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Bernie Sanders: Self-shackled Champion of the People

1:48 pm in Uncategorized by letsgetitdone

I gotta love Bernie Sanders, because he seems so much like people I grew up with and like myself too, and he also seems to have that passion for equality and democracy that is so important for the future of America. Sometimes I think Bernie is one of the few champions of the people left in Congress. But I also think that along with other progressives he has constructed chains for himself that prevent him from being as effective a champion of the people as he otherwise might be.

His chains are the chains of either false beliefs or a decision not to speak the truth about fiscal matters for fear that the “very serious people” in the Washington village will marginalize him even more than they do right now. I can’t say which of these is true, but I think whichever reason is operative, his self-shackling hurts his effectiveness.
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Dick Durbin Insults Everyone Else’s Intelligence About Social Security

3:33 pm in Uncategorized by letsgetitdone

Yesterday on Fox, Senator Dick Durbin said:

WALLACE: I’m going to talk about ObamaCare on a second, but you’re not answering my question. Why does taxes — why do taxes have to be on the table? Why can’t you just make a deal, short-term spending for long-term entitlement reform — which, Senator, you support and President Obama support. You have supported the idea of some entitlement reform.

DURBIN: That’s right. I do, and I’ll tell you why — because Social Security is going to run out of money in 20 years. I want to fix it now, before we reach that cliff.

Medicare may run out of money in 10 years, let’s fix it now. And that means addressing the skyrocketing cost of health care. That’s what ObamaCare is focused on, and yet, the Republicans want nothing to do with it.

If we don’t focus on the health care and dealing with the entitlements, the baby boom generation is going to blow away our future. We don’t want to see that happen. We want to make sure that Social Security and Medicare are solid.

The “. . . may run out of money. . . . ” and “. . . dealing with entitlements. . . “ memes, in reply to Chris Wallace’s question suggests that a deal trading increased revenues for Social Security and other entitlement cuts is acceptable to him. So, Durbin’s argument is that because Social Security Trustee and CBO projections, based on very pessimistic economic growth projections for the whole period, show a shortfall in the Social Security “Trust Fund” in 20 years, it is acceptable to make entitlement cuts now if the Democrats can get increased revenue from higher taxes, as if entitlement “reform” were the only way to meet the perceived Social Security solvency problem. But who would it be acceptable to? Read the rest of this entry →

Lavoie’s Critical Look at Modern Money Theory: A Reply

5:38 pm in Uncategorized by letsgetitdone

In October 2011 Marc Lavoie, a post-keynesian economist, very friendly to Modern Money Theory (MMT) wrote a paper presenting a friendly critical look at MMT. In his conclusion, Lavoie states that “. . . the neo-chartalist analysis is essentially correct . . . “ affirming his substantial agreement with MMT’s analysis of banking operations and fiscal realities in nations with non-convertible fiat currencies, with floating exchange rates and no debts in currencies they do not issue, as well as MMT’s analysis of Eurozone viability. But he goes on to say (p. 25):

“There is nothing or very little to be gained in arguing that government can spend by simply crediting a bank account; That government expenditures must precede tax collection; that the creation of high powered money requires government deficits in the long run; that central bank advances can be assimilated to a government expenditure; or that taxes and issues of securities do not finance government expenditures.”

So, Lavoie questions the wisdom of MMT economists and writers making certain counter-intuitive statements he perceives as certainly questionable, perhaps untrue, and also confusing to people, economists and decision makers trying to understand MMT writings. He considers these statements an important barrier to understanding, and he wants this ‘baggage’ to be discarded because he thinks it hurts MMT and post-keynesian efforts to get important new approaches to economics accepted.

Recently, Lavoie’s work was used in a very vigorous and important discussion at Rodger Malcolm Mitchell’s Monetary Sovereignty web site by a commenter named “Tom,” questioning some of Rodger’s formulations and the statements of other commenters who defended the MMT and MS positions. I participated in the discussion, but also concluded that it would be more useful to write a more formal reply to answer Lavoie’s question of what is gained by taking some of the positions MMT and MS writers often take. This is my reply.

The Consolidated Government Assumption

Well, let’s set the parameters of this discussion. When MMT writers refer to the Government, they don’t mean just the Executive Branch or the Treasury. They include in “the Government,” the whole central government including the Congress, the Supreme Court, and the so-called “independent agencies” including the Federal Reserve — the Central Bank of the United States. Now, there is wide disagreement about whether the Fed, comprised of its Board of Governors, the Federal Open Market Committee (FOMC), and the Regional Fed Banks are a Government agency. I won’t try to resolve those disagreements in this post. I’ll just assume for purposes of this discussion that the system comprised of these institutions and their interaction as created by the Congress, is part of the Federal Government under the full authority of the Congress to regulate.

Whether this is right or not is disputable, and I’m sure some of my friends among the commenters will dispute it. But, what is not open to dispute is that when MMT writers make the claims attributed to them by Lavoie, this is what they are assuming. So, if one wants to refute these claims he or she must argue against the basic assumption, or failing that one must critique the MMT claims by first stipulating to that key MMT assumption, for the sake of argument.

Lavoie disagrees with the MMT assumption that it is useful to see the Government, especially the Treasury and the central bank, from a consolidated point of view for purposes viewing the reality of fiscal operations. He does not dispute this by claiming that the central bank isn’t part of the Government, and in my view he presents no compelling argument why the MMT conceptual consolidation of the Government and the central bank is incorrect; but, in spite of this he opts to view the Government and the central bank as separate entities because he finds that view more illuminating for his own analytical purposes.

He’s entitled to do this, of course. But, in evaluating his view that MMT gains little or nothing from various statements it makes, I think one needs to keep in mind that what is gained may look different if one accepts the consolidated Government point of view than if one doesn’t. Now, let’s get to each of the MMT claims Lavoie questions and try to answer his question about what is gained by asserting them.

“Government can spend by simply crediting a bank account;. . . ”

I think MMT economists and writers point this out because it is true, provided that all parts of the Governmental spending system are aligned. That is, if spending is appropriated by the Congress and the Federal Reserve banking agent of the Treasury places the reserves in the Treasury General Account, then the Government can, and most often currently does, spend by crediting private sector bank accounts. So, the question now becomes what is gained by simplifying the above explanation into the short claim above?

And the answer is that MMT wants people to know that their Government, as a whole, can spend freely if it wants to, because if MMT can convey that message to people, then they will be in a position to deny the claims of the austerity-mongers that the Government just doesn’t have the money and cannot get it, because it must either tax or borrow, and then face inescapable “funding” constraints on both options. If we could get to the point of public recognition that such a claim is false, then that would be a great, enabling, political gain in the fight for MMT-based policies.

Looked at in other words, MMT writers see the power of the austerity position on fical policy in its claim that “There Is No Alternative” (TINA). The idea that the Consolidated Government spends by simply marking up accounts creating its fiat money in the private sector is a powerful one in beginning to make the case that “There Are Good Alternatives” (TAGA) to austerian fiscal policy.

“. . . government expenditures must precede tax collection; . . . “

MMT doesn’t exactly say that. What it says, as Lavoie recognizes in his detailed analysis in the paper, is that from a logical point of view there has to have been government spending of the currency unit of choice allowing people to accumulate that currency, before it can be used to pay government tax obligations. That doesn’t mean that MMT is saying that government spending must precede tax collections on any given month, or given day, or given year. As Stephanie Kelton puts it in her account of the way in which deficit spending creates net financial assets:

“As we in the MMT tradition consistently insist, spending must, as a matter of logic, precede taxation in the first instance (for it would be impossible to collect dollars from the private sector unless they had first been spent into existence by the public sector). But in the real world, the Treasury receives tax payments on a daily basis, and government checks are clearing bank accounts on a daily basis as well. So there is really no objective beginning point or ending point. You can begin with spending if you prefer. But it will not alter the result.”

So, I think Lavoie has overstated this MMT claim. If he doubts the validity of the claim made as a point of logic then I think it’s up to him to explain how people can have the currency needed to pay taxes without the Government, in the MMT meaning of that term, spending in the first place to originate the process of establishing the legitimacy and value of the currency.

“. . . the creation of high powered money requires government deficits in the long run; . . . “

High-powered money includes cash money and reserves emanating from the Government, including the Federal Reserve. If there’s no deficit spending the Government is destroying as much money through taxation as it is spending/creating. And so, it is not doing any net high powered money creation. MMT writers simplify a bit when they they say “the creation of high powered money” rather than “the net creation of high powered money” but I think it’s easy to excuse the simplification since the word “net” tends to make people’s eyes glaze over, and much MMT writing is an attempt to communicate with the broader public, rather than just other economists.

Lavoie seems to think that net high powered money creation isn’t necessary for an economy, even if it is good to have. He says:

“While I would certainly agree that government deficits in a growing environment are appropriate, as it provides the private sector with safe assets, which can grow in line with private, presumably less safe, assets, it is an entirely different matter that government deficits are needed because there is a need for cash. Even if the government keeps running balanced budgets, central bank money can be provided whenever the central bank makes advances to the private sector.”

Of course, it’s true that the central bank can provide money to the private sector through lending and asset swaps; but this kind of money creation is not net money asset creation unmatched by a corresponding liability. So, all it can do in the long run is to produce unsustainable credit bubbles that will periodically crash the economy, rather than net money asset creation, which can support the continuous creation of real wealth.

The gain in using formulations like the one Lavoie critiques is that these and related expressions provide a counter to the conditioning of people to the idea that deficits are somehow a negative state that ought to be avoided as much as possible. Lavoie is certainly no opponent of deficit spending, but I think perhaps, he’s not giving deserved recognition to the difficulties MMT economists have been having in fighting the world view of austerity that looks at deficits as overwhelmingly negative states that ought to be minimized and eventually avoided. A negative view of deficits as immoral is fundamental to the austerity posture in fiscal politics. If we can get people to agree that deficits are necessary for nominal wealth accumulation in the longer run, then we will greatly weaken the negative view of deficits that is so important to austerians.

“. . . . central bank advances can be assimilated to a government expenditure; . . .

I’m not sure what Lavoie has in mind here. It’s not clear to me what he means from the analysis in his paper, and I’ve never seen an MMT writer say anything like the above statement.

“. . . taxes and issues of securities do not finance government expenditures. . . . ”

Lavoie wonders what is gained by a statement like this after he has shown through an analysis using T-accounts that the Treasury borrows from the private sector when it needs to deficit spend. Then he says (p. 18):

“The purpose of this whole exercise is to show that there is no point in making the counter-intuitive claim that securities and taxes do not finance the expenditures of central governments with a sovereign currency. Even in the case of the US federal government, securities need to be issued when the government deficit-spends, and these securities initially need to be purchased by the private financial sector. It seems to me that the consolidation argument – the consolidation of the central bank with the government – cannot counter the fact that the US government needs to borrow from the private sector under existing rules.”

However, it’s just not true that the Consolidated Government needs to borrow from the private sector to deficit spend under existing rules. Here are four reasons why this is not so.

First, “existing rules” include the Constitution of the United States which states the most fundamental rules of all for the Consolidated Government. Article One of the Constitution provides Congress with the authority to create money without limit and to appropriate spending with or without borrowing. That authority is a fact. And it is important for people to recognize that any constraints on the authority to create money without issuing debt instruments that may exist in current practices are, as MMT says, self-imposed constraints.

Second, apart from existing constitutional authority to delegate authority to the Treasury to spend without borrowing, there is also the fact that in addition to those rules that appear to constrain the Treasury component of the consolidated Government to only taxing and borrowing to deficit spend, there is also legislation that allows the Treasury to coin money, deposit it at the Fed, force the Fed to provide reserves in return for that deposit, and proceed to have the seigniorage revenue resulting from this process “swept” into the Treasury General Account (TGA), the spending vehicle of the Federal Government.

Seigniorage has always been a relatively minor source of reserves for Treasury. However, an act passed in 1996 provides the authority to mint platinum coins of arbitrary face value to use in the process of gaining seigniorage. Face values on these coins can be in the many trillions of dollars and can fill the public purse to arbitrarily high levels. These reserves can only be spent on Congressional appropriations and repaying Federal debts and interest due, so this capability doesn’t take away the purse strings from the Congress. But it does make Lavoie’s claim that the consolidated Government needs to borrow from the private sector to deficit spend under existing rules untrue; even overlooking the constitutional authority of Congress to amend current constraints on the Treasury’s ability to generate reserves “out of thin air.”

Third, there is the issue of whether the Treasury is really borrowing money, when it issues debt instruments in return for the Consolidated Government’s own fiat. MMT economists often point out that when the Government “borrows” money it is not like you or I borrowing money. Yes, the Government must repay in both cases, and in both cases the term ‘debt’ is used. But, a) the Government’s debt is more like the liability of a bank to its depositors, than it is like the liability you or I might have to the bank.

The Government, in selling its debt, is functionally providing the equivalent of a time deposit opportunity to depositors, rather than borrowing money from people who are incurring a risk that they won’t be repaid. In fact, the Government’s “time deposit” carries the same risk with it that a “time deposit” placed in a bank does, since it is the Government that insures such deposits.

And b) what sort of ‘debt’ is it that provides no burden at all on the borrower and pays a return to the lender without exposing that lender to risk? It certainly isn’t like a ‘debt’ that you and I or any user of a currency incurs. The reason is that the power and authority of the consolidated Government to create reserves is unlimited, so no matter how circuitous the process of generating those reserves may be, the issue is never in doubt. The Government can always create the reserves it needs to repay its debts. And under the 14th Amendment, to the US Constitution, section four, the US cannot default on its ‘debts.’

Fourth, “the counter-intuitive claim that securities and taxes do not finance the expenditures of central governments with a sovereign currency” is true if one considers carefully the term “finance.” When you or I have to “finance” our spending we must do it from money we acquire from others through our economic activity including our lending. But, the Consolidated Federal Government in the end creates money from the Fed’s power to generate reserves, and the Treasury’s (US Mint’s) power to generate currency (ordered by the Fed) and coins.

The Treasury may tax and borrow as an important part of its spending operations, but that doesn’t mean that it is the Consolidated Government that ultimately “finances” these spending operations through these measures. The Treasury may use these measures plus seigniorage to generate the reserves that end up in the TGA; but the Consolidated Government, viewed as whole, ultimately enables and facilitates the Treasury’s spending through exercising its collective authority to create reserves by fiat in the TGA in response to Treasury’s tax, debt instrument sales, and seigniorage-producing activities. It does not “finance” its spending in the manner we normally associate with the term “finance.”

So, what do MMT writers gain by claiming that the Consolidated Government doesn’t ”finance” deficit spending by “taxing” or “borrowing?” I think the answer is that we continue to underline the central point that governments sovereign in their own currency have no solvency concerns, because they have an unlimited capability to generate nominal wealth. This point is very central to both MMT and MS, because it implies that austerity is an untenable position in fiscal policy, and that the whole litany of neoliberal concerns about the sky falling someday because the Government is running out of money is just a fairy tale.

This point is where the action is politically, and much of the effort of MMT and MS writers is devoted to demonstrating it in various ways, and underlining it again and again in order to overthrow the neoliberal paradigm of economic thought. I think that overthrow is our main messaging objective, and that objective is served by the various counter-intuitive statements that Lavoie views as “baggage” MMT ought to get rid of.

For my part, I think these statements are both true and also important in creating our alternative paradigm. Paradigms advance by creating cognitive dissonance in those who accept the old paradigm or who are neutral in relation to that paradigm. That is, I think, exactly what we are doing.

And out of that dissonance we are beginning to see change. Let us hope that we will see that change accelerate over the next few years so that the world and its various nations will be able to end the global move toward plutocracy, and a new feudalism that is gradually impoverishing the middle class and ending the hope brought by freedom and democracy everywhere this new feudalism advances.

(Cross-posted from New Economic Perspectives.)

What Social Security/Medicare Solvency Problem?

8:56 pm in Uncategorized by letsgetitdone

For years now, economists using the ideas of Modern Money Theory (MMT) have been telling us that the so-called long-term “funding” problems of Social Security (SS) and Medicare emphasized incessantly by supporters of austerity are faux problems. The MMT economists believe this because the US is a currency issuer of a non-convertible fiat currency, has a floating exchange rate, and incurs no debts in any currency except US dollars. So, the US Government can issue whatever financial resources it needs to carry out its obligations without raising any solvency issues. The only problems involved in carrying out these obligations are problems of political will, not problems of financial incapacity, which is why, from an economic point of view, they are faux problems.

There are other economists who also believe these are faux problems, even though they don’t subscribe to the view that the government can’t become insolvent. They also view them as problems of political will because they think that the SS long term “solvency” issue can be easily solved by Congress just by lifting the payroll tax cap on income; while the problem of rising health costs threatening long term Medicare “solvency” is easily solved by passing a Medicare for All bill such as HR 676, which creates a single-payer for most health care services and puts the private insurers out of business, while holding down provider costs through negotiations.

Still other economists and fiscal policy analysts, believe, or say they believe, that the Federal Government does have fiscal limits, that the Government can only fund activities through taxing or borrowing, that deficit spending must be avoided or kept to a low level because it corresponds to growth in public debt, which will eventually create spiraling interest rates in the bond markets leading to financial insolvency for the United States, or at least to very damaging periods in which the US must impose extreme austerity on its citizens and forgo economic growth, because it must, at all costs, reduce its public debt substantially, and in short order.

These “austerians” suggest that this last fate be avoided by cutting deficits now, and, even more, by implementing long term deficit reduction plans that cut entitlements. Since the passage of the stimulus bill in 2009, the counsel of austerians of varying degree has dominated the US Government leading to conflicts among some who want to lower deficit spending to extreme levels and others who want to lower deficits more gradually and to levels a bit higher than their “starve the beast” opponents. Despite conflicts among them, the austerians have, through a few rounds of “debt ceiling,” fiscal cliff,” and “sequester” conflicts managed to implement considerable deficit reduction with serious costs to the economy and efforts to decrease unemployment substantially.

This conflict has created the present situation where the sequester and recent increases in Social Security taxes have set the stage for a “grand bargain” that would begin deep cuts in entitlements by implementing the Administration’s “chained CPI” proposal. But, a number of things have now happened to slow down the austerity train and even threaten its derailment.

Reality, the Austerian Retreat, and Entitlements

The first of these things has been the record of austerian deficit reduction efforts from 2010 to the present. The impact of austerity on economies the world over has been abysmal. Unemployment in many economies, including many of the Eurozone nations is now at levels not seen since the Great Depression, and in is even higher in some nations, especially among younger workers. In addition, in many nations brutal cuts in government spending have only increased deficits and debts while creating greater unemployment.

Nations like Canada, Australia, New Zealand, and the US, which haven’t implemented extreme austerity after initial stimulative reactions to the crash of 2008, but also have put in place efforts at deficit reduction in response to increasing influence of the austerians, haven’t suffered as much as other nations that have implemented full bore austerity. But they have suffered losses in employment and economic slowdowns as a cost of lowering deficits. The UK, which like the US, could have chosen to be less aggressive about deficit reduction, instead elected a Conservative-Liberal coalition that bought into the dogma of “expansionary austerity” and created a declining economy suffering periodic dips after the initial recession.

Second, the intellectual underpinnings of austerity have recently taken a big hit from academic studies showing spreadsheet errors, and various other errors in analysis, in the major academic studies supporting the idea that public debt-to-GDP ratios cause slower GDP growth. More and more analysts and observers now seem to believe that it is likely that low growth causes high public debt, rather than the opposite belief, which had fueled the austerity efforts of politicians and government officials.

Third, in the United States, the deficit reduction outcomes of Congressional/ Executive conflicts, while reducing actual deficits somewhat, have reduced projections of future deficits even more, and are perceived as both having reduced actual deficits and as holding back economic recovery. So, political sentiment has been gradually building against additional austerity efforts. There is now much opposition to further deficit reduction including opposition to proposals providing for entitlement cuts. And there are claims from progressives that “austerity is dead,” and advocacy that we should no longer make deficit reduction the centerpiece of fiscal policy but should immediately shift to an emphasis on creating jobs.

This past week saw a recent important defection from the ranks of advocates for austerity. The Center for American Progress (CAP) published a report by Michael Linden which concludes:

What does it mean to reset the debate? First, it means starting from the understanding that there is no longer a looming fiscal crisis—if there ever even was one. . . . .

Second, resetting the debate means discarding other fiscal theories that have fared poorly over the past several years. . . .

Third, we must recognize that there are costs to elevating deficit reduction above all other concerns. . . .


. . . . we can no longer afford to pretend as if the benefits of deficit reduction always, in all circumstances, outweigh the costs. And we cannot allow the continued perception of a deficit-reduction imperative to prevent us from fixing the sequester and avoiding more economic damage.

It is time to reset the entire budget debate. No more pretending that the sky is falling. No more rash actions to cut the deficit without regard for real-world impacts. No more calls for an ever-elusive grand bargain. No more super special committees or draconian automatic punishments intended to force action. Improving our national finances is still an important goal—that has not changed. But so much else has, and the debate must change too.

It is good to see this beginning of wisdom, and even implied opposition to entitlement cuts, in a report from an organization with direct lines to the White House. But it’s important not to mistake this report, with its fine rhetoric, for actual opposition to the Federal Government continuing to pursue an inadequate level of deficit spending to simultaneously contain the growth of debt while somehow creating substantially lower levels of unemployment than we have now.

Progressives and Centrists like CAP still don’t understand that austerity is destroying private sector net financial assets by cutting government spending and/or raising taxes in such a way that Government additions of net financial assets to the non-government portions of the economy (government deficits) fall to a level low enough that they are less than the size of the trade balance, whether in deficit or in surplus. Right now the trade deficit is 3.5% of GDP. That means Government deficits must be at least 3.5% of GDP to prevent contraction in net private sector financial assets. That’s a roughly a $560 B deficit in 2013, just to remain in place. CBO’s latest projections are for a deficit of $642 Billion this year, a bit higher than break even; but not by very much. The deficit could well be smaller than that, however, since it’s dropping fast.

If the economy recovers further, it’s likely that the trade deficit will grow larger as a proportion of GDP. If the Government deficit isn’t allowed to grow, then the result will mean declining net financial assets and greater inequality since the scramble for declining net financial assets will favor the economically well-positioned over most of the rest of us.

The question is: will the progressives and centrists who have had enough of austerity be ready to run deficits large enough to both compensate for the trade deficit and also allow enough saving of net financial assets to fuel renewed aggregate demand and the growing consumption needed for an expanding economy? Since deficits large enough to do both might range anywhere from 6 – 10% of GDP or more, I doubt that they will be up for that, because despite their protestations about leaving austerity behind, their de-emphasis on deficit reduction doesn’t mean they’ve abandoned their fear of increasing debt-to-GDP ratios, or their belief that high debt-to-GDP ratios are hurtful to economies.

In fact, a recent “austerity is dead” post at Think Progress (a project of the Center for American Progress Action Fund) in advocating for Michael Linden’s recommendations to repeal the sequester at least for the next few years, and invest $82 Billion (roughly 1/2 of 1 percent of GDP) on “pro-growth investments” to create jobs, cites the CBO projection favorably that shows the deficit falling sharply right now, and falling below 3% annually in 2014 and staying below that level until 2019.

But that projection is actual government austerity from now until 2019, barring a substantial decrease in our trade deficit over that period. Also, if there’s no private credit bubble during this time, it’s very likely that the economy will do nothing but stagnate until 2019 and beyond. We are looking at a Japanese “lost decade” scenario for the US economy.

And most “progressives” don’t see it because while they joyously proclaim that “austerity is dead,” they also, with equal joy, plan for austerity-level deficits of 3% or less for the foreseeable future. Now hear this CAP, Campaign for America’s Future, and other “village” DC/New York progressive organizations: Warren Buffett’s 3% deficits are the very essence of austerity, as the Eurozone well knows.

Make no mistake about that. So, when you tell us that “austerity is dead,” please don’t tell us at the same time that you’re planning to maintain deficits at the 3% level or below, and with them austerity for the indefinite future.

And how about the more determined austerians? What do they think about the death of austerity? Well, generally, they don’t believe it. They still hold that high debt-to-GDP ratios are problematic for growth. And while they’re now willing to grant that it may be wise to back off deficit reduction somewhat in order to emphasize job creation a bit; austerians like the Peter G. Peterson Foundation, and the Washington Post editorial writers, are still persuaded that now is the time to pursue arrangements for long term spending reductions in Social Security and Medicare entitlements. So, for them, and for the White House, pursuit of a “grand bargain” is still not off the table that the President has so persistently set, since at least the beginning of 2010.

In brief, the hard-core austerians still believe that deficits and the GDP ratio are very important and must be reduced even at the cost of considerable economic pain for those who aren’t wealthy. Given their view, it’s unwise for people who really think that austerity is, or should be, dead to relax now, because it’s a good bet that if the austerians can make a deal with the Republican right to reduce entitlement spending, then they will do just that, and also spring their deal on Congress suddenly and at the last moment.

The No Debt/No Inflation Platinum Coin Solution to the “Long Term Entitlement Solvency Problem”

So, let’s address a solution to the long-term entitlement spending solvency problem that really kills austerity for entitlements dead. Of course, it’s a faux problem in the sense that there is no economic or financial solvency problem, since the Federal Government can never involuntarily run out of money to pay Social Security and Medicare obligations, as long as Congress is willing to provide the authority to meet those obligations. But there is a real political problem in that Congress may decide not to do that because spending on entitlements in future years may exceed FICA tax revenues year after year until “the trust funds” cannot “cover” the deficit between annual tax revenues and annual spending.

The austerians want to solve this political problem by cutting back on entitlement benefits. “Progressives” want to solve it by eliminating the income cap on FICA taxation. The advantages and disadvantages of both solutions are very well-known so I won’t repeat them, but will just point out that both will subtract net financial assets from the economy, and offer a third solution that doesn’t have that problem.

That solution is for the Executive Branch to use its Platinum Coin Seigniorage (PCS) authority under 31 USC 5112(k) and 31 USC 5136 to mint a single proof platinum coin each year to cover any shortfall between FICA revenues and spending on Social Security and Medicare. If that were done annually in advance, based on projections, then there would be no further depletion of the “trust fund” credits, and no further political issue of Social Security and Medicare insolvency.

This solution also has at least the following other advantages.

– It requires no Congressional action to implement. The necessary authority is there already;

– It will not increase spending, beyond that already scheduled for Social Security and Medicare, so it won’t add any inflation beyond that already built into the system;

– It will not increase the public debt subject to the limit, so that worry needn’t trouble people;

– It will educate people about the fact that the Government can spend without having to tax or borrow if it needs to do that;

– It will educate people about PCS as an alternative to taxing and borrowing;

– It will educate people to the idea that neither the Treasury nor the Government can become insolvent because it can always mint coins;

– It will educate people about the fact that the US Government need not ever borrow back its own previously issued currency from anyone else, unless it wants to;

– It will educate people to the idea that their grandchildren won’t have a burden of public debt that they can’t always easily pay back by using PCS;

– It requires neither an increase in taxes nor cuts in Social Security or Medicare benefits.

– Also, if benefits were increased in the future there wouldn’t need to be any tax increases to “fund” them.

– It would be a great political success for any President who did this, because it would have the effect of safeguarding the major components of the safety net for good, and that President would be remembered by a grateful populace for having done that.

There are, of course, some disadvantages to this third solution, too.

– The opposition to the President will attack she or he for using PCS, claiming that it is the dreaded “printing money,” practiced, so infamously, by the Weimar Republic and Zimbabwe. This may be an effective attack in holding down the President’s approval rating for a limited period of time; but once people observe that no inflation results from using PCS, this attack will fade away; it’s effectiveness destroyed by experience and reality;

– To make PCS effective, the President may have to force the Federal Reserve Chairman to create reserves in exchange for Treasury’s platinum coins. This may create a firestorm politically if the Fed Chairman resigns in protest. However, eventually, the President will find a successor who will credit the Mint’s Public Enterprise Fund (PEF) account for platinum coins with very high face value, because the law is clear that in cases of disagreement between the Fed and the Secretary on matters of interpretation, the opinion of the Secretary is to prevail.

– The opposition may attack the President for “grabbing more power.” This may make a few headlines; but since the President’s action would halt any further depletion of the Social Security and Medicare “trust funds” it is hard to see the public either disapproving of the action, or getting motivated by any perceived power grab.

– The opposition to the President in Congress may become enraged by the loss of leverage against entitlement spending they experience as a result of the Administration using PCS to stop depletion of the “trust funds.” However, I can’t see this anger going anywhere unless it somehow gets extended to the country at large. But, then again, the only reason why most people would get angry at this is if inflation were somehow triggered using PCS. Since this is a very unlikely prospect, the anger in Congress will just go to ground in the sweep of events.

Two weeks after the minting each year, there will be other issues to fight about. After a few years of use, PCS will be institutionalized as the way to ensure the sustainability of Social Security and Medicare regardless of fluctuations in the economy and in tax revenues.

So, that’s it. Using PCS to cover the shortfall between entitlement spending and FICA revenues is a quick and relatively easy solution to the political problem of ensuring that the Social Security and Medicare “trust funds” are sustainable, provided that a president will use it. When will this, or the next, or the next president make this happen and really kill “austerity” politics targeting the entitlements that most Americans love so well? When will this or some future president hear the voice of the people?

(Cross-posted from New Economic Perspectives.)

The Fiscal Summit Counter-Narrative: Part Three, Are There Spending Constraints On Governments Sovereign in Their Currencies?

8:29 pm in Uncategorized by letsgetitdone

An issue at the core of all the fuss about fiscal sustainability is Government solvency. The deficit hawks and doves believe that Governments sovereign in their own currency can run out of money if they keep deficit spending, and keep borrowing to do it. They believe that if deficit/debt levels are high enough, then Government insolvency can occur, because eventually the burden of interest on the public debt will crowd out all other public spending and investments. So, they are for working towards debt/deficit reduction, “reforming” (i.e. cutting) entitlement spending, and raising taxes, though not necessarily on the rich.

The counter-narrative of Modern Monetary Theory (MMT) is that such a currency issuer can never involuntarily run out of money, though it can default voluntarily from an excess of stupidity. And because such nations can’t run out of money and can buy anything for sale in their own borders, including all labor resources, that means that their governments can spend what they need to spend to help solve the problems they encounter. They can afford job guarantees for anyone wanting full-time work at a living wage with a full package of fringe benefits, universal single-payer health insurance for all, a first class educational system, re-inventing their energy foundations, cleaning up their environments, re-creating their infrastructure, and doing anything else necessary to create good, democratic societies. For Governments sovereign in their own currencies, running out of money is never an issue. The real issues are resource constraints, political constraints, and constraints of poor decision making. But they are not fiscal in nature.

So, the critical issue of government financial solvency was a major topic in developing the counter-narrative of the Teach-In. Stephanie Kelton, Associate Professor of Economics at the University of Missouri, Kansas City gave the presentation on this topic. It was a model of clarity. Audios, videos, presentation slides, and transcripts for the presentation are available at selise’s site and a slightly different version of the transcripts is available from Corrente as well.

Stephanie Kelton’s Presentation On Spending Constraints

Stephanie began by point out that the name Modern Money Theory is not a name the MMT economists gave to their approach. Instead people following what they were doing “started referring to us as the Modern Money School and to our ideas as Modern Money Theory” (MMT). Stephanie also said that this is unfortunate:

“. . . because it is something of a misnomer. What we’re doing is actually not modern at all. The ideas are not theoretical, and they aren’t particularly modern. What we’re doing is simply describing, operationally, the way government finance works. It’s not a theory; we do not make assumptions, . . . . but rather . . . attempt to simply describe the way in which the institutional arrangements are set up, and the accounting identities and what happens in a balance sheet framework; when one side of the equation moves, what happens on the other side of the equation?

“What we didn’t do, I guess, a lot of this morning is really to talk about money, and what is money. And, while there were some references to accounting, and blips on a screen and button pushing and so forth, we didn’t really distinguish what we’re talking about in Modern Money Theory from what most of the textbooks describe and what our students end up getting taught in most economics programs across the globe.”

After a brief discussion of some of the historical sources of the approach in the work of Georg Friedrich Knapp, John Maynard Keynes, and Abba Lerner, Stephanie turns to accounts of the origins of money. She describes the theory that currency arose spontaneously out of a need to transcend barter as a means of exchange in markets.

“The private sector figures out that there’s a more efficient way to conduct exchange. They choose to use money. They decide what money is. And this all happens without imposition from any authority, no state, nothing like that. So the money is stateless. And, then of course, over time, money evolves (I’m still in the textbook story) from things like primitive money to gold and then to paper with gold backing. People take paper in exchange for real goods and services and the argument is – well, but at the end of the day, it’s as good as gold. So they continue to accept the paper.

“Then the story gets more difficult to explain, for this group. Sometimes we call them the Metalists because, when you have a pure fiat money system, why do people accept currency, that is intrinsically worthless, backed by nothing of value, and yet people will beg, borrow, steal, toil away the day, in order to get these otherwise worthless pieces of paper?”

So, then Stephanie counterposes the MMT theory of the origins of money, tracing “the nature and origin of money to the early authorities . . . the money does not emerge spontaneously by the will of the people, but it is imposed on them.”

”How is it imposed on them? It is dictated by the authority. It is chosen. The authority establishes that you all must pay something to me. I define the unit of account. In the United States, the unit of account is the dollar. So I say in what unit you must pay obligations to me and then I tell you what you have to do to eliminate those debts. And so, I impose a tax liability on you. I make you indebted to me. Now you need to do something to eliminate your obligation to me. And I tell you how you can do that. In the United States, you can earn dollars. You pay your tax obligation to the state in U.S. dollars. That gives value to the government’s otherwise worthless pieces of paper, and allows them to move real resources from the private to the public domain.

“So the Modern Money approach accepts that the currency derives its value from the state’s willingness to accept it in payment to the state, to eliminate obligations to the state. Now there are lots of things that obviously circulate as money things. The government’s money is not the only thing out there. And there is some ordering, or hierarchy of money things. Some are more generally accepted than others.”

And she also says: “The State’s IOU “. . . is at the top of the hierarchy . . . because it is the most generally accepted and it gains its acceptability by virtue of the state’s proclamation that we all need it in order to eliminate our tax liability.”

”So, Modern Money Theory stresses the relationship between the government’s ability to make and enforce tax laws on the one hand, and its power to create or destroy money by fiat on the other. I would define as a sovereign government, a government that retains these powers, that they are sovereign in their own currencies. Among others, examples of governments with sovereign currency, the United States, Canada, UK, Japan and Australia, all sovereign in this regard, by this definition.

“So the question then becomes, for a sovereign government, how much can it spend? Can it afford Social Security? Medicare? Tax cuts? Is the current path sustainable? Isn’t inflation going to be a problem? Will we bankrupt our children and grandchildren? What if the foreigners decide they don’t want to hold our bonds? I am only going to answer a couple of those questions in this talk because many of those are designed to be answered by other panelists later today.”

So, we have the household/ government analogy which teaches that governments have budget constraints analogous to households. Like households they can spend what they take in in revenue, plus what they can borrow, but no more.


“. . . . when it comes to buying things in the United States there’s really only one way to make final payment. When you purchase something, at the end of the day, the only way to pay for it is with the government’s money. There is no other way.

“How does that work? And so here’s an example. Suppose that you go out to dinner and you purchase your meal with your Visa card. Is that the final payment? No. You get a bill in the mail from Visa, and what do you do? You write them a check. Is that the final payment? Well, maybe the last time you see anything happen, but it’s not the final payment. At the end of the day, Visa doesn’t want your check. It doesn’t want what you’ve written down. What it wants is a credit to its bank account and that happens as that check goes through a clearing process and Visa’s bank account is credited with reserves. What are bank reserves? Government IOUs. Federal Reserve money. government money. Only the government’s money can discharge a payment as final means of payment. We are the users of the government’s currency.

“In contrast, the government is the issuer of its currency. It is not like a household. It doesn’t have to raise money by borrowing or collecting taxes in order to spend. Those of us in the private sector have to earn or borrow dollars before we can spend. The government must spend first. And we say this, and sometimes people have a hard time understanding that. How can the government spend first? How can it not spend first? How could the government collect taxes, in dollars, first? It first had to have spent those dollars into existence. The spending has to come before the payment or the collection of taxes. The government must spend first. Government spending is not (we use this term a lot) operationally constrained by revenues. It doesn’t need tax payments and bond sales in order to fund itself. It is not operationally constrained. The only relevant constraints are self-imposed constraints. We talked a little bit about this earlier, things like debt ceilings. That’s a self-imposed constraint. Rules that prevent the Treasury from running an overdraft in its account at the Fed. That’s a self-imposed constraint. It is a constraint that is imposed by Congress. Rules that prevent the Fed from buying Treasury bonds directly from the Treasury, so-called monetizing the debt, is a self-imposed constraint.”

LetsGetItDone Comment: It’s true that the constraints mentioned by Stephanie Kelton just above are self-imposed constraints, from the viewpoint of the government as a whole, since Congress is part of the Government. But there are also political/fiscal constraints imposed by one part of the Government, Congress, on another, the Executive Branch, and the Treasury Department. If these constraints were the last word, then the Executive would have limited ability to spend Congressional Appropriations beyond what the credits in the Treasury General Account (TGA) allow and further income from taxing, borrowing, fees, and asset sales.

However, that isn’t the whole story. Due to a law passed by Congress in 1996, the Executive Branch can use Proof Platinum Coin Seigniorage (PPCS) to fill the public purse to any desired amount, including an amount great enough to retire the full amount of the current debt subject to the limit and to remove the need for issuing further debt subject to the limit for the foreseeable future, except possibly for issuing very short-term debt which would be repaid immediately at the end of the short-term involved.

Stephanie goes on to explain how the Government actually spends and explains that when it spends it creates money and that when it taxes it destroys money. I won’t go into the details, but highly recommend the transcript of the presentation if one wants to understand the actual mechanics of the interaction between the government and non-Government sectors when the Government spends. She also points out that there

“. . . . is an attempt to coordinate the government’s spending with taxes and bond sales and it creates the illusion that what’s happening is that the government is taking money from us and using it to pay for the things that it purchases. But that’s not really what’s going on. As Warren likes to say, the government neither has nor does not have any money at any point in time. It is simply the scorekeeper. . . . ”

And as the scorekeeper it can never run out of “points” (i.e. dollars) to assign to entities in the government sector. So, since the Federal government doesn’t need our money to spend,why does it collect taxes at all? In doing this it’s only taking its own IOUs back, which it can issue in unlimited amounts anyway.

”So, why do it? Two reasons. One is, and this goes back to the Modern Money Theory that I began with, one is that taxes give value to the government’s money. If they were just to say, ‘We don’t need taxes in order to spend, so let’s suspend all collection of taxes’, that would undermine the value of the currency. It would take away the need that we have to acquire the government’s money. Why would we work and produce things for the government? Why would the government be able to move resources from the private sector to the public domain if it can’t get us to do that by virtue of the fact that we are willing to work and provide things to get the government’s liabilities? So, taxes maintain a demand for the government’s currency – that’s important – and the other thing they do, is they allow the government to regulate aggregate demand. Too much spending power can be inflationary, too little causes unemployment and recessions.”

LetsGetItDone Comment: There’s also a third reason. That reason is political, and only indirectly economic. It is that economic inequality has become so great in the United States that it is a threat to democracy. The accumulation of wealth over the past 40 years, in a relatively few hands, has resulted in the corruption of the presidency and Congress as representative bodies. One reason for very progressive taxation of income, wealth, and property is to help restore the more balanced inequality of the 1960s and early 1970s, which would leave a lot less free money available to the 1% to corrupt the political system.

Stephanie next goes on to explain what the function of bond sales is. Bonds are no more than a “savings account” at the Fed. The saver moves dollars out of their checking (reserve) accounts today into a ‘savings account” and receives “dollars plus interest at a future date” back in those “checking” accounts.

So looking at:

“. . . . the national debt clock, the sum total of all of the outstanding bonds that the Treasury has issued. . . . what we would argue is we shouldn’t call that the national debt clock; we should just rename it. It’s the national world dollar savings account. All it does is keep a record of the total amount that’s invested in savings as opposed to checking accounts at the Fed.”

And back again to the solvency question

”Something about the issue of solvency, the tipping point problem. Can the government run out of money? The U.S. government can’t run out of money any more than the Washington Nationals Baseball team stadium can run out of points. Every time a ball game is played at Washington National Stadium, some team scores some points and they appear on the screen and then the other team scores and some more points appear on the screen. And there’s nobody behind the screen going, ‘Hey Johnny, we’re running out of points here’, you know, right? Look in the trust fund. That’s not the way it happens. You just add the points.

“Same exact thing with the way the government operates. And this is the quote that Marshall brought up earlier and the one that Warren likes to use a lot, and I like it too. So here it is in writing so that you know we didn’t make it up. This is Ben Bernanke in an interview on Sixty Minutes just last year when Pelley asked him, “Is that tax money the Fed is spending?” And Bernanke says, “It’s not tax money. The banks have accounts at the Fed much the way that you do, have an account at a commercial bank. So when we want to lend to a bank, we simply use the computer to mark up the size of the account they have with the Fed.

“It’s exactly like putting points on the screen at the baseball game. Just mark up the balance. Can you run out of points? Can the government run out of money? No. There is no solvency issue when you are the issuer of the currency. OK, this is a quote from Alan Greenspan saying largely the same thing. “A government cannot become insolvent with respect to obligations in its own currency. A fiat money system like the ones we have today can produce such claims without limit.””

And then Stephanie addresses the question of why Europe is in the middle of a crisis, which, of course, has gotten more and more serious in the two years since the Teach-In. She explains that none of the nations of the Eurozone are currency issuers. They are all currency users like the American states, because they all gave up their own fiat currencies. From the national perspective, the Euro isn’t their fiat currency. It’s the fiat currency of the European Central Bank, “a non-convertible, stateless currency.” So, default risk, potential insolvency, are real problems for the states using the Euro, especially the fiscally weaker states in the PIIGS group, but, to a lesser degree, for all the others too.

”They must borrow or raise taxes; they must collect money before they can spend. It’s the only way they can do it. They are all users of their own currency. They are the users of their currency, much like California, Illinois, New York, New Jersey – they’re just like states in the United States. They’re in the same relationship relative to the currency as are individual states in this country.

“This is the hierarchy of money. So the entire thing in Euroland is denominated in Euros. For any particular government, look at the hierarchy of money. What is it that sits at the top of the hierarchy? It’s the Euro. What is the relationship between the currency at the top of the hierarchy and the government? In this example, the government does not control the currency that sits at the top of the hierarchy. And that turns out to be a huge problem for Greece.”

And now there are problems with all the PIIGS nations. Greece is farthest along in their crisis, but Ireland has been devastated, Portugal and Spain are in dire straits, and Italy isn’t very far from a crisis, while France and the Netherlands are seeing serious political stresses resulting from Euro-related austerity policies. Stephanie also points to Mexico in 1995, Russia in 1998, the Southeast Asian currency crisis in ’97. She points out that “Every one of these countries had fixed exchange rates. And, as a result, every one of their governments became the users rather than the issuers of their currency. “ And she says further:

”I don’t know of a single example of a currency crisis or a debt default by a sovereign government that has issued obligations in its own currency when it has flexible exchange rates in a non-convertible currency. I don’t know of one. The U.S. can control its currency and therefore, by implication, its economic destiny.

“There is a relationship between the power the state has in the monetary sphere and the power that it can exert in the political policy sphere. There is no revenue constraint for governments that control the money that sits at the top of the hierarchy. Does that mean that we should spend without limit? No. No. Emphatically no. As the economy recovers, spending will need to be regulated to prevent inflation. But I would argue, and I think what we’re all here to argue today is that it’s time to stop allowing the monetary system to limit our range of policy options. It is causing unnecessary human suffering and it’s time for us to begin to recognize the advantages of a Modern Monetary System. Thank you.”

Professor Kelton’s presentation was followed by a panel discussion and then a Q and A session. In the interests of space, I’ll telescope these as much as I can and also introduce comments of my own on the questions and answers. But before I do, I’ll provide some follow-up references on the subject of Stephanie Kelton’s solvency presentation appearing since the Fiscal Sustainability Teach-In. Here are some from Stephanie: here, here, here, here, here, and here.

And some from Randy Wray, Warren Mosler and Bill Mitchell: here, here, here, here, here, here, here, here, and here.

And finally, a few of my own: here, here, here, here, and here.

SESSION 2: “Are There Spending Constraints on Governments Sovereign in their Currency?” – Q&A

Unidentified: “I have one question, can you explain the difference between what happened in Argentina and what happened in Russia? Because Russia defaulted voluntarily on its domestic debt versus Argentina had a problem with US dollar debt.”

Warren Mosler, “So… If any of you have been to the Fed, you know you start everything off with “So.” So what happened in Russia [he laughs] was that they had a fixed exchange rate, the ruble was fixed at 645 to 1, and they were borrowing dollars in order to keep it going because people were— would rather have their dollars than a ruble. When you have a fixed exchange rate, the dynamic is, if you get paid in rubles, you have three choices: You can do nothing, you can buy ruble securities, or you can cash them in for the reserve currency, which was dollars. So with a fixed exchange rate the treasury competes with the option to convert, and you see that all the time, and so with fixed exchange rates, the interest rates are actually controlled by the market. And so what happened in Russia is as the treasury competed with the option to convert, interest rates went up and up and up, and finally they were paying 200 percent and there was no interest rate where people would rather have the rubles than the dollars and they ran out of reserves, couldn’t borrow any, and defaulted on their conversion obligation. Now, at that point in time, what most countries would do would be just to float the currency and say, Okay, look, there are no more dollars for now and the ruble’s floating and just keep the money— the central bank operational. What they did in Russia, when they ran out of dollars, they just turned out the lights and went home, shut off the computers, didn’t open for up four months later. When they did open up, they went in through the hard drives, and sure enough, the ruble balances were still there, and they were — they basically honored them. There was a little bit of restructuring, but nothing particularly serious on the interest-rate side. And so it was a fixed-exchange-rate collapse, or blowup, and they just shut everything down.

“Now in Mexico they had the same kind of blowup and they just — what was it, three to one, three and a half to one, or something like that? Was it three? Three to one back in about ’95, they were supposed to honor these tessa bono obligations, where you were able to turn these in, they were at an index to U.S. dollars, where you could turn in and get— and they were guaranteed you could get enough pesos where you could convert those instantaneously into 40 billion dollars. Well, there was no amount of pesos that could be converted into 40 billion dollars, so the whole thing collapsed, and they wound up dishonoring their promises, rolling some into Brady Bonds, and they let the currency float, they just— and so the peso went to nine to the dollar or somewhere around there. And they kept business as usual with the— as a floating exchange rate. Okay, so I don’t know if that answers your question or not, but that’s what happened.”

LetsGetItDone Comment: I think this contrast between Russia and Mexico by Warren is both instructive and compelling and shows the importance of having a non-convertible fiat currency with a floating exchange rate.

Unidentified: “I was asking about Argentina…”

Warren Mosler: “Argentina. Yeah. Argentina was fixed one-to-one to the U.S. dollar. Same type of thing: Interest rates went up because of the option to convert, they ran out of dollars, and one night in a deflationary mess that followed with after thirty-two dead in the street one night Buenos Aires they reopened with the floating exchange rate, they let the peso float. Okay, Russia, the difference was, when it blew up they just turned the lights off and went home. They could have kept it going if they wanted to, they didn’t know what buttons to push at the central bank, or they were afraid for their lives, the central bankers, and just left, okay, which is the story I’ve heard also.”

LetsGetItDone Comment: And this further underlines the point. If you don’t have a sovereign fiat currency, then your capacity to adapt to economic changes is severely crippled.

Unidentified male: “Just one corollary follow up question. Can you explain how this relates to the Rogoff Reinhart book? That is the debt in foreign currency versus in on your own currency and what these magic numbers, 90% debt-to-GDP means.”

Stephanie Kelton: “Yeah, I think the lesson to be drawn from the arguments that I made are that the debt-to-GDP ratio is largely irrelevant so long as the debts have been written in a currency that you have a monopoly over the issue of. So the U.S. Government can always meet, on time and in full, any payment that comes due in U.S. dollars, *period*. Okay? If you’re borrowing in a currency that you do not control, you cannot create, like Greece cannot create the Euro. . . So they can’t always, necessarily, serve as on-time and in-full obligations that come due; it’s not a sovereign currency.”

Warren Mosler: “Let me just add to that, if you look at Italy back in the eighties, they had one of the best economies in the world with debt-to-GDP ratios well over 100 percent and inflation rates in double digits. So the problem with inflation is not that there’s any real economic problem, it’s a political problem. People don’t like it, and you will get thrown out of office if you allow inflation. Not because it’s not good for employment and output, it’s just considered immoral. It’s the government robbing us of our savings, and hidden taxes and all these types of things. And it has to be respected, and democracy reflects the will of the people.”

Stephanie Kelton: “Keep in mind also that Japan’s debt-to-GDP ratio is roughly 200 percent, but as long as the borrowing is done in yen, it’s not a problem.”

Bill Mitchell: “If you read their book carefully, you’ll see — and you go through each case and trace the currency systems being run, the circumstances surrounding the default, you’ll only find one example of a sovereign, truly sovereign government in modern history that has defaulted, and that was Japan, and it was during the war, and the reason they defaulted was because they said they weren’t going to pay back debts to their enemies, and it had nothing at all to do with the question of solvency, it was a political decision. And so, you know, I think the book is being used very frequently now by commentators as, See, this is the definitive piece of research, and in actual fact it’s highly limited research and applies to a very small number of circumstances that we don’t find in very many countries.”

LetsGetItDone Comment: So, what can you say about Reinhart/Rogoff’s failure to distinguish nations sovereign in their currencies from nations that are not? You can’t say anything, but that their work is a great example of ideological pseudo-science incapable of making correct predictions about fiscal sustainability across the board.

Warren Mosler: “Look, I’ve had very strong conversations with David Leibowitz of Standard & Poor’s about this, separating the difference between ability to pay and willingness to pay, and the last time on that last go-around I sent you a copy of that, but they have stopped downgrading on ability to pay, I believe, they are now downgrading on willingness to pay, which is what happened with Japan. So what we’re saying is, there’s always the ability to pay; there may not be the willingness to pay. Very different things.”

Pavlina Tcherneva: “Just to add on to the Argentina story, it’s instructive for another reason. Argentina actually is a very good case study of how you launch a currency. When the state was bankrupt, the provinces were bankrupt, what they did is they actually issued their own IOUs. They issued [patacornes?? lecops?? foreign terms], the varieties of local currencies. Now, our states are prohibited from doing that, but in Argentina they could, and so you get back to Stephanie’s point, Why do you trust the currency you didn’t have before, you didn’t use before, the vast majority of people are not using, you know, there’s no trust that was built in the system, and the reason was because the states taxed the population in these LECOPs and they negotiated that you could pay your utility bills in patacones. And so, although everybody was up in arms and saying, you know, You can’t be using this system, and, granted, it didn’t last very long, you go to Argentina and you see every store says “Aceptavos patacones.” It is very effective to launch this currency. Once they floated, they had no need for them anymore.”

Warren Mosler: “In Russia, after the central bank shut down, they traded what they called arrears, which is I thought a fantastic word for what things are. So the states with the— whole corporations would trade arrears with each other.”

John Lutz: Asked Stephanie to explain Zimbabwe and Weimar Germany. She and Marshall Auerback replied by saying that Marshall would explain those cases in his afternoon Teach-In session on Inflation and HyperInflation.

LetsGetItDone Comment: To be reviewed in Part Five of this series.

Roger Erickson: “Another question about getting back to treasury bonds. We’ve all heard, most of us have heard now that we went off the gold standard under Nixon in 1971. The question that rarely gets asked is, “Why does anybody bother selling Treasury bonds anymore, at least very many of them,” and a follow-up is, “Is there any country in the world that doesn’t bother doing that to any extent?””

Roger’s question elicited comments from Marshall Auerback, Warren Mosler, Randy Wray, and Bill Mitchell in what proved to be a lengthy and illuminating exchange. The answers included that it was the law (Auerback); it’s what countries do when they become countries (Mosler); it’s a legacy of the gold standard years caused by the failure of Congress to amend laws based on gold standard thinking (Auerback); it’s an interest-bearing alternative to holding reserves (Wray); selling term securities raises interest rates (Mosler); decision makers are caught in an ideological tangle and believe that issuing debt voluntarily supports fiscal sustainability (Mitchell); and they may want to sustain higher mortgage rates (Mosler); or perhaps know what they’re doing but want to benefit bondholders.

Roger Erickson: then followed with a comment that the past 30 years seem to have de-regulated everything, but, inexplicably hyper-regulated our monetary system.

Bill Mitchell: “No, it’s not inexplicable at all, because they wanted to — the whole paradigm and the whole ideology was to create freedom, so-called freedom, for the private sector and hamper the government sector from having any freedom, ’cause you can’t trust the public sector, you can only trust the private sector, because the rhetoric is that the private sector is market-disciplined and the public sector isn’t. It’s entirely consistent.”

To which Professor L. Randall Wray adds that he thinks that financial people may well understand how things work but want to continue to create myths or frauds about how it works because they want to constrain politicians, and voters, who they don’t trust, from growing the government. It’s also about their mistrust of democracy.

LetsGetItDone Comment: I agree very much that this is about ideology and about opposition to democracy. Even more, I also think it’s about the emergence of plutocratic oligarchy. See here, and here.

After a brief question about why the US retains gold and an answer from Warren about it being another asset of the Government it holds on to, Teresa Sobenko: asked whether the euro is a scheme or whether people are just not aware of the problems with it. Marshall Auerback replied that he thinks they were aware of the problems when they formed the monetary union, but hoped that it would lead eventually to a political union. There was further discussion about the politics of the situation originally leading to a much-expanded Eurozone.

Edward Harrison: followed up on the issue of the need to issue treasury bonds, and asked whether if one prefers monetary to fiscal policy “don’t you need a constant flow of treasury securities in order to keep on the run securities constantly coming in order to keep a liquid market in that vehicle”? Warren Mosler replied that the Fed could just trade Fed funds at a particular rate and that would be enough to target interest rates. Ed replied by saying that doing “that would never fly” from “a political perspective.” Warren agreed with that and emphasized that he was just saying that as an operational matter all the Fed has to do to set interest rates is to “set the overnight rate in terms of a bid and an offer, which is what they do in Canada and Australia, . . . “ and “you don’t need treasuries for that. . . then he points out that with our present “. . . institutional structure, where the Fed has to use a repo market where they’re doing overnight loans back and forth where they’re required to use treasury securities as collateral, then you’re correct in that sense, but again, that’s a self-imposed constraint, . . . “ which after the middle of 2008 they overcame using a variety of tools, but never getting politically to the point of actually just trading in Fed funds to control the interest rates.

Next, Bill Mitchell: made what I thought was a priceless statement:

“Just two points on that. In ’90–’96 we elected in Australia a conservative government — Warren will know this story I’m about to tell I think — and for the next ten out of eleven years they ran surpluses increasing, and they sold it to the public as rail bridges started to crumble, public education started to crumble, hospital waiting lists started to increase, they sold it to the public as getting the debt monkey off their backs, and because they were now obviously retiring debt as it became due, and by 2001 the bond markets were so thin that there was a huge outcry. Now who did the outcry come from? Well, it came from the Sydney futures exchange at the beginning, and all of the other traders that were using the government debt as what I call corporate welfare, basically as a guaranteed annuity in which they could price their risk off, and this led to the government having an official inquiry —remember that Warren? — they had an official inquiry onto what the size of the bond market should be, and they were blithely running surpluses all the time, and they agreed, they caved into the pressure particularly from the Sydney futures exchange, they caved into the pressure and announced that they would continue to issue debt at an agreed amount, they came up with an agreed amount of millions per quarter, even though they were running surpluses, they continued to issue debt. I thought that was a really… Do you remember that, Warren?”

And then Warren and Bill referred to a paper they co-authored in 2002 describing:

”. . . all of the special pleading from the top end of town on why the government had to issue debt even though they were running surpluses, despite two facts. One is that at the same time the recipients of the corporate welfare were leading the charge to deregulate the welfare state for the workers and deregulate the wage system and get rid of social security, and secondly, despite the fact that the top end of town were the ones that were leading the myths about the onerous debt burdens the deficits they used to run were causing. . . . ”

LetsGetItDone Comment: which clearly makes the point that the “top end of town” is about “lemon socialism” at least, and perhaps about fascism, itself, but never really about the “free market.” That’s just for the peasants, not for entitled folks like them.

Jeff Baum: next raised the issues of inflation and its distributional consequences and pointed out these raised political questions, so he thinks that “just changes the question from: “But we can’t afford this” to “What are we going to spend it on?” and maybe there is a big question there, as Randall was saying, that once the voters figure that out it turns into a big political fight. . . . Do you have any kind of summary about how this turns into a political question, and what are the distributional consequences of that?”

L. Randall Wray then replied: “. . . I think that what the public needs to understand is if you’re saying you want the government to do this, you want the government to spend on this, that means we’re going to devote real resources to this. Do you really want the government to devote our nation’s capacity to supply you with this, and if you do, then democracy wins and we do it. But you got to realize that means less resources here, okay, so to get it out of the deficit hysteria, the affordability, and so on, it’s a real issue. Do we want to devote an ever-rising share of our nation’s output to be put to taking care of aged people? Put it that way, and let the population vote on it. They might vote yes, they might vote no . . . okay? That’s democracy.”

Marshall Auerback: then followed with: “Two points I’ll make. One is that if we get the debate along the lines that you’ve suggested, then we’ve effectively won the argument, because we’ve always said ultimately it’s a political argument. . . . And the other point I would make is that even the notion of affordability, it’s applied in a very, very selective way, as I’m sure you’ve noticed. I mean, when we declare war, we don’t sort of say, “Well, we’re running a budget surplus and can we afford to go to war?”, we just do it. Or we don’t say, “Well, we’re going to buy this aircraft carrier, so we’d better check with our bankers in China as to whether we can afford it or give them a line item and see if they want to red-line anything.” Nobody actually ever does that, but that’s the logic of their position, if you follow it through to the conclusion. But somehow when we get onto a subject like health care or Medicare or Social Security, it’s like, Oh, well, affordability becomes an issue, so I think it’s more a reflection on our skewed value system than anything else, actually.”

LetsGetItDone Comment: which reveals one of the core purposes of MMT, which is to get past the mythology of insolvency or “we can’t afford it,” and get to the real political issues, the neoliberal elites are trying to avoid. They know that if the debate becomes full time employment vs. the possibility of inflation, then they’ll lose. They know if it becomes Medicare for All or bailout of the insurance companies without the “we can’t afford it” coming up, then they’ll lose. They know that if it becomes debt jubilees for home owners and college students, then they’ll also lose, as they will if it becomes reinvented vs. crumbling infrastructure. There are so very many issues they’d lose on, and democracy would win, if “we can’t afford it” is gone.

Stephanie Kelton: “Just one point on the distributional issue, one of the things that you hear a lot about now is the growing size of the national debt and the growing interest burden, and we really need to make that a distributional topic, because it goes directly to this argument that we’re passing this on to the next generation and the generation after that, becomes a generational argument, which it absolutely is not, okay? All of the interest payments will be made by the people who are alive at the time the interest payments come due, and what we’re talking about is a shift of income from those paying taxes to those receiving payments because they’re bondholders. And so the bigger the share of the interest, relative to the size of the economy, the bigger the command of the goods and services the bondholders can wield against the rest of us. And so that becomes a discussion that we definitely would want to have.”

LetsGetItDone Comment: Especially since the austerity myths have been used to transfer wealth from poor people and the middle class to the richest people for 35 years or more now, accounting for the danger to democracy we are now seeing.


MMT ideas about the origin of money, the fiat nature and origin of money, the idea of a Government sovereign in its own currency, and the idea that such a government cannot become bankrupt involuntarily are central to MMT and are enormously important. Their importance was underlined to day in a post by J. D. Alt at the New Economic Perspectives blog, on how MMT ought to be framed to persuade people Alt says:

”The interesting thing here is that it appears the way modern money actually functions today is extraordinarily beneficial to everyone! It occurs to me that the first sovereign country that politically understands this, and is able to align its fiscal policies accordingly, will become so wealthy and prosperous it will rapidly dominate all other economies. It will be able to have the finest, most advanced medical and health services industry, the most efficient and convenient transportation system available, the most beautiful and comfortable housing imaginable, the healthiest and tastiest foods that can be grown and prepared, the most effective education and school systems, the best and most stylish shoes and apparel, the healthiest and most diverse natural ecosystems, and the most leisure time—including the most wonderful, fun, and satisfying places and ways to spend it. What politician, in her right mind, couldn’t get behind that? What voter, in his right mind, wouldn’t vote for it? And how could a platform of sour-faced austerity even begin to compete?”

Both Bill Mitchell’s (see Part Two) and Stephanie Kelton’s presentations and the accompanying panel and Q & A sessions at the Fiscal Sustainability Teach-In explained MMT foundations relevant to actual, rather than faux fiscal sustainability, and government sovereignty in its own currency that explain why J. D. Alt’s vision of open possibilities with MMT makes sense.

The sky really is the limit if we can get our economic thinking straight and stop our victimization by the austerity/deficit hawk narrative being kept alive by the Peterson Foundation, Peterson’s various other outlets, as well as his other network allies such as Bowles and Simpson, and President Obama himself, who has used the austerity rhetoric from the very beginning of his administration as much as anyone else. On the other hand, if we can’t end the dominance of that narrative, the future of the United States is likely to be very dark, since we may not be facing a lost decade, so much as a lost generation whose futures are destroyed by a false economic ideology. Frankly, I don’t know if American Democracy, already greatly weakened by the mindless reaction to 9/11, will be able to survive that outcome.

In Part Four, I’ll cover more MMT foundations from Warren Mosler’s great discussion of “The Deficit, the Debt, the Debt-To-GDP ratio, the Grandchildren and Government Economic Policy.” We’ll see how his version of the MMT counter-narrative strengthens and extends what we’ve already learned from the proceedings of the first two sessions of the Teach-In.

(Cross-posted from

The Fiscal Summit Counter-Narrative: Part Two, Defining Fiscal Sustainability

2:44 pm in Uncategorized by letsgetitdone

(Cross-posted from

'Reject Fear: Austerity Stops Here' sign at a protest.

Austerity / Household Tax protest. Photo by William Murphy.

One of the most irritating things about the deficit hawk/austerity literature, is that it uses the ideas of “fiscal sustainability” and “fiscal responsibility” in an ideological way, without ever really analyzing or explaining these labels. It’s almost as if the austerians know that if they clearly and directly stated what they meant by these terms, and how their meanings were actually related to the ideas of “sustainability” and “responsibility”, then flaws in their whole ideological and policy framework would be very clear to everyone else.

Of course, if you read any of the austerian literature you soon learn that they think fiscal sustainability and responsibility both relate to the impact of government spending on the federal deficit, the public debt subject to the limit, and the debt-to-GDP ratio, and to no other impacts of fiscal policy.” But the austerians never really explain why these three numbers are relevant for fiscal sustainability and responsibility. Instead, they take the relationship as obvious to all, and start evaluating fiscal policies on the basis of past and projected deficit, debt, and debt-to-GDP ratios. Invariably, regardless of the nation in which you find them, they end up advocating for lower taxes for the wealthy, less regulation for corporations, and sacrifices of Government programs and the social safety net; all this based on the ideas of fiscal sustainability and fiscal responsibility that they’ve never even explained to an incurious and uncritical media, but very bought media, or to the public.

Because of the very great importance of the fiscal sustainability/fiscal responsibility/fiscal crisis/solvency rhetoric, the first session of the Fiscal Sustainability Teach-In Counter-Conference covered the topic “What Is Fiscal Sustainability?” and the primary speaker was Professor Bill Mitchell of the University of Newcastle. Audios, videos, presentation slides, and transcripts for the presentation are available at selise’s site and a slightly different version of the transcripts is available from Corrente as well.

Bill Mitchell’s Presentation on Fiscal Sustainability

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The Fiscal Summit Counter-Narrative: Part One

8:58 pm in Uncategorized by letsgetitdone

(Cross-posted from

Well, it’s Springtime in DC. Time for the Peter G. Peterson Foundation’s annual event. The Fiscal Summit, to be held on May 15, better named the Fiscal Cesspool of distortions, half-truths and lies, is a propaganda extravaganza designed to maintain and strengthen the Washington and national elite consensuses on the existence of a debt crisis, the long-term ravages of entitlement spending on America’s fiscal well-being, and the need for long-term deficit reductions plans to combat this truly phantom menace. The purpose of maintaining that consensus is to keep an impenetrable screen of fantasy intact in order to justify policies of economic austerity. that have been impoverishing people and transferring financial and real wealth to the globalizing elite comprised of the 1% or far less of the population, depending on which nation one is talking about.

Austerity Road Sign

Photo by 401K


The 2010 Fiscal Summit

The first “Fiscal Summit” was held in Washington, DC on April 28, 2010. It was lavishly funded by the Peter G. Peterson Foundation, and included many “big names” associated with “fiscal sustainability” and “fiscal responsibility,” including Bill Clinton, who appeared along with personalities from Peterson’s stable of deficit hawks such as David Walker, Alice Rivlin. Robert Rubin, Alan Simpson, Erskine Bowles, and Paul Ryan. Its purpose was to spread the deficit hawk message of Peter G. Peterson, including various myths of the world-wide austerity movement:

The 2011 Fiscal Summit

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The Fake Social Security Solvency Crisis Is Congress’s Fault!

6:18 am in Uncategorized by letsgetitdone

Ah…. my fellow Americans, be very, very, afraid of the terrible Social Security crisis that will sink us as a nation. According to Government projections, we won’t be able to pay full Social Security benefits, in 2037 and beyond, unless we cut benefits now, because the Social Security “Trust Fund” will be short of money.

So, say Paul Ryan, Peter Peterson and his minions, Mike Pence, Alice Rivlin, Erskine Bowles and Alan Simpson, and also many other deficit hawks. In reply, the most liberal of the deficit doves say that even though there will be a solvency crisis in 2037; it’s really nothing to worry about because all we have to do to end it is to lift “the cap” on FICA contributions entirely, so that wealthier income earners are paying the same rate on their total earnings, as workers whose wages or salaries are below $106,800 per year.

So, both the hawks and the doves agree that there is “a solvency crisis;” they only disagree about what to do about it. However, the SS solvency crisis is a big fake, like so many of the issues that arise in Washington. It is a fake because the crisis is not due to powerful economic forces that no one can do anything about, and that no one has control over; but rather is due to a choice Congress made when they wrote the original Social Security Act; namely that it would be paid for by raising revenues to fund it through FICA contributions and placing those in a “trust fund,” rather than by paying for it from general revenues. All that Congress has to do to end the crisis is to decide sometime between now and 2037, to pay for SS benefits automatically, out of general revenues, in the same way it pays for that part of the Social Security program called Supplementary Medical Insurance (SMI). End of problem. End of story.

Here’s a link to a post by selise featuring a youtube clip of Stephanie Kelton at last year’s Fiscal Sustainability Tech-In Counter-Conference explaining why this simple move by Congress solves the problem. Audios, Videos, presentations, and transcripts from the Conference which provides the definitive counter-narrative to the deficit hysteria currently rending our nation is here. Professor Kelton summarizes her argument here.

“Funding Social Security is always and everywhere a political choice. The strongest evidence of this comes directly from the 2009 Annual Report of the Trustees. In that report, they predict gloom and doom for Social Security because “there is no provision in current law that would enable full payment of benefits, once the Trust Funds are exhausted”.

In contrast, the Supplementary Medical Insurance (SMI) Trust Funds are “both projected to remain adequately financed into the indefinite future because current law automatically provides financing each year to meet next year’s expected costs.”

It is that simple. The former is in ‘trouble’ because the government isn’t committed to making the payments, and the latter gets a clean bill of health because the government will always make the payments.”

I think this really underlines how arbitrary the projections of financial doom from the Peterson crowd, CBO, and other Government agencies are. Apart from the silly and unreliable projections as far out as 25-65 years from now, the predictions of doom are really based on provisions in law that Congress can change at any time. Which means that just like the fake national debt crisis, the fake Social Security solvency crisis is Congress’s fault.

It is more Washington kabuki politics at its finest.

Selise has this to say in her post on why this is kabuki:

Q: Why is there even a debate about “fixing” Social Security when it’s not broken?

A: Because the focus of the debate is on problems that are unreal.

Focusing on unreal problems makes no sense. Unreal problems are NOT REAL!

Let me explain what I mean here by real as opposed to unreal problems with an example of each:

Unreal = “We can’t afford to Social Security because the Trustee’s report says that costs will exceed payroll tax receipts”

Real = “We can’t produce the goods and services needed by our nation’s seniors to keep them fed and housed.”

The unreal problem is about the availability of dollars. Our federal government is the monopoly issuer of the nation’s currency. We’ve been off the gold standard for almost 40 years and we have floating exchange rates. Therefore, the availability of dollars is a political issue. Tax revenue is not required, borrowing is not required — unless Congress chooses to impose those constraints.

A main reason why this particular instance of kabuki politics still exists is because so-called “progressives,” are unwilling to give up the idea that to keep Social Security safe it is essential that people “pay into it,” so that the opponents of Social Security won’t dare say that it’s a welfare program paying benefits to people that they are not entitled to. Guess what? The problem with this theory is that the opponents do dare say it, and have been saying it for many years through “propaganda” that has made “entitlement” a dirty word.

They don’t care whether people have made FICA contributions or not. For them the only issue is whether the Government “can afford” to pay for SS retirement benefits, not whether people have earned and paid for them, and so “deserve their benefits.” And they say the Government can’t afford it because they’re both busily cutting away at Government tax revenues and also falsely claiming that Government money is limited by a non-existent solvency risk.

Giving up the argument that people have paid into Social Security and so are entitled to it, is what progressives fear. But, nevertheless, since that argument is clearly not working, and also because that argument is bought only at the price of maintaining a very regressive tax on working people, they badly need to give it up in favor of an argument that all Americans, whatever their station, contribute something to the development of American society over time, often in ways that can’t easily by measured by the money they’ve made, or the visible things they’ve accomplished; and that because of these contributions and their American citizenship, each is owed a decent and dignified old age by the nation in the form of Social Security and affordable health insurance (now provided by Medicare).

This is especially true, since the money needed to pay them isn’t directly funded by taxes but only needs to be issued by the Government according to its constitutional authority. It is not money that is taken from anyone, or that is re-distributed. It is not some quantity from a limited supply of gold that is coming out of other people’s pockets. This money gets its value ultimately from the real wealth American society produces, which, in turn, comes from the past and present productive efforts of everyone, and the productive capacity that all of us together have created over the years and still create.

There is no right to share in this wealth equally, and there is no right for the elderly to cause younger people to go without, or to sacrifice opportunity. But American society is wealthy enough to make choices like these unnecessary. It is wealthy enough to provide an old age for its citizens that is free from want and fear.

Roosevelt knew that and it’s part of what he included in his second bill of rights. But Roosevelt’s old enemies, the Hooverians, have come back. They go by different names now. Sometimes, they’re called neo-liberals, sometimes austerians, sometimes Petersons, sometimes deficit hawks or doves. But whatever they’re called, the message is always the same, and that message is that money is limited, and that when it is given to some, it must be taken from others.

If the Government wants to spend money, it must be taxed away from some, or borrowed away from others. And finally, because money is limited, there are always hard choices to make, choices that sometimes put money ahead of people, and that make it necessary for “courageous people,” like the wealthy neo-liberals who talk and write this way, to choose who will prosper and who will suffer, who will be eating caviar, and who will subsisting on catfood or worse. That’s unfortunate, but it’s just the way of the world and we all must adjust to it.

The Austerity Doctrine is not, in the end, part of the American, or the progressive outlook. We are an optimistic people. We know that money isn’t really limited and that our constitution allows us to provide enough of it to make the economy we want. We also know that even though certain real resources are limited, resource limitations can be overcome using new human knowledge, by redefining the practical meaning and use of existing resources. We also know that real wealth, the stock of valuable goods and services, is increasing all the time as the mix of different kinds of capital, human knowledge, and human effort changes in accordance with the development of human society.

So, the truth is not Hooverian, it’s Rooseveltian, we know that Federal money isn’t limited, and we also know that real wealth can be increased through effort that in turn can be mobilized by nominal wealth (Federal money). We aren’t playing a zero-sum game in which some must win and some must lose. We are playing one in which everyone can win.

So, in the nature of things we don’t need to take anything away from retirees, because of some imaginary fiscal crisis. We can easily do what’s right and not only maintain Social Security and other entitlements, but even increase their benefits. All we need to do is to revise a few laws to say that all entitlements will be automatically paid for by the Government in perpetuity out of general funds, and that all entitlement trust funds are abolished. Let’s make Congress get off its high horse, show some real courage, and do it!

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

Loose Talk and Numbskull Notions At the Podesta/Holtz-Eakins Debate: Part Two

12:12 pm in Uncategorized by letsgetitdone

This is Part Two of a critical review of The National Journal’s Debate on "Our Fiscal Future" between John Podesta and Douglas Holtz-Eakin with Jim Tankersley moderating, at The George Washington University’s Jack Morton Auditorium. This part provides more observations and evaluation on some of the propositions offered by Holtz-Eakin and Podesta.

H-E: Eliminating tax cuts for the rich will cost 1.5% to 2% GDP annually.

Me: This one is really hard to believe. The tax cuts for the highest income people would average about $70 Billion per year. The multiplier associated with these cuts is only $0.29 on the dollar. So destroying these financial assets through taxation will cost the economy about $20 Billion annually. As a percent of current GDP that amounts to 0.14 percent, not 1.5 to 2 percent. So, I think we need to view this claim of Holtz-Eakin’s with a big dose of skepticism. The question is, why didn’t Podesta question it?

H-E: It’s not Obama’s money, it’s theirs! The Government is a redistributive engine!

Me: This is a conservative article of faith. But looking at it from a more objective point of view, currency creation is a monopoly of the Federal Government. All of it originates with the Federal Government. It is distributed to people, corporation, and other institutions according to a framework of laws that accords property rights to the recipients of currency.

These property rights aren’t absolute, they originate in due process of law, and they are limited by legal frameworks and processes. Without such a framework, property rights would not be operative at all, but possession of property would exist only because the holder of property had the physical power to continue to hold it. It is part of the legal framework of our society that the Federal Government has the right to tax and destroy financial assets, that is to take some financial property, in accordance with due process of law in order to fulfill public purposes. This taking of property is not arbitrary it is done according to law and in the context of a political democracy where citizens authorize the legislature to make rules that govern these "takings" by the Government.

So, no “owner” of currency or financial assets has absolute ownership. People and institutions “owning” currency have no absolute rights in that currency, and the Government can repossess currency (tax) to fulfill its legislatively approved purposes. No, the money doesn’t belong to Obama; but the idea that it may be subject to income or other kinds of taxation is firmly enshrined in law and custom. In fact, taxation is necessary to give a fiat currency its value in the first place.

As for the Government being a redistributive engine. You bet it is! But markets are redistributive engines too, and when they are non-competitive, and manipulated and governed by fraud and insider trading, they are an illegitimate, even criminal redistributive engine, as we have seen in the past few years.

Also, the legal framework we create to regulate commercial transactions to a greater or lesser degree itself results in redistribution. The framework put in place by The New Deal in the 1930s eventually produced both great prosperity, and a much greater degree of economic equality than we have today. Conversely, the legal framework that began to develop in the Carter Administration, and that was firmly set in place by Reagan/Bush41, strengthened by Clinton and Bush43, and so far maintained by Obama, has produced substantial destruction of wealth among the middle class in the past few years, and increasing inequality over the whole period of these presidencies. It has served us badly in the way it distributed wealth, and it now must change in the interests of justice.

So, yes, Government, in combination with market dynamics, is a distributive engine, and for the past 35 years it has been redistributing economic rewards in the wrong direction. It is time to right the balance. A silent “class war” has been fought for 35 years now, by the rich and the large corporations, against the poor and the middle class. It is time for the people who are victims of this one-sided war to begin fighting back; to acknowledge that "class war" is what is going on, to fight that war, to win it, and to adjust the legal framework, so that the balance is redressed toward greater equality. It is time to end the days of plutocracy and to bring back democracy to America.

H-E: Deepest unfairness is not keeping Government small!

Me: Holtz-Eakin is given to pronouncements of articles of faith from conservative ideology. The notion that Government should be kept small was outdated in Teddy Roosevelt’s time when he went to war against the giant trusts. It was outdated in FDR’s time when he tamed the interests controlling economic life in America. In these days of giant global businesses and international cartels it is absolutely ridiculous to think that small government could possibly produce fairness to individuals. Americans need big government to represent it against the great concentrations of economic and private political power we see all around us, because only big government can have the power and resources to make large corporations obey our laws, and treat individuals fairly and with respect.

It is either big government and heavy, careful regulation of the corporations, aand the markets, or breaking up the global corporations, scaling then down to a size that a small government can regulate, and making sure that they never grow beyond a certain point again. But we cannot have a small Government and huge global corporations and expect to have liberty and justice too. That is just dreamland.

Our problem is not big government. It is that the Big Government constructed by the New Deal and its successors was corrupted by neoliberal ideology, lack of enforcement of regulations, repeal of essential regulation, and control of our regulatory institutions by people who were appointed to gut them, and who refused to fulfill their legal responsibilities while in office.

Our big Government is broken. True enough. But the only reasonable way forward is to fix it; not to find refuge in small government, 19th century liberal, fairy tales. The deepest unfairness is not failing to keep government small; it is a weak and ineffectual government that doesn’t have the power or the willingness to see to it that corporations and the wealthy respect the rights of Americans and treat them fairly.

H-E: The top two tax brackets will have to go as high as marginal tax rates of 80% if we can’t borrow money as we are now!

Me: We don’t have to continue to borrow money in order to deficit spend. The Government has the constitutional authority to create all the money it needs by spending; i.e. by marking up private sector accounts. We are not running out of keystrokes to accomplish this spending. Debt issuance is a policy choice. Not a necessity. If the bond market doesn’t want to buy our securities at the price we’re offering them for, then we can have the Fed buy them at whatever interest rate we think is appropriate. The interest the Fed earns on these securities gets remitted to the Treasury minus the Fed’s cost of processing.

So, if we want to, we can issue no more debt, or alternatively only debt that will be bought by the Federal Reserve at an interest rate of our choice. There will be no high interest burden and there won’t be any debt that it is necessary to pay down or off. There will only be the permanent recycling of debt at very low or no interest. So there will be no need to raise marginal tax rates to 80% as Holtz-Eakin claims.

But even though there is no need to tax at 80% marginal tax rates to achieve fiscal responsibility or sustainability, we may still want to tax at those marginal rates, if that’s what is necessary to create a more equal society. In American history, there have been two central values: individual liberty and equality of opportunity. The loss of a measure of economic equality is now threatening both those great values. If we want to restore them we have to bring the great engine of big government under democratic control once again, and begin to level play fields, so that dangerous concentrations of bureaucratic power, either private or public, are neutralized, and every American has the opportunity to lead a fulfilling life.

P: Tax reform is very hard to do, has very low prospects!

Me: John Podesta is very much involved in practical everyday politics. He understands both Congress and the Executive branch very well, and the limitations of what those institutions could do in the last 20 years or what they can do today. But how good is he at predicting political change? For example, did he anticipate the rise of tea party candidates and their success in this primary season? Can he predict what the big political picture will look like in two or three years? I doubt it!

Clearly if the future political environment is like it is now. The prospects of tax reform will be small. But one thing we do know is that we live in a political economy that is being buffeted by the winds of change. There’s an appreciable danger of a double-dip recession, and there’s a widespread feeling in the country that the Congress, and especially the Senate, is dysfunctional, and that this institution must change. If it does change., if the filibuster goes, then the political context will change quickly, and tax reform will then be much easier.

But before, Podesta and Holtz-Eakin wish for tax reform, perhaps they ought to give a little more thought about what kind of reform it may be. Based on things said among the elites, many seem to feel that we should be adopting a Value-Added-Tax (VAT). This idea is very, very unpopular among the public, however, and if democratic control begins to come back, the reform we may see won’t be a VAT, but a much more progressive income tax system than perhaps they’d like to see.

H-E: If we go down the road we’re on, the best case is stagnation; the worst case is collapse and then stagnation!

Me: Well, the road we’re on is a bad one. But the road Holtz-Eakin favors is even worse. The austerity he recommends is the true path to collapse and then stagnation. It is the Hooverite path, and it is already bringing suffering and poor economic performance to the PIIGS in the Eurozone.

H-E Entitlements have to be on the table. It’s that vs. nothing!

Me: That assumes, of course, that we have a deficit or a debt problem. As I argued in Part One of this series and in other places. This idea is a myth, a fantasy, and it betrays ignorance of the workings of a fiat currency system. Most of what Holtz-Eakin says about the economy applies very well to economies on the gold standard, economies without control of their own currency, or economies with substantial debts owed in a foreign currency. But, very little of what he has to say applies to a Government sovereign in its own fiat currency, like the United States.

P: The new health care reform act changes the way we deliver health care.

In you dreams, John Podesta. The new health care reform is mostly about insurance coverage. It does have provisions that could lead to more effective and efficient health care delivery, if the providers cooperate and the act is well-administered, and if the claims of the Administration about how many additional people will be covered by insurance prove true.

However, the lack of insurance cost controls suggests that people will not be able to afford insurance once the program really goes into effect in 2014. Also, it’s doubtful that the vast expansion of Medicaid can be handled financially by our revenue-starved states even with Federal Aid specified in the act. In addition, CBO’s projections of money saved are unlikely to occur simply because CBO projections are unreliable more than a few years out.

All this means that we are unlikely to have much change in how we deliver health care, except, perhaps to have further deterioration in the way we deliver it across the board. The celebratory attitude of John Podesta about how the act is going to bend the cost curve looks to me like one of the many “happy dances” the current Administration and its supporters have done about its very limited, and highly compromised achievements. All of which have been carefully constructed with an eye toward compromise with every special interest that could possibly squawk about the legislation it passed.

Finally, a more general word about this whole debate on our fiscal future. In spite of their ostensible disagreement which framed the debate, both Holtz-Eakin and Podesta agreed that fiscal responsibility will, in the coming years, be viewed from the standpoint of our success in stabilizing the debt-to-GDP ratio. That is, fiscal responsibility for both is not about using the Government’s fiscal policy capabilities to create full employment, end poverty, create a first class educational system, rebuild our infrastructure, create a new energy foundation for our economy, or any of the other substantive public purposes that Government fiscal power can be used to facilitate, enable, and even achieve. No, from their point of view we will be fiscally responsible if we see to it that the debt-to-GDP ratio stabilizes at some unspecified level rather than continuing to grow.

From my point of view however, this is not fiscal responsibility or fiscal sustainability. I think, instead, that fiscal responsibility means using the Government’s fiscal power to help achieve public purposes Moreover, I don’t think the debt-to-GDP ratio level is very relevant to fiscal responsibility at all, simply because that ratio has nothing whatsoever to do with the Government’s capability or authority to spend.

A government like ours that is sovereign in its currency has no risk of solvency. It has the same power to spend at a debt-to-GDP ratio of 170% as it does at 30%. What it does risk is inflation, if its spending outruns the productive capacity of the economy in a given time period.

The US Government can spend quite a lot right now before it runs up against that limit since we are operating somewhere around 70% of our productive capacity right now. But, if we do really want to risk inflation, then all we have to do is to follow Holtz-Eakin’s advice, and drive our economy into a depression deep enough to destroy some of our productive capacity and real rather than just financial wealth. Then when our Government does finally turn around, and tries to mimic FDR rather than Hoover, it will find it much easier than it is now to outrun our diminished productive capacity with its spending, and to cause inflation.

In other words, apart from the unnecessary human suffering, there is another potential cost to listening to Holtz-Eakin’s austerity nostrums, rather than to those who want to create full employment within 6 months, and that is that an adventure in Austerianism might well leave us with much less pre-inflation room than we have now to life the economy with Government spending.

I’m not saying that we won’t be able to create full employment later on if we need to. We can always do that, but the room for injection of financial assets into the economy by the Government can be much less, so that the end result of Government spending is less savings for the private sector, and a longer recovery time than we would have had if we had acted in the right way from the beginning. In my view we have already wasted time with the Administration’s very poorly structured stimulus with its overabundance of tax cuts, and its relative avoidance of higher multiplier initiatives to create demand. At this point we ought to wholly ignore the Austerians, and go right to legislation that will create full employment in a matter of months.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).