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June 21, 2010

Comments

Suppose that the minute the 2010 census is complete, the US government sends a $10,000 savings bond to every man, woman, and child in the country.

I'm talking real, full-faith-and-credit government bonds. Honest-to-goodness "financial assets". People could hold them to maturity, or buy and sell them amongst themselves.

I think everybody here would agree to the following:
1) The "national debt" would increase by about $3 trillion.
2) The private sector's "financial wealth" would increase by about $3 trillion.
3) GDP, unemployment, interest rates, all would be different, next year, than they would have been without this action.

If you think GDP would go down, unemployment up, interest rates way up, then naturally it would be a stupid thing to do.

If you think GDP would go up, unemployment down, and interest rates remain flat, then it would not be so stupid.

If you, gentle reader, think the second thing would happen but you oppose the idea because, well, people just plain don't deserve a $10K savings bond, that's fine -- as long as you're not coy about it.

--TP

John,

Certainly many of these things are outsourced, they are services costs as opposed to direct wage costs so by definition the businesses are paying a service provider.

From my alternative personal experience there has been, and likely will be, continuing wage inflation in the IT services sector that still has many areas of labor shortages.

I think the point here doesn't address wage inflation though, it addresses that primarily domestic services industries producer costs are going up. This measures inflation in our economy more accurately than the overall PPI.

That wage inflation, by itself, is good is inconsistent with any economic theory I can fathom. If I am doing the same job today as yesterday, the market is paying the same amount for the output and the rest of the economy is growing slowly, then why would it be good for those wages to outpace the economy?

We have had an extended period of low inflation overall that gets reflected in stagnant wages, (I think 2% over a reasonably long period) but that doesn't mean that people haven't gotten promotions, better jobs, etc. where they make more. What it means is that the price paid for one hour of work has stayed at the inflation rate.

I am sure that if the tradeoff between relatively stagnant wages or wages chasing higher inflation the first is a better alternative. In those periods of high inflation I have lived through, wages didn't ever catch up until the economy flattened out.

So, Seb, do you have a formula in mind that would require moving the goal post, er, I mean, previous cuts equal to the recent stimulus as part of the Keynesian analysis you mentioned? And I don't think the point in necessarily shrinking the budget during expanions so much as running a surplus. I'm thinking that, I don't know, not cutting taxes when you don't need to might count just as much as reducing spending.

And what does "equal to" mean? Is that a percentage thing? If it's a dollar-for-dollar thing, it gets a bit dicey. If the budget, say, doubled in 2010 in response to the financial crisis and recession, would that mean I would have to have advocated cutting it to less than zero previously, when the budget was smaller, to offset the 2010 increase to qualify has an honest-to-goodness Keynesian?

I guess it's not enough to generally say "surplus during the good and deficit during the bad" when you're commenting on a blog and not in charge of fiscal policy. And I'm sure there's some figurin' to do in specific cases, but I somehow doubt you've done it such that you can disqualify anyone as a two-halved Keynesian (or maybe give us each grades for how well we've met your specific mathematical definition).

Let's not forget INCREASING TAXES during an expansion as well.. isn't that Keynsian, too?

Also increasing taxes to fight a couple of wars would be fiscally responsible, at all times.

.. O.K, forget it. What's the use?

See this is why, in response to Sebastian's (not picking on Sebastian ... ) request that others of us consider the other half of the Keynsian bargain, I say forget it.

Again, not picking on Sebastian (that he would run for office and get elected as a Republican, instead of the cynical crapmeisters vomited up by that enemy party now), but the experience of the past 8 million years tells me that if I agree to spending cuts during an expansion, not one member of the opposition will consider tax increases as well during an expansion or spending increases during a cyclical downturn.

I don't want to have the conversation any longer.

They signed a pledge, the idiots, to not exercise all of the tools of responsible governing.

Screw them.

Marty: If I am doing the same job today as yesterday, the market is paying the same amount for the output and the rest of the economy is growing slowly, then why would it be good for those wages to outpace the economy?

If your wages have lagged productivity growth for a decade, it's good because you're finally getting a fair share of productivity improvements. And wage inflation in one sector does not necessarily translate into wider inflation: the products or services produced by higher-wage employees may not get much more expensive, instead profits may get smaller; and with so much slack in the economy, extra spending is not going to cause inflation either.

If wages had tracked productivity growth for the past decade I might be a little more concerned. But they didn't - collectively we all got paid about the same and ran up a lot of new personal debt to pay for all the new stuff, resulting in a large net transfer to the financial sector (which was reflected in their wages). And whether or not the government can run a persistent deficit, households certainly cannot. You can't run a household by just continually extending credit, because at some point you cease to be able to pay it off. So if you want economic expansion, wages have to rise.

"collectively we all got paid about the same and ran up a lot of new personal debt to pay for all the new stuff, resulting in a large net transfer to the financial sector (which was reflected in their wages).[...] So if you want economic expansion, wages have to rise. "

Poor personal financial management and over leveraging at the individual level is no more excusable than overleveraging by the financial sector. I am not sure how this translates to a valid argument for wage inflation, so we should force wage inflation to bail out the individuals?

Marty: When most people's incomes are flat, and the vast majority of GDP growth has come from "innovation" in finance, and also gone to those "innovators" who were the ones who drove the economy off a cliff, the problem is that most of us didn't save, rather than the fact most of the growth was siphoned off to companies swapping money with each other and traders skimming off those giant flows of money to make themselves rich enough to not care what happened to the rest of us?

I am not sure how this translates to a valid argument for wage inflation, so we should force wage inflation to bail out the individuals?

Where did the forcing come in? Anyway, I think the point is that it would be better for people to make enough money to buy the things they are producing, rather than using credit. I don't see excuse making so much as a prescription for a better economy.

"So, Seb, do you have a formula in mind that would require moving the goal post, er, I mean, previous cuts equal to the recent stimulus as part of the Keynesian analysis you mentioned? And I don't think the point in necessarily shrinking the budget during expanions so much as running a surplus. I'm thinking that, I don't know, not cutting taxes when you don't need to might count just as much as reducing spending."

Running a minor couple-year budget surplus isn't Keynesian. Running up a debt during recessions and paying it down to near zero during expansions is. I'm not aware of anyone here who was talking about cutting enough/raising taxes enough to seriously cut the national debt during an expansion. Hell, even under Clinton/Gingrich coupled with a now clearly unsustainable tech bubble we got only momentary year-to-year surpluses.

Not cutting taxes doesn't count 'just as much as reduced spending'. You should be raising them enough to retire large portions of the debt. Furthermore you have to actively cut government spending during the good times specifically so that can increase it during bad times. Keynes is about balance. Lots more government spending in bad times AND lots less during good times. It isn't stimulus if the government is spending the money all the time. That just becomes the new baseline. If you have an ever-expanding baseline, when you need stimulus you just a huge debt overhead with no legitimate way to pay it off other than devaluation. Which is why bobbyp has to defend devaluation so much.

Btw, is there a reason why only the conservatives seem to be be arguing with bobbyp?

Do the rest of you agree with his analysis?

Marty: we should force wage inflation to bail out the individuals?

How is getting pay increases that correspond to productivity growth a "bailout"?

You have in mind a picture of some crazily irresponsible borrower who now needs a handout. I have in mind ordinary people who lacked leverage at work to extract wage increases in a period of low union membership, outsourcing, and automation, who used credit at historically low rates to fill in the gaps. Using credit is not in itself a bad thing - that's all a mortgage is - but it is something that cannot continue to expand without limit because there is a low bound to consumer interest rates and a ceiling of how much debt can be serviced with a given income.

It's not a bailout to say that that was not the best way of sharing out the rewards from increased productivity and that higher wages would have been a fairer and more effective system.

Poor personal financial management and over leveraging at the individual level is no more excusable than overleveraging by the financial sector.

You can refuse to excuse anything you like, Marty, but there's a difference between "individual" and "financial sector" over-leveraging.

Individuals don't have the power to limit the financial sector's leverage; the financial sector does have the power to limit individuals' leverage. Individuals borrow ("leverage" themselves) from the financial sector, after all.

Individuals could not have "over-leveraged" themselves unless the financial sector, in pursuit of profits for itself, had lent them money. I don't hesitate to mention the financial sector's motive, because I don't think I can be accused of mind-reading. Pursuit of profit is not some subliminal motivation on the part of the financial sector.

--TP

"Furthermore you have to actively cut government spending during the good times specifically so that can increase it during bad times."

Unambiguously false. Under our current fiat monetary system the government does not have to do any such thing. It is financially unconstrained.

This is not to say that the government should just willy nilly spend without limit under any/all circumstances. It is simply saying that it can.

The constraints are political, not financial.

PS: The government could run just fine without ever issuing interest paying debt instruments. These instruments are issued to satisfy private demand and as part of the way the government manages interest rates.

You want to make the bond market scream bloody murder? Have the government essentially shut it down by retiring all the US public debt.

PS: Marty: Economic theory says labor should share proportionately in the rewards from productivity increases. This has not been the case since the 70's. Why?

PSS: Thullen wins first place. Again.

Not cutting taxes doesn't count 'just as much as reduced spending'. You should be raising them enough to retire large portions of the debt.

Fine. Tell that to George Bush, if you didn't see where I was coming from.

I'm not aware of anyone here who was talking about cutting enough/raising taxes enough to seriously cut the national debt during an expansion.

I'm not aware of anyone here who has farted in the last hour. Doesn't mean no one has. Seriously, what expansion and how big? How serious is the cut? How can you be aware of something if you don't know what it is?

Furthermore you have to actively cut government spending during the good times specifically so that can increase it during bad times.

Really? If you can pay for the spending during the good times while still bringing in a surplus, why not? But, still, tell that to George Bush and Haliburton.

If you have an ever-expanding baseline, when you need stimulus you just a huge debt overhead with no legitimate way to pay it off other than devaluation.

The baseline will always be ever-expanding. The question is whether or not the flow is surplus during the expansions to allow for deficits during recessions.

Do the rest of you agree with his analysis?

I'm still digesting it, so I can't say whether or not I fully agree with it, but I agree with some of it.


Seb, "If you have an ever-expanding baseline, when you need stimulus you just a huge debt overhead with no legitimate way to pay it off other than devaluation. Which is why bobbyp has to defend devaluation so much."

I don't particulary care about currency devaluation. Since our currency freely floats in international markets, neither does my government, I guess. In fact, devaluation would be a good thing for our export industries.

I do care that we do not peg our currency to gold, bananas, the Euro, or the fetish of the day. That would unnecessarily constrain our financial freedom.

I care about having full employment and a decent standard of living, and I will absolutely not accept having my standard of living reduced to satisfy a reactionary political agenda based on claims such as "we cannot afford it" or "we are placing an unsustainable burden on future generations" which are both essentially lies given that we have a fiat currency system.

"It's not a bailout to say that that was not the best way of sharing out the rewards from increased productivity and that higher wages would have been a fairer and more effective system."

The problem with the productivity argument is that the economy also doubled the number of jobs available from the early 70's. It is actually a positive reflection on our economy that we were able to sustain wage rates while incoporating 70M more workerss during that time frame. There are simply many more variables than wage rates and productivity.

"I don't particulary care about currency devaluation."

Yes, we know. You think that issuing money creates assets. I'd like to hear if the others here (say Jacob, Tony, and Eric) agree. And if they don't, I'm kind of wondering why they aren't speaking up, as it is A) radical, and B) central to how this thread is shaping up.

"PSS: Thullen wins first place. Again.

Let's see. Would I like the prize money in the form of a $10,000 savings bond, or in BP stock?

fiat .. or Fiat? I'll take the fiat.

The problem with the productivity argument is that the economy also doubled the number of jobs available from the early 70's.

Unless I misunderstand the situation fairly dramatically, the change since the 70's has not simply been a larger pie distributed across more people, with no particular difference in the size of the slice of the pie at the individual level.

The wealthiest 20% (or perhaps less than 20%) has received *proportionally more* of the increased wealth resulting from increases in productivity since the 70's.

And where I say "proportionally more", most analyses (including the CIA Factbook) say "virtually all".

Virtually *all* of the increase in wealth created by increases in productivity over the last 30 to 35 years have gone to the wealthiest 20% of the population.

Seb,

Short answer, work is killing me, the topic is highly complex and I don't have time to get into it. Maybe after work.

Money is weird. Like the fact the Banksters bet more money than exists in the world on the various kinds of derivatives. Yet the portion of that they skimmed off was used to buy real assets, and the public is stuck with the real debts they ran up when their bets went bust. Are those debts they created not real debts? Are the assets they used their skimming to buy not real assets?

I'm not entirely sure I agree with bobbyp's position, or understand all the angles of it, but most of what he's saying, that money only means what we say it means, is hardly controversial. And the bond markets freaking out if we paid off the US debt, which was one of the reasons Greenspan used to shill for W. Bush's ginormous tax cuts for the rich.

And if printed money isn't really money, can we arrest the banksters for counterfeiting?

I'd like to hear if the others here (say Jacob, Tony, and Eric) agree.

Why didn't I make the list?

I'd say it would depend on the effect of the currency devaluation. I supposed I would agree that there are other things that should be taken into account, so currency devaluation is not in and of itself unacceptable regardless of the larger context. If it didn't hurt the domestic economy, I don't see why I would particularly care, either.

My guess is that bobbyp isn't saying that there is no scenario under which currency devaluation could cause problems so much as that some amount of devaluation isn't necessarily a problem in its own right. I think he's stating it the way he is to push back against the prevailing notion in some quarters that currency devaluation is more important than other considerations that it should be secondary to.

Marty: It is actually a positive reflection on our economy that we were able to sustain wage rates while incoporating 70M more workerss during that time frame.

I don't follow.

There are two sources of economic growth. One is population growth, and the other is productivity growth. Wages (as in, per-person wages, not the total amount of wages paid in the whole economy) should track productivity growth, not population growth. Population growth in itself should not have an effect on wage levels. (More people competing for jobs, but more people buying products and services creating more demand.)

Keeping wages flat with an increasing working population is not in itself a great accomplishment. The working population of the US did not start increasing in the 70s, it has been increasing for the entire history of the US, and for a long period in the 20th century wage differentials were narrowing or remaining stable with much less inequality than today. What is supposed to be different about the period from the 70s onward?

On the subject of devaluation, I think that it is not an imminent problem, it has the potential to be contained if it does become a problem, and that some degree of devaluation will help the balance of trade and therefore help employment. But for the most part I simply do not believe that spending a bunch of money will cause a significant devaluation, because that money will get soaked up in increased economic activity.

For inflation specifically, a little inflation (i.e. more than the none we currently have) would be quite useful in fixing the balance sheets of households and banks given the mess we've gotten ourselves into. It would not be entirely benign but neither will be another huge banking bailout as property prices drop to their long-run average - as I think they will - and destroy bank balance sheets all over again.

"Why didn't I make the list?"

Because you said you were still digesting it.

"I'd say it would depend on the effect of the currency devaluation. I supposed I would agree that there are other things that should be taken into account, so currency devaluation is not in and of itself unacceptable regardless of the larger context. If it didn't hurt the domestic economy, I don't see why I would particularly care, either."

The issue isn't currency devaluation in the normal sense of US dollars vs. the British pound for instance.

The issue is the devaluation of all the dollars you currently hold in the bank, and all the claim to any dollars that you currently may have (say in a 401k or a pension or in life insurance or what have you).

If you cut Social Security payments in half, it would hurt a lot of retirees. If you cut the purchasing power of Social Security payments in half it would hurt them in exactly the same way.

For various reasons (most having to do with the fact that wages are stickier than the price of goods) small amounts of inflation aren't bad because it allows companies to *effectively* pay less to some of their more marginal employees without firing them and without it ruining their lives. But that doesn't generalize to the rule that bobbyp is suggesting--that issuing lots of government fiat money is generally asset creating.

"You think that issuing money creates assets."

Wrong. I have consistently stated that deficit government spending (and as the monopoly issuer of the currency, they create the money to pay for it) impacts NET FINANCIAL ASSETS. The private sector cannot create a NET FINANCIAL ASSET becasue it is ALWAYS offset by a bookkeeping LIABILITY. This is pretty basic stuff.

This insight follows from an accounting identity in national income accounting. Now if you want to take on national income accounting procedures, be my guest. So far you have not. Instead we get the standard hoary assertions (totally unsupported)that government deficits will inevitably lead to financial disaster.

Then explain Japan to me, please.

Admittedly, I am new to MMT. But so far I find it to be a bracing antidote to standard memes that inevitably equate the constraints on the government's spending decisions to that of a private household. It's proponents have also been quite precient in their analysis of the problems in the Euro zone and Greece in particular.

There are critiques of this viewpoint. Google "chartalism". It's a short wikki entry.

Oh, you're talking more about inflation than devaluation. The argument isn't that excessive inflation is okay, rather that it won't necessarily result from injecting money into the economy so long as there is slack in productive capacity.

"I have consistently stated that deficit government spending (and as the monopoly issuer of the currency, they create the money to pay for it) impacts NET FINANCIAL ASSETS. The private sector cannot create a NET FINANCIAL ASSET becasue it is ALWAYS offset by a bookkeeping LIABILITY. This is pretty basic stuff."

Yes. But then you are being misled by the word 'asset' in the hypertechnical term 'financial asset'. You are talking about policy as if the hypertechnical term had very much useful to say about real assets. You are talking about debt policy as if the financial assets were more than just nominal claims on actual assets. You are talking about creation of financial assets as if it didn't devalue other financial assets. It is like you are noticing that oxygen and hydrogen are gases and then denying that you can drown in water because it is composed of 2 gases.

The problem is that you are taking an identity of financial assets equated against financial assets and then extrapolating into policy effects for non-financial assets. And that doesn't work the way you think.

You think that issuing money creates assets. I'd like to hear if the others here (say Jacob, Tony, and Eric) agree.

I said my say @12:58. Issuing money (or, in my hypothetical, $10K savings bonds) creates "private-sector financial assets" as bobbyp uses the term. It does not change the real assets of the nation directly. It does not even change the NATION's "net financial assets", if you take "the nation" to be "the private sector plus the government", for the government's financial debt goes up exactly as much as the private sector's financial wealth goes up.

But issuing $3T worth of government bonds on a per-capita basis ($10K to each American) would absolutely positively affect the production and distribution of real goods and services in the US economy. Just how it would affect them is something a valid economic theory would be able to predict.

A "valid economic theory" might predict different effects from this $3T "increase in net financial wealth of the private sector" if we do it when there's 10% unemployment rather than 5% (or 20%) unemployment.

A valid economic theory might also predict different effects from sending out the $3T as $10K per-capita, or $30K per household, or $3B to each of the 1000 richest Americans.

And naturally a valid economic theory would predict the effects (on real things, like unemployment, GDP, etc.) of NOT doing this.

If we had a "valid economic theory", we could compare the predicted effects of each approach, and select the one with the "best" effects.

But "best" would still be a matter of taste.

--TP

"If you cut Social Security payments in half, it would hurt a lot of retirees. If you cut the purchasing power of Social Security payments in half it would hurt them in exactly the same way."

Cutting Social Security payments would be a political decision, not a financial one.

If the government printed so much money that everything went up by 1000 per cent, then, all else being equal, my measely Social Security would also go up 1000 per cent since the government is not financially constrained.

Therefore: It would still be capable of purchasing the same measely basket of real goods that it does now unless imports were a hugely significant part of the economy. Assuming relative purchasing power decline wrt foreign goods, my purchasing power would suffer.

Similarly, encouraging a high dollar raises my standard of living. I can buy more cheap stuff at Wal-Mart with my measely dollars.

But as you can see, these effects are mostly distributional in nature, i.e., my betterment as a consumer comes at the detriment to those trying to export U.S. products.

bobbyp, you seem to be hawking the financial equivalent of a perpetual motion machine. Or, worse, the financial equivalent of zero-point energy.

Sebastian: "But then you are being misled by the word 'asset' in the hypertechnical term 'financial asset'. You are talking about policy as if the hypertechnical term had very much useful to say about real assets."

People lie, cheat, and steal for these "hypertechnical financial assets".

Not real, you say?

If you do not believe that a monopoly issuer of the currency that floats freely against other currencies (this is important) can, by its spending decisions have real effects (such as reducing unemployment), then I don't have much to say since it appears you are throwing out Keynes' insights into aggregate demand and the fundamental nature of fiat currency regimes.....which, by the way, we live in one.....

"People lie, cheat, and steal for these "hypertechnical financial assets"."

Because they can be exchanged for real assets and services. If you just double the amount of financial assets through fiat, all you have done is reduced the exchange rate of financial asset to real assets by 50%. You haven't created more real assets.

People want and in many cases need the real assets and services. The things you are talking about don't help them get that. You are making the exact same mistake as the banks that ran this country into the ground.

"And that doesn't work the way you think."

Well, yes it does. Look, conservatives have been yapping about the national debt for as long as I can remember (and I've been around a while). We have even had an experience of unusually high national debt (WWII). Japan has a debt/GDP ratio significantly higher than ours. Are you going to claim that their standard of living is lower as a result? What is the mechanism through which this happens?

Here's what happens in the real world. The private sector makes decisions as to savings vs spending. If the private sector decides to save (S>I), the government will be in deficit. Under a fiat currency system this will be unambiguously true whether this offends Protestant sensibilities or not (Mitchell argues the government spending is thus exogenously determined).

A political decision to try and maintain balanced budgets under this circumstance will only make matters worse.

Why is the desire to make matters worse so widespread?

If you just double the amount of financial assets through fiat, all you have done is reduced the exchange rate of financial asset to real assets by 50%.

Suppose you just increase financial assets by precisely 0.1%, does that just shift this "exchange rate" by 0.1%? I'm familiar with the doctrine that money is a veil, but how far do you think you can push that kind of reasoning in a deep recession?

bobbyp, you seem to be hawking the financial equivalent of a perpetual motion machine. Or, worse, the financial equivalent of zero-point energy.

That's how it looked to me at first, so I can understand why you would write that, Slart. I think it's a matter of emphasis and what bobbyp is arguing against more than what he's arguing for that makes it appear that way. I haven't seen a statement, say, suggesting that the government couldn't possibly increase the money supply so much that it would result in excessive inflation. I have seen statements suggesting that, so long as there is excess capacity, this will not happen. But it does come off a bit too absolute or unqualified sometimes.

If you really want to delve into it, I'd suggest going over to billy blog, because it's very interesting. I've made it one of my favorites. There a lot of people asking the kinds of questions I would ask and they're getting some good answers. There are also some good arguments going on among the more knowledgeable commenters and Bill Mitchell (thus, billy blog) that are over my head, but fun to read.

I don't know if I can buy the whole thing outright, but they're definitely on to something, I think.

Slarti,

In a sense, that is true. But it is the system we have. We have a fiat currency system. Money is created by the government from nothing. The government will unhesitatingly use force to insure that it is the monopoly supplier of that currency. The government levies taxes to insure there is always a demand for the currency. You are not allowed to pay taxes in something other than the monopoly currency.

Perpetual? Yes. Since Nixon slammed the gold window and ended the Bretton Woods system. A good deal of time has passed since then. We're still here. There has been no financial armaggedon. We have not "gone broke".

What I am hawking is simple: Under that system, decisions such as a "balanced budget amendment" or cutting government spending when 10% of the working population is looking for work are political decisions imposing political constraints, and are not decisions that are mandated by whether or not the government has "too much" debt or that future generations will "suffer" as a result of that debt.

Those concepts are false if you are of the opinion that the government is not financially constrained.

This puts the argument back where it belongs: Who (real people) gets what (real stuff).

But thanks for putting up with me!

"You haven't created more real assets."

Under conditions of slack demand and underutilized resources, yes, you do. The spending substitutes government demand for real goods and services where private demand has fallen off.

Those goods and services elicited from the real economy are certainly "real" and, unless I am totally mistaken, create real assets.

But you have faithfully ignored my post above where I quoted Mr. Mitchell at length on this very subject.

"Suppose you just increase financial assets by precisely 0.1%, does that just shift this "exchange rate" by 0.1%? I'm familiar with the doctrine that money is a veil, but how far do you think you can push that kind of reasoning in a deep recession?"

As I said before, at very small margins, you can definitely do things like that. The positive effect there is likely to come from the erosion of wages without the need for firing the employees and from other sticky pricing problems.

Bobbyp is making arguments that go well beyond that. See for example: "In the private sector any financial asset is offset by somebody else's liability. This is elementary bookkeeing 101. The private sector cannot create a NET INCREASE in private assets. Any increase in assets is inevitably offset by an increased liability somewhere else.

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

[note the transposition from financial assets to normal assets in the bolded section. And if he is speaking merely of PURE financial assets the whole thing doesn't make sense, so either he can't be saying that, or doesn't understand what he is saying.]

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

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

Here he confuses financially constrained with materially constrained. Printing more money doesn't create more non-financial assets.

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

Here he fails to realize that "unbearable" doesn't have to mean default. It could also mean an enormous decrease in the purchasing power of dollars vis-a-vis goods.

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

Here the answer is obviously "yes" unless we expect them to NEVER spend their dollars.

""Furthermore you have to actively cut government spending during the good times specifically so that can increase it during bad times."

Unambiguously false. Under our current fiat monetary system the government does not have to do any such thing. It is financially unconstrained."

Here again he is confusing the markers with the things you spend the markers on.

And so on.

Financial assets are important only in the sense that you can exchange them for goods and services. Waving one's hands about financial assets without worrying about the goods and services they buy and the relationship between the financial asset and the 'real' asset is craziness. Talking about national income accounting without dealing with the effect that printing more money has on the money's ability to be exchanged for goods and services is crazy. And the really crazy part is that it is the exact kind of crazy that let people think that housing prices and financial instruments regarding them could go up indefinitely without hitting any real world constraint about how their prices were related to other goods and services.

Sebastian: If you just double the amount of financial assets through fiat ... You haven't created more real assets.

"Double" is silly. Doubling would be enormously disruptive for all sorts of reasons and would certainly not just double the prices of everything.

I don't want to put words in anyone's mouth, but I think this comes down to a basic faith in equilibrium at all levels versus a belief that things can be seriously far from equilibrium for a long time and not return to a sensible equilibrium rapidly or indeed ever.

So the idea is that printing $1,000,000 and spending it has a knock-on effect throughout the economy, raising prices in such a way that everything costs, say, GDP/1,000,000th more than it used to. And that has an intuitive appeal. But what is missing from this description is the mechanism by which such price increases occur.

If the economy is in equilibrium and every transaction is described by textbook-perfect supply/demand curves then sure, walking out and buying another $1,000,000 worth of stuff will raise prices for everyone else buying the same stuff as you. And when the economy is at full employment and capacity utilization is high that's not a bad approximation. That's what taxes are for, to prevent government spending from causing inflation by decreasing private spending.

But there are times when those things aren't true. Prices and wages are sticky, as the economists like to say; they don't adapt rapidly to changes in the price level and especially do not adjust downwards rapidly. You can't easily introduce widespread pay cuts. And it's not just that, but capacity can exist and be completely slack; people can be unemployed, factories can be shuttered, service businesses can be unable to find enough work to keep their employees busy.

In those cases, printing money and spending it may not cause any change in the price level. The government isn't crowding out a private employer when it employs someone who is unemployed right now, and it's not driving up prices when it buys output from a factory that is idle, and it's not outbidding other clients when it employs service businesses that are slack. There is no immediate feedback to price levels. There may never be any feedback to price levels because the increased economic activity that is stimulated accounts for the money that is added.

bobbyp might be making a more expansive case than that, he has to speak for himself. I don't underestimate the potential for damage from a loss of confidence in the dollar, but I also don't think it's an imminent danger. The US still has no competitor in the scale and strength of its economy, and dollars remain useful for buying oil, guns, food, US corporations, and US real estate, none of which are going out of fashion anytime soon.

"Under conditions of slack demand and underutilized resources, yes, you do. The spending substitutes government demand for real goods and services where private demand has fallen off."

Sure. But your argument has been that you can get away with it across the entire business cycle, NOT just in a deep recession.

Which is why you argued with me on the expansion side where I suggest that you have to take drastic-to-us seeming cuts in government spending leading to large scale government debt retirement.

Jacob "But there are times when those things aren't true. Prices and wages are sticky, as the economists like to say; they don't adapt rapidly to changes in the price level and especially do not adjust downwards rapidly. You can't easily introduce widespread pay cuts."

Sigh. I'm well aware of that. If you look back in the thread *I'm* the one who introduces wage stickiness and the advantage of even small scale inflation.

But he is making an argument MUCH more expansive than that.

Seb,

The relationship between financial assets and real assets is one issue.

The distribution of real assets among the population is a different issue.

What I see bobbyp arguing is that government creation of financial assets can affect the distribution of real assets, e.g. between rich and poor, labor and capital, young and old, etc.

What I see you arguing is the same thing. Except you don't like it.

--TP

Sure, just about anything can affect the distribution of real assets. Creation of financial assets isn't a particularly great or direct way of doing so.

"But your argument has been that you can get away with it across the entire business cycle"

That has not been my argument at all. When the economy picks up tax receipts go up (cp) and the government's spending position tends toward balance/surplus. This happens automatically.

What does NOT happen automatically is cutting spending during a recession. Yet that is exactly what deficit hawks are demanding right now. The European variety is especially delusional in this regard.

MMT would argue that when we are at full employment and things get overheated due to too much money out there, we could cut spending or raise taxes.

However, you seem to argue that these ideas are "crazy" because they are 'nominal' 'hypertechnical' and 'not real' yet you go on to argue that these 'nominal' instruments would have some horrible 'effect' that is somehow 'real'.

Take one simple example: You argue that the 'real' value of dollars would be 'less' if we printed up a bunch of them, but people, for whatever reason, stuffed them in their mattresses. How would you know? Nobody is spending them. That is the point.

Therefore your reply to that example is simply inchoherent.

I know you know that, sorry, I was just trying to lay out the whole argument for why increased spending can be non-inflationary there.

I don't quite understand the idea either that across the business cycle the government is not revenue-constrained, except in the trivial sense that they own the printing presses. I understand that in theory they can produce more money without taxing, but do not believe that the results would be benign if that was done to excess, but then that's true of a lot of things. I don't think that running persistent deficits of moderate size even during an expansion is actually harmful.

I also think a somewhat larger public sector would help stabilize the US economy, in particular I think that an increased federal share of spending would be stabilizing because state-level spending is so pro-cyclical, tending to crash and make things worse during a recession, whereas federal spending can be more balanced across the cycle and therefore moderate it.

The US has such a large share of GDP going to consumption that there is a lot of scope for switching from spending on private goods to public without impinging on personal liberty too much (and in fact given levels of inequality and especially unequal access to opportunity, there is a lot of potential for increasing real liberty through public spending that enhances access to opportunity). I don't suggest this should be imposed by a dictator after a revolution of the proletariat, I suggest this should be the policy of the democratically-elected US government based on enlightened self-interest.

""Furthermore you have to actively cut government spending during the good times specifically so that can increase it during bad times."

I disagree with this because you clearly imply that the government has to "save" during "good times" in order to save for/have the financial resources needed in bad times.

Save what? Are you saying that the government should print up a bunch of money and keep it in a vault somewhere so that it can be spent during "bad times"?

Do you realize how silly that sounds? And you call my fuzzy half informed ideas "crazy"?

"I disagree with this because you clearly imply that the government has to "save" during "good times" in order to save for/have the financial resources needed in bad times."

Yes. The printing press isn't a financial perpetual motion machine. Ask Germany or Zimbabwe.

"Save what? Are you saying that the government should print up a bunch of money and keep it in a vault somewhere so that it can be spent during "bad times"?"

No. That is the kind of mistake made by your analysis, not by mine. Printing lots of money and putting it in a vault is NOT saving. It is devaluing. Devaluing is NOT saving.

It has to pay off debt so that it maintains the ability to usefully allow fiscal policy to change things during a recession.

"When the economy picks up tax receipts go up (cp) and the government's spending position tends toward balance/surplus. This happens automatically."

Or it tends to increase government spending to unsustainable levels. See for example California or New York. And before you point out that US states can't print money (though California actually did with IOUs) you should realize that 'unsustainable' is not the same as "doesn't have the printed money to 'pay' for".

Sebastian,

Example of Germany. Yes, this is the usual example trotted out by naysayers. Let's look at the record. A country loses a war and is subjected to harsh reparations. The reparations have to be paid back in gold. A foreign power occupies your industrial heartland devastating your ability to produce exports (there's that real stuff again!) to sell abroad to get the gold to pay back the victors.

Now you could claim this is exactly the same situation we are in now, but then I would tend not to agree.

Printing money and putting it in a vault for future use is not saving. Well, I agree (see, it's possible!). It's also unecessary. But let's look at it this way. The government's ability to print money is not constrained-it can 'print' unlimited amounts of the stuff. One could reasonably surmise that this ability alone "devalues" the currency, but it doesn't. Similarly, having a bunch of actual printed currency notes drying in a vault will not do it either. After all, the vault and its contents are not in any way necessary.

"It has to pay off debt so that it maintains the ability to usefully allow fiscal policy to change things during a recession."

No. It does not. Spending is not constrained by the amount of debt out there. If the national debt was a gazillion dollars, the governmnent as the monopoly issuer of currency still has the ability to purchase whatever the economy can produce (not more). You deny this?

"Or it tends to increase government spending to unsustainable levels. See for example California or New York."

Incorrect. I'm not sure what "it" is...prosperity? That tends to raise spending to unsustainable levels? You're not serious.

California and New York are not sovereign issuers of their own currency (and please, do not bring up the example of Arnie's chits--that's not even comparable). Apples and oranges, sir.

Btw, is there a reason why only the conservatives seem to be be arguing with bobbyp?

It's hard to follow the back and forth, and I think it is a bit excited. I weighed in earlier cause I'd prefer some calm discussion rather than people doing reductio ad absurdum with the gold standard. Plus the World Cup times are killing me.

Liberal Japonicus,

Well it could be that those liberals know bobbyp is a hard case, somewhat loony, and a bit off center, having insanely defended Bill Ayers when Hilzoy joined the pack to cast him into the nether world....

It does strike me that Seb and I are talking past each other, but really, is that unusual?

As a neophyte to MMT, I may get a bit confuse, excited, and go overboard. But I will note this, when introduced to most people (well, actually nearly everybody), they have the same reaction as Seb-amazed incredulity, and a tendency to dismiss it out of hand as "crazy".

As for the World Cup times...sorry, I am of no use to you in that regard (I'm assuming you insist on watching it live). Since all my teams have been eliminated, just like my March Madness brackets, my incentive to keep up has evaporated.

Maybe I should crank up the printing press and lavish myself with some yummy "hyper-technicalities" to get out of the doldrums.

Time to close up shop on this one.

and best regards to you,

bobbyp

no worries, we all get wrapped up sometimes and you clearly have a passion over this.

And the question of what things are worth, well, I took a job where I didn't have to try and figure out how much I could charge people for what I do, I prefer to just work and get paid and not worry too much. Why an ounce of gold, or a mint condition comic book or an hour of work can be worth X sometimes and Y other times but can never be Z is perpetually perplexing and so confusing that it is nice to hear how other people think about these things.

"Spending is not constrained by the amount of debt out there. If the national debt was a gazillion dollars, the governmnent as the monopoly issuer of currency still has the ability to purchase whatever the economy can produce (not more). You deny this?"

Yes.

Bobbyp is of course absolutely right about everything he says, and everyone should become a reader of billyblog and a member of the modern monetary army. There really is a known and proven way to full employment, maximal resource utilization and prosperity without inflation.

It might be hard to perfectly steer an economy when everything is going right, keeping between the lines. But when it isn't, like now, with deflation and depression, driving off a cliff on the side of the road, it is VERY, VERY EASY - hog wild fiscal stimulation, or driving away from the cliff! Watch what will happen to Europe - a guaranteed Great Depression caused by their insane let's drive straight off the cliff / we don't believe in arithmetic / austerity programs.

A couple of rhetorical points: Sure printing money, big deficit spending, etc can be price-inflationary, but not in a depression, never, unless the gummint goes completely insane and hands out million dollar bills to everyone. Create just enough money to cure the giant unemployment problem, NOW! It is a "fallacy of composition" to equate the two things, to use one of Prof Billy Mitchell's favorite phrases. MMT / Federal Job Guarantee would lower inflation - it's an automatic stabilizer. Read Randy Wray's Understanding Modern Money.

People should realize that government deficits = non-government surplus are the norm, a GOOD THING, while government surplus = non-government deficit are generally a BAD THING. When is a surplus, the gummint taking money out of the economy good? Well, when there is a giant die-off like the Black Plague, when all the factories are destroyed by bombs, when there is too much money chasing too few goods. And then the real problem isn't really financial, but the fact of the die-off, etc. Or more usually and less seriously, when there is full employment and serious inflation - which the USA and other developed economies haven't seen for many years. The virtue of MMT / Chartalism / Post Keynesianism / stock flow consistent macroeconomics is that by analysing the nitty-gritty of what happens in the financial world inarguably better than any competitor, it distinguishes between that and keeps its eye much better on what is happening in the real world of real goods and services than neoclassical / neoliberal pseudomathematical pseudoscience.

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

That'd be all hunky-dory if it were more than a fifth of it were true. Yes, Reagan and the Congress did raise FICA taxes. But, there was no such promise, and of course later benefit raises HAVEN'T been paid for, longterm. The raise in FICA only was meant to last fifty years from its passage, not forever.

The fifty-year SSN projection was already based on moderate economic growth. Of course, the medical benefit real rises have been decidedly off early projections, running at 25%ish a year, 8x our economic growth rate, so, of course, Bush decided to add a hardly-paid-for and unnecessarily expensive drug benefit.

Isn't it entirely unsurprising that inflation is happening in service industries due to Baumol's cost disease?

There really is a known and proven way to full employment, maximal resource utilization and prosperity without inflation.

To me, "known and proven" means that it's been done before, under various conditions, with reasonably predictable outcomes. So, some examples are probably in order.

Since Nixon slammed the gold window

My perpetual-motion remarks weren't intended to refer to fiat currency, so much as what Sebastian has already pointed out: that when you just put more money into the economy, that money is now worth less.

This could all be just my inadequate understanding of economics at work, here, but the net purchasing power of a dollar can only stay constant (with rising number of dollars in circulation) if people's willingness to part with them for a given set of goods & services remains constant.

I believe Spain mined so much silver in the New World that the price of silver began to drop, and that devalued their reals. I suspect there is some kind of analogue for fiat currency, although it should be painfully clear by now that I am not an economist.

It shouldn't matter if you don't do something so drastic as double the amount of dollars in the economy; I'd guess (as would Sebastian, I suspect) that if you increased the number of dollars by 1%, prices would inflate by 1%, for a net advantage of zero.

It'd be interesting to know whether or not this is true, and why.

Bobbyp is of course absolutely right about everything he says, and everyone should become a reader of billyblog and a member of the modern monetary army. There really is a known and proven way to full employment, maximal resource utilization and prosperity without inflation.

I'm going to try to say this as matter-of-factly as possible, because my intent is not to insult.

I find MMT to be very interesting and illuminating as what is for me a new concept. But this sort of presentation is off-putting. In fact, when I began reading this comment, I thought it was meant as sarcasm. When I realized it wasn't, it became, for me, a cultish-sounding statement of true-believerism (if I can make up my own words).

I would very much like other commenters here whose opinions I respect to read up on MMT at billy blog or elsewhere, if they haven't already, because I think it's worth consideration, and I'd like to know their thoughts on the subject. I don't think they'll be as likely to do that if the people urging them to do so come off as sounding a bit nutty and over the top in their fervor and certainty of their beliefs, like people trying to drag strangers into a tent revival for immediate salvation.

Slart:

"that when you just put more money into the economy, that money is worth less."

Economics makes my head hurt, too. Accounting breaks my heart.

But I wonder if this oft-repeated statement is always true. If a huge liquidity hole is blown in the economy -- plunging stock prices, disappearing equity (which was used as liquidity, unfortunately) in primary residences and other real estate, a good 16.6% (including those who dropped of the employment seeking map) of Americans out of the workforce, surely money in its various forms has disappeared in a huge way.

And what money is left stops moving -- its velocity slows.

So the government prints money, along with other measures, to restore liquidity and stimulate velocity. Some of that money is spent on keeping body and soul together for the 16.6%

Corporate America is currently swimming in cash, some of it provided by TARP. If they disapprove of the U.S. Government's socialist (fine, call ME that, but save on the Stalinist and Nazi crap* or I'll act like them and knock you down) measures, then do something with that cash besides keeping it in the effing bank.

Buying back stock does not employ people.

Employed people buy products.

If corporate and small-business America won't employ them, then the government should in its various ways.

*I speak here of Thomas Sowell, the renowned a*shole (apparently achieved through the special affirmative action program our Nation's a#sholes run), who in Investors Business Daily (where as*hattery stays above its 200-day moving average perpetually) equated the BP escrow fund with Third Reich policies, and what's his face Goldberg who believes public infrastructure projects lead right to the ovens at Auschwitz (and he seems to like a new bridge in Dubuque even LESS than he liked Auschwitz).

I'd guess (as would Sebastian, I suspect) that if you increased the number of dollars by 1%, prices would inflate by 1%, for a net advantage of zero.

It'd be interesting to know whether or not this is true, and why.

Sebastian can speak for himself but judging by his remarks about sticky prices I think you are misreading him. Anyway there's a wealth of empirical evidence that money is not entirely neutral. An increase in the money supply typically leads to some combination of an increase in real output and an increase in prices, not inflation alone.

A list of explanations for this reads like a history of macroeconomics. Workers and employers are subject to "money illusion" (Irving Fisher); that is to say, they don't immediately notice that the rewards they are chasing are purely nominal. Workers are involuntarily unemployed (Keynes) - they would buy more goods if only they had jobs and firms would employ more workers if only they could sell more output. That vicious circle, a.k.a. as a deficiency of effective demand, can be broken by putting more money into circulation.

There are many variations on these themes. If you're really interested, Krugman's The Return of Depression Economics is a very good introduction to the topic.

So the government prints money, along with other measures, to restore liquidity and stimulate velocity. Some of that money is spent on keeping body and soul together for the 16.6%

That gets at what I think the discussion of the "printing money" comes down to. It's not just a question of whether or not there will be inflation. It's a question of how much inflation, if any, and whether or not that inflation represents a problem worse than the ones we have without that money being "printed." And the answer to that question depends on the real-world circumstances at the moment, not simply a dogmatic fear of "printing money."

Under some circumstances, "printing" a given number of dollars will lead to more inflation than it will under others, and the problems to be addressed by doing so may be greater under some circumstances than others.

So the question is, how does all of that work in the US in 2010? My inclination today is not to believe that it will work the way, say, Alan Greenspan says it will, so I'm looking elsewhere.

I've been reading his blog, and I can't prove it, but I think there are some serious flaws. His basic insight is that under certain circumstances government debt responds much like private savings in that it can be used to purchase things in a crisis.

That much is true.

But he gets a lot of things out of hedges. "Once we understand the accounting relationships it is easy to reject the argument that budget surpluses represents “public saving”, which can be used to fund future public expenditure. Public surpluses do not create a cache of money that can be spent later. National governments spend by crediting a reserve account in the banking system. The credits do not “come from anywhere”, as, for example, gold coins would have had to come from somewhere. It is accounted for but that is a different issue. Likewise, payments to government reduce reserve balances. Those payments do not “go anywhere” but are merely accounted for.

There is an elaborate institutional structure in place to obsfucate the true nature of these transactions. But in an accounting sense, when there is a budget surplus, then base money and/or private wealth is destroyed. The opposite is the case for budget deficits."

This is all true, but not nearly as helpful as people think because yes, governments can pay off their debt in an accounting sense merely by printing money. Which is the point he makes again and again and again and again.

Unfortunately, the accounting sense isn't all that matters. As he says in the comments to the post: "There is no financial problem for the US government in any of that. It is a real resource availability problem which becomes a political problem."

So we go through all the accounting identity thing and get back to that?

What did we gain? We started at that, or at least I did.

Essentially his work seems to be premised on: "assume that the government can pay back its debts purely by printing money AND THAT PEOPLE WILL ACCEPT THAT WITHOUT DEVALUING THE MONEY RELATIONSHIP TO REAL GOODS".

Everything he writes follows logically from that premise, but the premise looks wrong. I may be simplifying incorrectly, but I did try to analyze it fairly. So he is correct that government debt IS savings so long as printing money doesn't deform the economy at all.

Seb,

This is from a comment I made after reading a bit at billy blog for the first time two days ago:

My thinking thus far is that I'm not fully understanding what his actual point is or that there is some fatal flaw in what he's saying.

Heh.

Nice discussion we've got going here. I'm glad we had it while Keynianism was still alive.

Too bad Germany and 42 traitorus, anti-American subhumans in the U.S. Senate decided to kill it.

Warning to the 42: Next time you are in the majority, you had better reduce every single tax in this country to zero, at all levels of government. I'm not interested in paying one cent in taxes to Republican and Blue Dog gummints, at any level.

Taxes are theft? Then the first cent of tax is just as much theft as the highest marginal one cent of tax.

You arm me and then steal from me.

In most civilized countries, that doesn't work very well.


Economics at this kind of abstract level goes over my head. If it isn't pretty concrete, I don't really get it.

Things I note at a concrete level include:

I've been paying extra into SS since 1983, basically my entire adult working life, specifically to fund the expected extra cost of the boomers retiring. If the response at this point is going to be "sorry, we pissed that away, you're SOL" I can assure you that to the degree that I can make it happen, somebody somewhere is going to pay.

Talking about SS becoming "bankrupt" is noise. What's going to break the bank are the health related entitlements. In comparison, and in fact in comparison to most government programs, SS is pretty well funded and run.

A lot of the reason that household buying power hasn't gone completely in the dumper over the last 35 years is that most households now have more than one person working, and quite often each working person working more than one job.

A lot of the folks who want to pull the plug on SS want to do so not because it's financially shaky, but because they just don't like it. Some folks just hate the idea of the government taking their money and giving it to somebody else, period, regardless of whether that's a good idea or not in the bigger picture.

IMVHO, the financial discussion is interesting, but it's usually just a stalking horse for the philosophical issue. Folks who object to SS on principle rarely like to advance that argument because SS is actually a pretty well run program and most folks like it. So, we get the bankruptcy boogeyman.

As far as borrowing goes, individuals, businesses of all sizes, and pretty much any other organization that requires money to operate borrows money and carries some level of operating debt all the time. The current debt to GDP ratio is historically high, and that's worrisome, but IMO it seems like the larger concern should be getting the private economy healthy. If the private economy is not happening, discussions of whether the government should be running a debt or not are kind of academic. And not for nothing, but Congress is specifically empowered to borrow money on the full faith and credit of the US in Article I section 8.

Last but not least, this discussion prompts me to ask if anyone's heard from bedtimeforbonzo recently?

Seb,

My hat goes off to you for actually going to Billy Blog and reading Mitchell's stuff. Kudu's to you.

Now to really up your game: Try "Who Is IOZ?"

I bet Thullen drives his Fiat over there once and a while.

Thanks.

Last but not least, this discussion prompts me to ask if anyone's heard from bedtimeforbonzo recently?

Sadly, no. I figured at some point he and I would have hit a Phillies game together.

This particular discussion had me thinking of ThatLeftTurninAlbuquerque, who I'm sure would have had some interesting input. Mikkel, too, if you remember him. They always rocked the econ stuff.

"Folks who object to SS on principle rarely like to advance that argument because SS is actually a pretty well run program and most folks like it."

Pretty well run, aside from the whole "pissed that away" part.

There's something fishy here...hmmmm?

MMT "assumes.....THAT PEOPLE WILL ACCEPT THAT (the government can pay back its debts purely by printing money) WITHOUT DEVALUING THE MONEY RELATIONSHIP TO REAL GOODS".

Well let's see.... (1.) Government spends dollars and credits your account; (2.) government creates the dollars with the click of a mouse; (3.) government collects taxes in dollars and debits your account with the click of a mouse.

All of this done without so much as one mention of gold or other immutable standards. And how do you save mouse clicks?

Now if only I knew what a "money relationship" was. Then I wouldn't feel so devalued.

Seb quotes (and highlights) the statement that

It is a real resource availability problem
and then says:

So we go through all the accounting identity thing and get back to that?
What did we gain? We started at that, or at least I did.

If I put two and two together correctly, Seb is pointing out that the "accounting identity" is much ado about nothing because what matters is "real resource availability".

I agree that "real resources" are what matters. But I'd like to know Seb's definition of "resources" in this context. Like Russell, I understand definitions much more easily when illustrated by examples. So I want Seb to tell me:

Is the idle time of 10 million unemployed people an example of a "resource"?

Surely, it's something that can be tapped, like an oil deposit. OTOH if it's going untapped by the free market, maybe it's not a "real" resource. On the third hand, maybe the idle time of 20 million workers is twice as big a "resource".

I ask this because, pending clarification, "resource" seems just as loosey-goosey a concept to me as "net financial assets of the private sector".

--TP

In the context of the "accounting identity" real resources are the things that you buy with the money. Goods, services, land, etc. Adding zeros doesn't hurt the accounting identity, but it generally doesn't help you with the actual resources either.

The Keynesian concept is that in a recession government deficits can be used to help restart the economy. (The theory being that a recession happens when investors become overly cautious and/or when sectoral shifts are happening). These deficits can help ease the pain of job shifting and can start projects up that will let investors get back into investing.

The Keynesian idea is that during non-recessions, governments should pay down the debt so that they have the ability to act with massive force during a recession. MMT followers don't think that is necessary because they think you can always just add zeros to the government bank account.

"The Keynesian idea is that during non-recessions, governments should pay down the debt so that they have the ability to act with massive force during a recession. MMT followers don't think that is necessary because they think you can always just add zeros to the government bank account."

Making the real question, (One of them, anyway.) whether moving from running large deficits to larger deficits really has the same stimulative effect that moving from surplus to deficit has. Or whether the stimulative effect saturates out at some point.

Current models assume the effect is linear at all levels of deficit spending. But very few phenomenon actually act like that. A cup of coffee wakes you up. Your tenth cup just makes you piss.

Yes, that's the assumption current macroeconomic models make. But almost all professionals in macroeconomics are employed by the government, either directly, or not very indirectly. And their employers, politicians, want an excuse to deficit spend without limit.

Would you trust theories about the effects of alcohol that was paid for by alcoholics who didn't want to sober up?

Pretty well run, aside from the whole "pissed that away" part.

I'm not sure you can lay that at the feet of the SS administration.

The economic theory stuff is interesting, but I would like a straight up debate on whether the feds are going to be in the business of addressing social problems, or not.

If they are, then they are, and we make it work. If they're not, they're not.

Social Security is not where the scary numbers are. The scary numbers are health care costs, and in the long term robustness of the US economy as a whole.

MMT followers don't think that is necessary because they think you can always just add zeros to the government bank account.

From what I've read, this is a gross overstatement and oversimplification of what MMT allows for, particularly because of the use of "always just." It depends on the economic conditions, and what they seem to argue against is government austerity during recessions with high unemployment for the purpose of deficit reduction. If you don't want to issue more debt, don't. Just "print the money" and take the slack out of the economy. Then stop.

That's not to say that my last comment isn't a gross oversimplification, either. I just think it's a more accurate one.

"It depends on the economic conditions, and what they seem to argue against is government austerity during recessions with high unemployment for the purpose of deficit reduction. If you don't want to issue more debt, don't. Just "print the money" and take the slack out of the economy. Then stop."

That isn't what I read says at all. Billy was specifically talking about paying pension benefits during an economic recovery and specifically denying the need to pay down debt during an economic recovery. So he is talking about doing it at times when there isn't much slack in the economy. He claims that debt is automatically retired due to automatically increased revenue (taxes during the recovery) and automatically decreased welfare payments. This has been observably true approximately 3 years out of the last 60. So either he thinks we've been in recession for most of modern economic history, or something else is going on.

Seb, for this discussion to be productive, we'd probably have to present specific quotes and argue (or agree) on how to interpret them. I'm on the fence as to whether or not I care enough to do that, so I'll leave it to you.

One thing I would point out is that you used the word "recovery." I'm not sure I'd disagree that there is no need to pay down debt during the recovery, if the recovery is the period of transition between recession and expansion, where employment and production are still ramping up. So it depends on what you (or Bill) mean.

Ok. In response to Krugman's article Now and Later

Krugman writes:

Spend now, while the economy remains depressed; save later, once it has recovered. How hard is that to understand?

...

So America has a long-run budget problem. Dealing with this problem will require, first and foremost, a real effort to bring health costs under control — without that, nothing will work. It will also require finding additional revenues and/or spending cuts. As an economic matter, this shouldn’t be hard — in particular, a modest value-added tax, say at a 5 percent rate, would go a long way toward closing the gap, while leaving overall U.S. taxes among the lowest in the advanced world.

But if we need to raise taxes and cut spending eventually, shouldn’t we start now? No, we shouldn’t.

Right now, we have a severely depressed economy — and that depressed economy is inflicting long-run damage. Every year that goes by with extremely high unemployment increases the chance that many of the long-term unemployed will never come back to the work force, and become a permanent underclass. Every year that there are five times as many people seeking work as there are job openings means that hundreds of thousands of Americans graduating from school are denied the chance to get started on their working lives. And with each passing month we drift closer to a Japanese-style deflationary trap.

Penny-pinching at a time like this isn’t just cruel; it endangers the nation’s future. And it doesn’t even do much to reduce our future debt burden, because stinting on spending now threatens the economic recovery, and with it the hope for rising revenues.

So now is not the time for fiscal austerity. How will we know when that time has come? The answer is that the budget deficit should become a priority when, and only when, the Federal Reserve has regained some traction over the economy, so that it can offset the negative effects of tax increases and spending cuts by reducing interest rates.

Billy's response to THAT is:

Because he concludes: “So America has a long-run budget problem”.

No it hasn’t. It has a long-run political problem where a particular cohort in the population will require more real resources (possibly) and that will have to be mediated by: (a) productivity growth; (b) others having less.

There is no financial problem for the US government in any of that. It is a real resource availability problem which becomes a political problem.

Of-course, they can start converting primary schools into aged care units as they become obsolete.

It is pretty much his mantra. There is no financial problem because the government can always print money.

But if there IS a real resource limit, which of course there is, then he hasn't added anything useful to the discussion because we already know that, and he is just adding a confusing and unhelpful mid-step by talking about a financial asset issue that doesn't speak to the real problem.

Yes the government *from a purely financial point of view* could always print more money. And *from a purely financial view* there is no limit to that power.

But the accounting book financial view has to correspond to the real world goods and services view. Focusing laserlike on the financial bookkeeping point of view isn't adding value to the discussion when it avoids talking about the actual interaction of goods and services. And Billy is incredibly careful not to talk about that very much. Which is silly because that is where nearly all the hard questions are.

"I'm not sure you can lay that at the feet of the SS administration."

Of course you can't; The SS administration was required by law to hand over any surplus to Congress to be pissed away. If they'd done anything else with it, they'd have gone to jail. Pissing away the money was the plan from the start, it was the whole point of raising SS taxes.

It is pretty much his mantra. There is no financial problem because the government can always print money.

But, Seb, that's the oversimplification. It's not that the government can always print money. It's that the government can spend in such a way that unused resources can be used and that needed resources can go where they need to go such that the long-term budget problems, that are projected based on that not happening, become irrelevant. I can't say for sure that he's right about that, but I'm pretty sure that that's what he's saying.

Here are some comments to support that.

From Bill:

“Further, it makes no sense to even focus on the public debt to GDP ratio. What exactly does it tell us? Answer: Not much. It is the history of the public deficits scaled by the size of the economy. That is all it signals. The more complete understanding comes from analysing what was going on in the real economy to generate those deficits over time.
Were they the manifestation of a government intent on expanding its share in total production and squeezing private spending out as a political strategy?
Were they a sign that private spending was weak and the automatic stabilisers were operating to provide some support for aggregate demand?
Were they are sign of added discretionary fiscal support to failing private demand?
What was happening to employment growth and unemployment?
These are the questions that need to be focused on.”

“The maths might be right or wrong – given it is based on so many assumptions that are forecast out 30 odd years or more. None of this is exact. I am sure based on those assumptions the maths are “correct”.
But MMT would just consider it to be irrelevant and advise the US government to get as many people working again as soon as possible and start investing in R&D and public education through to higher education.”

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

“I would start by employing all workers who currently have zero bid in the private market. There in an infinity of productive outlets for the valuable but unused labour. They are no earning rents now by definition. The advantage of fiscal policy is that you can target it and also reduce spending elsewhere.”

From a commenter:

“MMT’s reasoning has to do with not responding to anything other than real constraints and visible inflation in the short and long run. It is assumed that future taxation potential can overcome, not only any future inflation threat, but any threat due to what may appear to be unsustainable deficit mathematics.”

And another:

“I think that Bill’s point is simpler and mathematical. The projections are made far into the future, and are based upon many hidden assumptions. That makes them worth little, if anything. Do you ever hear of error estimates with such projections? No, because that would reveal how absurd they are. As the computer scientists say, “Garbage In, Garbage Out.”
Near term projections how persistent high unemployment. One of the hidden assumptions of those projections is the lack of a Jobs Guarantee or other government hiring. That is probably an assumption of the other projections, as well. Bill’s suggestion that the U. S. gov’t “get as many people working again as soon as possible and start investing in R&D and public education through to higher education,” makes all such projections irrelevant.”

The current failure to pass the jobs bill demonstrates exactly what I have been complaining about. Opponents of the measure claim the added spending is "beyond our means", is "unsustainable", or will "burden future generations". These are all political constraints masquerading as some kind of unassailable financial "law". Those assertions are flatly untrue.

You may assert that putting the unemployed to work via government spending is socially and morally wrong. You may claim it sends 'wrong signals'. You may claim our resources are better directed elsewhere. That's all fine and dandy, a good subject for more pointed discussions.

But you cannot claim some imagined financial constraint on the ability of the government to spend as an excuse to oppose the proposed spending when we have the disastrous labor market we have currently.

As far as "saving down" over the business cycle goes, I ask this: Where do the savings "go"? What is the debt constraint? Some claim it is some magic ratio of debt/GDP. Others just pick numbers out of there you know what.

After WWII we did not "pay down" the huge debt. If point of fact, it has pretty much increased over the intervening decades (as he pointed out). In Seb's economic world, this should have untethered the "money relation" that he is so afraid will suffer a terrible disconnect. It didn't. We outgrew the debt.

Since the onset of the financial crisis, the fed has inflated its balance sheet by some two trillion dollars (i.e., buying t-bills). There is some tussle going on now in those august halls about whether or not we are on the verge of a "double dip" recession, and Bernake is thinking it may have to go to five trillion.

Discuss.

But the current failure to pass the jobs bill is foolish in the Keynesian analysis too. No magic required.

"In Seb's economic world, this should have untethered the "money relation" that he is so afraid will suffer a terrible disconnect. It didn't. We outgrew the debt."

I think you're forgetting about the stagflation years which are EXACTLY the problem I'm talking about.

Seb,

Your fears are utterly misplaced.

http://neweconomicperspectives.blogspot.com/2010/06/europes-fiscal-dystopia-new-austerity.html

Happy 4th

Thanks, bobbyp. Now I'm really depressed. Brett referenced Rush on another thread. I'm thinking of Pink Floyd - specifically Animals.

The pigs (in this case, the FIRE sector) are convincing the dogs (politicians, and upper middle-class voters who think they've gotten theirs - little do they know) to do their (the pigs') bidding in keeping the sheep (pretty much everyone else, who will lose their jobs and meager pension and health-care entitlements) in line. The album ends in a bloody mess when the sheep finally rise up.

We'll all be tea partiers soon, of one sort or another. I'm going to have to re-watch Road Warrior to mentally prepare (since I rely on popular culture to understand the world).

I'm not at all sure how the link you provide is supposed to be a response to me. It doesn't seem to speak much to stagflation nor the wisdom of printing money to pay pensions. Printing money to pay pension obligations has been tried, and it has been VERY ugly for the economies that try it.

Seb: "But the accounting book financial view has to correspond to the real world goods and services view"

So why don't the deficit hawks ever frame the discussion in terms of the ability of the economy to produce real goods and services? Instead they bring up utterly false accounting arguments....as I have repeated endlessly, in order to justify an economic output and distribution paradigm that, quelle surprise (sic), exactly matches their politics.

Who should get what and why. That is the question, not some mysterious debt/GNP ratio that you have never even tried to trot out, or a theory to explain and/or predict what that limit is.

And speaking of repeated requests, you have never explained the Japanese experience.

You would not make a very good DJ.

hairshirthedonist,

I'd watch Mad Max as well, but I'd just yell at the screen repeatedly, "Are you a jieu?", are you a joo?, are you a jeee-ou?", and then I'd get blind drunk and pass out.

So I'll take a pass.

Enjoy the 4th anyway. What the heck.

"So why don't the deficit hawks ever frame the discussion in terms of the ability of the economy to produce real goods and services?"

They do. They call it money, and talk about spending, saving, and earning it.

"Instead they bring up utterly false accounting arguments....as I have repeated endlessly, in order to justify an economic output and distribution paradigm that, quelle surprise (sic), exactly matches their politics."

No. They bring up normal everyday debt discussions about how much debt is wise to incur. You're the one arguing that printing money is no problem.

"And speaking of repeated requests, you have never explained the Japanese experience."

Which experience? It is difficult for me to explain things when you barely allude to them and leave us all wondering how they fit into your discussion.

"So why don't the deficit hawks ever frame the discussion in terms of the ability of the economy to produce real goods and services?
They do. They call it money, and talk about spending, saving, and earning it.

Seb, money is "a financial asset" and I think you're just "adding a confusing and unhelpful mid-step by talking about a financial asset issue" here.

Seriously, Seb, you can't get away with writing this paragraph,

But the accounting book financial view has to correspond to the real world goods and services view. Focusing laserlike on the financial bookkeeping point of view isn't adding value to the discussion when it avoids talking about the actual interaction of goods and services. And Billy is incredibly careful not to talk about that very much. Which is silly because that is where nearly all the hard questions are.
and then responding to bobbyp as you just did. "Real goods and services" is what the unemployed 10% of the workforce could be creating, if not for the absurd conceit that the government would run out of money by putting them to work.

Incidentally, when the DJIA goes up by 800 points (which it has been known to do in a day), the "financial wealth of the private sector" goes up by a trillion dollars or so -- without any immediate increase in the real goods and services available to the nation. Why is it so great when The Market creates a trillion dollars out of thin air, but so horrible when the guvmint does it?

--TP

Why is it so great when The Market creates a trillion dollars out of thin air, but so horrible when the guvmint does it?

I asked this same question of Brett back on the first page and got no answer whatsoever.

So why don't the deficit hawks ever frame the discussion in terms of the ability of the economy to produce real goods and services?

Incidentally, when the DJIA goes up by 800 points (which it has been known to do in a day), the "financial wealth of the private sector" goes up by a trillion dollars or so

Asked and answered.

Why is it so great when The Market creates a trillion dollars out of thin air, but so horrible when the guvmint does it?

The market hadn't created a trillion dollars out of thin air. It would have if people had cashed out of their stocks and realized that gain, but that did not happen, and would not have happened had it had been tried.

Stock valuation != cash-in-hand.

Yeah, I know: for every transaction, there must be a seller.

More coffee is needed, clearly.

I guess I'd say, just prior to More Coffee, that long-term wealth "generated" by market swings, if unsustainable, results in a bubble.

Do we want to generate a public-sector bubble on purpose?

I'm wondering how good a question that's going to look like, to me, after the caffeine infusion.


If there's anything I can't stand, it's an unemployed person standing in front of me at the grocery buying a six-pack of Colt-45, a package of pork chops (thick-cut mind you), and some of that deluxe Sara Lee cheesecake with their gal-darned food stamps......

...... while they track their high-frequency trading account at Goldman Sachs and shout "Sell, Yves, for Godssake sell!" into their I-phone to their broker in Switzerland.

The Dagny Taggert in me wants to take time out from humping the Chrysler Building and do the fascist two-step on their hobo foreheads with my stiletto heels.

The market hadn't created a trillion dollars out of thin air.

Wait, what? Surely, somebody, someplace was claiming that value on a balance sheet. And aren't those values counted as part of the M2 measure of the money supply?

(Sorry for calling you "Shirley.")

"Do we want to generate a public sector bubble on purpose?"

Nah, I don't think anyone wants to do that, but when you have multiple private sector bubbles deflating all around you, the public sector needs to emit some oxygen into the atmosphere to dilute the helium escaping from the private sector.

It doesn't matter anyway ... as Krugman points out, we are in a deflationary Depression now thanks to the G-20 and the assorted Andrew Mellons among us, including the "conservatives" in the U.S. Senate whose hatred of the black man in the White House is so great that they have taken the hapless unemployed hostage.

Just to be redundant in following John Thullen's comment with this one, I'll say that it's getting tiresome hearing about MMT advocating, without qualification, the expansion of the money supply. It's stated over and over and over again that there are conditions under which this can be done without significant risk of problematic inflation. It's not that you can always print more money.

I also think saying that MMT doesn't consider real resources and real world effects of fiscal and monetary policies is entirely backwards. I don't know what people are reading if they say that. What focus there is on pure accounting is in response to the excessive focus on the same by mainstream economists. The whole point of MMT is to focus on real resources being used properly and putting unused resources to work to increase real value for the people most in need of it, rather than worrying about unsubstantiated, theoretical accounting rules at the expense of that very focus.

You can disagree with MMT, but you need to know what it's saying first.

"....out of thin air."

This seeming miasma does have real effects. The 'wealth' created by the real estate bubble had real effects, and it does not take everybody 'realizing' their gains by selling their houses, or taking out 2nd mortgages to do so.

Please Google "wealth effect". It is not a new term in economics.

Seb: Japan has a public debt to GNP ratio of 170%. They have engaged in huge deficit spending for years. Their interest rates are extremely low. Their currency is sound. Your take would imply massive inflation.

Where is the inflation? Where is the financial collapse?

It's not there.

One edit: What seemingly excessive focus there is on pure accounting is in response to the excessive focus on the same by mainstream economists.

It would have if people had cashed out of their stocks and realized that gain

How about if one party sold the promise to pay another party funds sufficient to make the other party whole if they lost money on an investment? Regardless of whether (oops!) the first party was capable of doing so?

You can call it sleight or hand, or say that it's not a real gain, and I'd agree with both statements, but somebody cashed those bonus checks.

Just to kick what may be a dead horse, I want to offer the following and, in my opinion, key quote from billy blog:

So the purpose of State Money is to facilitate the movement of real goods and services from the non-government (largely private) sector to the government (public) domain. Government achieves this transfer by first levying a tax, which creates a notional demand for its currency of issue. To obtain funds needed to pay taxes and net save, non-government agents offer real goods and services for sale in exchange for the needed units of the currency. This includes, of-course, the offer of labour by the unemployed. The obvious conclusion is that unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save.

This analysis also sets the limits on government spending. It is clear that government spending has to be sufficient to allow taxes to be paid. In addition, net government spending is required to meet the private desire to save (accumulate net financial assets). From the previous paragraph it is also clear that if the Government doesn’t spend enough to cover taxes and the non-government sector’s desire to save the manifestation of this deficiency will be unemployment. Keynesians have used the term demand-deficient unemployment. In our conception, the basis of this deficiency is at all times inadequate net government spending, given the private spending (saving) decisions in force at any particular time.

For a time, what may appear to be inadequate levels of net government spending can continue without rising unemployment. In these situations, as is evidenced in countries like the US and Australia over the last several years, GDP growth can be driven by an expansion in private debt. The problem with this strategy is that when the debt service levels reach some threshold percentage of income, the private sector will “run out of borrowing capacity” as incomes limit debt service. This tends to restructure their balance sheets to make them less precarious and as a consequence the aggregate demand from debt expansion slows and the economy falters. In this case, any fiscal drag (inadequate levels of net spending) begins to manifest as unemployment.

The point is that for a given tax structure, if people want to work but do not want to continue consuming (and going further into debt) at the previous rate, then the Government can increase spending and purchase goods and services and full employment is maintained. The alternative is unemployment and a recessed economy. It is difficult to imagine that an increasing deficit will be inflationary in a recessed economy because there are so many underutilised resources, both capital and labour.

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