But We Know It's Just a Lie, to Scare Your Son, Scare Your Daughter

by Eric Martin

Paul Krugman provides a concise take-down of the "ZOMG! Social Security is going bankrupt!!!" canard, and indirectly makes the argument that maybe Social Security/the federal government would be a little more solvent if the establishment media had spent less time snickering about the fact that Al Gore said "lockbox" several times, and more time wondering whether or not "would rather have a beer with" was the right criteria with which to choose the next President.

Specifically, Simpson has resurrected the old nonsense about how Social Security will be bankrupt as soon as payroll tax revenues fall short of benefit payments, never mind the quarter century of surpluses that came first.

We went through all this at length back in 2005, but let me do this yet again.

Social Security is a government program funded by a dedicated tax. There are two ways to look at this. First, you can simply view the program as part of the general federal budget, with the the dedicated tax bit just a formality. And there’s a lot to be said for that point of view; if you take it, benefits are a federal cost, payroll taxes a source of revenue, and they don’t really have anything to do with each other.

Alternatively, you can look at Social Security on its own. And as a practical matter, this has considerable significance too; as long as Social Security still has funds in its trust fund, it doesn’t need new legislation to keep paying promised benefits.

OK, so two views, both of some use. But here’s what you can’t do: you can’t have it both ways. You can’t say that for the last 25 years, when Social Security ran surpluses, well, that didn’t mean anything, because it’s just part of the federal government — but when payroll taxes fall short of benefits, even though there’s lots of money in the trust fund, Social Security is broke.

And bear in mind what happens when payroll receipts fall short of benefits: NOTHING. No new action is required; the checks just keep going out.

Right.  When there's a Social Security surplus, the money gets eaten by general expenditures and, in the case of Bush, massive tax cuts aimed primarily at the uber wealthy.  But if there's a prospect of a Social Security deficit, eventually, we can't possibly buttress the Social Security pool with general revenue (perhaps even boost said revenue by repealing some of those deficit busting tax cuts*).  No, it's time to cut benefits and extend the retirement age to 70.

* (though perhaps we should hold off until we're out of the recession)

Comments

[tgirsch]

Why hold off until after the recession? Certainly keep the lower brackets where they are, but the top two brackets? I don't see why those shouldn't go back to where they were more or less immediately. If you're (still) up in that income area, the recession clearly isn't hurting you very much.

And I agree with what you argued in a previous post: why should the top bracket kick it at under $400K/year? Why not a millionaire's bracket? Why not a multi-millionaire's bracket? (Of course, those brackets wouldn't do much of anything unless you also made them apply to capital gains.)

[bobbyp]

The fact that Obama appointed this commission and apparently is going along with this zombie farce is deeply deeply disturbing.

And pleas to "stop letting the perfect be the enemy of the good" will only incite me to homicidal violence.

Cutting benefits is pure theft. The last time I looked, theft is a crime.

[Eric Martin]

Agreed bobbyp.

TG: I don't disagree strongly, but I can see the argument for not even raising on those brackets in the middle of such a funky recession - unless you paired with increased stim or other cuts.

[bobbyp]

The Krug is correct here: And bear in mind what happens when payroll receipts fall short of benefits: NOTHING.

See billy blog for details.

[cleek]

perhaps even boost said revenue by repealing some of those deficit busting tax cuts

if HR 4213 has its way, the delicious tax loophole that makes the S-corp an attractive option would be eliminated.

[Ugh]

Sorry cleek.

[Jacob Davies]

High-end tax increases would make it possible to do more actual stimulus, so I think there's no time like the present for them. I think it's a big mistake to make benefit & budget cuts a subject of discussion without making it clear that tax increases are part of the story.

Another reason to do them now is to head off the inevitable claims that the recovery was due to said tax cuts (by some voodoo mechanism) rather than due to the actual government spending. One of the reasons to have multiple parties with actually differing views and for those actually differing views to be enacted into legislation is so that we can see what works and what doesn't. That is the trouble with bipartisanship - you wind up with a muddle of policy based on contradictory theories of government action without ever making it clear what might be responsible for success or failure.

There is another excellent reason to enact progressive tax increases now, and that is to get them into law before the baby boomers retire, so that the luckier boomers can (belatedly) make some contribution to pre-paying the general fund for their retirement. The boomers worked under a much less progressive tax regime than their predecessors and in particular paid very low rates for the last decade or two, which was exactly their peak earning period. Actually, what really happened was that the richer boomers (and wealthier members of the previous generation) robbed the poorer boomers by jacking up the payroll tax and using the money to issue huge tax cuts for the wealthy. But the net was that while low-moderate-income boomers have pre-paid a fair amount, the system relied on wealthier boomers also paying income tax at reasonable levels, and that hasn't happened.

The big problem with that is the resulting chronic underinvestment in the subsequent generations who are the ones going to have to pay for the boomers retirement. And that's in so many areas it's hard to count - reduced funding for schools (e.g. Prop 13 here in CA), increased costs of college, reduced public spending on research and science, reduced investment in infrastructure (highways, water, sewage, rail, bridges), and increased housing costs.

All of which are going to make it more and more difficult for genx/genyers to pay for the care that the boomers need. This is not a blame-the-boomers-fest, or not intended to be, but it is a partial indictment of the failure of that generation and the one before to think through the consequences of starving the next generation of investment.

You can think of something like the battle over funding schools for poorer minorities as a classic example. Among better-off whites all the attention was paid to "How well off are my kids going to be?" or "How much property tax will I have to pay?" while the question of "How will a poorly-educated majority-minority America pay for my retirement?" never seemed to come up.

[Slartibartfast]

massive tax cuts

Silly Eric. Tax cuts have no mass.

First day back from vacation; this is all I've got.

[cleek]

Sorry cleek.

meh. no big deal.

i just sold the IP of my biggest money-maker and i'm considering letting the rest of it sputter out. it had a good 12 year run.

[GoodOleBoy]

'Silly Eric. Tax cuts have no mass.'

At least you came up with something amusing.

The only fun these folks have is playing with other people's money.

[efgoldman]

We donn' need no stinkin' FACTS!

Seriously, aren't the Shrub/Cheney/Rove tax cuts about to expire out of originalist GO[B]P stupidity?

[Eric Martin]

Yeah, yeah.

You want a government that doesn't collect any taxes? Move to Somalia. Lots of ocean front property available on the cheap.

You want to live in a society that does things like field a police force, military, fire department, roads, sanitation, etc., then people have to pay taxes.

Now that we've agreed on that, we must figure out who pays and how much.

Not "other people's money" mind you, since all of us pay taxes in this country as part of the aforementioned compact.

Some of us (myself included) pay more than most others, but it's all good because I derive a bigger benefit from a well functioning society.

And I'm mature enough to recognize that reality.

[Eric Martin]

EG: I believe so, but there a big fight to keep them in place, and more estate tax chicanery and hedge fund loophole craziness.

[wj]

And here I had somehow gotten the impression that Krugman was some kind of economist. But obviously not. Otherwise he would realize that a "surplus" which has already been spent on regular government operations (or tax cuts, or benefit increases, or whatever) is totally irrelevant to the financial condition of Social Security.

Now if the surplus payments to Social Security had been saved or invested (in something other than US government bonds) or anything other than spent, perhaps he would have a point. But all they have been used for is to buy US government bonds -- which, since they will have to be paid for by other taxes, means there is basically nothing there without massive tax increases elsewhere.

[cleek]

The only fun these folks have is playing with other people's money.

you be sure to let us know when you've stopped making use of all services, products and infrastructure which was built, funded or regulated, directly or indirectly, by the US government, mm k?

[cleek]

But all they have been used for is to buy US government bonds -- which, since they will have to be paid for by other taxes, means there is basically nothing there

tell that to the Chinese.

[Jacob Davies]

wj: there is basically nothing there without massive tax increases elsewhere

Now you're getting the idea.

The people who got the big tax breaks paid for with Social Security revenues were supposed to use that money to invest wisely and grow the economy so that they can pay the massive tax increases that are coming down the pike.

That's the deal. I'd say "That was always the deal", but actually, the part where the SS surplus got diverted into regressive tax breaks wasn't part of the original deal, but the idea was always to overpay early and be repaid from general revenues later, which is why they printed all those Treasury bonds and put them in a drawer at the SSA. The point - one which makes good economic sense - was that the overpayment was a form of forced savings which would increase present investment and decrease present consumption so that when it came time to pay the bills the whole country would be sufficiently better-off that it wouldn't be a burden.

Well the Bush tax cuts really screwed the pooch there, because they didn't produce a great increase in present investment, which is what we said was going to happen, but the people who benefited from them (and their heirs) are still on the hook for the Treasury bonds they sold to Social Security. Massive tax increases or no.

[Eric Martin]

wj, I think that's his point.

There was a surplus which was absorbed by general obligations, creating a framework under which SS should not be considered a separately contained unit.

However, now that it might soon be collecting more than it's distributing at some point 50 years out, everyone acts like it is a separate, contained unit, and to use general revenue to buttress it would be unthinkable (despite the fact that using surplus revenue from it to pay for general obligations was cool, because it wasn't a separate unit, but now it is, etc).

It's a bit like the attitude to big biz in this country: socializing the losses and privatizing the profits.

Either way, the working class/average taxpayer gets screwed.

[Eric Martin]

Also what jd said.

[John Thullen]

Jacob:

"I think it's a big mistake to make benefit & budget cuts a subject of discussion without making it clear that tax increases are part of the story."

Then you're Hitler, Stalin, Mao, and Hugo Chavez, a Chicago-style, pimping, community-organizing thug, a shake-down artist, a brown person wearing a brown shirt over his witch doctor outfit, a reason for militia-types to get up in the morning and do what needs to be done, a self-hating Jew (or maybe a self-hating Catholic or Buddhist, but whatever, rest assured, WE hate you more than you could ever hate yourself), the goat of Erick Erickson's dreams, an anti-American elitist thief, a bowing, kowtowing agent of foreign influence, Mohammed in drag, and pretty much the type of guy for whom John Wilkes Booth would skip the second act to run an errand, and what Alan Simpson, Sarah Palin, Sharron Angle, and Grover Norquist put in their watering can to refresh the tree of liberty from time to time (well, not RIGHT now, because they have another speaking engagement to go to; we can talk murder .... uh ... horticulture later, gotta run)

You still think it's a big mistake?

The pledges have been signed.

Over their dead bodies.

Start stepping over them. While you're at it, kick them in the head while they're down.

I myself favor the broad jump accompanied by a shooting spree.

[John Thullen]

Funny how U.S Government Bonds have beat stock market returns over the past ten years.

I guess the vaunted markets are telling us there be more "there" in bonds than there will be in stocks.

I love it that the markets are simultaneously the all-knowing answer AND completely full of crap, to quote Alan (Mr Magoo) Simpson.

[bobbyp]

"But all they have been used for is to buy US government bonds....."

The boneheaded stupidity of this claim would, under other circumstances, be hilarious.

Under a fiat money system with a nonconvertable currency the government cannot store away a "surplus" to "use" in the future. The government spends today. Granted, this could be physical infrastructure that has long term real economic benefits, or it could be what is typically called waste (defense spending, which see). Each dawn, the government buys stuff. Taxes are simply a way of creating demand for the currency or influencing behavior (tobacco tax, etc.), and bonds are just a sop to the financial community.

The constraints are political.

Again, see Billy Blog for the fun details.

[Jacob Davies]

Incidentally I actually do think that benefits will need to be cut somewhat in conjunction with tax increases, and I don't find that entirely unfair given that the boomers collectively participated in the decision to blow the trust fund surplus on tax cuts by electing Bush. "Elections have consequences"; one of the lasting consequences of the Bush years is that, due to underinvestment and malinvestment, the country is going to be significantly less wealthy overall than it would have been if the money had been spent on education, infrastructure, research, and employment.

Unless you think that the rash of McMansions and the immense tracts of housing in the Inland Empire and Phoenix are going to pay off at 5% a year for the next 50 years. That's what we "invested" in during the oughts - houses that are way too big for any family to make sensible use of and guzzle energy, houses in places that no sensible person would want to live, and HELOCs that got used to buy jetskis and Mercedes-Benz SUVs. In other words, we blew it, it was fun, but it's gone now and we're stuck with the hangover.

[bobbyp]

"The only fun these folks have is playing with other people's money."

Like bankers?

[bobbyp]

JD,

I agree with you as to the REAL economic effects of our lunatic past real resource allocations. The problem is folks believe that we are restricted by some kind of financial straightjacket going forward. Given current resource underutilization (i.e., 10% unemployment), this is not the case.

But for fun assume no Bush tax cuts. Then what?

Absent increased spending elsewhere, it would have meant paying down the national debt. This could also have led to ruinous economic consequences...(private sector dissaving--or deficit as it were).

[Brett Bellmore]

"Funny how U.S Government Bonds have beat stock market returns over the past ten years."

Nothing particularly funny about it; The returns of US government bonds are, essentially, extracted from the stock market, in as much as they're paid from tax revenues.

Well, to be honest, tax revenues don't even cover current spending, actually the returns of US government bonds are paid by issuing even more US government bonds...

[bobbyp]

Bellmore,

Your ignorance is well neigh total. If I own a treasury bond and it increases in value (due to decline in interest rates) this is not value "extracted from the stock market". Is the "stock market" in any sense "poorer" when I sell the bond?

The government, by issuing bonds, injects net financial assets into the economy, and is the only actor that can do so. All private assets net out to zero (my asset is your liability). This is bookkeeping 101.

[Brett Bellmore]

You seem to have trouble distinguishing between symbols, and the things they symbolize. The government injects numbers into the economy by incurring debt. Not "net assets".

But the rationalizations for governments getting deeper into debt are legion, aren't they?

[Nell]

2005: Bush launches an effort to privatize Social Security and Josh Marshall and TPM are an integral, enthusiastic part of the campaign to stop it.

2010: Obama launches an effort to cut the guts out of Social Security and Medicare, and Josh Marshall... is utterly silent. Not a freaking word on the whole site about the austerity commission.

[GoodOleBoy]

'Not "other people's money" mind you, since all of us pay taxes in this country as part of the aforementioned compact.'

Boy, would I be happy if this were more than a half-truth.

[Tony P.]

GOB, what are you calling a half-truth?

--TP

[bobbyp]

But the rationalizations for governments getting deeper into debt are legion, aren't they?

As opposed to your rationalizations? Tax cuts for the wealthy? Endless war? I don't seem to recall your full throated opposition to war in the Middle East because it would be "too expensive" and "burden our children with debt".

Why is that?

As for symbols, it is hysterical deficit hawks who can't distinguish fact from fiction. Fact: Under our fiat currency system, only the government can inject net financial assets into the economy. Fact: The U.S. government is not financially constrained. The constraints are political. Fact: The U.S. government cannot "go broke", but the belief, and action on that utterly insane belief could impact the real economy.

But that never stops the deficit hawks from urging price deflation and unemployment as a way to promote price stability, prosperity, and full employment.

Do tell us how such policies make any sense whatsoever. How does throwing people out of work create jobs, Brett?

Those folks out of work wondering where their next meal is coming from are all too real.

[Slartibartfast]

I'm interested in this concept of "net financial assets", and in how the government creates them. Explain, please?

[Brett Bellmore]

"Fact: Under our fiat currency system, only the government can inject net financial assets into the economy."

Again, you're confusing numbers, and assets. Counters, and what they count. Printing more money does NOT inject "assets" into an economy, it injects bits of paper that are supposed to denote assets.

"Fact: The U.S. government is not financially constrained. The constraints are political. Fact: The U.S. government cannot "go broke", but the belief, and action on that utterly insane belief could impact the real economy."

That's magical thinking, that's all it is. "The government can do anything so long as the people unconditionally believe in it."

Fact: While beliefs can certainly impact the economy, believing you can fly won't keep you from hitting the ground if you step off a roof. Economics does have SOME rules, it's not ALL belief.

[Phil]

Again, you're confusing numbers, and assets. Counters, and what they count. Printing more money does NOT inject "assets" into an economy, it injects bits of paper that are supposed to denote assets.

This is, of course, no different than banks creating money by lending more than their fractional reserves, which I'm certain you have no objection to. Basically anything that isn't M0 or M1 is pretty much made up.

[cleek]

GOB, what are you calling a half-truth?

my guess says that the "half" is the %age of people who "pay taxes" in wingnut mythology.

[Eric Martin]

Right cleek. Which requires one to ignore myriad taxes and only focus on federal income tax (and even then, not FICA/Medicare).

A useful canard used by the uber wealthy to distract people from the game.

[bobbyp]

Slarti,

The government deficit/surplus equals the private sector surplus/deficit. To quote Billy Mitchell:

The only entity that can provide the non-government sector with net financial assets (net savings denominated in the currency of issue) and thereby simultaneously accommodate any net desire to save (financial assets) and thus eliminate unemployment is the currency monopolist – the government.

While folks like Brett still seem to believe that we are not quite off the gold standard, we (in the US) are in a fiat currency world, the implications of which seem to confuse most.

Google "billy blog" and see for yourself. Below is one of his latest entries:

http://bilbo.economicoutlook.net/blog/?p=10384#more-10384

[bobbyp]

Brett,

I repeatedly say "net financial assets" and you keep taking the word "financial" out of it and accusing me of "being confused". I leave the implications of this childish debating tactic to the reader.

If you do not believe that holding government issued/created fiat currency (say in a savings account) or US Treasuries is a claim on future REAL economic resources, they by all means send what you have to me.

[bobbyp]

broke: unable to meet one's financial obligations.

So Brett, as the monopoly issuer of a nonconvertible currency that is freely floating in international currency markets, do lay out a scenario whereby the U.S. government goes "broke".

That would be magical thinking indeed.

[bobbyp]

Brett,

If the government is spending (buying real stuff) more than it is collecting in taxes where does that money (handed over to private parties to buy the stuff) go?

Why, it goes into (private) savings, right?

I have yet to see a bonfire made from masses of folks piling up their government issued checks and igniting them.

You, apparently, have. Do tell us about it.

[hairshirthedonist]

bobbyp,

I did some reading over at billy blog, and it's interesting stuff. I'm not sure I fully digested it, though. My thinking thus far is that I'm not fully understanding what his actual point is or that there is some fatal flaw in what he's saying.

I get what he's saying about what I, not being an economist, would think of more as the money supply rather than financial assets being in the hands of the government or the non-government sector. I'm just not entirely sure about what that has to do with the real-world constraints on government spending. I'm not sure how it relates to economic growth versus money supply and inflation/deflation.

I think he admits that the government can't simply spend without limit for more than political reasons, so I'm just not sure where it's all going. I would guess that even Brett would agree, if pressed, that the government can't literally go broke, but that it could devalue our currency by issuing too much, with more or less the same result. (That's what you mean, I think, Brett, not "oh crap, we're plum out of dollars," right?)

[John Thullen]

Magical thinking works thusly:

Government sells bits of paper -- motes of denotation -- figments of imagination -- the proceeds (yet more magical thinking) of which it uses to purchase imaginary weaponry assets to protect itself from Brett (who's not sure we have the imagination to believe this, but why take chances?) and to Israel and myriad other countries (with borders -- yet more imagination) all of whom make believe they now have the assets to protect themselves.

Brett believes all of this enough that he then uses bits of paper issued by aforementioned government to purchase his own weapons (imaginary cool guns, the odd denotative machete, etc) to protect himself from aforementioned government when the figments finally hit the imaginary fan.

He and his gun dealer look at each other, shrug their shoulders, and in a genuine leap of faith say, "Hey if you're selling, I'm buying." Maybe Brett traded a chicken, a rutabaga and four Kruggerands for the weapon, but people with no imagination would like to know what he used to buy THOSE.

Once the fan blows its ill wind of reality, all stop believing in the fairy dust of fiat dream money and nothing is left but the weapons, which turn out to have been real assets injected into the world's economy by the will-o-the-wisp gummint fiat.

Then we all kill each other, but it doesn't hurt much because nothing is real. We get up and shake off the imaginary wounds, because it buggers belief that weaponry assets injected into the economy by imaginary jiggerypokery could turn out to be real.

Until then, we gather at Obsidian Wings and poke our fingers into imaginary keyboards, causing electronic whizbangery to denote funny-looking symbols in the comment box (a ruse itself) -- all of which are symbols which signify as long as significant belief permits (Brett can't believe what he's reading, but sometimes reality sucks) -- but if you say the words "magical thinking" over and over again they become mere gibberish, signifying nada.

[Slartibartfast]

I'm not sure how it relates to economic growth versus money supply and inflation/deflation.

That's pretty much where I was coming from, HSH.

[Jacob Davies]

I haven't been quite able to figure out what the MMT people are talking about when it comes to taxation, but that may just be me not getting it.

As far as I understand it in fairly conventional terms, taxation is used to reduce consumer demand and private investment so that when the government spends money it doesn't cause inflation by demanding more than the economy can produce.

When the economy is operating below "capacity" (admittedly a very hazy concept but 10% unemployment ought to be a pretty big hint) the government can spend money without causing inflation because there are slack resources, so it's not necessary to pull money out of the economy through taxation to pay for all the stimulus spending. (Of course if you just eliminated all taxes and kept spending you would rapidly exceed capacity and cause inflation.)

In order to maintain stable prices you also need to create enough new money to keep up with economic growth from productivity increases and population growth, else you wind up with deflation. Galbraith at least is pretty clear on this: the banks don't like deficit spending as a means of creating money because it competes with bank lending as a means of creating money. But bank lending is unreliable, as we're seeing right now, and of course letting private entities create a lot of new money also gives them (rather than the government) the benefits from it. Since there are lots of public goods that I think are worth funding, I think the government should be doing more deficit spending. But because I do think deficits are quite large, and because I think the net effects of progressive taxation are positive, I do favor progressive tax increases even right now. There is some progress on that front, actually, with an increase in the capital gains tax for starters. I'd like a financial transactions tax as well, which ought to increase the real returns of ordinary investors by reducing the ability of banks to arbitrage every last micron of excess value from stocks through high-frequency trading.

[hairshirthedonist]

Reading a bit further and thinking about it a bit more, I think what's being said is that it's not the deficit (or the subsequent accumulated debt) per se, that is a problem. It's a matter of where resources are going, what the money is being spent on, that's important. But I think at some point that will or won't manifest itself in debt as a percentage of GDP.

So long as the spending, even if it increases the debt as a percentage of GDP over some amount of time, is properly placed such that it fosters future growth so that the percentage of GDP the debt represents eventually, though soon enough (I guess), goes down or at least stabilizes, it's not a problem in and of itself. But this dynamic can create an artifical problem if it's not appreciated both domestically and abroad.

In other words, whether or not it should freak people out is less important than whether or not it does freak people out. So I think the point is to make sure people aren't freaked out unnecessarily by scary sounding deficits and debts, particularly if viewed through the obsolete lense of fixed exchange rates and the gold standard. But it's a general point AFAICT, and I'm not sure how well it applies to the specific case of the US in 2010.

More reading and thinking will be necessary for me to have anything close to a strong opinion on that.

[hairshirthedonist]

If I take this:

Since there are lots of public goods that I think are worth funding, I think the government should be doing more deficit spending. But because I do think deficits are quite large, and because I think the net effects of progressive taxation are positive, I do favor progressive tax increases even right now.

together with this:

It's a matter of where resources are going, what the money is being spent on, that's important.

I think I can tentatively (or not) state my position as this:

Deficit spending to fund tax cuts for richer people who tend to spend money on stupider (less necessary, if you like) stuff and to fund blowing up things and kill people on the other side of the globe is bad not because it's deficit spending, but because it's just bad and makes no economic sense.

Deficit spending to build useful domestic infrastructure and help poorer people by educating them and giving them a chance to be healthier (and, therefore, more productive) is good because it makes economic sense in the long run.

[wj]

bobbyp, you may know that the government cannot save a surplus. And I may know it. But that puts us in the distinct minority among Americans. And Krugman's comments suggest that he doesn't see it either.

[nous]

Thullen is usually the riffmeister around here, but I gotta say that Brett channeling Ezra Pound reading Canto 45 is pretty entertaining as well.

[hairshirthedonist]

Here's a quote from bill at billy blog from the comments on his deficit post:

Poorly designed deficit spending which buffers economic rents and rewards waste is not an indictment of properly targetted deficit spending.

[Tony P.]

wj,

When you say that "government cannot save a surplus" you are using the words "save" and "surplus" in a definite sense. But I'm not sure in what sense.

In real terms, neither the government nor you or I can effectively "save" by stockpiling things like electricity, medical services, or even frozen peas for future consumption. If you're using "save" in this real sense, that's fine.

But in the same "real" sense, what's a "surplus"?

In the financial sense, you and I can "save" by purchasing financial instruments like stocks and bonds. We cannot eat financial instruments, but we can exchange them for real goods and services in the future. We can buy shares of stock in Ford (the company) today, and sell them to buy a Ford (the car), someday. "Financial" saving like this is more convenient than buying the car today and storing it for future use, which would be the "real" form of saving.

But the government can do the same thing, can't it?

There's one type of financial instrument you and I can buy that maybe you imagine the government cannot buy: government bonds. If you imagine that, today, you are of course wrong. There are trillions of dollars' worth of government bonds out in the market, and the government can buy them like you or I can. Buying bonds is a way to "save" in the financial sense -- for the government as well as you or me.

If and when we get to the point where the government has run a "surplus" for so many years in a row that it has bought up all the government bonds outstanding (or, in plain English, has retired the national debt), then we can worry, as Alan Greenspan once did, whether it's a good idea for government to "save" by buying stock in Ford or Exxon or United Health Care.

But neither you nor I are likely to live that long.

--TP

[Hogan]

Brett channeling Ezra Pound reading Canto 45 is pretty entertaining as well.

CONTRA NATURAM, COMMIE.

[hairshirthedonist]

But, Tony P., what does it mean for the government to own its own bonds? The way I see it, they are retiring debt, but not really saving the way you or I would be were we to buy those same bonds. We wouldn't owe ourselves the money.

[Tony P.]

Hairshirt,

Debt is savings with a minus sign in front. Or if you prefer, savings is negative debt. I'm talking in "financial" terms, here.

To "save" is to make your debt more negative. That's true whether your debt is positive $15 trillion (like the government's) or negative $1K (like yours, if you have $1,000 in the bank). If you have a thousand-dollar "surplus" next month, you "save" it by making your negative debt $1K more negative -- i.e. your bank balance goes from $1K to $2K. If the government runs a trillion-dollar surplus next year, it makes it's debt $1T more negative -- i.e. takes it from $15T to $14T.

Again, this bit of pedantry applies only if we're talking in financial terms. But financial terms are what we're using when we talk about bonds, governmental or otherwise.

Incidentally, government "owning" its own bonds is indeed meaningless, but I was talking about the act of government buying its own bonds. Not from itself; from their current private-sector owners.

--TP

[Tony P.]

Aw, crap. As a pedant, I profoundly apologize for "it's". And italicized, no less.

--TP

[Brett Bellmore]

" I would guess that even Brett would agree, if pressed, that the government can't literally go broke, but that it could devalue our currency by issuing too much, with more or less the same result. (That's what you mean, I think, Brett, not "oh crap, we're plum out of dollars," right?)"

You wouldn't even have to particularly press me: Even if the dollar became so worthless that most government employees quit their jobs to become subsistance farmers, the President could always snag a thousand dollar bill blowing down the street, scribble nine or ten extra zeros on it, and 'increase the money supply'. So the government indeed can't go broke in THAT sense.

But even well short of that scenario, printing dollars does not "create net financial assets". It, so long as people are willing to trade goods and services for dollars, very effectively transfers net financial assets to the government. But if the government tonight were to increase the money supply ten times over, we would not tomorrow be, on average, any wealthier, for all that we were using another zero to balance our checkbooks.

There would have been no 'net creation of financial assets' in any sense any sane person would value.

[bobbyp]

"But the government can do the same thing, can't it?"

In the sense that the government can stockpile real resources (like the petroleum reserve), yes. However, it has to SPEND to do so.

If we all turned in all of our money (most of which is just bookkeeping pixels on a computer screen) to the government tomorrow, the government could not "save" it for some use in the future. Why would it? It can create unlimited supplies of the stuff whenever it wants to.

[bobbyp]

hairshirt,

Taxes create a demand for the monopoly currency. You have to have the currency to pay the taxes (the government will not accept chickens or gold for tax payment purposes). Taxes are also useful to shape behaviors or reinforce desired social policies (cf progressive income tax).

When the government tries to buy more than the economy can produce, then you have inflation. The fix is self evident from the way the problem is presented.

Wingers are consciously employing badly reasoned FINANCIAL arguments ("we can't afford it", "oh, those future generations", yadda, yadda) to strongarm their opposition into making a POLITICAL decision.

The argument should be about the disposition of the economy's REAL OUTPUT, not whether or not the U.S. Government is "going broke".

Do you get this now?

[bobbyp]

Tony P,

Under Andrew Jackson the entire US government debt was retired.

Every last penny.

Did this usher in paradise on earth? Why no, this was followed by one of the severest depressions of the 1800's.

Under a fiat currency system and no net imports/exports, a policy of conscious government surpluses means the private sector MUST be dissaving. This is an accounting identity that even Brett, in his profound ignorance, cannot deny.

[bobbyp]

Billmore,

In the private sector any financial asset is offset by somebody else's liability. This is elementary bookkeeing 101. The private sector cannot create a NET INCREASE in private assets. Any increase in assets is inevitably offset by an increased liability somewhere else.

The government can inject NET assets into the system. It f%$^#cking creates them from NOTHING.

Thus Billy Mitchell's essential claim that in a fiat system with a freely floating currency (unlike Greece) the monopoly issuer is not FINANCIALLY constrained.

[hairshirthedonist]

The argument should be about the disposition of the economy's REAL OUTPUT, not whether or not the U.S. Government is "going broke".

Do you get this now?

Since I wrote "It's a matter of where resources are going, what the money is being spent on, that's important," and that sounds more or less like "The argument should be about the disposition of the economy's REAL OUTPUT," I suppose I'm getting it. Whether it is the unquestionable truth or not, I'm not sure, but I think I know more or less what it is now.

[hairshirthedonist]

Tony P., I understand what you're saying and I expected that response. But, while we're being pedantic, my point was more that buying government bonds is not the same kind of saving for the government that it is for you and me. I don't need to have outstanding debt as a prerequisite for that form of saving. It's really not that big of a deal I suppose, since I don't really disagree with your larger point, but pedantry is as pedantry does, sir.

[bobbyp]

"....but I think I know more or less what it is now."

damn that unrestrained exhuberence on my part, and thank you for your understanding.

[Sebastian]

"The private sector cannot create a NET INCREASE in private assets. Any increase in assets is inevitably offset by an increased liability somewhere else.

The government can inject NET assets into the system. It f%$^#cking creates them from NOTHING."

Your use of the word 'asset' here is misleading because you're using it in different senses when moving the discussion from the private to public sectors. It would be much clearer to talk about it as 'instruments' or 'currency'.

Yes the private sector can't make currency as easily as governments. (Though saying that it can't make it at all isn't correct either. See frequent flier miles). But suggesting that being able to create currency is the same as being able to create assets is definitely not correct. Simply adding zeros is indeed the creation of 'currency' but it also devalues the existing currency. That isn't the same as creating a real asset out of nothing.

[Brett Bellmore]

"The government can inject NET assets into the system. It f%$^#cking creates them from NOTHING."

Indeed. But only in a trivially tautological sense; If 'assets' are denominated in dollars, if you print more dollars, there are 'more' assets.

But that's a measure of 'assets' nobody in their right mind cares about, because THAT sort of 'increase' in assets doesn't make you any better off. It just transfers wealth to whoever gets the new dollars first, almost always the government.

Otherwise the government could make us all freaking rich by increasing the money supply a thousand times over.

[hairshirthedonist]

This I quote from a comment at billy blog with emphasis added because it captures something that has confounded me, as a non-economist, for years about economics:

I can’t improve on what Bill Vickrey wrote 17 years ago–

This then is the goal I lay before you. Real full employment, at levels higher than have been experienced in peace-time over at least the last century, is to be reached within two or three years and maintained thereafter, with magnificent results not only in increased output and income, but reduced poverty, iII-health, drug abuse, crime, and commitment to the maintenance of a useless military superfluity. But to do this we have to toss out our shibboleths of budget balancing, puritanical abstinence, maintaining the value of the almighty dollar and servicing a “favorable” balance of trade, and instead focus our attention on the real resources, human and material, that we have on hand and figure out how to use them effectively to produce real welfare…

For too long we have unquestioningly allowed numbers on books of account to control our lives. Such accounts have their place, but when they are allowed to compel us to tolerate the wastage of human resources and all the concomitant social problems that unemployment provokes, we must look at the “real” side of the coin. William Jennings Bryan used to conclude his stock campaign oration with “you shall not crucify mankind upon a cross of gold.” today we might say “we must stop shooting ourselves in the foot with a blunderbuss of financial rectitude.”

[bobbyp]

Seb,

"But suggesting that being able to create currency is the same as being able to create assets is definitely not correct."

Your statement is categorically wrong. I have tried to be consistent, but let me be unambiguously clear. The claim by MMT refers to financial assets. Financial assets are claims on future output (stocks, bonds, savings accounts, mortgages, loans, etc.). T-bills, currency, and bank reserves are financial assets. Do you agree or not? Only the government can increase NET financial assets.

Now you can say these financial "assets" are not "real", but then my counter is simple: Give me your T-bills, please.

Currently, the Fed has injected a couple trillion dollars into the money supply via reserves loaned out to banks in exchange for their crippled loans. Where is the inflation? The current deficit is a trillion dollars? Where is the inflation? Treasuries are selling for a very high price. Where is the "devalued currency"? Where is the all seeing all knowing market signal indicating the fiscal doom and final financial collapse? Just what light at the end of yon tunnel are you seeing?

Your irrational fear (of something) is utterly misplaced, but conveniently fits your politics. And that's what this discussion is all about.

[bobbyp]

Billmore,

claim: "Indeed."

reply: Wow. That's impressive. Just like George Will!

claim: "But only in a trivially tautological sense; If 'assets' are denominated in dollars, if you print more dollars, there are 'more' assets."

reply: If you hadn't noticed, all financial assets are denominated in dollars. If you hold dollars, you have some financial assets. Only government action can inject or withdraw NET financial assets. Let's take a simple case: If you received a mystery box full of freshly minted US dollars in the mail (real ones), there are now more financial assets. Now tell me, where is the corresponding liability?

claim: "But that's a measure of 'assets' nobody in their right mind cares about"

reply: You're detached from reality. Nobody cares about financial assets? About money?

claim: "...because THAT sort of 'increase' in assets doesn't make you any better off."

reply: Then give me the box of currency.

claim: "It just transfers wealth to whoever gets the new dollars first, almost always the government."

reply: So are these dollars wealth or not? You don't seem able to make up your mind. The government spends. Real economic actors do real economic things as a result (pave roads, manufacture copier machines, scream at their bond trader, etc.). These activities increase real economic output. Given this, your assertion is simply backwards, a common way of wrong thinking employed by deficit hawks as they repeatedly bludgeon their political opponents with utterly ridiculous and wrong financial nostrums.

claim: "Otherwise the government could make us all freaking rich by increasing the money supply a thousand times over...."

reply: If the spending demands of the government are greater than the ability of the real economy to produce, then you have inflation. Are you claiming we are anywhere near that point at this time? If so, I simply ask that you present a reasoned rational case in lieu of endless specious fear mongering.

Thanks.

[bobbyp]

hairshirt,

Yes, Vickrey stated an eloquent truth.

Mitchell repeats this a lot, and it's hard to grasp at first (I still blow most of his regular Saturday quiz questions), but here goes:

1. A monopoly issuer of fiat currency that freely floats in international markets is NOT FINANCIALLY CONSTRAINED.

2. The constraints are POLITICAL (splitting up the pie).

Deficit hawks deny (1) to enforce compliance with the political constraints they advocate as per (2).

Thus we get insultingly ridiculous claims such as: "We have to throw more people out of work in order to resume economic growth."

Specious financial claims are asserted ("public debt will be an unbearable burden on future generations" is a common one)in order to advance the political agenda that favors the wealthy (that damned pie), i.e. balanced budgets, less spending, lower taxes (for the wealthy), voodoo economics developed drunkenly in a cocktail lounge scribbled on a napkin.

[bobbyp]

Currently the private sector is trying desperately to save. Consumers are cutting back on spending, just as banks are using arbitrage and cheap federal funds to repair their balance sheets.

This, by definitional national income accounting identities, means the government MUST be in deficit (if you exclude our net trade balance).

So who are you going to believe, national income accounting identities or your lying eyes?

[liberal japonicus]

bobbyp,
I'm sympathetic to the point you are making, but you seem to be succumbing to the battle fever as they keep saying on the Guardian world cup reports. Specifically, I don't think you encourage thoughtful reflection by mangling Brett's name. If it's accidental, no worries, but you've done it twice. Could you take it down a notch? Thanks.

[Jon]

bobbyp wrote;
Cutting benefits is pure theft. The last time I looked, theft is a crime.

.. doesn't that depend a bit on the cut? Are you going to tell me that cutting benefits to somebody making a $million or more a year is a horror and a theft?

...and, aren't rather alot of retirees in a bad moral position to talk about theft after having majorities vote candididates who ran up long-term debt after long-term debt into office, ever since Nixon?

That's something that hadn't happened before, without a REAL crisis - yeah, I looked. Of course, the GOP was worse, but even Democrats failed to reasonably START to reform benefits 'til Obama.

[bobbyp]

Jon,

The Congressional Democrats worked hand in hand with the Reagan administration to craft the 'reform' of 1983 which essentially doubled the FICA paycheck with-holding with the implicit promise that future benefit costs would be pre-funded. This was quite a financial hit that for some reason goes unremarked by those who make facile remarks about those oh-so-selfish boomers. Was this not the very essence of Protestant rectitude?

Please expand on your implied assertion that benefits need to be 'reform(ed)'.

Clinton was seriously considering Social Security privatization but the sex scandal derailed that effort. Does that count as a start?

But mostly I would ask that you take Krugman's point to heart and pick which one of the two ways you desire to evaluate the program.

A more fruitful discussion could then ensue with that basic understanding.

As for long term debt. We have just about always had some national debt. After WWII (yes, a crisis)we had a lot of it. We got over it--mostly due to the fact that economic growth was strong after the war.

Most everybody assumes that some way and some how the previous economic growth path will be restored (1945-74, pretty good; 1974-2008 not so good, but OK). If true, the massive hand wringing worry about the national debt will be a thing of the past. So you have to assume a pretty crappy future for the national debt to be taken seriously as a "major" problem. Do you share that assumption?

It is one thing to question if we shall ever experience the sustained economic growth we have had since WWII. That is a very debatable and serious proposition. It is another thing to use incorrect financial analysis and insist (falsely) that the government's financial position is akin to that of a household, and that we will somehow "go broke" due to having a lot of treasury bills outstanding.

[bobbyp]

Dear Mr. Japonicus,

Specifically, I don't think you encourage thoughtful reflection by mangling Brett's name.

You've got to be kidding.

If it's accidental, no worries, but you've done it twice.

It was accidental. If it had been done on purpose, it would have been mangled a great deal more wickedly.

Could you take it down a notch?

Why? This is a serious issue, and I need the practice.

Thanks

You are most welcome.

[Tony P.]

bobbyp,

It's worth emphasizing that it was not "World War Two" that stimulated the US economy out of the Great Depression. That is, it wasn't the death and destruction that ended unemployment, upgraded the industrial base, created new technology, and so on. It was massive deficit spending that did it. It was the huge increase in the national debt that did it.

It's also probably worth emphasizing that the economic boom during WW2 was not a free-market entrepreneurial exercise. Government pretty much dictated to industry the whole time. I don't for a minute suggest that what our current economy needs is a dose of dictatorship. I merely point out, for the benefit of our friends who worship The Free Market, that here was a case where the economy boomed DESPITE the fetters and shackles imposed on the market by Big Government.

--TP

[Sebastian]

"Financial assets are claims on future output (stocks, bonds, savings accounts, mortgages, loans, etc.). T-bills, currency, and bank reserves are financial assets. Do you agree or not? Only the government can increase NET financial assets."

I don't agree, and frankly you aren't even making sense. Printing money doesn't increase the value of claims on future output, it increases the denomination of claims on future output.

"Now you can say these financial "assets" are not "real", but then my counter is simple: Give me your T-bills, please."

I don't have any T-bills. But you are asking me to give you my DOLLARS. You just want to do it by devaluing the ones I already have rather than taking them away from me physically. But we shouldn't pretend that is asset creation. It isn't.

"Currently, the Fed has injected a couple trillion dollars into the money supply via reserves loaned out to banks in exchange for their crippled loans. Where is the inflation?"

It is staving off deflation. Which is a good thing. I'm all for short term stimulus. Also there hasn't been that much net stimulus because the state level spending has dropped so much.

I'm not a deficit hawk in the sense that I deny that *short term spending during a crazy recession* is bad. The problem is that people who listen to Keynes during recessions (prescription: massive government spending) are studiously non-Keynesian during the expansions (prescription: large cutbacks in government spending).

But agreeing with you on the short term analysis doesn't mean that your long term analysis makes sense. Your "creation out of thin air" asset concept is frankly crazy. Printing money is most certainly not asset creation. Calling it a "financial asset" doesn't change the reality. Making long term plans on that faulty basis will only lead to long term bankruptcy.

[Hartmut]

One aspect that seemingly noone has remarked on yet is that perception (and trust) of value plays a great role too. To a degree government can cheat by increasing the money supply 'without telling anyone'*. Admittedly that is more difficult these days than in past centuries, esp. when overdone. Btw, I find the idea that gold represents real value not very persuading too. More value than printed paper** or bits in a computer maybe but modern society could do without gold***, maybe without silver but definitely not without copper and iron.

*also remember the old money forger rule: one does not get rich with the counterfeit money itself but by exchanging it for real goods (or money) before the forgery is noted.
**In practical terms empty paper could easily be more useful than its weight in gold.
***although electronics now need more of it than ever, it is not irreplacable

[Brett Bellmore]

"Btw, I find the idea that gold represents real value not very persuading too."

For the record, I agree with that. The chief advantages of gold as a basis for a currency is not that it's actually worth something itself, but that it's

1. Relatively scarce.

2. Doesn't get stale.

3. The existing stock is very large compared to annual production, which isn't likely to be boosted substantially.

4. Has a long history as an accepted currency basis.

1 implies that you don't need a freight train full of it to represent a lot of value. 2 means that it doesn't rot in your pocket. And 3 means that it's a stable basis for a currency. Finally, 4 implies that you wouldn't have much trouble getting people to ACCEPT it as a currency basis.

Actually being worth something itself doesn't factor into this at all. It's even a point against gold, as some of it's going to be diverted into non-currency uses.

Of course, gold is never going to be revived as a currency basis, unless after a serious economic collapse. The point of using something like gold as a currency basis is indeed stability, and governments don't want their currency to be stable, they want to be able to inflate it at will. They just want people to think of it as stable, regardless of the truth.

[Brett Bellmore]

"This, by definitional national income accounting identities, means the government MUST be in deficit (if you exclude our net trade balance).

So who are you going to believe, national income accounting identities or your lying eyes?"

Maybe I'm going to refuse to exclude net trade balance? Give me a good reason for excluding it...

Anyway, Hartmut has a good point: Even defining "net financial assets" in your trivial accounting sense, it's not just the government that can create them out of thin air. Anybody with a color printer can. It's just illegal for everybody else.

[Lieutenanth]

Seb, it won't lead to bankruptcy for exactly the reason Brett is happy to admit. Mass inflation (if bobbyp is wrong) and currency devaluation, but not actual bankruptcy.

bobbyp - you seem to be totally avoiding the notion that if you print more dollars, each existing dollar becomes worth less, in that there are more dollars around to compete down the value of dollars both nationally and internationally.

(Or at least, I'm too stupid to figure it out)

What have you to say on this in particular?

[bobbyp]

Brett,

"Maybe I'm going to refuse to exclude net trade balance? Give me a good reason for excluding it..."

I ask that it be excluded to demonstrate a simple accounting identity, the implications of which are the nub of our disagreement, i.e., when the private sector desires to save (S>I) by definition the government will be in deficit (G>T).

The trade deficit is what? $400 billion/year? If the private sector desires to save $1trillion/year that implies the government deficit will be $600billion/yr.

None of my many doubters here has explained to me why we do not currently have inflation given the fed's action (injecting huge amounts of reserves into the monetary system) and the huge spending increase (fiscal stimulus).

Where is the inflation?

The government has done exactly what you all claim will "make money worthless".

P.S.: I am not advocating this type of fiscal and monetary response under all conditions.

[bobbyp]

Billy Mitchell, a Modern Monetary Theorist, explains the "creation of net financial assets" below. It is not too long, and I hope this will clarify my weak attempts at explanation. Google "billy blog" and review his writings further:

"As a matter of national accounting, a government budget deficit adds net financial assets (adding to non government savings) available to the private sector and a budget surplus has the opposite effect. The last point requires further explanation as it is crucial to understanding the basis of modern money macroeconomics.

While typically obfuscated in standard textbook treatments, at the heart of national income accounting is an identity – the government deficit (surplus) equals the non-government surplus (deficit). The only entity that can provide the non-government sector with net financial assets (net savings denominated in the currency of issue) and thereby simultaneously accommodate any net desire to save (financial assets) and thus eliminate unemployment is the currency monopolist – the government.

It does this by net spending – that is, running deficits. Additionally, and contrary to mainstream rhetoric, yet ironically, necessarily consistent with national income accounting, the systematic pursuit of government budget surpluses is dollar-for-dollar manifested as declines in non-government savings.

A simple example helps reinforce these points. Suppose the economy is populated by two people, one being government and the other deemed to be the private (non-government) sector. We abstract from the distinction between the external and private domestic sectors here – which mostly only involved distributional considerations anyway.

If the government runs a balanced budget (spends 100 dollars and taxes 100 dollars) then private accumulation of fiat currency (savings) is zero in that period and the private budget is also balanced.

Say the government spends 120 and taxes remain at 100, then private saving is 20 dollars which can accumulate as financial assets. In the first instance, they would be sitting as a 20 dollar bank deposit have been created by the government to cover its additional expenses. The government deficit of 20 is exactly the private savings of 20.

If the government continued in this vein, accumulated private savings would equal the cumulative budget deficits. The government may decide to issue an interest-bearing bond to encourage saving but operationally it does not have to do this to finance its deficit. If the savers transfer their deposits into bonds their overall saving is not altered and it has no implications for the government’s capacity to spend. It has the advantage for savers that they now also enjoy an income flow from their saving.

However, should government decide to run a surplus (say spend 80 and tax 100) then the private sector would owe the government a net tax payment of 20 dollars and would need to sell something back to the government to get the needed funds. The result is the government generally buys back some bonds it had previously sold. The net funding needs of the non-government sector automatically elicit this correct response from government via interest rate signals. Either way accumulated private saving is reduced dollar-for-dollar when there is a government surplus.

So it is clear that the government surplus has two negative effects for the private sector: (a) the stock of financial assets (money or bonds) held by the private sector, which represents its wealth, falls; and (b) private disposable income also falls in line with the net taxation impost.

Some may retort that government bond purchases provide the private wealth-holder with cash. That is true but the liquidation of wealth is driven by the shortage of cash in the private sector arising from tax demands exceeding income. The cash from the bond sales pays the Government’s net tax bill. The result is exactly the same when expanding this example by allowing for private income generation and a banking sector.

From the example above, and further recognising that currency plus reserves (the monetary base) plus outstanding government securities constitutes net financial assets of the non-government sector, the fact that the non-government sector is dependent on the government to provide funds for both its desired net savings and payment of taxes to the government becomes a matter of accounting."

Thanks for the discussion.

[hairshirthedonist]

bobbyp - you seem to be totally avoiding the notion that if you print more dollars, each existing dollar becomes worth less, in that there are more dollars around to compete down the value of dollars both nationally and internationally.

I'm new at this MMT stuff, but I think it has to do with how much idle productive capacity can become employed in response to the additional spending. If we're working at capacity, additional money leads to inflation. If there's slack, to doesn't. (Aside from that, it's important that there is real value being produced in response to the spending rather than digging holes and filling them back in.)

[bobbyp]

Lieutenath asks, "....you seem to be totally avoiding the notion that if you print more dollars, each existing dollar becomes worth less, in that there are more dollars around to compete down the value of dollars both nationally and internationally."

Disagree. Look at an extreme example: Everybody wakes up one morning and decides they are too deeply in debt. They increase their desire to save money. Sound familiar? The government prints a whole bunch of money. Will each dollar be worth "less" when they are hidden under mattresses or stashed away in savings accounts?

This is exactly what has been happening to our economy. Is a dollar a year ago worth substantially more than a dollar today?

When Krugman speaks about the "lower bound" of monetary stimulus, this is what he is referring to. Thus government spending is the effective antidote. Some of this spending is automatic (unemployment insurance, for example), and drives government balances into deficit under conditions where the private sector has a net demand to save.

Now if the government was trying to buy more than the economy can produce, you will get inflation (the "guns and butter" policy of LBJ). Similarly, in WWII, the government was demanding (i.e., spending and thus buying) just about everything the economy could produce for the war effort. To keep a damper on inflation price controls and rationing were instituted.

Strangely, there was not a great hue and cry that this spending would somehow lead to bankruptcy. Pretty amazing, huh?

[bobbyp]

Sebastian writes: "The problem is that people who listen to Keynes during recessions (prescription: massive government spending) are studiously non-Keynesian during the expansions (prescription: large cutbacks in government spending)."

The problem is that people with a political agenda are using bad economics to inflict wrong-headed policies that impose unnecessary harm (idle resources-unemployment).

Generally this is done by turning the discussion from what the real economy can and can not do (or is actually doing) to invoking fears that "we will spend ourselves into bankruptcy", a concept that, in the aggregate, makes absolutely no sense under a fiat currency system.

Advocating policies that choke off expansions because you have made the political decision that, say 5% unemployment, is "OK" is not "consistent with Keynesian prescriptions". It is a political decision, a self-imposed constraint.

[hairshirthedonist]

The problem is that people who listen to Keynes during recessions (prescription: massive government spending) are studiously non-Keynesian during the expansions (prescription: large cutbacks in government spending).

Which people are they? Are any of them commenting on this blog?

[Eric Martin]

The problem is that people who listen to Keynes during recessions (prescription: massive government spending) are studiously non-Keynesian during the expansions (prescription: large cutbacks in government spending).

Is this true in recent history?

Didn't President Clinton cut back spending, creating an actual surplus, during a financial expansionary period?

[bobbyp]

"The point of using something like gold as a currency basis is indeed stability..."

Stability for whom? For economic elites and rentiers, yes. For ordinary folks....not so much.

The 19th century was rife with financial panics and depressions. Some stability.

[hairshirthedonist]

Maybe he was talking about Bush.

[Marty]

"Generally this is done by turning the discussion from what the real economy can and can not do (or is actually doing) to invoking fears that "we will spend ourselves into bankruptcy", a concept that, in the aggregate, makes absolutely no sense under a fiat currency system.

Advocating policies that choke off expansions because you have made the political decision that, say 5% unemployment, is "OK" is not "consistent with Keynesian prescriptions". It is a political decision, a self-imposed constraint."

Ok.

In reverse order, you first have to explain to me how you measure full employment. The reality is that, the way we count unemployment, 5% unemployment is very close to full employment which politically and economically we maintained for a very long time.

Second, "spending ourselves into bankruptcy" is certainly not technically correct, as you point out, but it is a perfectly accurate description of what happens when the currency gets devalued and your bonds become hard to sell. More than one country has gone through the inevitable inflation, reduction of the standard of living and soaring unemployment that goes with the government printing an accelerating amount of currency to cover its debts. This is even more problematic when much of the world holds your currency as if it were gold, the run on the dollar in a more dramatic default would exacerbate the problem.

Also, The attitude that we can inject 3 trillion into the economy to prop it up and there won't eventually be repercussions is questionable to me. However, hopefully, that price will be paid over a long slow recovery so no one will ever identify it nor deal with it all at once.

[Eric Martin]

Also, The attitude that we can inject 3 trillion into the economy to prop it up and there won't eventually be repercussions is questionable to me. However, hopefully, that price will be paid over a long slow recovery so no one will ever identify it nor deal with it all at once.

Yeah, that's the theory.

There are consequences, but there would be worse consequences without it.

[John Thullen]

bobbyp:

"None of my many doubters has explained to me why we do not currently have inflation ........."

Krugman has several recent posts explaining the phenomenon. Or, the doubters could check out Brad Delong.

As for Sebastian's formulation regarding Keynsians, reverse it for the non-Keynsians.

The economy's doing fine -- cut spending and lay people off. The economy sucks --- cut spending and lay people off.

Everyone is half a Keynsian, except those who are not Keynsian at all, but don't like the half Keynsians.

Of course, the Keynsian haters get desperate and start calling Obama the Keynsian a Kenyan. They want "do more with less" AND "do less with more".

How bout we do less until we get to zero.

As bobbyp has explained, it is a nearly always a "political" decision to keep surplus labor .... in surplus.

We choose folks at random and make them surplus. Good God, we can't have wage inflation.

We then make ourselves feel better about our lofty economic theories by telling surplus labor that it is their individual moral failing that caused the surplus.

Except for Milton Friedman, who made an exception for his moral failing by working a Federal Gummint job during the 1930s. As an economist. Cripes, talk about digging pointless holes and filling them. That Friedman didn't starve to death during the aftermath of the Crash is testimony to the fact that even he had the moral failing of falling back on fiscal stimulus when monetary expansion did not happen. Schmuck.

I then had to sit through his other welfare gig on PBS to hear why it all made perfect rational sense.

You're fired. Get a job. I just had a job. Not my problem. F*ck off.

[Marty]

"Now if the government was trying to buy more than the economy can produce, you will get inflation (the "guns and butter" policy of LBJ). Similarly, in WWII, the government was demanding (i.e., spending and thus buying) just about everything the economy could produce for the war effort. To keep a damper on inflation price controls and rationing were instituted."

An interesting note is that inflation is acclerating in the huge portion of our economy that is the service sector. In an interesting post Michael Mandel has this view supported by an interesting graph.

The inflation story differs tremendously depending on whether you look at goods or service inflation. Goods inflation is very low and stable–the producer prices for finished goods less food and energy are rising at only 1% per year.

By comparison, service sector inflation is accelerating. Over the last few years, the Bureau of Labor Statistics has started reporting producer prices for what it calls “traditional service industries.” These include such services as healthcare, finance, information services, legal, accounting, management consulting, security guards, employment services, janitors, advertising, and so forth and so on. Many of these services are mainly bought by businesses, so they don’t show up in the CPI. They also tend to be labor intensive and more domestic.

So there is the inflation, in industries that are labor intensive and primarily domestic.

[Sebastian]

"Aside from that, it's important that there is real value being produced in response to the spending rather than digging holes and filling them back in."

This isn't an important distinction in bobbyp's formulation. Which is why it is rather noticeably suspect. In fact according to bobbp's formulation no actual work needs to be done, the mere printing of the money is enough.

"Which people are they? Are any of them commenting on this blog?"

So far as I can tell, all of you are. Were any of you interested in contemplating cutbacks in the size of government as large as the spending increases we are talking about today? Really? When? What were they?

"Didn't President Clinton cut back spending, creating an actual surplus, during a financial expansionary period?"

Lots of commas there. He cut back spending, but not even a quarter of the amount that you would expect in Keynesian analysis. The cuts weren't nearly enough to create a surplus, it was the enormous increase in revenues caused by the expansion that did that. And 'he' didn't do it. Clinton and the Gingrich Republicans did it.

Btw, I'm perfectly willing to give Clinton credit for that. He isn't and wasn't a typical Democrat in that respect and his attempts at cuts weren't particularly well received by Democrats at the time.

Do you really contemplate/advocate cuts *the size of the stimulus* when the economy is humming again? It seems like almost all of the domestic policy I've heard you discuss involves very large permanent increases in government spending.

[Jacob Davies]

Marty: The attitude that we can inject 3 trillion into the economy to prop it up and there won't eventually be repercussions is questionable to me.

But what are the repercussions of not injecting 3 trillion dollars into the economy? It's not like that would have been a cost-free exercise. Unemployment is at 10% now, how high would it be without the stimulus?

And 10% unemployment has repercussions. The long-term unemployed have a very hard time ever getting back to work. The resulting loss of productivity damages the economy as a whole. It's not a case of choosing between crazy, irresponsible spending that might blow up the economy and doing nothing which will be benign and easy.

[Marty]

"But what are the repercussions of not injecting 3 trillion dollars into the economy?"

The infusion was necessary, the assumption it doesn't have consequences is questionable at best.

[Nate]

Sebastian: There's the little matter of decades of infrastructure and systemic decay created by cutbacks in private sector and government in the name of "efficiency". There's billions, if not trillions, of dollars in infrastructure maintenance that's been "deferred" (not done at all).

Also, if the government can do something more efficiently than the private sector (like, say, health care), then having the government do it makes the government bigger, but is a net savings of money.

Also, we could cut huge amounts of government spending by ending the two wars we're in and not thinking we need to have a military that can bomb the whole world at once.

[Brett Bellmore]

"Didn't President Clinton cut back spending, creating an actual surplus, during a financial expansionary period?"

No, he didn't. This is a common myth among Democrats. We did, with a Congress dominated by the opposing party, (And locked in a death match with the President!) and a stock market bubble, keep spending from going UP as fast as revenue, resulting in the deficit declining. It nominally went marginally into surplus territory, but only by government accounting practices, which are specifically intended to understate the deficit for political purposes. The fact that the federal DEBT went up every year of the Clinton administration demonstrates that there weren't any actual surpluses.

[John Thullen]

Marty:

"So there is the inflation, in industries that are labor intensive and domestic."

The janitors and security guards certainly do the labor but their wages are hardly intensive, especially in the age of outsourcing. From personal experience (hiring), you pay their companies, some of which are publicly traded, others private, $40 to $50 an hour to provide a janitor or security guard $13 bucks an hour in wages.

Sounds like shareholder and business owner inflation to me, not labor inflation. In these two cases.

There is also the observation that "businesses" outsourced many of the services you reference ... to cut costs.

Now their costs are going up. So much for outsourcing.

[Eric Martin]

Btw, I'm perfectly willing to give Clinton credit for that. He isn't and wasn't a typical Democrat in that respect and his attempts at cuts weren't particularly well received by Democrats at the time.

Do you really contemplate/advocate cuts *the size of the stimulus* when the economy is humming again? It seems like almost all of the domestic policy I've heard you discuss involves very large permanent increases in government spending.

Really? Have you not heard how I want to cut Defense spending? I know I've posted on that more than once, and considering that it accounts for such a huge portion of our budget, that would help.

I'm also in favor of relaxing drug laws which would save some money federally - more for the states, but still, there are federal charges/prisons/trials, etc that could be done away with. Not huge savings, but something.

I'd also scale back some DHS spending, subsidies for ethanol/corn/some other farm subs, foreign aid to Israel, Egypt and certain other states.

And regardless, the Dems, not the Republicans, are pushing paygo now. Dems now have completely adopted that fiscal restraint - for better, AND for worse.