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. . . .

and:

. . . . 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.)

It makes a good headline; but it’s dangerous to say “austerity is dead,” just because new budget projections indicate that the deficit has already been cut by $200 Billion more than in previous projections, and because the Reinhart-Rogoff study has been debunked successfully, and, hopefully, irretrievably. Austerity will only be dead when legislators, Presidents, Prime Ministers, Central Bankers, and international lending organizations stop trying to implement it, whether or not they stop because deficits have already been cut.

Of course, those claiming austerity is dead, mean by their claim that deficit cutting efforts have already been successful enough in the United States that future projections in all the mainstream budget plans now show only “moderate” deficits (See the Table which now includes CBO revised budget projections.) These don’t signal a debt crisis, and instead suggest that we can now turn to the really serious economic, health, and environmental challenges we face.

In addition, deficit reduction efforts in the rest of the world seem to clearly show that austerity efforts have been unsuccessful nearly always and everywhere in that their costs in economic damage have been far greater than any gains that have been made by nations purposefully pursuing these efforts. In cases, such as Greece, Ireland, Italy, Latvia, Portugal, and Spain, deficit reduction efforts have actually made debt problems worse than they were before harsh austerity measures cutting government spending were taken, because their negative effects on national economies and employment have also reduced tax revenues by more than the savings achieved from cutting government programs.

But Everybody’s Still Doing It

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On May 9, 2013, The Republican House passed H.R. 807 the Full Faith and Credit Act. The Bill says in part:

(a) In General- In the event that the debt of the United States Government, as defined in section 3101 of title 31, United States Code, reaches the statutory limit, the Secretary of the Treasury shall, in addition to any other authority provided by law, issue obligations under chapter 31 of title 31, United States Code, to pay with legal tender, and solely for the purpose of paying, the principal and interest on obligations of the United States described in subsection (b) after the date of the enactment of this Act.
(b) Obligations Described- For purposes of this subsection, obligations described in this subsection are obligations which are–
(1) held by the public, or
(2) held by the Old-Age and Survivors Insurance Trust Fund and Disability Insurance Trust Fund.

So, in brief, the Bill provides for the Treasury, even when it is about to reach the debt ceiling, to issue additional debt to pay principal and interest on debt instruments issued to the public including foreign nations, and to pay principal and interest on Social Security (SS) “trust fund bonds” in the course of paying SS recipients.

Reactions to the Act immediately fell into two categories. Some hailed it as a move toward fiscal responsibility, while others saw it as another demonstration of Republican fiscal irresponsibility paving the way for US default on some obligations not prioritized by the bill, while making sure that bond market interests and “China” would get paid what they were owed, while the American people would be stiffed, unless Democrats gave the Republicans what they wanted in the upcoming debt ceiling crisis now projected for this October. Here are some typical reactions of the two types.

From John Avlon at the Daily Beast we have:

But even Speaker John Boehner realizes that the 50 or so radicals on the far right of his own party—the Bachmann, Broun, Gohmert and King crew—are the greatest impediment to responsible self-government right now.

That’s why the new responsible Republican proposal, which passed the House Thursday by a vote of 221-207, could be the best way to defuse the debt ceiling from its most destructive impact. . . .

So the Full Faith and Credit Act should be a no-brainer. But the Obama administration is opposing the measure, releasing a Statement of Administration from the Office of Management and Budget that stated H.R. 807 would “result in Congress refusing to pay obligations it has already agreed to … this bill would threaten the full faith and credit of the United States … this legislation is unwise, unworkable, and unacceptably risky.”

And here’s one from Travis Waldron at Think Progress:

But such a plan makes it clear that the U.S. will meet only some of its obligations, leaving many Americans, including troops, veterans, and the elderly, out in the cold. . . .

Worse yet, the Republican plan doesn’t allow the nation to avoid default. If the U.S. services its debt payments but still misses others, it is still defaulting on payments it is required to make. Since the bill only allows Treasury to make payments as it receives revenues, and the bulk of its payments are made at the beginning of the month even though revenues don’t come in until later, it would almost certainly be unable to meet at least some of its obligations.

When the GOP has considered similar plans before, Treasury officials have called it “unworkable.” Bipartisan analysts said it was “essentially impossible.” Failing to fulfill spending obligations would be “the first step to becoming a banana republic,” a Bush-era Treasury official said. Instead of inspiring confidence among investors, bondholders, and the American people, the legislation would zap it.

Far from preventing default, the Full Faith and Credit Act would essentially ensure it. That wouldn’t just put paying China ahead of senior citizens and members of the military — it would also hammer economic growth both in the United States and across the world. (HTHuffington Post)

Calling this a “responsible” bill as the Daily Beast did is outrageous, and, of course, Waldron is quite right to point out that the bill is fundamentally irresponsible because if it were to pass and nothing more was done it would still not avoid a default inflicted by Republicans who refuse to raise the debt ceiling for the sake of hostage-taking. Nevertheless, even though I agree with Waldron and the President that the bill is irresponsible, I also think that the Democratic Senate should jump on the opportunity provided by the Republicans and pass it forthwith without Amendment, and that the President should sign it immediately, as part of a larger plan to take the debt ceiling off the table in all future negotiations. Here’s the plan.

Budget projections show that if the Bill is passed, then the Treasury would have the authority it needs to meet the majority of its projected deficit obligations and would lack only about $170 Billion in Fiscal 2014 to meet them all. Let’s look at CBO’s budget projection.

Total Revenues for the Treasury in 2014 are projected at $3.0 Trillion. Total Outlays are expected to be $3.6 Trillion. That’s a deficit of roughly $.6 Trillion, or $600 Billion. CBO projects net interest on debt owned by the public of $243 Billion, and I’ve estimated OASDI interest at about $225 Billion. Summing the two we see that the Full Faith and Credit Act would allow debt financing of $468 Billion, leaving a gap of about $130 Billion which Treasury can’t cover with debt instruments.

So, what can Treasury and the President do to meet its remaining obligations? The answer is that it can use Platinum Coin Seigniorage (PCS), an approach the Administration rejected in January of 2013 before the latest compromise with the Republicans allowing debt financing while temporarily suspending the debt ceiling. In January, the dominant proposal making the rounds in the blogosphere was that the Administration use a few Trillion Dollar Coins to defuse the crisis. I didn’t favor that, but preferred and still prefer a “shock and awe” $60 Trillion PCS strategy that would end austerity politics forever, if the President had the desire and the will to do that.

The President doesn’t have the desire and the will, or he would already have filled the public purse in this way. Assuming he still feels that he doesn’t want to end austerity politics, with its terrible effects on poor people and the middle class; but does want to avoid debt ceiling crises in the future, provided the Full Faith and Credit Act is passed without amendment, he can then:

– First, beginning at the start of fiscal 2014, mint platinum coins having face values of $20 Billion per month until the Federal Government is no longer in danger of failing to meet all its obligations. This is about twice the average amount of projected shortfall of $10.8 Billion per month corresponding to the $130 Billion annual shortfall projected. That amount should be enough to cover variations from the average, and also errors in the projection caused by possible recessionary effects due to the sequester and the FICA tax increase in January.

– Second the Government can keep doing this until Congress fully restores the capability of the Treasury to issue debt instruments alongside deficit spending Congress has appropriated. How long this will go on, depends on the Republicans, of course. But even over a year’s time, the amount minted would come nowhere near the Trillion Dollar Coin values the Administration found unpalatable a few months ago. In fact, if the debt ceiling crisis is resolved by year’s end, the amount minted wouldn’t exceed $60 Billion, hardly great enough to roil the international or bond markets, or most people, given the amount of Quantitative Easing (QE) the Fed has already done. If the debt ceiling crisis lasts any longer than that and the financial world gets roiled by the practice, then a) it will certainly prefer the minting of those coins to the alternative of default; and b) they’ll know which party to come down hard on in blaming someone for the continuing crisis.

– Third, at some point in this process, the Republicans will be willing to increase the debt ceiling, but since PCS is being used to avoid shutting down the government or defaulting, their leverage to extract concessions will make the debt ceiling negotiations much easier than they are today. I recommend that the Administration give away nothing to get the debt ceiling raised. It should simply insist on a no-strings attached permanent elimination of the ceiling; while pointing out that the Full Faith and Credit Act, coupled with PCS provides enough flexibility for the Treasury to continue spending appropriations and meet all the nation’s obligations, even if the debt ceiling is never raised.

This may seem to be a very hard line. But in passing the Full Faith and Credit Act, the House has given the Democrats the opportunity to use debt instruments to cover most of the deficit anyway. And PCS gives the Administration the power to cover the rest. So, the Republicans would have a choice of getting rid of the debt ceiling permanently, or allowing the minting of $20 Billion platinum coins at the beginning of every month. If that’s their choice, then I think they’ll get rid of the debt limit, before the President decides to mint a $60 Trillion Dollar coin, don’t you?

Update: CBO just released revisions to its projections for 2013 – 2023. Total Revenues for the Treasury in 2014 are now projected at $3.042 Trillion. Total Outlays are expected to be $3.602 Trillion. That’s a deficit of roughly $.56 Trillion, or $560 Billion. CBO projects net interest on debt owned by the public of $237 Billion, and I’ve estimated OASDI interest at about $225 Billion. Summing the two we see that the Full Faith and Credit Act would allow debt financing of $462 Billion, leaving a gap of about $98 Billion which Treasury can’t cover with debt instruments.

The smaller gap means that it may not be necessary to use $20 Billion platinum coins every month; but only $15 Billion coins to handle variations from the new average shortfall of about $8.2 Billion per month. Of course, if deficits accumulate faster than expected, it would be easy to simply begin minting $20 Billion coins.

(Cross-posted from New Economic Perspectives.)

This post is a more complete statement of my conclusions based on the analysis in Parts One and Two of this series. As I’ve explained in Part Two, there’s no reason in the Reinhart-Rogoff (R-R) data to believe that the debt-to-GDP ratio has a negative impact on growth. Ironically, that’s because their data set is terribly biased in its incompleteness, and was constructed to try to prove that there was a negative relationship between the debt-to-GDP ratio and economic growth. The interests supporting the RR work, both in its inception, and in disseminating its original results, were clearly trying to develop a basis for saying that since there is such a negative relationship, the right thing to do when the ratio gets too high (over 90%) is to implement a program of austerity aimed at deficit reduction, more or less drastic, depending on the individual case.

Of course, there may well be a relationship between debt-to-GDP ratios and economic growth in nations lacking non-convertible fiat currencies and floating exchange rates, and and/or having external debts in currencies they cannot issue. However, the R-R data set didn’t include those variables, so that analysis can’t be done without augmenting the data set. In such nations, MMT theory suggests that Government Budget Constraints (GBCs) on deficit spending, such as those we find in Eurozone nations would create a negative relationship between debt-to-GDP ratios and growth.

In fiat sovereign nations, such as the US, the UK, Australia, Japan, etc. we might also have the presence of an indirect relationship between variations in the debt-to-GDP ratio and economic growth through the actions of politicians who believe in austerity ideology pulling back on government deficit spending and consequently having a negative impact on economic growth through that mechanism. But to test for that self-fulfilling prophecy, and also for the negative relationship in nations subject to a GBC, someone will, again, have to augment the R-R data set and re-analyze it to include currency regime variables

In addition, we need to build on the biased and incomplete R-R data set to begin to test alternative hypotheses about the effects of austerity and different types of fiscal and monetary policy on different outcome variables and on feedback relationships from those outcome variables to economic growth and much more. When Matthew Berg and Brian Hartley say: “We suggest that simultaneous equations models may offer a way forward on the “frontier question” of causality,” they are also saying that other possible causes of both economic growth and debt-to-GDP ratios must be included in richer theories of economic dynamics, if we want to understand the place of both growth and debt in the broader context of what matters to people.

What matters to them are economic and social value gaps related to the idea of Public purpose like these:

– the gap between actual output and projected “full” output;

– High involuntary unemployment vs. full employment;

– Price stability vs. inflation or hyperinflation;

– Minimum wage vs. a living wage;

– No operative right to health care for everyone;

– social exclusion and the loss of personal freedom;

– skill deterioration due to unemployment;

– psychological harm such as sense of identity, self-respect, and sense of
empowerment;

– much greater ill health and reduced life expectancy than necessary;

– loss of motivation to live a full empowered life;

– deterioration of social relations, communities, social networks, and family life;

– increasing racial and gender inequality;

– increasing educational inequality;

– decreasing equality of opportunity;

– loss of social values and sense of individual responsibility;

– increasing economic inequality over time;

– increasing poverty;

– increasing crime rates including increasing use of control frauds by
important economic institutions;

– Failure to prosecute and punish people who commit control frauds;

– The collapse of real estate values and the destruction of the wealth of
working people after the crash of 2008;

– increasing anger against economic and political elites that get more and
more and more wealthy, and more and more immune to the rule of law;

– increasing political inequality undermining political, social, and economic democracy;

– increasing political unrest and threats of political violence both from the privileged and those seeking change.

– increasing environmental degradation;

– Increasing climate change/global warming.

– the gap between current energy foundations of our economy and new energy foundations based on renewables.

It will involve more of an effort to gather the necessary data in some of these areas than in others, and doing this kind of thing is a multi-year job. But it’s imperative that something like it gets done, because the kind of narrowly focused data set created by R-R is biased towards the concern of neoliberal ideology with debts, deficits, inflation, and economic growth, and its lack of concern with the impact of its favored economic policies on a range of outcomes important for most people. We need to be gathering data on those outcomes and analyzing the past, present, and likely impacts of alternative fiscal and monetary policies on them. In short, we need to be gathering data that allows us to test the impact of alternative fiscal policies on public purpose.

Finally, we must ask why there wasn’t a greater outcry from progressive activists and economists when the R-R study first appeared and they failed to make their data available for re-analysis and replication. After all, everyone who read their work and who knows even a little about quantitative analysis in the social sciences could see that it was based on a very superficial two-variable cross-country global data analysis, and that any result they reported had to present a false picture of causality.

This is true because you can’t provide a thorough analysis of causality between two cross-country variables without including additional variables and doing time series analysis at the national level to establish causal ordering and partial out spurious correlations. This has been well-known in the social sciences for at least 50 years.

MMT economist Randy Wray has called the R-R study “crap.” He’s right; for all the reasons just advanced, it was crap from the get-go. It presents an argument of partisan advocacy, not one of economic scientists making a conscientious effort to get at the truth.

So, the question is why has it been it challenged so little since 2010? It’s true that some economists provided critiques. But the discipline as a whole was respectful. The criticism was civil, when it should have expressed outrage. Everyone treated the critical exchanges as a matter of “he said, she said,” even though every economist who does any data analysis must have recognized the very simplistic level of R-R’s data analysis.

So, again I ask, why didn’t economists make ‘em prove it? And why did policy makers accept the findings so easily? You can’t tell me that the top economists in the Obama Administration, in the UK, and the Eurozone couldn’t see the nakedness of their co-emperors. They chose not to see.

I think there’s really no mystery here. Neoliberal elites wanted to believe in the austerity fairy tale for various reasons, including perhaps a desire to widen the wealth gap between the very rich and the middle class, and also a belief that belt-tightening in welfare states has moral value for the population subjected to that belt-tightening, though not for them, of course. For them, R-R was just window dressing for the financial sadism they wanted to implement anyway. If you doubt this characterization, then pay close attention to interviews of Erskine Bowles and Alan Simpson sometime. The are exhibit A.

But for the progressives, and others opposed to austerity, the R-R work should have immediately become a target of opportunity for educating the public about “junk” economic studies relied upon by politicians to justify their favored policies. Opposition to the study should have taken the form of telling people never to trust simplistic two variable analyses using cross-sectional rather than time series data to develop causal explanations. It should have taken the form of a demand for the economists and policy makers to prove what they say rather than just wave around a fig leaf that couldn’t possibly, and in the end did not, prove a thing about the desirability of austerity in modern economies.

But none of this occurred. And partly as result of this dog who never barked, millions around the world live with economic hardship lasting for years. Millions lost their homes. Millions went into bankruptcy, and many thousands needlessly died from lack of medical care and are still dying today.

(Cross-posted from New Economic Perspectives.)

In Part One, I asked whether the Carmen Reinhart/Kenneth Rogoff study and book didn’t show that, on average, nations experiencing debt-to-GDP ratios above 90% had negative rates of economic growth? And I said the answer to the question was “no.” But I didn’t explain why that was true. So, here goes.

The Fall

When Reinhart and Rogoff published their work they did not make their data set available to people to replicate, analyze, critique their findings, and augment to improve the data set. They ignored the scientific norm that you do that when you’re claiming that you’ve made an important empirical discovery. Other researchers wrote them and requested access to their data set in vain for at least the past three years.

Then a few weeks, ago, they finally yielded to a request for the data set made by Thomas Herndon, a Graduate Student in economics at the University of Massachusetts (UMass) in Amherst. Herndon tried to replicate their analysis and findings and could not do so. In fact he found errors. Here’s a summary from the paper he co-authored with two of his professors, Michael Ash, and Robert Pollin, both of the economics department (hereafter called HAP).

RR has made significant errors in reaching the conclusion that countries facing public debt to GDP ratios above 90 percent will experience a major decline in GDP growth.9 The key identified errors in RR, including spreadsheet errors, omission of available data, weighting, and transcription, reduced the measured average GDP growth of countries in the high public debt category. The full extent of those errors transforms the reality of modestly diminished average GDP growth rates for countries carrying high levels of public debt into a false image that high public debt ratios inevitably entail sharp declines in GDP growth.

Moreover, as we show, there is a wide range of GDP growth performances at every level of public debt among the 20 advanced economies that RR survey.

Specifically, “actual average real growth in the high public debt category is +2:2 percent per year compared to the -0.1 percent per year published in RR.” That change in the findings is very important because even though the new average growth level found is still less than in the 60% to 90% category, where the average growth found was 3.2% annually, the claim that there’s a sharp drop-off between these two categories isn’t supported since the 1 percent difference is not statistically significant. In addition, neither the 3.2% nor the 2,2% average growth rates are representative of their debt-to-GDP ratio level categories, since as HAP say just above there’s a wide range of GDP growth performance in all the categories.

So, that does it. That one finding shows that RR did not show that, on average, nations experiencing debt-to-GDP ratios above 90% had negative rates of economic growth, or even that they had an average rate of growth significantly different from the average in the 60 – 90 % category. Given this finding, what happens to the further inference that high debt levels cause lower growth?

In Part One, I showed that even assuming that the R-R finding was correct it still would not have provided any test of the inference that high debt levels cause lower growth. I stated three reasons. First, R-R committed the ecological fallacy in implying that the high level debt category group growth average could be extended to individual nations and times in each group. We can see from the conclusions of HAP, that there was good reason to be concerned about the ecological fallacy because the group growth average was not found to be representative of individual nations and times.

Second, I pointed out that R-R ignored currency regime variables, failing to include them in the analysis, when it is very likely that any association between the debt-to-GDP ratio and economic growth would vary with these variables. Since HAP end up showing that there is only a small difference between averages in the over 90% category and the 60 – 90% category, it is even more likely that including these variables would have washed out the small differences found, or even reversed the relationship claimed by R-R.

Third, I pointed out that control variables that might have shown that the relationship stated by R-R was spurious were not included in the study, so that possible causes of both a high level of debt-to-GDP and economic growth could not be tested. HAP has nothing to say on this score, but it does raise the question of causality and the failure of R-R to analyze it in any rigorous way, and it concludes by questioning the claim that the R-R findings support the view that high levels of debt inevitably cause low growth.

After the Fall Empirical Research

The HAP analysis and the new availability of the R-R data quickly led to three other analyses, all of which began to explore the question of causality, each one by using more rigorous and more sophisticated though not novel techniques of analysis, than used in the study by Reinhart and Rogoff. A question which immediately occurs is why R-R with all the resources they cold call upon didn’t pursue the same or similar analyses either before or after publication of their results in 2010. After all, those replicating their study only a took a few days to begin to explore questions of causality once they had the R-R data set, yet R-R with three years of opportunity or more to do the same or similar analyses of their own data sets, evidently never did anything of the kind. One simply has to ask whether they were afraid of what they would find if they took a deeper dive into their own data.

Dube’s Distributed Lag Cross-country Panel Analysis

The first of the three studies following on HAP was done by Arindrajit Dube in a guest post at Next New Deal entitled “Reinhart/Rogoff and Growth in a Time Before Debt.” Professor Dube is also in the economics department at UMass. Working on 20 OECD nation corrected panel data set of R-R produced by HAP, Dube used LOWESS regressions and distributed lag models. His results speak to the question of whether slow GDP growth causes higher debt-to-GDP ratios, or whether, as R-R opine, while alternately protesting that correlation isn’t causation, higher debt-to-GDP ratios cause relatively low or even negative growth. They suggest that the causation is more likely to run from growth to debt-to-GDP ratios, than from those ratios to growth. Dube also found that 1) any negative relationship between debt ratios and growth is strongest at lower levels of debt, rather than at higher levels as found by R-R, and 2) there is a stronger association between past economic growth, and current debt ratio levels than the association between current debt ratio levels and future economic growth.

Basu’s Time-Series Analysis of the US, Italy and Japan

The second new follow-on to the R-R and HAP studies was done by yet another UMass economics professor, Deepankar Basu and reported at Next New Deal. He addressed the question of causality by examining time series data in Italy, Japan, and the United States, using vector autoregression (VAR) models, accompanied by Granger non-causality tests and impulse response analysis. VAR analysis isn’t enough to determine causality without making additional assumptions about an underlying causal model. But in cases, where one is analyzing a two-variable relationship using time series data and one assumes that causality can only run way or another, or perhaps both ways, the VAR technique can produce evidence about which of the two variables, if any, is prior to the other. I’ll quote Basu’s summary of his results

To summarize, I find that the time series pattern of the dynamic relationship between public debt and economic growth in the postwar U.S., Italian, and Japanese economies is consistent with low growth causing high debt rather than the high debt causing low growth. I draw this conclusion from two types of analyses: Granger non-causality tests and an investigation of impulse response function plots.

Granger non-causality tests allow one to ask the following questions: (a) do debt levels in the past help in better predicting current economic growth, and (b) does economic growth in the past help in improving predictions of current debt levels? The evidence suggests that for the U.S., Italy, and Japan, the answer to the first question is a NO and the answer to the second is a YES.

Impulse response analysis allows one to address the following questions: (a) what is the impact of an unexpected increase in current debt levels on the future time path of economic growth, and (b) how does an unexpected decline in economic growth affect future levels of debt? The data suggests that an unexpected increase in debt levels has only a small effect on future economic growth but an unexpected decline in economic growth is associated with large and long-lasting increases in public debt levels.

So, Basu’s analysis further extends HAP’s suggestion that it’s more likely that growth causes debt than debt causes growth. Like Dube’s it falsifies the austerity conjecture that debt causes growth at least in the context of a two variable model.

Berg and Hartley’s 20 Nation Panel Study

Perhaps the most important of the recent analyses of the R-R data comes from Matthew Berg and Brian Hartley who are Graduate Students in the economics department at the University of Missouri at Kansas City. They followed Dube in analyzing the R-R 20 nation panel data, used and corrected by HAP, using LOWESS regressions, and distributed lag with impulse response analysis.

First, they addressed the important question of whether the relationship between current debt-to-GDP levels and future growth is the same or at least similar across nations. They found (through an examination of individual “backwards/forwards” graphs) that this relationship varied widely across nations. That is, nations were heterogeneous, not homogeneous with respect to this key relationship. They say:

. . . Even if some sort of relationship between debt-to-GDP and growth can in fact be found in cross-country panel analysis, that relationship does not appear to hold up on the level of individual countries. Because economic policy is made on the level of individual countries, this heterogeneity appears to undercut the rationale for any given particular country to make important policy decisions on the basis of government debt-to-GDP ratios.

I’ve italicized their key point in the paragraph for emphasis. Any attempt to generalize across all the 20 nation panel data, such as the R-R attempt to say that a debt-to-GDP ratio above 90% leads to relatively low or negative economic growth contradicts what the data show at the individual nation level for the two key variables, and is therefore just a false inference.

Second, Berg and Hartley also say:

We find that the correlation between government debt-to-GDP ratios and future growth in Reinhart and Rogoff’s . . . dataset results from outliers which come from the country most suggestive of the hypothesis that slow growth causes high levels of government debt – Japan. . . .

That is, the Japanese data disproportionately distort the overall relationship and create a misleading picture, because of the unique history of Japan. But, nevertheless historical examination of both Japan and the other nations provide evidence consistent with the “reverse causation” causation hypothesis that growth causes debt to-GDP ratio levels rather than the alternative hypothesis of a debt-GDP ratio causal ordering priority. Berg and Hartley show this with distributed lag/impulse response analyses and LOWESS regressions with and without the Japanese data. The analysis, for all practical purposes, shows that there is no relationship between current year association between GDP growth and the debt-to-GDP ratio as claimed by R-R.

They also summarize:

. . . This evidence strengthens and reinforces criticisms recently made by Herndon, Ash, and Pollin . . . of research suggesting a negative relationship between government debt-to-GDP ratios and real GDP growth rates. . . . we . . . find evidence suggesting that correlation of government debt-to-GDP ratios and future growth are much more likely explained by “reverse” causation running from slow GDP growth to high government debt-to-GDP ratios than by “forward” causation running from high government debt-to-GDP ratios to slow growth. Furthermore, what little evidence there is for forward causation appears to stem almost entirely from Japanese outliers. Because – as economists generally recognize – Japan is the clearest of all cases of reverse causation, this considerably weakens the argument for forward causation. In addition, we find tremendous heterogeneity on the level of individual countries in the relationship between current government debt-to-GDP ratios and future growth. This suggests that even if substantial evidence for forward causation is eventually discovered in cross-country studies, the effect will likely be small in size and unreliable, and therefore not relevant to economic policy decisions in any particular individual country. Our findings are suggestive, but not conclusive, and more research is needed. We suggest that simultaneous equations models may offer a way forward on the “frontier question” of causality.

Conclusion: You Can’t Generalize Across All Nations and Times About the Impact of the Debt-to-GDP Ratio on Economic Growth

Actually, I think the findings of Berg and Hartley following on and taking into account the findings of HAP, Dube, and Basu are pretty conclusive and not just suggestive. What they say is that the data included in the two-variable analyses flatly contradict the idea that the debt-to-GDP ratio causes economic growth in the individual nations comprising the 20 nation OECD panel. If anything, the evidence is much more consistent with the idea that it is growth that impacts the debt-to-GDP ratio.

I think there has hardly ever been a clearer finding in the Social Sciences than this one. After all, it took HAP, Dube, Basu, and Berg and Hartley only a matter of days to arrive at it. The only way R-R could have missed it is if they weren’t looking for it. It’s as if they just weren’t looking for the truth; but were only looking for an argument that could be used to justify the austerity policies they favored. That’s not economic science. It’s bias, pure and simple.

In Part Three, I’ll end this series on the R-R affair with a retrospective.

(Cross-posted from New Economic Perspectives.)

OK, austerity has always been about the causality. The people who are trying their best to get us to cut more and more spending, somewhat less than their best to get us to raise taxes, and who are doing nothing to fix our fraud-laden financial system, or the worst period of dis-employment we’ve experienced since the Great Depression, have been making other people (never themselves) suffer, because they believe the theory that excessive public debt hurts economic growth, and that to get rid of it we must follow a plan of long-term deficit reduction. And I’m being very charitable when I opine that they believe in this theory, because the alternative is that they don’t believe it, but are just using it as an excuse to make other people suffer, and widen the wealth gap between themselves and the rest of the population.

Either way it’s important for the rest of us to demand that before we do anything more based on that theory, they should be forced to prove that it is the best theory out there about the causal relationship between public debt and economy growth. Actually, we should have made them prove that before we allowed Congress and President Obama to start playing austerity games with us way back in 2009 – 2010, because there’s been a lot of water under the bridge since then, including continuing very high disemployment, thousands and thousands of people dying due to lack of health insurance, suicide, depression-related illnesses, crime that need not have occurred, and all the effects of hopelessness that afflict the poor and the middle class during bad economic times. And now, our wonderful leaders have managed to inflict the sequestration upon us, while planning to inflict entitlement cuts on the old and the sick.

Lately, of course, the armor of the austerians, and their claims of empirical support for their view that high levels of the debt-to-GDP ratio are associated with and/or cause very low or even negative rates of economic growth has suffered repeated blows from Economics Graduate Students and Professors at the University of Massachusetts and the University of Missouri at Kansas City, in recent papers. I’ll review those studies in Part Two. In the rest of this part, I’ll evaluate the proof austerians had for their policies before this new research work appeared.

What Proof Did They Have?

So, what proof did they have, before the recent research appeared, that austerity is the best course to follow? Well, it’s been practiced all over Europe for years now, and what are the results? Only record unemployment, shrinking economies, increasing public debt, crime, public unrest, increasing suicide rates, damaged health care systems denying care to people who need them, no improvement to speak of in the economic outlook, and immense dissatisfaction all over the continent.

How about here? A stagnant economy, three steps forward, two steps back, high youth unemployment, no jobs for college graduates, layoffs in the public sector and declining services, low wages, recovery limited to the financial sector and the stock market — the kinds of results that in not so many years will produce a plutocracy, if one doesn’t exist already.

Everywhere austerity is being practiced we see a slowed economy. In some places, like Japan, we see short periods of it followed by some backing off, producing stagnation for close to a quarter of a century. In other places, like Australia and Canada we’ve seen enough of it that the prosperity they could have enjoyed is beyond their grasp.

Sure, Germany, hasn’t hit real hard times yet because their export-led economy gives them more policy space to run surpluses, but most of the nations of the Eurozone can’t run a trade surplus, so for them, continuing government austerity results in private sector losses, year after year, absent a change in rules by the Eurozone. Even the German economy has been slowing as its neighbors can afford less and less German goods, and France is seeing more than 10% unemployment and is rapidly becoming another basket case, creating the need for changing the well known Eurozone acronym to the PFIIGS. Is there an unambiguous success for austerity since the Second World War in a country running a trade deficit? I don’t know of one.

So, what about the work of Carmen Reinhart and Kenneth Rogoff? Didn’t it show that, on average, nations experiencing debt-to-GDP ratios above 90% had negative rates of economic growth? And doesn’t this provide evidence that excessive debt does cause low economic growth and even economic contraction, so that if we value economic growth, we must reduce the debt-to-GDP ratio to a much lower level than 90% before we try to use deficit spending to try again to grow?

Well, the answer to these questions is no, and no. I’ll explain the second “no” first, and consider the first “no” later on in Part Two.

Common Fallacies: First, Reinhart and Rogoff never claimed that the findings of their analysis of their very extensive cross-national, historical database supported causal inference. It’s true that after they wrote their paper and published their book reporting on their data and analysis, they recommended austerity policies and either referred to their work in that context, or have been identified by others hosting an appearance or publishing an article as having done that work to support their “expertise.” So, they talked out of both sides of their mouths; but in their work itself they acknowledge that correlation isn’t causation, and that they hadn’t proved cause and effect. And they urged further research to explore cause-and-effect relationships.

In addition, critics of their work have long emphasized that the reported association between high debt-to-GDP levels and low economic growth for all nations, had nothing to say about cause and effect in individual nations and therefore could not serve as the basis for a fiscal policy of austerity, or for Reinhart and Rogoff’s mere opinions that such a policy, expressed in other contexts should be implemented. One problem is that the association between debt-to-GDP and economic growth at levels of debt-to-GDP above 90% doesn’t apply to every instance in every nation. It’s an average, a mean or a median which is reported.

So, the association is ecological across all instances. It is the well-known ecological fallacy of social science to conclude that it applies to all or even most instances in the high debt-to-GDP category. To go on from there, and then suggest that the association is causally relevant in individual systems, is to compound the ecological fallacy with the correlation is causation fallacy. To do that is just terrible social science.

Currency Regime Variables: Read the rest of this entry →

Warren B. Mosler

(Cross-posted with permission of the author from The Center of the Universe)

The intellectual dishonesty continues. As before, it’s the lie of omission.
R and R are familiar with my book ‘The 7 Deadly Innocent Frauds of Economic Policy’ and, when pressed, agree with the dynamics.

They know there is a more than material difference between floating and fixed exchange rate regimes that they continue to exclude from their analysis.

They know that one agents ‘deficit’ is another’s ‘surplus’ to the penny, a critical understanding they continue to exclude.

They know that ‘demand leakages’ mean some other agent must spend more than its income to sustain output and employment.

They know federal spending is via the Fed crediting a member bank reserve account, a process that is not operationally constrained by revenues. That is, there is no dollar solvency issue for the US government.

They know that ‘debt management’, operationally, is a matter of the Fed simply debiting and crediting securities accounts and reserve accounts, both at the Fed.

They know that if there is no problem of excess demand, there is no ‘deficit problem’ regardless of the magnitudes, short term or long term.

They know unemployment is the evidence deficit spending is too low and a tax cut and/or spending increase is in order, and that a fiscal adjustment will restore output and employment, regardless of the magnitude of deficits or debt.

Carmen’s husband Vince was the head of monetary affairs at the Fed for many years, serving both Alan Greenspan and Ben Bernanke. He knows implicitly how the accounts clear and how the accounting works, to the penny. He knows the currency itself is a case of monopoly. He knows the Fed, not ‘the market’ necessarily sets rates. He knows that, operationally, US Treasury securities function as interest rate, and not to fund expenditures. He knows it all!

Carmen, Vince, please come home! I hereby offer my personal amnesty- come clean NOW and all is forgiven! As you well know, coming clean NOW will profoundly change the world. As you well know, coming clean NOW will profoundly alter the course of our civilization!

Carmen, Vince, either you believe in an informed electorate or you don’t!?

By
Warren Mosler
(Cross-posted with permission of the author from
The Center of the Universe)

(Editor’s note: I think this reaction of Warren’s to the death of Margaret Thatcher is pretty unique and also the best statement I’ve seen of his view of why the “stagflation” of the late 70s and early 80s went away. Hint: President Jimmy Carter had more to do with it than Paul Volcker, and Thatcher is much less important to what happened next, than the Keynesian failure to handle the stagflation, and the resulting shift to monetarist economics. Here’s Warren!)

Here’s how I remember it all.

I didn’t look anything up, with the idea that memories matter.

The ‘golden age’ from WWII was said to have ended around 1973. Inflation and employment was remembered as relatively low, productivity high, the American middle class thriving.

Why? Keynes was sort of followed. The Kennedy tax cuts come to mind. But also of consequence and ignored was the fact that the US had excess crude production capacity, with the Texas Railroad Commission setting quotas, etc. to support prices at maybe the $2.50-$3.00 price range. And stable crude prices, though maybe a bit higher than they ‘needed’ to be, meant reasonable price stability, as much was priced on a cost plus basis, and the price of oil was a cost of most everything, directly or indirectly.

But in the early 1970′s demand for crude exceeded the US’s capacity to produce it, and Saudi Arabia became the swing producer, replacing the Texas Railroad commission as price setter. And, of course, price stability wasn’t their prime objective, as they hiked price first to about $10 by maybe 1975, which caused a near panic globally, then after a too brief pause they hiked to $20, and finally $40 by maybe 1980.

With oil part of the cost structure, the consumer price index, aka ‘inflation’, soared to double digits by the late 70′s. Headline Keynesian proposals were largely the likes of price and wage controls, which Nixon actually tried for a while. But it turned out the voters preferred inflation to their government telling them what they could earn (wage controls on organized labor and others) and what they could charge. Arthur Burns had the Fed funds rate up to maybe 6%. Miller took over and quickly fell out of favor, followed by tall Paul in maybe 1979 who put on what might be the largest display of gross ignorance of monetary operations with his borrowed reserve targeting policy. However, a year or so after the price of oil broke as did inflation giving tall Paul the spin of being the man who courageously broke inflation. Overlooked was that President Jimmy Carter had allowed the deregulation of natural gas in 1978, triggering a massive increase in supply, with our electric utilities shifting from oil to nat gas, and OPEC desperately cutting production by maybe 15 million barrels/day in what turned out to be an unsuccessful effort to hold price above $30, as the supply shock was too large for them and they drowned in the flood of no longer needed oil, with prices falling to maybe the $10 range where they stayed for almost 20 years, until climbing demand again put the Saudis in the catbird seat. Meanwhile, Greenspan got credit for that goldilocks period that again was the product of stable oil prices, not the Fed (at least in my story.)

So back to the 70′s, and continuous oil price hikes by a foreign monopolist. All nations experienced pretty much the same inflation. And it all ended at about the same time as well when the price of crude fell. The ‘heroes’ were coincidental. In fact, my take is they actually made it worse than it needed to be, but it did ‘get better’ and they of course were in the right place at the right time to get credit for that.

So back to the 70′s. With the price of oil being hiked by a foreign monopolist, I see two choices. The first is to try to let there be a relative value shift (as the Fed tries to do today) and not let those price hikes spill into the rest of the price level, which means wages, for the most part. This is another name for a decline in real terms of trade. It would have meant the Saudis would get more real goods and services for the oil. The other choice is to let all other price adjust upward to keep relative value the same, and try to keep real terms of trade from deteriorating. Interestingly, I never heard this argument then and I still don’t hear it now. But that’s how it is none the less. And, ultimately, the answer fell somewhere in between. Some price adjustment and some real terms of trade deterioration. But it all got very ugly along the way.

It was decided the inflation was caused by unions trying to keep up or stay ahead of things for their members, for example. It was forgotten that the power of unions was a derivative of price power of their companies, and as companies lost pricing power to foreign competition, unions lost bargaining power just as fast. And somehow a recession and high unemployment/lost output was the medicine needed for a foreign monopolist to stop hiking prices??? And there was Ford’s ‘whip inflation now’ buttons for his inflation fighting proposal, and Carter with his hostage thing adding to the feeling of vulnerability. And the nat gas dereg of 1978, the thing that actually did break the inflation two years later, hardly got a notice, before or after, and to this day.

As today, the problem back then was no one of political consequence understood the monetary system, including the mainstream Keynesians who had been the intellectual leadership for a long time. The monetarists came into vogue for real only after the failure of the Keynesians, who never did recover, and to this day I’ve heard those still alive push for price and wage controls, fixed exchange rates, etc. etc. in the name of price stability.

So in this context the rise of Thatcher types, including Reagan, makes perfect sense. And even today, those critical of Thatcher type policies have yet to propose any kind of comprehensive proposals that make any sense to me. They now all agree we have a long term deficit problem, and so put forth proposals accordingly, etc. as they are all destroying our civilization with their abject ignorance of the monetary system. Or, for some unknown reason, they are just plain subversive.

Thatcher?

It was the blind leading the blind then and it’s the same now.

And that’s how I remember it/her.

And i care a whole lot more about what happens next than about what happened then.

:(

(Editor’s note: So, we have ignorance about the fiat monetary system and “chance” to blame for the displacement of the Keynesians by the monetarists, the victories of Thatcher, Reagan, and neoliberalism, and the ensuing decades of increasing evolution to a new feudalism. This is the broad scope of change over the past 40 years. In viewing this change, we can’t forget what it’s done and is still doing to people. Bill Mitchell’s retrospective on Thatcher is very good on that. Don’t miss it!)

Jack Foster proposed a framing document for High Value Platinum Coin Seigniorage, in a recent comment he made on one of my posts. In response, I posted a six-part blog series to accommodate readers who prefer the blog format.

Some, however, will want to read or reference a single framing document, rather than six separate posts, and I prefer it in that form myself because it facilitates seeing the whole picture provided by the many and diverse objections to PCS and HVPCS. So I’ve provided one here. I think the full picture provided by the many objections is that of opposition grounded in a fierce unwillingness to change familiar ways of performing Federal deficit spending requiring debt issuance, even though many of those offering objections know very well that the Government is perfectly capable of creating its own high-powered money without selling debt instruments, and even know that all money creation in our financial system is ultimately, if most often indirectly, based on the constitutional authority of the Congress, and its delegation of that authority to other parties.

What can one say about this except that it is mere conservatism and grounded in fear of the unknown at best, or worse, grounded in a desire to continue to benefit from the financial system in one’s own, rather than the public interest? I’m not saying that conservatism is never rational, or that it is unjustified in all cases. But I think my evaluation in the series, and the full framing document indicates that many, and perhaps all of the objections that have been offered to HVPCS reflect a transparent bias to preserve the present system and are relatively easy to turn aside, because they are a stretch reflecting the bias of the people offering the objections.

In any event, that’s my view of the matter, and I leave it to others to read the framing document and to evaluate for themselves, whether the pattern I’m drawing out of the objections makes sense to them. In doing that I hope others will join me in continuing to gather objections to HVPCS I haven’t covered here, and to record these in comments, so that the document may be kept up to date and may become the primary reference for objections and replies to HVPCS. Let’s try to transform this into a crowd-sourced document, so that it becomes a true community document. I’ll be looking forward to your comments and your contributions!

(Cross-posted from Correntewire.)

How many times have you heard that the Government can only spend money after it raises revenue by either taxing or borrowing? Nearly every time someone talks or writes about the US’s public deficit/debt problem? How come nobody asks why, since Congress has the unlimited authority to create coins and currency, it doesn’t just create money when it deficit spends? The short answer is that Congress in 1913, constrained the Executive Branch from creating currency or bank reserves, delegated its power to do that to the Federal Reserve System, and never looked back when we went off the gold standard in 1971, even though this removed the danger of money-creation outrunning gold reserves, and also created a new monetary system based on fiat currency.

How It Works

But coins, it turns out are different from currency and bank reserves. They’re the province of the Executive. And Congress provided the authority, in legislation passed in 1996, for the US Mint to create one oz. platinum bullion or proof platinum coins with arbitrary fiat face value, having no relationship to the market value of the platinum used in the coins. These coins are legal tender. When the Mint deposits them in its Public Enterprise Fund (PEF) account, the Fed must credit it with the face value of these coins. The difference between the Mint’s costs in producing the coins, and the reserves provided by the Fed is the US Mint’s “coin seigniorage” or profit from the transaction.

The US code also provides for the Treasury to periodically “sweep” the Mint’s account at the Fed for profits. These then go into the Treasury General Account (TGA), the spending account of the Treasury, narrowing or eliminating the revenue gap between spending and tax revenues. So, for example, say the Secretary of the Treasury ordered the Director of the Mint to create a $60 Trillion (face value) coin; and deposit it in the PEF account at The NY Federal Reserve Bank. The Fed would credit the PEF with $60 T in reserves, and the Treasury would then “sweep” the seigniorage, nearly $60 T, into its spending account.

Benefits

Platinum coins with huge face values such as $60 T, can produce seigniorage closing the revenue gap and technically end deficit spending, while still retaining the gap between tax revenues and spending that can add to aggregate demand and produce full employment. Platinum Coin Seigniorage (PCS) is also a way for the Executive to end debt ceiling crises, since the profits could be used to repay debt instruments when they fall due, without the need to issue any more debt.

The seigniorage from a $60 T platinum coin would serve as a potent symbol of the truth that the Federal Government can never involuntarily run out of money. This is one of the central ideas of MMT that the public needs to accept routinely, to understand that the Government’s budget isn’t like their household budget. The presence of the $60 T in the public purse would be a positive enabler of progressive legislation creating benefits that people want now, but austerians say we can’t pass because “we can’t afford it.”

If all debt instruments are re-paid by using PCS, then, eventually the US would have no debt subject to the limit, or presence in the bond market, and would pay no interest to bond holders. No one would worry about the public debt, or use its size to justify blocking legislation that fulfills public purpose and promotes the general welfare.

So, PCS-based elimination of debt can end the whole austerity mind set that provides our current budgetary process with its constraining conservative cast, focused on narrow monetary cost considerations, rather than on a broader progressive framework that weighs the real costs and benefits of proposed fiscal activities of the Federal Government. Congress and the Executive would then evaluate the substance of legislative proposals based on their likely direct impacts and side effects on the lives of Americans, rather than their impact on Federal deficits and surpluses. Then the issues will be about what people need, and what improvements we can make by working together through the Federal Government. That would be the fulcrum of a new, game-changing politics, not debt, deficits, and debt-to-GDP ratios.

Why we need to get it done right now!

It must be done now! If it doesn’t, then people who are against the use of PCS will have time to organize against it and get it repealed by the Congress. Now that the PCS capability is widely known, the FIRE Sector will be gunning for it with all the financial, political and propaganda power it can bring to bear. It will do that because using PCS, especially the $30 T or greater coin, High Value Platinum Coin Seigniorage (HVPCS) I propose, strikes at the domination of the financial and political systems by Wall Street and the big banks. Cullen Roche explains why:

The most interesting thing about the coin idea is that the biggest threat of the coin was to the existence of private banking. I am actually surprised that a major bank hasn’t come out very publicly stating that the coin was ridiculous. Why? Because the coin exposes a potentially enormous change in the way the US monetary system functions. Instead of having a money system that is designed almost entirely around private banks (who issue most of the money) the coin threatened to expose the reality that government could self finance if it wanted to. In other words, the government could become the permanent primary issuer of money (as opposed to choosing to use private bank money).

So the Fed’s role is of particular interest here. And we must again ask ourselves. What is the Fed? Is it a public entity or private entity? It’s a bit of both. The Fed is a strange sort of hybrid public/private entity. But the coin decision has to make one wonder where they stand on this issue and whether the Fed has imposed its will on a potentially important debate. Is this merely a case of the Fed being apolitical and independent? Or is this a case of the Fed siding with its true master – the private banking oligopoly? I don’t know, but one thing we know for sure is that the Fed is not merely serving public purpose at all times. After all, its existence as a support feature for an oligopoly that serves private purpose (banks are slaves to their owners) renders the Fed compromised on public purpose to some degree.

So, HVPCS threatens the banks’ domination of the Fed, and also their role in money creation, and with it some of their income. The more time that passes without using HVPCS, the more likely it is that the Executive Branch will lose this capability to Wall Street’s persistent political efforts at repeal, and become the actual, rather than only the pretended (kabuki) prisoner of debt instruments and austerity once again.

Already, some bloggers in the business press who want to use the TDC to avoid the debt ceiling have proposed and expressed support for the idea that the capability to use PCS could be repealed in a swap for repeal of the debt ceiling legislation. This is a very unequal swap, because the power to use PCS, along with the willingness to use it, already makes the debt limit a dead letter.

The only swap that makes any sense is repeal for legislation giving Treasury the same right as the Fed has now, to create money out of thin air, but only for the purpose of repaying debt subject to the limit and covering deficit spending appropriated by the Congress; because this, and only this, is the equivalent of the PCS power. The only thing that would be more preferable than either of those things is to end the “independent,” really big bank and Wall Street dominated, Fed, and make it accountable by placing it under the direct authority of the Executive Branch and the Secretary of the Treasury with the Fed’s current capabilities to create money intact.

Progressives need to fight for retaining the Executive’s capability to use PCS, because that is the quickest road to ending austerity politics and preparing the way for Modern Money Theory-based policies to deliver sustainable economic prosperity, full employment, low inflation, and fiscal policy devoted to the public purpose. Removal of the capability would require that austerity politics be ended through change in the Congress. That sort of change, however, is years down the road, whereas the President can make HVPCS happen right now.

(Author’s Note: h/t to Jack Foster for proposing a framing document for HVPCS. This is it; but divided into 6 parts for blogging convenience. The rest of the series will deal with objections made to HVPCS and answers to them.)

(Cross-posted from New Economic Perspectives.)