external surplus is large enough. Otherwise, if you attempt to achieve that stage via fiscal cutbacks the policy strategy will undermine employment and growth. The upshot is that the budget deficit is likely to rise because the slowing economy will undermine tax revenue.