A couple weeks ago I wrote a post addressing the question 'why does money matter?'. I hope I laid out a clear explanation of the role of money in our economy and how many mainstream economists misunderstand just what it is at its most fundamental level.
The basic insight is that money is credit or an IOU, and not a commodity nor a representation of a commodity (or commodities). So if money is credit, then what gives it value?
The metallists, those who believe money is like a commodity or a 'fiat' representation of commodities, believe money gets its value from that commodity or commodities. That is, they believe money gets its value from gold or in more modern times, from the bundles of goods a currency area produces.
I wondered about this question long ago, why is gold so valuable? I just didn't get why a mostly useless shiny metal would be so coveted by the Egyptians, Romans, or Europeans. Then I took a money and banking course in college that provided me with an explanation. Gold and other precious metals were used as money because they were easily molded into small, transportable coins. And because of its moldability, it could be divided into larger and smaller coins with varying values with markings to protect against counterfeiting. This mostly satisfied my curiosity. I though, 'oh, the people of Egypt (or wherever) were smart enough to figure out that this commodity, of all the commodities available to them, would serve best as money because of its inherent properties'.
Later in the course, however, I learned of an alternative approach to money that completely flips this view on its head. This is the Chartalist view that regards money as credit. To them, all money is an IOU or credit and anyone can then create money as long as someone is willing to accept it. Monies fall into a sort of hierarchy of acceptance with the most worthy creditors (or debtors) at the top and the worst at the bottom.
And it is here were we find the key to money's value. It isn't anything based on intrinsic worth of the commodity used to represent the IOU, it is rather the acceptability of the IOU. The most acceptable IOUs have more value!
A Ph.D. student's perspective on Catholic Social Teaching and economics.
Showing posts with label Modern Money Theory. Show all posts
Showing posts with label Modern Money Theory. Show all posts
Wednesday, May 23, 2012
Thursday, May 17, 2012
Monopoly and Modern Money Theory
This is a brilliant post by J.D. Alt on how the economy is like the game of monopoly. It is kind of long, but really understands how the economy works, particularly from a MMT perspective.
Full Post: Playing Monopolis Monopoly
Highlights:
Full Post: Playing Monopolis Monopoly
Highlights:
Why does it seem like there isn’t enough money to pay for the things we really need? The headlines are filled with stories about our nation’s “debt problem” and dire warnings about our impending “bankruptcy.” As an architect who fills his waking hours thinking up all kinds of wonderful things we could be building, I’m alarmed by the idea there isn’t enough money to pay for any of them. Before wasting more time dreaming, I had to find out: Is it really true? Are we really too poor to put America back to work making and building the things we need to maintain a prosperous nation?
Searching for an answer, I discovered a small (but growing) group of economists (see here, here, here, here, here, here) who represent an emerging school of thought known as “modern monetary theory” (MMT). These men and women are valiantly trying to make us all understand a paradigm shift that occurred some forty years ago, when the world abandoned the gold standard. Their key insight shocked me: A sovereign government is never revenue constrained when it is the Monopoly issuer of its own pure fiat currency; it has all the money that’s needed to put its citizens to work building anything—and providing any service—that is desired by the public (provided the real resources are available). Even more remarkable, sovereign “deficits” in the fiat currency are just the accounting record of the surpluses that have been injected into the private economy. Eliminating the sovereign currency deficit by imposing austerity will not make the economy healthier; it will, in effect, bankrupt the citizens!
If this seems to defy logic, stay with me for just a few minutes. I’m going to propose a simple exercise that will help you “see” this reality for yourself. The exercise is simply that everyone join me in a familiar game of Monopoly. By the end of the game, I hope to convince you that MMT is correct
and that we could be doing better, much better – for ourselves and future generations—if we just understood and took ad vantage of our modern monetary system.
Let’s begin.
Playing Monopolis Monopoly
We’ll play by the normal rules (I’ll suggest some added features as we go along) except this time we’ll pay special attention to certain things that are happening. For example, you’ll recall that before the game can begin, one player has to agree to be the “banker” (a tedious task, but someonehas to do it.) But now choosing this person has a special importance: it must be done democratically, with the players voting to determine who will manage the game’s money. We’ll do this little exercise because we want to pay special attention to the fact that the Monopoly “bank” is an entity created by the players themselves for their mutual benefit. In fact, we won’t refer to it as the “bank” anymore, but instead will call it our “currency issuing government” (CIG). In a real sense, we all “own” CIG together, and taking a minute to democratically choose who will manage it heightens our awareness of this key fact.
To reinforce this awareness, the next thing we’ll think about, as we set up the Monopoly board, organize the Deed Cards, shuffle the Chance Cards and choose our tokens, is that what we are really doing is setting up, and getting ready to operate, a miniature nation-state. Let’s even give it a name: Monopolis. We, the players, are the new citizens of Monopolis. We have just established, through democratic consensus, our currency issuing government, and we are now getting ready to operate our economy. That’s what the game is about.
Issuing the Currency
As we get ready to play, we immediately discover an odd dilemma: CIG has all the money! We, the players, are ready to go but we can’t start the game until we have some of CIG’s money. This is an awkward moment, which is dispensed with so quickly in regular Monopoly we hardly notice it. (The “banker” is instructed to make initial cash distributions in the amount of $1500 to each player). If we pay attention, we can see that this moment raises some interesting and crucial questions.
Monday, November 7, 2011
Understanding Fiat Money
There seems to be a lot of confusion concerning just what gives money its value or even what money really is. I think that evidence has shown that this is a somewhat elusive issue, because the nature and role of money has varied throughout history (See David Graeber's book "Debt: The first 5000 years").
But almost invariably, money has represented a credit-debt relation. Money is one person's asset and another's liability. It has taken many forms throughout history: gold, tokens, coins, tallies, people, cigarettes, and even numbers in bank accounts. There really are too many to name in a reasonable amount of time. But the important point is that the object represented a relation or social obligation. The gold or whatever was the asset of one individual but the liability of another.
Money in recent history has evolved from precious metals and the gold standard to paper money and eventually to pure credit represented by numbers in bank accounts or so the tale goes. But if gold was what gave money its value (supposedly) and our paper currency or even our pure credit currency isn't backed by gold then what gives it its value?
That is, if money is a credit-debt relation and not merely an object, then what gives it value? Some contend that the goods it can buy is what gives it value, i.e. that it is backed by real goods. This seems to make sense, because after all, paper money is pretty worthless in and of itself. It doesn't do anything but get you other things that do have some use-value. I suppose you could use it as kleenex (as in one of my favorite movies), but clearly its physical properties are not what give it value. Pure credit money would have no value at all then.
Instead, we give it value by accepting it. Just like the key to obtaining a loan (a debt) is getting it accepted by a creditor, the key to any money is getting it accepted. I can create my own money, essentially IOUs, but the only way that it would have value is if someone was willing to accept it usually in exchange for something. They might do this if they trust me to make good on my promise to pay them back whatever it is that I said I'd pay them back.
Acceptance, then, is the key to any money having value. All monies fall into a sort of hierarchy of acceptance. Not many people would be willing to accept my IOUs, but perhaps they would accept them from a higher more powerful institution, say a bank. In fact, that's what bank loans are, bank money. They aren't US Dollars. They are convertible into US Dollars, but they aren't initially US dollars.
So why do we use US dollars as currency? Because our government requires us to pay our taxes and fines to them in US dollars. To pay taxes we need to obtain US dollars. We do this by working for the state, offering goods and services to the state in exchange for US dollars. We then use those dollars to pay our taxes. Logically, the gov’t must pay out at least as many dollars as it requires in taxes, otherwise some of us wouldn’t be able to pay our taxes and would face the punishment of not paying our taxes. But even more likely, it will have to pay out more dollars than it requires us to pay in because we will want to save and prepare for future tax liabilities. This means that the govt MUST spend at a deficit (gov’t spending>taxes).
Because we need US dollars to pay taxes, we will also use them to exchange for other goods and services outside of the government sector because others will also need US dollars to pay their taxes. So long as the tax liability is sufficiently high and on a sufficient amount of the people in the nation, US dollars will be the most accepted form of money. If taxes aren’t high enough, then inflation can become an issue. Spending should be high enough to provide the public with enough dollars to pay back in taxes and to satisfy their desire for net financial saving. With this understanding, you can see that a balanced budget would be disastrous! Deficits do matter; the right sized deficit is what we need, not a balanced budget.
To sum up, acceptance is what gives money its value, not real goods and services (note however that real goods and services are what matter in an economy because we create money in order to obtain or lay claim to those goods and services, but that the value of money still depends on acceptance). Taxes are what make state money the most accepted form of money in a nation, and it is therefore the state’s ability to issue a tax on its people that gives it its power over the monetary system.
Moving to a gold standard would not remove this power from the state. It would only restrict their ability to respond to economic or financial crises much like in the early 20th century.
For more on this topic I recommend this post from L. Randall Wray.
But almost invariably, money has represented a credit-debt relation. Money is one person's asset and another's liability. It has taken many forms throughout history: gold, tokens, coins, tallies, people, cigarettes, and even numbers in bank accounts. There really are too many to name in a reasonable amount of time. But the important point is that the object represented a relation or social obligation. The gold or whatever was the asset of one individual but the liability of another.
Money in recent history has evolved from precious metals and the gold standard to paper money and eventually to pure credit represented by numbers in bank accounts or so the tale goes. But if gold was what gave money its value (supposedly) and our paper currency or even our pure credit currency isn't backed by gold then what gives it its value?
That is, if money is a credit-debt relation and not merely an object, then what gives it value? Some contend that the goods it can buy is what gives it value, i.e. that it is backed by real goods. This seems to make sense, because after all, paper money is pretty worthless in and of itself. It doesn't do anything but get you other things that do have some use-value. I suppose you could use it as kleenex (as in one of my favorite movies), but clearly its physical properties are not what give it value. Pure credit money would have no value at all then.
Instead, we give it value by accepting it. Just like the key to obtaining a loan (a debt) is getting it accepted by a creditor, the key to any money is getting it accepted. I can create my own money, essentially IOUs, but the only way that it would have value is if someone was willing to accept it usually in exchange for something. They might do this if they trust me to make good on my promise to pay them back whatever it is that I said I'd pay them back.
Acceptance, then, is the key to any money having value. All monies fall into a sort of hierarchy of acceptance. Not many people would be willing to accept my IOUs, but perhaps they would accept them from a higher more powerful institution, say a bank. In fact, that's what bank loans are, bank money. They aren't US Dollars. They are convertible into US Dollars, but they aren't initially US dollars.
So why do we use US dollars as currency? Because our government requires us to pay our taxes and fines to them in US dollars. To pay taxes we need to obtain US dollars. We do this by working for the state, offering goods and services to the state in exchange for US dollars. We then use those dollars to pay our taxes. Logically, the gov’t must pay out at least as many dollars as it requires in taxes, otherwise some of us wouldn’t be able to pay our taxes and would face the punishment of not paying our taxes. But even more likely, it will have to pay out more dollars than it requires us to pay in because we will want to save and prepare for future tax liabilities. This means that the govt MUST spend at a deficit (gov’t spending>taxes).
Because we need US dollars to pay taxes, we will also use them to exchange for other goods and services outside of the government sector because others will also need US dollars to pay their taxes. So long as the tax liability is sufficiently high and on a sufficient amount of the people in the nation, US dollars will be the most accepted form of money. If taxes aren’t high enough, then inflation can become an issue. Spending should be high enough to provide the public with enough dollars to pay back in taxes and to satisfy their desire for net financial saving. With this understanding, you can see that a balanced budget would be disastrous! Deficits do matter; the right sized deficit is what we need, not a balanced budget.
To sum up, acceptance is what gives money its value, not real goods and services (note however that real goods and services are what matter in an economy because we create money in order to obtain or lay claim to those goods and services, but that the value of money still depends on acceptance). Taxes are what make state money the most accepted form of money in a nation, and it is therefore the state’s ability to issue a tax on its people that gives it its power over the monetary system.
Moving to a gold standard would not remove this power from the state. It would only restrict their ability to respond to economic or financial crises much like in the early 20th century.
For more on this topic I recommend this post from L. Randall Wray.
Tuesday, September 13, 2011
More on the History of Money
I don't know if these are boring you, but I am deeply fascinated by this topic, because it seems as if my profession has gotten it wrong for the past 100 years or longer. Most economics textbooks will tell you money sprang forth naturally from barter to solve the 'double coincidence of wants' problem made evident in Adam Smith's Wealth of Nations. Austrian economists and 'goldbugs' really seem to like this interpretation of the history of money, but the evidence seems to be against this view.
David Graeber, an anthropologist (not an economist), recently authored a book called ‘Debt: The First 5,000 Years’ and has made some waves in the media. I posted an interview on PBS a couple weeks ago.
Note that this history of debt/money is already very much a part of MMT and in line with the findings of A. Mitchell Innes almost a century ago. I can't wait to read his book, but until then, I recommend his post at Naked Capitalism in which he responds to a pro-Austrian economist who argued against his findings.
Full post here: David Graeber on the Invention of Money
Highlights:
David Graeber, an anthropologist (not an economist), recently authored a book called ‘Debt: The First 5,000 Years’ and has made some waves in the media. I posted an interview on PBS a couple weeks ago.
Note that this history of debt/money is already very much a part of MMT and in line with the findings of A. Mitchell Innes almost a century ago. I can't wait to read his book, but until then, I recommend his post at Naked Capitalism in which he responds to a pro-Austrian economist who argued against his findings.
Full post here: David Graeber on the Invention of Money
Highlights:
First, the history:
1) Adam Smith first proposed in ‘The Wealth of Nations’ that as soon as a division of labor appeared in human society, some specializing in hunting, for instance, others making arrowheads, people would begin swapping goods with one another (6 arrowheads for a beaver pelt, for instance.) This habit, though, would logically lead to a problem economists have since dubbed the ‘double coincidence of wants’ problem—for exchange to be possible, both sides have to have something the other is willing to accept in trade. This was assumed to eventually lead to the people stockpiling items deemed likely to be generally desirable, which would thus become ever more desirable for that reason, and eventually, become money. Barter thus gave birth to money, and money, eventually, to credit.
Sunday, September 11, 2011
Employment for All Debate: My Response to Darwin
Great response from DarwinCatholic. I’ll outline my response similar to his. [You can find my proposal and the first of this series here.]
Unemployment/Job searching
I agree that job searching is a good thing in the short term. My proposal is not meant to replace unemployment insurance or job searching. I think unemployment insurance should be made available to those who choose to remain unemployed and search for a job vs. being hired into the job guarantee program so that the worker can search for a higher paying job or one that more closely suits their interests or skill set.
So you could offer unemployment insurance for a few months or even up to year at which point the gov’t could remove the insurance in order to create incentive to join the program over free-riding unemployed. The guaranteed job at a low living wage would always be there for them, some could choose to remain unemployed, but it is their choice, thus eliminating all involuntary unemployment.
Make work/sticky jobs
The program is designed to pay workers a minimum living wage, to provide goods and services that would otherwise be unprovided, and to increase the skills and hire-ability of the workers in the program. That is, a major part of the program is getting them back into the private sector by providing them with the skills necessary to do so. So, no, there isn’t a future in the program, the future is out of the program; we really don’t want them in the program and should do what it takes to get them out.
I do think that there may be “lifers”, that is, those who like the job and the pay would never want to leave, but I wouldn't say it is a free-riding issue as might be the case of other welfare programs. It is a guaranteed opportunity to provide for oneself and one's family by working, not a case of getting something for nothing. Other welfare programs should fill any inadequacy of the job guarantee program in providing the minimum level of goods and services necessary to maintain the person's dignity that is his by virtue of him being a person created in the image and likeness of God. So I don't think free-riding will be an issue, and I don't think that "lifers" are a problem, either.
The program should increase their future earnings by preventing the deterioration of skills caused by unemployment and by providing them with new skills in sectors that are hiring.
Inflation
This is a much trickier area of argument and again it gets a little ‘wonkish’ so please stick with me. MMT is very correct in my view on how finances work and what money is, etc., but when it comes to inflation there is much less certainty. Though I do believe MMTers still have a better idea of how inflation works than most mainstream economists.
Darwin provides a neat example of how injecting reserves into an economy via government spending is inflationary. I have no bone to pick there, government spending of its very nature is inflationary. But I think he is ignoring or overlooking the deflationary tendencies/factors. Taxes are deflationary for example. They drain the economy of reserves (money). Net desired aggregate saving is also deflationary. Investment equals saving in the private sector (necessarily), but if the private sector wants to net save financial assets, which is expected to be the normal case, then this is also deflationary (the savings must either come from the public sector through federal government deficits or a trade surplus).
Drops in consumer spending are also deflationary. So when consumers are paying down debts and increasing saving in the wake of a crisis they bring about a deflationary tendency by lowering aggregate demand (note this is no different than saying they desire higher net saving). Also note that this deflationary factor shows up more often as slack in the economy rather than price decreases, that is, firms decrease output more so than they decrease prices.
Increasing aggregate supply also is deflationary as would be the case if unemployed workers are put to work in a job guarantee program.
Inflation is more complicated than ‘too much money chasing too few goods’. There are many tendencies at work. A simple closed economy example cannot nail down all the tendencies and cannot say which will outweigh the others.
Darwin also brings up ‘value’ which is much trickier than inflation to pinpoint. Is it subjective? Objective? Both? Neither? Material? Supernatural? Both? Neither? Valuable in that it serves needs? Wants? Both? Neither?...etc. Value is the question that has flummoxed economists since before Adam Smith. I would argue that the ‘value’ that Darwin introduces here is subjective (as opposed to objective), which is in line with mainstream economics but has some problems, not the least of which is that it is based purely in the mind on the imaginary, incalculable concept of ‘utility’ (hence its subjectivity).
So, I don’t reject Darwin’s argument that net gov’t deficits are inflationary, but I do disagree that the program I propose would bring about inflation let alone hyper-inflation. It is not simply more money chasing a less ‘valuable’ amount of goods. There are other forces at work. The program is designed to work as a buffer stock by fixing the price of low skilled labor and letting quantity float much like the gold standard did except that low skilled labor is a much more pervasive ‘commodity’ in American production and is the ‘commodity’ hit hardest by crises. The fixed wage would temper aggregate demand during booms by anchoring wages and the prices of goods whose production involve low skilled labor and would prevent large drops in aggregate demand during crises by guaranteeing a wage to anyone willing and able to work for that wage.
The nature of a buffer stock would help anchor prices just like the gold standard. The difference between a labor buffer stock and a gold buffer stock is that labor is more pervasive and important and also that it necessarily guarantees full employment just as a gold standard ‘employed’ all gold. So full employment and greater price stability is achieved.
This to me is a great ‘side-product’ of the program, whose main attraction to me is providing an opportunity for men and women to provide for themselves and their families in times when the private sector is unwilling to do so.
Socialist caluculation problem/Administration difficulties
Here I suggest that the jobs that the workers will do be based on their skills and the needs of the community. I recommend a county level administrator who can assess the skills of the workers and the needs of the community and even ask for applications from the community who know their needs better than an administrator would. To me, the biggest problem the job guarantee program faces is administration, much like all gov’t programs. There will no doubt be some politics involved and some skewed motives/incentives on the part of workers and administrators. My opinion, however, is that the administration difficulties are outweighed by the benefits of the program—full employment and price stability.
Discipline of workers is absolutely necessary to prevent shirking as in all private sector jobs. There must be ability to fire workers with conditions placed on re-hiring.
Convicted criminals could also be an issue in the form of limiting what they can do (they couldn’t work in a classroom as an assistant, e.g.), but ex-criminals can provide for society and indeed this program may help rehabilitate criminals who would otherwise not find work in society once outside of prison.
Dignity of the job guarantee program
I disagree with Darwin here that dignity of work is solely tied to a sense of providing value to society. I believe that the dignity of work involves providing value for society, but also in providing for oneself and one’s family and in the spiritual, moral development of the worker. I also believe this is what CST says as well.
I think that there are many, many “make-work” jobs that would provide substantial amounts of ‘value’ to society and provide the worker with dignity. I do think that there might be some that feel they are getting a check to do nothing valuable for society, but I believe that to be the case with some jobs in the private sector as well. I hope that through time and our example they will realize that there is dignity in all kinds of work, even picking up trash.
Structural Adjustment?
I don’t think that the long term unemployment we are experiencing is a structural adjustment; rather, I am strongly convinced that the drop in employment caused by the financial crisis is cyclical and NOT structural. In other words, the roughly 5% unemployed before the crisis are maybe structurally unemployed (mismatch of skills and jobs), but the increases in unemployment caused by the crisis are because of the drop in overall demand, not an Austrian sectoral re-balancing.
I really appreciate Darwin taking on the task of engaging in a debate over a topic I have studied more intensely than he has. He brought up excellent points and I’m glad to debate with someone willing to understand a new/alternative perspective. I, too, have benefited greatly from this conversation.
But now I want to know, what do you think?
Unemployment/Job searching
I agree that job searching is a good thing in the short term. My proposal is not meant to replace unemployment insurance or job searching. I think unemployment insurance should be made available to those who choose to remain unemployed and search for a job vs. being hired into the job guarantee program so that the worker can search for a higher paying job or one that more closely suits their interests or skill set.
So you could offer unemployment insurance for a few months or even up to year at which point the gov’t could remove the insurance in order to create incentive to join the program over free-riding unemployed. The guaranteed job at a low living wage would always be there for them, some could choose to remain unemployed, but it is their choice, thus eliminating all involuntary unemployment.
Make work/sticky jobs
The program is designed to pay workers a minimum living wage, to provide goods and services that would otherwise be unprovided, and to increase the skills and hire-ability of the workers in the program. That is, a major part of the program is getting them back into the private sector by providing them with the skills necessary to do so. So, no, there isn’t a future in the program, the future is out of the program; we really don’t want them in the program and should do what it takes to get them out.
I do think that there may be “lifers”, that is, those who like the job and the pay would never want to leave, but I wouldn't say it is a free-riding issue as might be the case of other welfare programs. It is a guaranteed opportunity to provide for oneself and one's family by working, not a case of getting something for nothing. Other welfare programs should fill any inadequacy of the job guarantee program in providing the minimum level of goods and services necessary to maintain the person's dignity that is his by virtue of him being a person created in the image and likeness of God. So I don't think free-riding will be an issue, and I don't think that "lifers" are a problem, either.
The program should increase their future earnings by preventing the deterioration of skills caused by unemployment and by providing them with new skills in sectors that are hiring.
Inflation
This is a much trickier area of argument and again it gets a little ‘wonkish’ so please stick with me. MMT is very correct in my view on how finances work and what money is, etc., but when it comes to inflation there is much less certainty. Though I do believe MMTers still have a better idea of how inflation works than most mainstream economists.
Darwin provides a neat example of how injecting reserves into an economy via government spending is inflationary. I have no bone to pick there, government spending of its very nature is inflationary. But I think he is ignoring or overlooking the deflationary tendencies/factors. Taxes are deflationary for example. They drain the economy of reserves (money). Net desired aggregate saving is also deflationary. Investment equals saving in the private sector (necessarily), but if the private sector wants to net save financial assets, which is expected to be the normal case, then this is also deflationary (the savings must either come from the public sector through federal government deficits or a trade surplus).
Drops in consumer spending are also deflationary. So when consumers are paying down debts and increasing saving in the wake of a crisis they bring about a deflationary tendency by lowering aggregate demand (note this is no different than saying they desire higher net saving). Also note that this deflationary factor shows up more often as slack in the economy rather than price decreases, that is, firms decrease output more so than they decrease prices.
Increasing aggregate supply also is deflationary as would be the case if unemployed workers are put to work in a job guarantee program.
Inflation is more complicated than ‘too much money chasing too few goods’. There are many tendencies at work. A simple closed economy example cannot nail down all the tendencies and cannot say which will outweigh the others.
Darwin also brings up ‘value’ which is much trickier than inflation to pinpoint. Is it subjective? Objective? Both? Neither? Material? Supernatural? Both? Neither? Valuable in that it serves needs? Wants? Both? Neither?...etc. Value is the question that has flummoxed economists since before Adam Smith. I would argue that the ‘value’ that Darwin introduces here is subjective (as opposed to objective), which is in line with mainstream economics but has some problems, not the least of which is that it is based purely in the mind on the imaginary, incalculable concept of ‘utility’ (hence its subjectivity).
So, I don’t reject Darwin’s argument that net gov’t deficits are inflationary, but I do disagree that the program I propose would bring about inflation let alone hyper-inflation. It is not simply more money chasing a less ‘valuable’ amount of goods. There are other forces at work. The program is designed to work as a buffer stock by fixing the price of low skilled labor and letting quantity float much like the gold standard did except that low skilled labor is a much more pervasive ‘commodity’ in American production and is the ‘commodity’ hit hardest by crises. The fixed wage would temper aggregate demand during booms by anchoring wages and the prices of goods whose production involve low skilled labor and would prevent large drops in aggregate demand during crises by guaranteeing a wage to anyone willing and able to work for that wage.
The nature of a buffer stock would help anchor prices just like the gold standard. The difference between a labor buffer stock and a gold buffer stock is that labor is more pervasive and important and also that it necessarily guarantees full employment just as a gold standard ‘employed’ all gold. So full employment and greater price stability is achieved.
This to me is a great ‘side-product’ of the program, whose main attraction to me is providing an opportunity for men and women to provide for themselves and their families in times when the private sector is unwilling to do so.
Socialist caluculation problem/Administration difficulties
Here I suggest that the jobs that the workers will do be based on their skills and the needs of the community. I recommend a county level administrator who can assess the skills of the workers and the needs of the community and even ask for applications from the community who know their needs better than an administrator would. To me, the biggest problem the job guarantee program faces is administration, much like all gov’t programs. There will no doubt be some politics involved and some skewed motives/incentives on the part of workers and administrators. My opinion, however, is that the administration difficulties are outweighed by the benefits of the program—full employment and price stability.
Discipline of workers is absolutely necessary to prevent shirking as in all private sector jobs. There must be ability to fire workers with conditions placed on re-hiring.
Convicted criminals could also be an issue in the form of limiting what they can do (they couldn’t work in a classroom as an assistant, e.g.), but ex-criminals can provide for society and indeed this program may help rehabilitate criminals who would otherwise not find work in society once outside of prison.
Dignity of the job guarantee program
I disagree with Darwin here that dignity of work is solely tied to a sense of providing value to society. I believe that the dignity of work involves providing value for society, but also in providing for oneself and one’s family and in the spiritual, moral development of the worker. I also believe this is what CST says as well.
I think that there are many, many “make-work” jobs that would provide substantial amounts of ‘value’ to society and provide the worker with dignity. I do think that there might be some that feel they are getting a check to do nothing valuable for society, but I believe that to be the case with some jobs in the private sector as well. I hope that through time and our example they will realize that there is dignity in all kinds of work, even picking up trash.
Structural Adjustment?
I don’t think that the long term unemployment we are experiencing is a structural adjustment; rather, I am strongly convinced that the drop in employment caused by the financial crisis is cyclical and NOT structural. In other words, the roughly 5% unemployed before the crisis are maybe structurally unemployed (mismatch of skills and jobs), but the increases in unemployment caused by the crisis are because of the drop in overall demand, not an Austrian sectoral re-balancing.
I really appreciate Darwin taking on the task of engaging in a debate over a topic I have studied more intensely than he has. He brought up excellent points and I’m glad to debate with someone willing to understand a new/alternative perspective. I, too, have benefited greatly from this conversation.
But now I want to know, what do you think?
A Colossal Hoax
U.S. bankruptcy that is...I've been saying this for a while now, but Susan Feiner from the University of Southern Maine wrote a nice article on modern money about a month ago that is probably a better explanation than what I offer.
From EconIntersect
From EconIntersect
Readers put on your thinking caps and learn something new about money.
Modern money—not the old fashioned, greasy kid’s stuff—follows uber modern rules, rules which have been misrepresented/misunderstood in the coverage of Washington’s debt-ceiling hysteria.
First things first: no matter how much money we’re talking about, there’s nothing there—not gold not silver. At best, a few reams of green paper.
Follow up:
For some folks the fact that there’s nothing there is intolerable. “How,” they wonder, “can money be so important, and so insubstantial?”
That’s modern money. When was the last time your pay (if you still have a job, there are 29.2 million unemployed or underemployed in the US today) was cash in an envelope? Like 99.9% of Americans you get paid by check or a direct deposit.
Someone working for your boss tapped on a keyboard (just like the keyboard I’m typing on now), to initiate a transaction that put ‘money’ in your checking account by taking ‘money’ out of your boss’s checking account.
That money is just a click, an electronic blip, your ability to keep bread on the table and a roof over your head, an ineffable nothing, and the root of all evil.
“Get out! No way! Susan, you’ve gone loony tunes.”
The United States is sovereign in its own currency. (Note to readers: this is just a fancy way of saying that the US is the only entity in the world that can create dollar denominated money. Japan and Mexican have similar monopolies on yen and pesos.) Our government creates, spends, borrows, and pays interest in dollars.
Clerks at the US Treasury enter numbers into computers that record plusses in federal agency accounts. When agencies spend—more keyboard clicks—other bank accounts are credited, then those account owners spend their money.
Next, people like you and me drive on roads, attend public school, drink clean water, fly on safe planes, and eat food checked for deadly bacteria. Myriad other necessities flow from Congressionally authorized Treasury clicks: fire and safety officers ready at a moment’s notice to come to our rescue, energy delivered via the nation’s grid powers our appliances, Social Security checks feed our seniors, and infectious diseases are checked when kids are vaccinated.
Of course people work (caveat: those 29.2 million people are still unemployed), businesses earn profits (well yeah, it’s a lot harder to do this when there are 29.2 million unemployed), consumers spend and banks’ lend.
But, as frustratingly insubstantial as it may seem, the wheels of commerce are greased by nothing more than these accounting clicks.
“You’ve got to be kidding me. My business has cash reserves of six months.”
“Sure you do. Is that reserve—coin plus currency—buried in the backyard? Or is it on deposit at a bank? If the former, send me your address! If the latter, baby you’ve got blips. You run your business by telling the bank what to do with your blips.”
As I said, money is nothing. Money is everything. And that’s true in spades for the federal government.
We are in a different place than is the government, because you and I will die. At that point, our estates will be settled: if our assets (positive blips) are greater than our liabilities (negative blips), then our heirs inherit. If the reverse occurs, then nobody gets anything. Ditto for business bankruptcies—paying off creditors requires asset liquidation.
There’s nothing comparable to death for the US. The national analogy—revolution or an invasion/occupation—would render dollars useless, no longer accepted for purchases or paying debts.
Bankruptcy is simply not possible. As long as the debts owed by the US government are dollar denominated debts, we can always create all the dollars we need.
Yep, you’re right. Creating dollars ad infinitum could cause repercussions. But that’s not what we’re talking about. The topic is bankruptcy … running out of the money needed to pay our dollar denominated debts. That is impossible, short of a self-destructive decision not to pay the debt.
The inflation boogie man can be put to bed, as well. If we create money to retire debt, we are “printing money” that has already been spent. (That’s what debt is: money - oops, blips - that has been spent.) It has already supplied whatever inflation it could. Offsetting those blips that have already been spent cannot produce any inflation. This is what the “mobs” are missing.
If you’re just about to pull out your hair because you are thinking …. “this woman, what a dimwit, if we created all this ‘money’ no one in the world would lend us a dime” .…, relax.
The interest rate the US is paying on its debt is at a historic lows. Globally, cash rich (oops, make that blip rich) investors are queuing up to lend to us. In fact, on August 1 (the day before we hit the debt ceiling) the world’s investors were paying America for the privilege of lending us money. Negative interest! I am not making this up. Markets ain’t worrying ‘bout federal borrowing or money creation.
And you shouldn’t be either. Le deficit es mort. Viva le deficit.
Thursday, September 1, 2011
Employment for All
A friend I have met in the blogosphere, known as DarwinCatholic (or sometimes just Darwin) has agreed to engage in a debate with me over a federal job guarantee program.
It's a policy I feel very strongly about, because I feel that not only is it possible to achieve both full employment and price stability (low inflation) in the U.S. but also that an ‘employer of last resort’ (ELR) or ‘job-guarantee program’ is the key to obtaining those goals.
Here is my very truncated argument (it is very difficult to make this argument in a short blog post, but I'm gonna give it a shot):
1) Full employment is desirable.
Okay, obvious I know, but this goal isn't just desirable for the obvious reasons (greater economic prosperity and efficiency, lower crime, higher education, less poverty, etc.) it's also desirable because man develops as a person through his work. As Pope John Paul II said, work enables a man to become “more a human being” for “virtue is something whereby man becomes good as man” – Centesimus Annus pp.9. Denying someone an opportunity to work, to feed his family and develop as a person is a grave evil that should be avoided if doing so doesn't bring about other greater evils.
2) Price stability is desirable.
Okay, this one may not be quite as obvious, but is still pretty obvious. We want price stability because it brings about greater overall stability to the society. Not knowing how much your dollar is going to be worth tomorrow adds to the already uncertain conditions we live in and would make the economy much more volatile. High inflation also erodes the value of savings, thus punishing savers. Price instability is not near as grave an evil as unemployment, but the results of price instability can be, so it too should be avoided if it all possible.
3) The Catholic Church has in several instances mandated societies to provide for decent work for all willing and able to work.
4) Economists have long thought that achieving both is very difficult if not impossible.
They call this the Phillips Curve. As unemployment goes lower and lower, inflation gets higher and higher. The opposite is also true. This relationship has held pretty well, with shifts in the curve occurring frequently, often times upon the onset of a recession. So full employment, that is everyone willing and able to work having a job, is NOT possible without accelerating inflation. Instead economists have shot for a low level of unemployment they called the NAIRU (non-accelerating inflation rate of unemployment) that would bring about the lowest unemployment possible without stimulating increasing inflation. This NAIRU has also shifted over the years, although economists don't really know what the number really is. They can only guess based upon the evidence they receive, which is why the number is constantly being revised.
Somewhat ironically, despite this perceived impossibility, the Humphrey-Hawkins Act of 1978 gave the Federal Reserve Bank the dual mandate of full employment and price stability.
5) So despite the desirability of full employment and price stability and the mandates given by the US gov't and the Catholic Church (which granted doesn't really carry much sway in the US), economists believe the goals to be incompatible. The best they think we can accomplish is some low rate of unemployment with some low rate of inflation.
I say, however, that it IS possible to achieve both and that to do so, the government would have to play an active role as an employer of last resort providing a job to anyone willing and able to work at a living wage.
6) To understand how this is possible, one first has to understand money. I argue that money is not a commodity like gold, but a token or debt/credit relation, a promise to pay, and has been for the past 4000 years at least. There have been periods in history where gov'ts fixed the currency to a commodity, but what made it the acceptable form of money used in that nation was the government's demand for it in payment of taxes, not the weight of metal in the coin. (Read here and herefor more on the history of money).
In nations where the gov't doesn't fix their currency to a commodity or another currency, that is, in nations with a sovereign fiat currency, there is no constraint to government spending. The issuer of the currency defines the currency and cannot go bankrupt or default on its obligations.
So going bankrupt or spending more than it "brings in" is not a reason we can't have full employment. I also argue that there is nothing inherently wrong with deficits. I argue that they don't crowd out private spending by raising interest rates (the central bank controls interest rates), they do not burden future generations, and they do not lead to financial ruin or a weak currency.
Deficits are expected to be the norm due to the private sector's desire to net save financial assets. To do so, the private sector must run a trade surplus (exports>imports) or the government must run a deficit.
Deficits can be too high, however. When they are too high they can be inflationary, so it is still necessary to show how inflation wouldn't ensue with such a program.
[This part gets kinda wonkish, so stick with me!]
7) The job guarantee program would act as a 'buffer stock'. That is, it would anchor prices by fixing the price for low-skilled labor and let the quantity of said labor in the program float.
I argue that the gov’t doesn’t have to pay the market price when it buys goods and services. If it offers a lower price suppliers may refuse to sell to the gov’t inciting a deflationary cycle, if the gov’t offers a higher price an inflationary cycle may set in.
It would not be wise to try and fix the price for everything it buys (the effects of which would be quite destabilizing and have major distributional changes). Instead it could fix the price of an important commodity letting the quantity float which would also mean the gov’t deficit would float with it. By fixing an important price, one that enters as a major cost in the private sector, the gov’t would impart some price stability to the economy and by letting the deficit float counter-cyclically the gov’t would fill any demand gap created when private sector spending is too low.
The best commodity to fix the price of, I argue, is low-skilled or unskilled labor. This will stabilize private sector wages and thus costs and prices. Employment in the program will increase when private sector employment decreases. When private sector spending picks back up, employees will be hired out of the job guarantee program back into the private sector.
The recommended wage for the program would start with the minimum wage and be ratcheted up until what is deemed a living wage is reached. Starting at a minimum wage and ratcheting it up to a living wage minimizes the one-time adjustment and subsequent adjustments in all other relative prices.
Such a policy guarantees full employment, a counter-cyclical deficit to fill any demand gap left by the private sector, and impart greater price stability than the current system.
8) Like any gov’t program, such a program is not without challenges. It is unwise to assume that gov’t would ever be perfect, we humans are not, so why would an institution created by us be perfect?
The ELR is not slavery, only those willing and able to work will be hired. It is not meant to replace welfare, but will likely replace a large amount of unemployment insurance and some other welfare spending as people earn their way out of need. ELR workers can be fired with restrictions placed on re-hiring; there will need to be discipline. This program will not resolve all economic problems, but will likely improve a great deal of them.
There are plenty of different jobs ELR workers can perform: companions to the elderly, classroom assistants, safety monitors, neighborhood cleaners, low-income housing restorers, day care assistants, library assistants, environmental safety monitors, artists or musicians, and many, many more. These jobs may not all ‘produce’ as much as they are paid and I have many arguments to address this, but is it not better to offer someone a job at a living wage who will produce something rather than give someone unemployment insurance for nothing?
I argue that it would be best to run the program at the county level with the Federal gov’t simply writing the check. I believe this is in line with the CST’s principle of subsidiarity.
Admittedly this a very non-orthodox approach to economics, but is one which I believe to be far more accurate than the mainstream’s belief that reaching the two goals of full employment and price stability is impossible. The key I believe is in the understanding of money and gov’t finance. This program does not favor ‘bigger government’ but rather a government that proactively works for the common good according to the principle of subsidiarity. Understanding how modern money works is neither republican nor democrat. Once it is understood how modern money works it seems natural to come to the conclusion that the gov’t should have a job guarantee program. Whether gov’t should be active in other areas is a matter left to further debate and is outside the scope of this argument.
It is impossible to address all the objections to the program in such a short post, so I’ll turn it over to my fellow debater to object and point out weaknesses and then respond to them.
You can read his response here. [Link will be posted shortly].
It's a policy I feel very strongly about, because I feel that not only is it possible to achieve both full employment and price stability (low inflation) in the U.S. but also that an ‘employer of last resort’ (ELR) or ‘job-guarantee program’ is the key to obtaining those goals.
Here is my very truncated argument (it is very difficult to make this argument in a short blog post, but I'm gonna give it a shot):
1) Full employment is desirable.
Okay, obvious I know, but this goal isn't just desirable for the obvious reasons (greater economic prosperity and efficiency, lower crime, higher education, less poverty, etc.) it's also desirable because man develops as a person through his work. As Pope John Paul II said, work enables a man to become “more a human being” for “virtue is something whereby man becomes good as man” – Centesimus Annus pp.9. Denying someone an opportunity to work, to feed his family and develop as a person is a grave evil that should be avoided if doing so doesn't bring about other greater evils.
2) Price stability is desirable.
Okay, this one may not be quite as obvious, but is still pretty obvious. We want price stability because it brings about greater overall stability to the society. Not knowing how much your dollar is going to be worth tomorrow adds to the already uncertain conditions we live in and would make the economy much more volatile. High inflation also erodes the value of savings, thus punishing savers. Price instability is not near as grave an evil as unemployment, but the results of price instability can be, so it too should be avoided if it all possible.
3) The Catholic Church has in several instances mandated societies to provide for decent work for all willing and able to work.
In Rerum Novarum, Pope Leo XIII wrote, “Among the several purposes of a society, one should be to try to arrange for a continuous supply of work at all times and seasons.”
In Quadragesimo Anno Pope Pius XI wrote, “But another point, scarcely less important, and especially vital in our times, must not be overlooked: namely, that the opportunity to work be provided to those who are able and willing to work.”
In Caritas in Veritate, Pope Benedict XVI wrote, “The dignity of the individual and the demands of justice require, particularly today, that economic choices do not cause disparities in wealth to increase in an excessive and morally unacceptable manner, and that we continue to prioritize the goal of access to steady employment for everyone.”
4) Economists have long thought that achieving both is very difficult if not impossible.
They call this the Phillips Curve. As unemployment goes lower and lower, inflation gets higher and higher. The opposite is also true. This relationship has held pretty well, with shifts in the curve occurring frequently, often times upon the onset of a recession. So full employment, that is everyone willing and able to work having a job, is NOT possible without accelerating inflation. Instead economists have shot for a low level of unemployment they called the NAIRU (non-accelerating inflation rate of unemployment) that would bring about the lowest unemployment possible without stimulating increasing inflation. This NAIRU has also shifted over the years, although economists don't really know what the number really is. They can only guess based upon the evidence they receive, which is why the number is constantly being revised.
Somewhat ironically, despite this perceived impossibility, the Humphrey-Hawkins Act of 1978 gave the Federal Reserve Bank the dual mandate of full employment and price stability.
5) So despite the desirability of full employment and price stability and the mandates given by the US gov't and the Catholic Church (which granted doesn't really carry much sway in the US), economists believe the goals to be incompatible. The best they think we can accomplish is some low rate of unemployment with some low rate of inflation.
I say, however, that it IS possible to achieve both and that to do so, the government would have to play an active role as an employer of last resort providing a job to anyone willing and able to work at a living wage.
6) To understand how this is possible, one first has to understand money. I argue that money is not a commodity like gold, but a token or debt/credit relation, a promise to pay, and has been for the past 4000 years at least. There have been periods in history where gov'ts fixed the currency to a commodity, but what made it the acceptable form of money used in that nation was the government's demand for it in payment of taxes, not the weight of metal in the coin. (Read here and herefor more on the history of money).
In nations where the gov't doesn't fix their currency to a commodity or another currency, that is, in nations with a sovereign fiat currency, there is no constraint to government spending. The issuer of the currency defines the currency and cannot go bankrupt or default on its obligations.
So going bankrupt or spending more than it "brings in" is not a reason we can't have full employment. I also argue that there is nothing inherently wrong with deficits. I argue that they don't crowd out private spending by raising interest rates (the central bank controls interest rates), they do not burden future generations, and they do not lead to financial ruin or a weak currency.
Deficits are expected to be the norm due to the private sector's desire to net save financial assets. To do so, the private sector must run a trade surplus (exports>imports) or the government must run a deficit.
Deficits can be too high, however. When they are too high they can be inflationary, so it is still necessary to show how inflation wouldn't ensue with such a program.
[This part gets kinda wonkish, so stick with me!]
7) The job guarantee program would act as a 'buffer stock'. That is, it would anchor prices by fixing the price for low-skilled labor and let the quantity of said labor in the program float.
I argue that the gov’t doesn’t have to pay the market price when it buys goods and services. If it offers a lower price suppliers may refuse to sell to the gov’t inciting a deflationary cycle, if the gov’t offers a higher price an inflationary cycle may set in.
It would not be wise to try and fix the price for everything it buys (the effects of which would be quite destabilizing and have major distributional changes). Instead it could fix the price of an important commodity letting the quantity float which would also mean the gov’t deficit would float with it. By fixing an important price, one that enters as a major cost in the private sector, the gov’t would impart some price stability to the economy and by letting the deficit float counter-cyclically the gov’t would fill any demand gap created when private sector spending is too low.
The best commodity to fix the price of, I argue, is low-skilled or unskilled labor. This will stabilize private sector wages and thus costs and prices. Employment in the program will increase when private sector employment decreases. When private sector spending picks back up, employees will be hired out of the job guarantee program back into the private sector.
The recommended wage for the program would start with the minimum wage and be ratcheted up until what is deemed a living wage is reached. Starting at a minimum wage and ratcheting it up to a living wage minimizes the one-time adjustment and subsequent adjustments in all other relative prices.
Such a policy guarantees full employment, a counter-cyclical deficit to fill any demand gap left by the private sector, and impart greater price stability than the current system.
8) Like any gov’t program, such a program is not without challenges. It is unwise to assume that gov’t would ever be perfect, we humans are not, so why would an institution created by us be perfect?
The ELR is not slavery, only those willing and able to work will be hired. It is not meant to replace welfare, but will likely replace a large amount of unemployment insurance and some other welfare spending as people earn their way out of need. ELR workers can be fired with restrictions placed on re-hiring; there will need to be discipline. This program will not resolve all economic problems, but will likely improve a great deal of them.
There are plenty of different jobs ELR workers can perform: companions to the elderly, classroom assistants, safety monitors, neighborhood cleaners, low-income housing restorers, day care assistants, library assistants, environmental safety monitors, artists or musicians, and many, many more. These jobs may not all ‘produce’ as much as they are paid and I have many arguments to address this, but is it not better to offer someone a job at a living wage who will produce something rather than give someone unemployment insurance for nothing?
I argue that it would be best to run the program at the county level with the Federal gov’t simply writing the check. I believe this is in line with the CST’s principle of subsidiarity.
Admittedly this a very non-orthodox approach to economics, but is one which I believe to be far more accurate than the mainstream’s belief that reaching the two goals of full employment and price stability is impossible. The key I believe is in the understanding of money and gov’t finance. This program does not favor ‘bigger government’ but rather a government that proactively works for the common good according to the principle of subsidiarity. Understanding how modern money works is neither republican nor democrat. Once it is understood how modern money works it seems natural to come to the conclusion that the gov’t should have a job guarantee program. Whether gov’t should be active in other areas is a matter left to further debate and is outside the scope of this argument.
It is impossible to address all the objections to the program in such a short post, so I’ll turn it over to my fellow debater to object and point out weaknesses and then respond to them.
You can read his response here. [Link will be posted shortly].
Wednesday, August 17, 2011
Krugman on MMT
Krugman first bashes MMT, then somehow makes an MMT argument presumedly without realizing it...
Franc thoughts on long-run fiscal issues
Anti-'MMT-types' migrate to stage II
MMT, Again
Printing Press Mystery
His acknowledgement:
Franc thoughts on long-run fiscal issues
Anti-'MMT-types' migrate to stage II
MMT, Again
Printing Press Mystery
His acknowledgement:
Countries without a printing press are subject to self-fulfilling crises in a way that nations that still have a currency of their own are not. The point is that fears of default, by driving up interest costs, can themselves trigger default — and that because there’s a crossing-the-Rubicon aspect to default, once a country crosses that line it will probably impose fairly severe losses on creditors. A country with its own currency isn’t in the same position: even if it is pushed into some inflation, there’s no red line that need be crossed.
That’s why America isn’t Greece; and why the UK is being foolish in imposing eurozone-type austerity on itself.
Friday, August 5, 2011
Understanding Modern Money
If you want a quick review of the background and history of Modern Money Theory, as well as a quick synopsis of its key elements there is none better than this post from Johnsville via Mosler:
Modern Money in a Nutshell
Highlights:
A rampaging mutant macroeconomic theory called Modern Monetary Theory, or MMT for short, is kicking keisters and smacking down conventional wisdom in economic circles these days. This is because an energized group of MMT economists, bloggers, and their loyal foot soldiers, lead by economists Warren Mosler, Bill Michell, and L. Randall Wray are swarming on the internet. New MMT disciples are hatching out everywhere. They are like a school of fresh-faced paramedics surrounding a gasping heart attack victim. They seek to present their economic worldview as the definitive first aid for understanding and dealing with the critical issues of growth, unemployment, inflation, budget deficits, and national debt.
MMT is a reformulated blend of some older macroeconomic theories called Chartalism and Functional finance. But, it also adds a fresh dose of monetary accounting for intellectual muscle mass. Chartalism is a school of economic thought that was developed between 1901 and 1905 by German economist Georg F. Knapp with important contributions (1913-1914) from Alfred Mitchell-Innes. Functional finance is an extension of Chartalism, which was developed by economist Abba Lerner in the 1940’s.
MMT is a broad combination of fiscal, monetary and accounting principles that describe an economy with a floating rate fiat currency administered by a sovereign government. The foundation of MMT is its recognition of the importance of the government’s power to tax, thereby creating a demand for its money, and its monopoly power to print money.
There is really not that much “theory” in Modern Monetary Theory. MMT is more concerned with explaining the operational realities of modern fiat money. It is the financial X’s and O’s, the ledger or playbook, of how a sovereign government’s fiscal policies and financial relationships drive an economy. It clarifies the options and outcomes that policy makers face when they are running a tax-driven money monopoly. Proponents of MMT say that its greatest strength is that it is apolitical.
The lifeblood of MMT doctrine is a government’s fiscal policy (taxing and spending). Taxes are only needed to regulate consumer demand and control inflation, not for revenue. A sovereign government that issues its own floating rate fiat currency is not revenue constrained. In other words, taxes are not needed to fund the government.
MMT also asserts that the federal government should net spend, again usually in deficit, to the point where it meets the aggregate savings desire of its population. This is because government budget deficits add to savings.
In the U.S., MMTers see the contentious issue of a mounting national debt and continuing budget deficits as a pseudo-problem, or an “accounting mirage.” The quaint notion of the need for a balanced budget is another ancient relic from the old gold standard days, when the supply of money was actually limited. In fact, under MMT, running a federal budget surplus is usually a bad thing and will often lead to a recession.
MMT is not easy for many people, including trained economists, to understand. This is probably because of its heavy reliance on accounting principles (debts and credits). Some critics consider MMT nothing more than a twisted Ponzi scheme that is simply “printing prosperity.” Calling MMT a “printing prosperity” scheme, by the way, is the quickest way to send MMTers into spasms of outrage. MMT does not “print prosperty” according to its proponents. The MMT counter argument is: it [is] a perverse injustice that, in online discussions, MMT sympathizers are frequently reproached for imagining that “we can print prosperity” when in fact it is us who constantly stress as a fundamental point that the only true constraints are resource based, not financial or monetary in nature. We are the ones insisting that if we have the resources, we can put them to use. It is the neoclassical orthodoxy and others who try to make out that we can’t use resources, even if they are available, because of some magical, mysterious monetary or financial constraint. Just who is it that believes in magic here?
A heavyweight Keynesian economist, like Nobel Prize winner Paul Krugman, has felt the sting of MMT. But the quantity and quality of his criticism of MMT, so far, has been featherweight. He could not land a solid glove on the contender, Kid MMT. Krugman only proved that he does not understand MMT, so his criticism was weak (see MMT comments) and his follow-up even weaker. MMT economist James Galbraith did a succinct breakdown of Krugman’s major errors.
Modern Money in a Nutshell
Highlights:
A rampaging mutant macroeconomic theory called Modern Monetary Theory, or MMT for short, is kicking keisters and smacking down conventional wisdom in economic circles these days. This is because an energized group of MMT economists, bloggers, and their loyal foot soldiers, lead by economists Warren Mosler, Bill Michell, and L. Randall Wray are swarming on the internet. New MMT disciples are hatching out everywhere. They are like a school of fresh-faced paramedics surrounding a gasping heart attack victim. They seek to present their economic worldview as the definitive first aid for understanding and dealing with the critical issues of growth, unemployment, inflation, budget deficits, and national debt.
MMT is a reformulated blend of some older macroeconomic theories called Chartalism and Functional finance. But, it also adds a fresh dose of monetary accounting for intellectual muscle mass. Chartalism is a school of economic thought that was developed between 1901 and 1905 by German economist Georg F. Knapp with important contributions (1913-1914) from Alfred Mitchell-Innes. Functional finance is an extension of Chartalism, which was developed by economist Abba Lerner in the 1940’s.
MMT is a broad combination of fiscal, monetary and accounting principles that describe an economy with a floating rate fiat currency administered by a sovereign government. The foundation of MMT is its recognition of the importance of the government’s power to tax, thereby creating a demand for its money, and its monopoly power to print money.
There is really not that much “theory” in Modern Monetary Theory. MMT is more concerned with explaining the operational realities of modern fiat money. It is the financial X’s and O’s, the ledger or playbook, of how a sovereign government’s fiscal policies and financial relationships drive an economy. It clarifies the options and outcomes that policy makers face when they are running a tax-driven money monopoly. Proponents of MMT say that its greatest strength is that it is apolitical.
The lifeblood of MMT doctrine is a government’s fiscal policy (taxing and spending). Taxes are only needed to regulate consumer demand and control inflation, not for revenue. A sovereign government that issues its own floating rate fiat currency is not revenue constrained. In other words, taxes are not needed to fund the government.
MMT also asserts that the federal government should net spend, again usually in deficit, to the point where it meets the aggregate savings desire of its population. This is because government budget deficits add to savings.
In the U.S., MMTers see the contentious issue of a mounting national debt and continuing budget deficits as a pseudo-problem, or an “accounting mirage.” The quaint notion of the need for a balanced budget is another ancient relic from the old gold standard days, when the supply of money was actually limited. In fact, under MMT, running a federal budget surplus is usually a bad thing and will often lead to a recession.
MMT is not easy for many people, including trained economists, to understand. This is probably because of its heavy reliance on accounting principles (debts and credits). Some critics consider MMT nothing more than a twisted Ponzi scheme that is simply “printing prosperity.” Calling MMT a “printing prosperity” scheme, by the way, is the quickest way to send MMTers into spasms of outrage. MMT does not “print prosperty” according to its proponents. The MMT counter argument is: it [is] a perverse injustice that, in online discussions, MMT sympathizers are frequently reproached for imagining that “we can print prosperity” when in fact it is us who constantly stress as a fundamental point that the only true constraints are resource based, not financial or monetary in nature. We are the ones insisting that if we have the resources, we can put them to use. It is the neoclassical orthodoxy and others who try to make out that we can’t use resources, even if they are available, because of some magical, mysterious monetary or financial constraint. Just who is it that believes in magic here?
A heavyweight Keynesian economist, like Nobel Prize winner Paul Krugman, has felt the sting of MMT. But the quantity and quality of his criticism of MMT, so far, has been featherweight. He could not land a solid glove on the contender, Kid MMT. Krugman only proved that he does not understand MMT, so his criticism was weak (see MMT comments) and his follow-up even weaker. MMT economist James Galbraith did a succinct breakdown of Krugman’s major errors.
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):
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?
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?
WE DON’T GET ‘HERE’- THERE IS NO SUCH PLACE!!!
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):
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.
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!
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.
PLEASE PLEASE PLEASE remember that:
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.
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.
PLEASE PLEASE PLEASE remember that:
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.
Monday, June 20, 2011
Lost Decade, here we come
From Paul Krugman:
"What you see isn’t a recovering economy that may be stumbling; you see an economy that has stopped its free fall, but hasn’t really been recovering at all.
I’d say that the burden of proof right now is on those who claim that we aren’t on track for a lost decade."
I don't really have any thoughts to add, just a question...why are we making the same mistakes that Japan made in the '90s and we made in the '30s?
The answer surely lies in our HORRIBLE misunderstanding of economics. Yet there doesn't seem to be much of a movement to change that understanding. If you do want to understand what's going on, I suggest following the "Modern Money Primer".
"What you see isn’t a recovering economy that may be stumbling; you see an economy that has stopped its free fall, but hasn’t really been recovering at all.
I’d say that the burden of proof right now is on those who claim that we aren’t on track for a lost decade."
I don't really have any thoughts to add, just a question...why are we making the same mistakes that Japan made in the '90s and we made in the '30s?
The answer surely lies in our HORRIBLE misunderstanding of economics. Yet there doesn't seem to be much of a movement to change that understanding. If you do want to understand what's going on, I suggest following the "Modern Money Primer".
Tuesday, June 14, 2011
Teeter-Totter Economics
Though the title is silly, the topic is not. Here is a nice, straightforward, and simple post from my professor on the basics of how the government deficit works. The government sector is not the same as the private sector and is not subject to the same constraints. The government's deficit is our surplus.
Note: this argument does not support either political party. It is merely a description of how the process works.
What Happens When the Government Tightens its Belt?
What Happens When the Government Tightens its Belt? (Part II)
And to continue on with the MMT primer:
The Basics of Macro Accounting
Note: this argument does not support either political party. It is merely a description of how the process works.
What Happens When the Government Tightens its Belt?
What Happens When the Government Tightens its Belt? (Part II)
And to continue on with the MMT primer:
The Basics of Macro Accounting
Monday, June 6, 2011
Understanding Modern Money Theory
Modern Money Theory (MMT) is the basis for my understanding of macroeconomics and is one of the reasons why I advocate certain policies over others and why I say seemingly crazy things like "we are not facing a debt crisis."
Randall Wray has just begun a weekly primer on MMT for newcomers to both MMT and economics. I highly recommend following this series to better understand our current economic situation and to understand where many of my posts are coming from.
Modern Money Theory Primer
Randall Wray has just begun a weekly primer on MMT for newcomers to both MMT and economics. I highly recommend following this series to better understand our current economic situation and to understand where many of my posts are coming from.
Modern Money Theory Primer
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