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Hey Patriotic Billionaires, You Can Do Better Than the Buffett Rule, Anyway!

7:05 am in Uncategorized by letsgetitdone

Well, the legislation implementing “The Buffett Rule” has been voted down in Congress as we all knew it would be. But so what? The Federal Government doesn’t really need your money, since it can generate all the money it needs to pay off the national debt and also close any gap between tax revenues and Federal spending that Congress may want to legislate for the foreseeable future.

There’s no problem of Federal solvency. There hasn’t been since 1971, when the US went off the Gold Standard! The idea that we risk insolvency is just a fantasy of people who won’t acknowledge that the US Government is the monopoly supplier of fiat currency to the non-Government sector of the economy, including all of the private sector.

However, even though your money isn’t needed by the Government, it is very badly needed to help fund two things, I’ll describe below. But, before I do that, since your patriotism has moved you to advocate for higher taxes for yourselves, I hope and expect that you will be motivated to spend the same amount in the two areas of activity where your money is most needed and would be much more effective in bringing the United States back to the state of a healthy democracy, than it would be if you and and other similarly situated patriots paid it to the Government in taxes.

I know you’ve frequently heard the Republican response to your proposals for higher taxes on very wealthy people like yourselves, namely that if you’re so sure that higher taxes on the very wealthy are the right thing to do, then you can always contribute the additional money to the government, if you really want to. Well, my view is that you can equally well, and with much greater effect on restoring fair and effective functioning to our democracy, contribute that money directly to activities that will change key background conditions that are driving our democracy towards plutocracy right now. Here are the two areas of activity.

Countering Economic Myths Standing In the Way of Change By Spreading the Economic Approach Called Modern Monetary Theory (MMT)

The old neo-liberal economic ideology neither explains nor predicts events or outcomes in the economy. Its failures are routine and legion. They are now to be expected, and one of neo-liberalisms greatest failures is its theories about what “fiscal sustainability” and “fiscal responsibility” mean. For neo-liberalism, fiscal sustainability is a budget that is not too deeply in deficit, a public debt-to-GDP ratio that is stable over time, and a gap between the projected revenues and expenditures of the National Government that is closing. Fiscal responsibility, on the other hand is legislating budgets that provide for fiscal sustainability.

These ideas however, assume that National Governments are necessarily constrained by their debt-to-GDP ratios, absolute levels of public debt, whether or not the projected gap between revenues and spending is closing over time, whether or not they can borrow back their own currency from the private sector, and, ultimately by their need to fund spending by either taxing or borrowing to avoid becoming insolvent. These assumptions however, are flat-out wrong when one is talking about a government with its own non-convertible fiat currency, a floating exchange rate, and no debts in a currency it can’t create.

That kind of Government isn’t limited by its ability to tax or borrow. It has the constitutional and legal authority to create whatever money it needs, and since it does “fiscal sustainability” and “fiscal responsibility” mean different things for that sort of Government than for a Government that’s on the gold standard, or is subject to some other currency standard it doesn’t control.

”Fiscal sustainability” is the extent to which patterns of Government spending do not undermine the capability of the Government to continue to spend to achieve its public purposes. “Fiscal responsibility” is fiscal policy intended to achieve public purposes while also maintaining or increasing fiscal sustainability.

So, the REAL Government fiscal responsibility problem for the United States, or other nations with sovereign fiat currency systems is not the problem of everyone “sucking it up” and responsibly accepting austerity. It is not targeting the debt-to-GDP ratio and managing Government spending to try to stabilize it.

Instead, for the US, it is the problem of people facing up to the need to use fiscal policy to stop our out of control economy from ruining the lives of any more Americans. This means that the REAL solution to the REAL fiscal responsibility problem is for Congress and the Executive Branch, to remove fiscal constraints and use the fiscal powers of the Government to fund solutions to the many national problems we face, starting with creating full employment, and a real universal health care system in which no one is shut out, or forced into foreclosure or bankruptcy by medical bills, and then moving on to all the other serious problems we face, but now will not handle because all our mainstream politicians and media voices claim a non-existent fiscal incapacity of the Federal Government.

But, there is no incapacity! We have not run out of money! We have only run out of will and courage and new ideas about economics! We need to get those back, and do what must be done to reclaim the future. But before we can get to that we need to get beyond neo-liberalism and its views on fiscal sustainability and fiscal responsibility because the dominance of these views in our political system means that every discussion about what we can do to solve our problems begins and ends with the question of whether we have the money to implement the solution, and, if not, how are we going to pay for it?

That question and its answer with reference to neo-liberal ideas about fiscal sustainability and fiscal responsibility limits and constrains the policy options we consider. It is a lens through which we see the world of policy options, and it is a lens that forces us to look at the world through a glass darkly. We need to replace that lens because it prevents us from seeing the world as it really is, and acting upon our real options.

So, we need to teach people what fiscal sustainability and responsibility mean for a 21st century America with a sovereign fiat currency. Millions of people are going to have to learn the point of view and basic ideas of the economic approach called Modern Monetary Theory (MMT), and more broadly the more general outlook of Post-Keynesian Economics (PKE). Once they learn these ideas, they then will be a position to give up on the austerity programs being advocated both by the Romney candidacy and the Obama Administration. This is critical because unless we abandon austerity and the neo-liberal view of the need for long-term deficit reduction to achieve their notions of fiscal sustainability/responsibility, we’re sure to slip into another recession or depression, that will probably be even deeper than the one we’ve been slowly recovering from.

Don’t believe me? Look at what’s happening all over Europe. Governments tightening up, trying for austerity-led growth, and what’s the result? Collapsing economies, ruined lives, civil unrest, increasing emigration from nations mired in poverty, and the spectre of threats to democracy. In the US, Canada, Australia, and New Zealand, the economies aren’t in a total funk, but the retreat from short-lived fiscal stimulus and increasing emphasis on the fairy story of “fiscal sustainability” is resulting in flat or only very slowly recovering economies, still far away from full employment. In Japan, in spite of continuing near-zero interest rates, passive fiscal policy continues to result in a long-term “balance sheet” recession.

In short, the continuing failure of neo-liberal economic policy all over the globe, is telling us that the world as well as the United States has to change course. That change is to move to post-Keynesian economics and specifically to the MMT approach, because policies based on that approach are most likely to restore full employment and sustainable economies operating at full capacity.

However, a major barrier to the spread of MMT is funding comparable to that available to think tanks, policy advocacy organizations, research institutes, and university centers devoted to the neoliberal approach to economics. But there are only a handful of university research centers heavily involved in MMT work; not a single policy advocacy organization, no think tanks, and no non-university research institutes. There are also very few conferences devoted to spreading the MMT approach.

So, patriotic billionaires, I think this is one area where the money you won’t pay in taxes can do much more for the United States than if it had been paid in taxes. Part of it can fund the network of think tanks, policy advocacy organizations, research institutes, and university centers needed to support MMT economics in its challenge to failed neo-liberalism. With that funding we can greatly speed up the process of economic and political paradigm change, and we can avoid the worst of the neo-liberal failures that otherwise are very likely to come over the next decade. Use your patriotism here! Help spread ideas about economics that can give the 99% a share and that can help move the US away from plutocracy and back towards democracy and open society. I know you value democracy and think it has an economic and social justice aspect to it. Otherwise, why would you have supported the idea of higher taxes for yourselves in the first place?

So, here, here, here, here, and here are the web sites that are at the heart of the MMT movement. They’re the place to start if you want to learn more about it and to contact people who can help you to plan the MMT network needed to change economic thinking in the United States and around the world.

The MMT support effort may require in the neighborhood of $500 million of support annually because the entrenched neo-liberal paradigm that MMT has to overturn is supported by literally billions of dollars annually. This funding is not trivial. But, along with the second area I’ll discuss just below it will change everything in American politics and make us capable of becoming a nation that can solve its problems in a way that serves both freedom and equality of opportunity: the two main values that are the reason for being of our nation.

A Meta-layer for Restoring Democracy and Open Society

(Parts of this section were written with the help of my friend Henk Hadders)

The second area in which the patriotic billionaires can have the most impact in revitalizing democracy in the United States is in funding a meta-layer for restoring democracy and open society in the form of bottom-up e-participation platforms that enable people to self-organize at little or no cost into extremely large voting blocs and political coalitions around political agendas and then to monitor, evaluate, and hold office holders accountable to these agendas, while neutralizing the influence of big money on politics. Efforts to create such platforms and some existing platforms don’t envision or provide the functions necessary to create such a meta-layer and some of them also fall short because they’re aimed at mobilizing people in the service of specific policies in a top-down fashion.

They don’t provide an environment for letting voting blocs self-organize as much as they provide one for supporting a pre-conceived voting bloc being created to support a particular kind of agenda and particular kinds of candidates. Other e-participation platforms may be bottom-up oriented, but the business plans of their creators include anticipated revenue from selling data and information to all comers including groups representing existing political parties and other interests representing oligarchical elites for their use in astro-turfing the users of these platforms for purposes of the oligarchy. To help in understanding what’s at issue in creating the right kind of e-participation platform, here’s some background on the context and requirements for the kind of platform we need to strengthen and restore American democracy.

The movement toward oligarchy in human-based systems happens because powerful people and institutions don’t like continuous bottom-up self-organization, and the appearance of new ideas, ideologies, and power structures that come along with it. So, they intervene to stop or regulate it, and, in doing so, destroy the essence of democracy; the ability of people to always organize anew and disturb and even displace the policies, power structures, elites, and institutions of the past with new ones, more adaptive in solving the problems of the present and future.

That is what is happening in the world and in the United States today. A globalizing corporate and financial multi-national elite has emerged, and in nation after nation is nullifying the will of the majority and placing national governments, even formally democratic ones under its control.

The task of any Complex Adaptive System (CAS), like the United States, is to maintain itself at “the edge of chaos.” This is difficult enough in the face of environmental influences that tend to transition CASs either to chaotic dynamics, or to closed systems inexorably driven toward a sterile mechanical equilibrium. It is even more difficult in the context of continuing political or management interventions that frequently may amplify the strength of tendencies toward one extreme or another by changing the internal environment affecting self-organization. management, leadership, and politics.

In nations that want to maintain open democratic societies, the task is about implementing policies and programs that will support self-organization in distributed knowledge processing and problem-solving by maintaining openness in problem recognition, developing alternative solutions, and error elimination, as well as openness in communicating and diffusing new solutions across the enterprise or across society. Conversely leadership, management, and politics in such systems that undermines self-organization by repressing or otherwise manipulating it, will transition human CASs away from openness and democracy, and towards extreme conflict systems, or authoritarian or totalitarian oligarchies.

But that’s exactly what is not happening in the United States today. Instead, we see very well-funded political parties and corporate and financial front groups astro-turfing anger and rage into channels acceptable to the elites doing the funding. It’s all “top-down,” with funding coming from an oligarchy. This isn’t just what’s happening with the tea party. We see it throughout politics with front groups of all kinds trying to mobilize discontent into petitions, protest demonstrations and organizations whose program and policy advocacy is formulated from the top-down with input from elite major contributors.

The elites decide which policy proposals and agendas are beneficial to, or at least okay with, them. The organizations representing their interests are expert at using idealistic slogans and rhetoric to get support for proposals that do very little to solve the problems they call out.

Ever notice the hyperbole in e-mail appeals for contributions coming across your computer screen these days? Ever notice the disconnect between that hyperbole and what you’re being asked to support or the contribution you’re being asked to make?

We’re being told that if x or y or z occurs then the results will be catastrophic. But what we’re often being asked to do will either not stop x, or y, or z or some slight variation of these things from occurring, or even if what we’re being asked to support would be effective by itself, it would do nothing to solve the underlying problem that is really responsible for the proposals we’re seeing and are being asked to support or oppose. It’s as though the elite is keeping millions busy with trivia so that they can’t organize a comprehensive effort to break the emergent oligarchy that is originating a steady stream of attacks on the public interest.

So, for democratic societies today, including the United States, an important question hangs in the balance. How can we counter tendencies toward oligarchy in our democracies by restoring self-organization and distributed knowledge processing to their proper place in reinforcing open society, democracy, and adaptiveness to environmental and societal change?

Many are looking to web-based e-participation platform innovations to provide an answer to this question. But if e-participation is to serve that purpose, rather than the purpose of elite astro-turfing, and manufacturing consent within a totalitarian oligarchy, then e-participation platforms have to fulfill certain requirements. We won’t be able to stop the movement toward oligarchy unless we can create a new institutional framework that allows us to change those aspects of our present situation supporting oligarchy and undermining open society. We need a framework that will operate within the context of existing rules and laws to create changes supporting increased self-organization and distributed knowledge processing shifting our formally democratic CAS back towards an open state.

The new institutional framework must provide a meta-layer of political interaction and networking that places new ecological constraints on the current political system, driving it back towards a condition in which the ability of individuals to both arrive at more accurate constructions of reality, and act on them, through increased self-organization and distributed knowledge processing, is dominant. The meta-layer can be provided by a web-based platform eventually incorporating most of the eligible voters in a political system, and providing capabilities for political organization that can overcome the impact of big money and media on political parties, legislators, legislatures, and politics generally.

Here are the requirements for such a framework. It must provide or enable:

– social contexts and milieus within which people can organize themselves and others around public policy agendas, comprised of policy options and policy priorities, into voting blocs and electoral coalitions ranging from very small to blocs of millions of voters without needing sizable financial resources from sources external to these social milieus, and without being subject to external mass media communications influenced by financial oligarchs and other special interests;

– social contexts and milieus offering the possibility of informal group and social network formation around these policy agendas;

– social contexts and milieus that are transparent and inclusive in providing participants with previously developed data, information, and knowledge, and in allowing them freedom to participate in communicating, organizing, collaborating, critically evaluating, problem solving, and decision making within voting blocs and electoral coalitions;

– social contexts and milieus in which participants have a modicum of trust in other participants and the highest level of trust in the neutrality of the web-based platform, its administrators and management, in: 1) maintaining the absolute privacy of information about individuals gathered in the context of the platform, except for information necessary to allow participants to contact and communicate with one another to form voting blocs and electoral coalitions and information individuals choose to disclose themselves in accordance with rules existing in voting blocs they choose to join; and 2) supporting all voting blocs wanting to self-organize, grow, and create electoral coalitions with other voting blocs.

– participants and voting blocs to communicate their policy agendas to candidates for public office and office holders, and also securing either commitments to these agendas, or clear refusals to support them;

– participants and voting blocs to continuously monitor and rate performance of office holders against agendas and to decide whether to continue to support them after performance ratings are arrived at;

– tools for voting blocs and electoral coalitions to organize efforts to get both major party and third party candidates and initiatives onto ballots, and to get people to the polls to vote. Simply, it must provide tools to enable voting blocs to do all the things political parties now do to support candidates they want to elect and ballot initiatives they want to pass.

In short, the new institutional framework must provide an alternative network of social and political relations to the contemporary world of political parties, established interest groups, and astro-turfing organizations. This alternative world must embody the key attributes of open society, which means it must provide an informal communications and knowledge network that is very much independent of the mass media, and also capable of enabling creating highly cohesive voting blocs and electoral coalitions of many millions of people, and even new political parties, which can offer decisive support to candidates and office holders in return for their continuing support of voting bloc agendas. The alternative world will then work as a meta-layer constraining the prior political world, and preventing it from concentrating power in oligarchies, by subjecting them and their representatives to continuous self-organization, critical evaluation, new emergent candidates for office independent of the oligarchy, and a cultural background of new knowledge arising from distributed knowledge processing.

Aristotle pointed out that monarchies were subject to transformation to tyrannies, aristocracies to oligarchies, and constitutional governments to democracies (mob rule). He had no way of knowing that such transformations may have something to do with whether the processes of self-organization decay to such a degree that lack of adaptive success in each of these systems drives their transformation to their perverted forms.

He also had no way of envisioning the need for modern constitutional liberal democracies to continuously renew themselves with new distributed ‘wicked’ problem-solving capabilities and accountability mechanisms that can only be produced through openness and self-organization supported through modern IT web-based e-participation platforms. These platforms can provide a meta-layer of new knowledge, cultural norms, and self-organization, for democratic political systems, unconstrained by and not open to, manipulation by emergent globalizing elites.

Without these new e-participation platforms, and the continuous self-organization they will bring, the iron law of oligarchy will continue to dominate representative democracies, and they will travel further along the real road to serfdom. With them, we can create the meta-layer necessary to strengthen self-organization into voting blocs, electoral coalitions, and web-based social networks in such a way, that new policy solutions can be continuously introduced, along with new mechanisms of accountability. That meta-layer can ensure that policy elites either become representative, or are quickly replaced by new officeholders who won’t rely on the financial and organizational resources now co-opting self-organizing movements, the heart and soul modern democracies. With it we can repeal the Iron Law!

So, the second area in which funding from patriotic billionaires is needed is in getting the right kind of e-participation platform working as quickly as possible. The amount of funding needed is much less than in the area of supporting the new MMT approach. Rather than $500 million annually to set-up and maintain a powerful network supporting economic paradigm change; e-platforms enabling creating the meta-layer for revitalizing democracy would take about $5 million to get off the ground, if done right, and might well be self-supporting during the second year of their operation.

Funding in this area won’t require nearly as much of a commitment from patriotic billionaires as paying higher taxes would. But the returns from this funding would be way out of proportion to the size of the investment, since it could well mean the survival of American democracy itself. A very good place to find out about some of the things going on in e-participation, and some available tools is Demo-net. Another with some interesting perspectives and tools is here. In addition, elsewhere, Henk Hadders and I have discussed an e-participation platform under development — a case study fulfilling the meta-layer requirements I laid out earlier. The platform is called the Interactive Voter Choice System (IVCS) and is based on a US patent.

(Time for Full Disclosure: I’m part of a community of MMT bloggers attempting to educate people about the MMT approach, but I’m not a regular contributor at any of the cites mentioned above. Nor do I receive any support from any of the universities or MMT research centers I’ve linked to.

I blog in the e-participation area too, and have written a good deal about IVCS. I’m also part of a team of advisors, all volunteers, helping Nancy Bordier, the inventor of IVCS, to implement the platform. I am not an employee of IVCS however, nor do I sit on the Board of Directors of any entities associated with it.)


I know, I know, there’s one big and obvious issue I’ve yet to consider. Here I am calling for patriotic billionaires who’ve been advocating for paying higher taxes themselves, to spend a sizable proportion of what they would have been willing to pay, on two things that I think are important: educating people about MMT, and implementing an e-participation web-based platform enabling a meta-layer for revitalizing democracy in the United States and eventually everywhere. But, the truth is, there are so many worthwhile things the patriotic billionaires could do with that money, and may already be planning to do with it. So, what makes me think that these two activities are so important that they are the two out of many worthwhile activities that should be supported at the levels I’ve suggested?

I think it comes down to a question of leverage. Replacing neo-liberalism with MMT and overturning the iron law of oligarchy by creating a meta-layer for revitalizing democracy are the two most important things we can do to create the America of our dreams.

The first will allow us to formulate fiscal policies that can produce full employment, sustainable growth, and reduce economic inequality. The second will allow people to make their elected representatives accountable to them, rather than the oligarchs, once again. The two together will allow us to fix the long list of problems that still remain unsolved because solving them isn’t in the interest of the oligarchy. That’s why these two are the critical things we need to get done, and are also the best use of the funds the patriotic billionaires were willing to give up to the tax man. Hopefully, they’ll agree with this analysis, and help make an MMT network of organizations, and a meta-layer for strengthening democracy both vibrant realities over the next year.

(Cross-posted from

Avoiding A Debt Ceiling Election Sellout!

11:16 am in Uncategorized by letsgetitdone

Wonderful Scrollwork In Library Of Congress Jefferson Building

(photo: paul_houle/flickr)

During the past few months the results of polling suggest that Barack Obama will be re-elected. But they also show that his support is shallow and could be shaken easily by an economic downturn during the next 6 months.

A few more months of very small or negative job growth, a rise in the unemployment rate to 9%, a blizzard of super-Pac propaganda, a lot of schmoozing by Ann Romney, some press coverage of the Obama Administration’s coddling of the mortgage fraudsters, the usual distractions from the most serious issues facing the United States, and who knows? People may well decide that they can overlook the robotics, the Mormonism, and the blatant lying of “the Mittster,” and take a chance that he can get them those jobs, even at at the price of scaling back their social safety net including their access to health care for the sake of providing a few more hundreds of thousands or millions of bucks per year to his good ball club and race car-owning cronies.

But, what are the chances that there will be that economic downturn that will suddenly result in a new ball game for our ever-hopeful and persistent corporate acquisitions star pander-bear? Well they’ve gotten a little better lately, I think.

Straws in the Wind

First, the BLS reports that only 120,000 full time jobs were gained in March, perhaps 100,000 less than anticipated. The news is also worse than that, if you look carefully at the numbers.

Second, Federal Government spending this year is down $433 Billion compared to last year at this time. That’s about a 3% of GDP drop, discounting any fiscal multipliers that might have been generated by spending at the same level as last year, and is about half the amount of spending appropriated in the ARRA fiscal stimulus bill of 2009.

Third, Federal Government tax revenues are running $45 Billion ahead of least year. Adding that amount to the $433 Billion in spending reductions, the Federal Government’s net spending input into the non-Government sector is nearly $500 Billion less than it was at this time a year ago.

Now that is fiscal drag. It is going to be reflected in economic growth; and it is going to be reflected in declining levels of employment growth, and perhaps in a growing unemployment rate or faux shrinkage of the work force, caused by BLS definitions of the labor force defining people out of it.

Fourth, now, into this mess comes the expectation that the debt ceiling may once again be reached by this Fall, just before the election. The Administration won’t want a debt ceiling fight disturbing its re-election campaign and giving Romney the chance to charge the President with fiscal irresponsibility.

The President’s campaign may well be able to manage that charge and turn it around on the Republicans. But the fight would be messy and risky, and if the President is ahead in the polls at the time it might well provide an opportunity for Romney to get level with him.

This President doesn’t seem like much of a risk taker to me. Others may disagree with that. But I think he likes to avoid uncertainty if he can, and that he will work hard to avoid a fight with the House Republicans until after the election.

In addition, as the debt ceiling approaches, the Administration may try to ensure that there is no messy fight over it by cutting back on Federal deficit spending to avoid reaching the debt ceiling before the election. In fact, it may have already started to cut back, which may be the explanation for Federal spending already lagging behind its pace of a year ago.

If this analysis is right, then we can expect Federal spending to lag behind last year over the coming months as well, with the results showing up in lower GDP and employment numbers. The Administration will probably play a game where it tries to balance Federal spending against economic results in such a way that after some time of letting the economy live with fiscal drag, it spends very fast to get it to build a head of steam in the last four months before the election, with a peak coming in September, but without breaching the debt ceiling. It may then try to make sure that the BLS results for October are available only after November 6th, at least if they don’t continue the downward unemployment trend planned for the four months just before October.

But what if games like this don’t work well for the Administration, what if it can’t balance things well enough, and spends too slowly to show that the economy is “moving in the right direction” near election day? Or what if it spends too fast and hits the debt ceiling on October 15th and there is a confrontation in the final weeks of the campaign?
The likely game the Administration will play may be successful in persuading the public that unemployment is improving, but it is, clearly, another risky course, which the President and his Party will want to avoid if they can. So, what will they do? Read the rest of this entry →

(MMT − JG) + Medicare for All ≠ MMT

10:24 pm in Uncategorized by letsgetitdone

In my last post, I discussed the first part of Beowulf’s post entitled: “(MMT − JG) + Medicare for All = MMT,” and also some dialogues between Jamie Galbraith and both TomThumb and Beowulf related to the MMT Job Guarantee at one of FiredogLake’s Book Salon’s featuring Jamie’s new book Inequality and Instability: A Study of the World Economy Just Before the Great Crisis.

In Beowulf’s post, he highlights replies by Jamie to a question about the JG including this point:

“. . . the federal government handles *insurance* extremely well. Social Security and Medicare are functional, efficient programs. That is why they are so hated by some people – and prized by others.”

Beowulf then remarks:

“I rather agree with his last point. As I’ve suggested before, Congress should dump universal healthcare funding onto the Fed’s lap. This would have the side benefit of providing the Fed with a fiscal policy tool; they could periodically adjust the rebate’s ratio of seigniorage vs transaction fee revenue depending on economic conditions.”

Beowulf then follows with more details of one of his way out-of-box proposals illustrating an unequaled talent (and I mean this in the best possible way) for policy wonkery, that puts the likes of the unjustly celebrated Ezra Klein to shame. Before I get to these details however, I’ll note that the general idea would require Congressional legislation and also legislation that gives the undemocratic Fed more authority than it has now.

In my view it would reinforce the Fed’s position in the Government, and since I think that position both violates constitutional separation of powers and also provides the financial industry with undue influence over the operations and policies of the Central Bank, my first reaction to Beowulf’s proposal is that it incorporates a big negative to begin with.

Beo goes on with the details:

“To take a few minutes to unpack my last paragraph (you can punch out if you don’t want to go into the weeds)… While Obamacare was being debated in 2009, Anthony Weiner went on the Morning Joe show to make a ridiculously strong case for a single payer system (Part I, Part II). Congressman Weiner was promised a floor vote on a Medicare for All bill he drafted but Pelosi and/or the White House pressured him to drop it so people would pay less attention to how flawed Obamacare really was (but I digress). Unlike the HR 676 Medicare for All bill that you often see touted, Weiner’s bill was actually vetted by the CBO so its additional expenditures were matched by additional taxes… A LOT of new taxes (approx $1 trillion a year, that’s over and above current govt health spending that’d roll over into the new system). Raising taxes seems rather unnecessary since Congress could accrue this revenue without taxes or inflation simply by mandating the Fed deposit an equivalent amount in TGA every year.”

So, there’s the Congressional action necessary for universal health care. Congress has to legislate Medicare for All, and then has to mandate that the Fed deposit an equivalent amount without either taxing or borrowing. So, where would the money come from? Beo goes on:

“The Federal Reserve Act was amended in 1980 to give the Fed governors (and NOT the FOMC) the authority to levy and adjust bank transaction fees. Of course this is completely different from bank transaction taxes, after all, only Congress can levy taxes! In 2005, UW-Madison Econ professor Edgar Feige proposed to President Bush’s tax reform panel a bank transaction tax (of approx. half of one percent) that would generate $1.8T in revenue (in 2002 dollars). My reading of the FRA is that the Fed could enact Feige’s plan on its own (though Congress can always push them if they won’t jump). In perhaps the most wonderful example ever of “its a feature, not a bug”, economist Bruce Barlett complained of Feige’s plan,

“Since GDP equals the money supply times the turnover of money—what economists call velocity—a fully effective transactions tax will presumably reduce velocity. Consequently, it would be severely deflationary unless the Federal Reserve substantially increased the money supply to compensate. It also means that the tax base will shrink as soon as the tax is imposed.”

“So this is the plan, the unstoppable force of $1 trillion in inflationary Medicare spending would meet the immovable object of $1 trillion in deflationary transaction fees. Of course we only need spending and revenue to match at full employment (and even that assumes no trade deficit demand leakage). At other times, The Fed could use this as an adjustable fiscal policy tool (the Board of Governors can amend their fee schedule at any time). When the economy falls short of full employment with balanced trade, the Fed could fund Medicare by cutting transaction fees and filling the deficit by way of the Mint with coin seigniorage (I’ll just note in passing that ordering, say, a $1 billion platinum coin seems less wasteful than a billion $1 coins, reasonable minds can differ).”

So, Beo has advanced an ingenious proposal for passing Medicare for All with perpetually mandated Fed funding coming from 1) bank fee revenue collected by the Fed and then deposited in the TGA, and 2) US Mint coin seigniorage profits generated by high face-value platinum coins during those years when recessions make it desirable for the Fed to back off some portion of its fee revenue for covering Medicare for All spending. Funding health care this way would not come up against the debt ceiling problem, and it would likely save the non-Government sector at least $800 B per year, or $8 Trillion over a decade, which it could use for other things besides health insurance/out of pocket spending, by putting the private health care insurers out of business and by disciplining the providers through cost negotiations with the Government, now acting as the single-payer.

An elegant proposal, right? But there are a few problems with it.

First, it makes the Fed always very subject to bank influence in the position of deciding what the bank fees will be. No doubt the banks will continuously push for reductions in the fee revenue and more reliance on seigniorage for Medicare funding.

Second, as indicated earlier, it increases the authority of an undemocratic institution that is already too powerful.

Third, why would Congress agree to mandate the Fed to go this way? The fees involved will be viewed as taxes by the banks, whatever they are called, so they will oppose them and will require their allies in both parties to defeat such a proposal.

Fourth, isn’t the fiscal tool given to the Fed in the proposal relatively ineffective and also unnecessarily generous to the financial sector in hard times? That is, backing off the transaction fee revenue will feed bank gross profits which will be transmitted disproportionately to wealthy executives and stockholders. So, isn’t the fiscal multiplier associated with backing off fee revenue and using coin seigniorage to fund Medicare for All likely to be relatively ineffective since we know that multiplier is likely to be similar to the one associated with tax cuts for the wealthy, which is roughly 30 cents on every dollar cut?

Fifth, isn’t this proposal unnecessarily complex from a political point of view? That is, if Proof Platinum Coin Seigniorage (PPCS) (the method of getting around the debt ceiling originally suggested by Beo some time ago) is going to be used anyway, and the Executive is going to be brought into the picture, then why start with the Congress to try to get this done?

Why not do what I suggested in this recent post and earlier? Namely let the President start with a $60 T coin, pay down all the intra-governmental debt within a week, have the executive pay off all the debt subject to the limit held by the non-Government sector as it comes due, and then have roughly $45 Trillion in unappropriated funds sitting in the TGA, waiting for Congress to target them at specific programs.

The $45 T sitting there would serve as a very visible reminder that the Government has the money to do whatever it needs to do to help solve America’s many problems; and certainly much more than enough needed to fund the full cost of Medicare for All for many years to come, in addition to State revenue sharing, payroll tax holidays, and a Job Guarantee program to entirely end the Great Recession and enable full employment at a living wage. I think this plan is much simpler than Beowulf’s new proposal, and it has the advantage that it can generate unremitting pressure on the Congress to create Medicare for All, which it could no longer easily turn aside by pleading that the US is running out of money with $45 T sitting in the bank, and the capability to generate still more money at will if needed. No one would be able to tell the lie that the US was running out of money ever again.

Finally, it should be obvious that “(MMT − JG) + Medicare for All = MMT” is false, because even if PPCS is used for Medicare for All, its substitution for the JG still falls short of MMT objectives. Adding Medicare for All to other MMT initiatives, without implementing the JG will bring the economy closer to FE, than would have been the case without Medicare for All, but that wouldn’t change the fact that we would still be relying on a buffer stock of unemployed persons to contain inflation. That’s not an MMT prescription, because it is less in conformance with public purpose than relying on a buffer stock of employed persons for a host of reasons reviewed in many posts here.

But, in addition, and just as important, the JG program in its MMT context makes real for the first time FDR’s proposed economic right to a job for all who are willing and physically and/or mentally able to work. I think that right is an essential aspect of the idea of public purpose, and that’s why the JG program ought to be, and is, so closely tied to MMT.

In short, (MMT − JG) + Medicare for All ≠ MMT, and the only way someone can believe that it does, is if they either don’t believe that the goal of economic policy in a democracy is to fulfill public purpose; or alternatively, if their ideas about public purpose don’t include the right to a job offer at a living wage. Do all who call themselves MMTers believe in this right? I don’t know.

But I do think that in the future, as more people in economics come to recognize that there are no value-free economic systems, and that MMT cannot be free of values and normative commitments, MMTers will come to recognize that they can’t avoid making their normative commitments explicit. And when that day arrives, I think most MMT supporters and practitioners will decide that the normative commitments to real Full employment and FDR’s right to full-time work are part and parcel of MMT, as is the JG itself, because it is the best method yet devised for fulfilling these aspects of public purpose.

And also because if MMT is anything at all, then it is surely the Economics for the Public Purpose that John Kenneth Galbraith wrote about in the 1970s. MMT is the modern embodiment of the tradition named by Galbraith in that fine book. Many of us still, and will always, revere the vision expressed in that book. To those who feel this way, Economics for the Public Purpose is the only economics we will practice, because it is the only economics worthy of the name.

(Cross-posted from

Dialogues with Jamie Galbraith and the MMT Job Guarantee

10:40 am in Uncategorized by letsgetitdone

A few days ago my friend Beowulf decided to exercise his wry sense of humor with this title of a post he offered for our consideration: “(MMT − JG) + Medicare for All = MMT.” Beo then goes on to talk about some details of a comment exchange with Jamie Galbraith at one of FiredogLake’s Book Salon’s featuring Jamie’s new book Inequality and Instability: A Study of the World Economy Just Before the Great Crisis.

Dialogue 1, Jamie Galbraith/TomThumb

Beo points out that Jamie has been closely associated with the approach to economics called Modern Monetary Theory (MMT), most recently in a pretty good Washington Post article by Dylan Matthews, someone who clearly has little familiarity with who’s who in MMT world. After setting the stage by pointing out that association, Beo goes on to quote part of Jamie’s comment giving his reply to a previous question about what he thinks of the MMT Job Guarantee (JG) proposal.

Here’s that reply:

“. . . To come back to the job-guarantee approach, I think asking the government to create jobs directly is not a robust solution. The problem is that the program goes right into the budget firing line, where it will get chopped up. That was the experience with CETA, the Comprehensive Employment and Training Act, back in the 1970s.

“So I prefer to think in terms of how to get decentralized institutions doing useful things, with their own funding streams, so that you can create jobs that endure. Education, health care, social services, home care, neighborhood conservation.”

Later FDL commenter TomThumb replied this way to Jamie:

“I worked under CETA as a Social Worker Assistant and then went right to Social Work graduate school when that ended in 1977. CETA works!

“Seems like you are giving up without a fight.”

To which Jamie replied:

“Good for you. I was on the congressional staff at that time so I still have some scars from the previous fight.

“But I think there are ways to get jobs funded — you just have to put a few degrees of separation between the program and the budget-cutters.”

TT quickly shot back:

“No. I disagree. I enjoyed it when you used to call for a direct frontal attack on their weasel words about creating jobs. Anything else is caving. In my opinion. Call them out for being do nothings. That is better than watching people get hurt every day and not making any changes.”

To which Jamie replied:

“Point taken. It’s a tactical issue and there are mornings when I agree with you.”

This exchange with TomThumb shows that Jamie is of two minds about direct Government job creation, and suggests the possibility that he might well prefer it if a Job Guarantee program could be structured as “. . . . a robust solution.”

I think it can be, but that discussion will have to wait for later in the post.

Dialogue 2, Jamie Galbraith/Beowulf

At this point Beowulf entered the discussion asking Jamie what he meant by the idea of getting jobs funded by putting “. . . a few degrees of separation between the program and the budget-cutters.”

To which Jamie replied:

“Well, I like the non-profit sector in this country a lot. Health care, education — these are useful things. Paul Samuelson once said to me “Health care is 15 percent of GDP, and it’s the best 15 percent of GDP.

“The thing about these sectors is, they have multiple funding streams. Higher ed has state money, federal money, tuition, philanthropy… This buffers the institution from cuts.

“If you go to (say) France, and look at what happens when you rely entirely on state funding for universities, you’ll see what I mean.

“That said, the federal government handles *insurance* extremely well. Social Security and Medicare are functional, efficient programs. That is why they are so hated by some people – and prized by others.”

To which Beo replies:

“That’s an interesting point, from a political standpoint, multiple sources of funding makes it more difficult to starve the beast (to say nothing of the politically powerful stakeholders in education and healthcare who won’t take losing their funding lightly).”

This dialogue is really interesting from an MMT point of view. Here’s Jamie Galbraith and Beowulf, both of whom have more than a passing familiarity with MMT, talking about job creation in the non-profit sector through funding that doesn’t derive from Government deficit spending.

Now, that kind of job creation isn’t impossible provided the fiscal multiplier trades involved are favorable, but both Jamie and Beowulf know very well that, assuming multiplier trade-offs are equal, without deficit spending by the Government sector, or the non-Government sector decreasing its total savings and perhaps increasing its debt, raising funding for non-profit sector jobs is likely to cost jobs elsewhere in the non-Government sector. They also both know that from a purely economic/fiscal point of view there’s no problem in funding a JG program. The problem with it is political. Namely, that in the current political climate a JG program, however structured, is very difficult to legislate (a point all three of us agree on).

Apart from that shared judgment of political difficulty, Jamie and Beowulf appear to diverge. Jamie says that not proposing a JG program is the best tactical choice right now. But Beowulf, who now favors the Modern Monetary Realism (MMR) approach, is opposed to the JG on strategic grounds because the MMR position is that the JG will not work as advertised by MMT, specifically, MMR believes that it will not produce full employment at a living wage with price stability, even if implemented as part of a broader MMT-like program including full payroll tax holidays and State revenue sharing.

The Upshot of the Dialogues

So, the upshot of these two contrasting dialogues is that both Jamie and Beowulf are talking outside of the MMT paradigm. And they are not acknowledging, or evaluating the implied MMT view that more “robust” job creation done in the non-profit sector without Federal deficit spending backing it, will in the end, either not be robust at all, or, alternatively will decrease the robustness of other non-Government sector employment.

Put another way, the lack of robustness critique of the JG policy idea based on the notion that JG funding will always be in the line of fire from deficit hawks and Republicans applies equally well to funding job creation in the non-profit sector, because ultimately that funding too, just like JG funding, can only be based on Federal deficit spending if it is to create new jobs, at least if we assume that imports will exceed exports, and that the non-Government sector will want to increase total savings during the period when new jobs are to be created.

Also, it looks like TomThumb, has it right. Jamie is giving up on the Job Guarantee idea too fast, because his view of its ultimate political fragility applies equally well to his proposal that the non-profit sector ought to do the job creation with non-Federal deficit funding. So, where do we go from here with the Job Guarantee proposal for direct job creation? Here are a few comments that contrast with Jamie’s doubts and his views on the lack of robustness of JG job creation.

First, from my point of view, none of the MMT recovery proposals are likely to be accepted in today’s political climate. So, the political feasibility criticism of MMT’s JG proposal isn’t any more weighty right now than similar criticisms of its payroll tax cut, and State revenue sharing proposals.

If any of them are to be passed, it will be necessary to overcome the ideology of austerity and get people in Washington to accept the fact that the American Government can’t have solvency problems. Doing that is job no. 1.

When and if that is done, and people really believe that the Federal Government can afford the social safety net and all sorts of other spending too, then we can consider whether the whole MMT program including the JG is politically feasible or not. My last post outlines some things the President can do to take austerity off the table and bring the day when we can do this with a real feel for feasibility closer.

But these are not to the point here. The point, instead, is that when it is off the table, then there will be no compelling reason why permanent automatic annual Federal funding of FDR’s right to a full-time job offer at a living wage, for every person if she/he wants to work, could not be funded through Federal spending, whether deficit or otherwise.

Second, Jamie says he prefers that the non-profit sector create the new jobs. However, the current MMT JG proposals are formulated so that even though the Government is the funder JG jobs, the work itself is actually defined, structured and supervised by the non-profit sector with the participation of local stakeholders who would define jobs that produce societally valued outcomes. Pavlina Tcherneva has been doing a lot of writing about this lately, (See also recent posts) as has Randy Wray. (See posts 38, 42-45 and also the response posts following each one.)

So, even though, the funding for an MMT JG program would come from the Federal Government, the non-profit sector would be heavily involved in specifying the jobs for the JG program. The result should be a program incorporating many of Jamie’s ideas about non-profit capabilities, based on Federal funding that might have no robustness problems at all, provided that the ideology of fiscal austerity is politically defeated by the time the MMT program, including the JG passed.

Third, Golfer1John, a commenter on one of Randy Wray’s recent JG posts suggested that the JG be renamed as The “Employment Insurance” program. I think this is a good name for it, because it describes what it offers to individuals who have been caught up by economic forces beyond their control, and it can also be marketed as part of an economic bill of rights.

In an environment where austerity has been defeated and the government is revealed as being able to fund anything that isn’t so expansive that it will cause inflation, it ought to be no problem to justify both an employment insurance program to guarantee a job offer to people who want to work, and also a universal health care program based on the idea of Medicare for All. So, we can have recovery, Job Guarantees, Universal Health Care, and Reconstruction of our severely damaged economy and society without having to worry about “running of of money.”

Beowulf’s Proposal

After highlighting Jamie’s view on the JG, but failing to review Jamie’s exchange with TomThumb, Beowulf goes on to offer a proposal of his own about Medicare for All, playing off Jamie’s remark that the Federal Government “handles ‘insurance’ very well. I’ll discuss that brilliant, but ultimately undesirable, proposal in a future post. And that’s when we’ll get into the humor reflected in the title: “(MMT − JG) + Medicare for All = MMT.”

(Cross-posted from

The WaPo MMT Post Explosion: Dean Baker’s Second Try On MMT (3)

8:47 pm in Uncategorized by letsgetitdone

This is the third and last installment of a critical review of Dean Baker’s second reaction to the debate kicked off by the WaPo’s piece on Modern Monetary Theory, written by Dylan Matthews. The first two installments starting with this one, discussed Dean’s views on using the monetary channel to boost aggregate demand, devaluing the currency and increasing exports, and work sharing. In this final installment I’ll evaluate Dean Baker’s view of the problems associated with relying primarily on the fiscal channel,

Pitfalls of the Fiscal Policy Channel

”One of the problems is the potential for creating large structural imbalances that could be difficult to correct, as noted in the case of large trade deficits. But there are other reasons why exclusive reliance on the government channel may not be the best route.”

As I said above, I don’t think that Dean Baker makes a convincing case for the claim that the trade deficit is a structural balance that will be difficult to correct, or for that matter that its costs necessarily outweigh its benefits. Above all, I don’t think that Dean has made the case that we need to do something about the trade deficit rather than just letting it change as other nations decide that they’d rather consume more of their own output. So, here is a disagreement between myself and, I think, the MMT economists, and Dean and (I suspect) other Keynesians as well.

Next, Dean says:

“First, if we go the spending route, there is a risk that some of the spending will be wasteful. This is both an economic concern and a political one. From an economic standpoint, we should always want our spending to be done in the most useful possible way. In the context where the alternative is just wasting resources by having workers and capital sit idle, then paying workers to dig holes and fill them up again would be an improvement, but we should hope to do better. Rushing huge amounts of spending into ill-conceived projects is not likely to be the best use of funds.

“This also raises the obvious political issue that bungled projects make great stories for the political opponents of economic stimulus. We will be hearing much about Solyndra in the months and years ahead. It is worth taking political risks when there are clear policy gains from going a specific route, but if it is not necessary, why do it?”

I don’t think Dean is directly addressing MMT proposals in this area. MMT doesn’t advocate wasteful spending, or digging holes for the sake of the activity, or spending money on projects and programs that will waste real resources or people’s lives. There is a risk that any spending, private or public, will be wasteful or involve an excess of real costs over real benefits. But that’s no excuse for avoiding private sector spending, so why should it be one for avoiding public sector spending when that’s called for?

The events of the last ten years show that both Federal spending on Wars, and private spending on financial adventures can be disastrous, but it was wasteful investments on fantasy sand castles that crashed much of the world economy; not deficit spending in the United States intended to achieve public purpose. In fact, that kind of spending has been starved for the past 35 years at least. And right now, there is no record of wasteful public spending that remotely compares with the record of wasteful private spending over that same period.

By the way, it really hurts me when I see an acknowledged progressive give voice to the conservative narrative that public spending is somehow excessively wasteful or subject to greater corruption than private sector spending is. That is not a narrative that has an empirical foundation. It is false. And it is not a framing that we ought ever to strengthen in the way Dean Baker does here.

Moving on to MMT, itself, it favors spending that can be justified based on projections of its real benefits and costs, not projections of its nominal benefits and costs to a Federal Government that can never have any solvency problem. MMT is against crony capitalism, and for prosecutions of banksters and fraudsters. MMT proposals in the health care area would not only improve health care outcomes and reduce private sector expenditures on health care but would also produce millions of new jobs in the health care sector, while putting the health insurance barons out of business. MMT stimulus proposals for ending the recession, include Revenue Sharing grants to States on a per person basis, so that States could re-hire staff laid off in response to the recession’s impact on tax revenues. It’s very doubtful that hiring back Police, Firefighters, Teachers, and other State Civil Servants would be viewed as wasteful to most people.

The MMT JG program would have its projects planned and implemented locally with the participation of workers in the program, as well as local Government and non-profit stake holders. Only projects whose positive value could be projected by these stakeholders would be approved. Of course, some of them would be wasteful. There’s no way to avoid that. But there’s no reason to believe that many, many worthwhile projects producing valuable and durable results would not occur. That’s what happened during the New Deal, and that’s what would happen here.

On the subject of political risks, the fact that Dean even raises the question of whether there are clear benefits shows that he still doesn’t know the MMT literature. The Job Guarantee proposal envisions a permanent program, that in the context of other stimulus measures would create Full employment WITH Price Stability. Dean may doubt this claim of MMT, but before saying that he can’t see the difference between Keynes and MMT, he has to address and dismiss this claim, because neoliberal Keynesians think there’s a trade-off between Full Employment and Price Stability at some level of Unemployment.

But MMT economists firmly reject that assumption and offer a policy that, in theory, at least destroys this historic trade-off by ending the unemployed buffer stock and replacing it with an employed buffer stock. If MMT is right and this goal can be achieved, then it is certainly worth taking a political risk to try to accomplish it, and show that Government can help the economy to create both Full Employment and Price Stability in both good times and bad ones.

Next, Dean addresses tax cuts as a way to deficit spend:

Alternatively, we can go the tax cut route. There is little doubt that if we have big enough tax cuts that we will eventually prompt enough consumption to bring the economy back to something resembling full employment. However, this does raise the risk that at some point when housing has recovered, the additional consumption from the tax cut will lead to a real problem of excess demand leading to inflation. I know the MMT answer is then to raise taxes, but I am not confident that this can always be done so easily.

Politicians are not generally eager to raise taxes. If we create a situation in which we are counting on big tax increases to prevent inflation, then we run a real risk that inflation could become a big problem, especially if we have been very loose with our monetary policy.

MMT policy proposals for both spending and tax cuts occur in the context of creating a strengthened safety net with automatic stabilizers that would not require frequent positive action by Congress to maintain. The JG program is one of these. Since the JG hourly rate would be the de facto minimum wage rate and once implemented, would not be raised to compete with the private sector even in good times, so when private employers require all available labor, JG program spending would fall to close to zero, and would make close to no contribution to Government deficit spending. On the other hand, when deficit spending is needed because private sector employers had laid people off, the JG program would rapidly ramp up deficit spending to directly create effective demand.

In the revenue sharing program the program would be triggered during each cyclical downturn when unemployment reaches a particular level. The Federal grants would be implemented through a single countercyclical infusion for each cyclical downturn.

On the tax cut side, one of the major MMT legislative proposals is to cut all payroll taxes on both the employer and employee sides during a recession, when a particular level of unemployment is reached, then payroll taxes would be automatically re-imposed based on reaching a preset level of unemployment. Neither the cuts, nor the re-imposition of taxes would require Congressional intervention once the MMT program was passed.

There are variations of the above proposals, of course, and debates about which variation is best. But the main point here is that whatever tax cut programs would be implemented by MMT would be based on the idea of automatic indexing to real economic conditions. The legislation would provide for both automatic tax cuts and tax increases indexed to cyclical conditions measured by specific economic indicators.

Dean’s Conclusion and Mine

Dean next discusses the political difficulty of resolving tax and spending trade-offs in Washington, DC at this point. And he concludes by talking about his reluctance to embrace MMT because:

– He has “. . . long realized that in Washington policy debates who says something is far more important than what is being said.” And “. . . that anyone challenging the status quo is almost completely excluded from public debate.”

– And that if one can’t even “. . . win a debate on arithmetic, how can we think we will get people in policy positions to accept that their conceptual framework is wrong?”

– And that he thinks the best course is to challenge people on their arithmetic and their inconsistency if you want change, rather than to change people’s minds about the “. . . sort of monetary theory the Fed should be applying.”

I think this is a reasonable position for a person to take; but I also think that it makes the common mistake of denizens of Washington, which assumes that the politics of the past will, more or less, be the politics of the future. Politics in Washington is frequently linear and stable in its patterns over a period of years. One comes to understand those patterns and to believe that there will never be more than incremental pattern change.

However, my view is that Washington in its current state doesn’t care about logical inconsistency, or rationality, or arithmetic. At this point it is a closed “village” of opinion. As Dean implies, points of view that have no currency in the village don’t get discussed, or ridiculed when they are. The question however, is how does a closed system like this change, since it is fairly closed to changes in viewpoint that may be necessary to use to solve its problems?

I think the answer to that question is raw failure that destroys confidence in the governing world view which is neoliberalism. The highly visible failure of neoliberalism in 2008 wasn’t capitalized on by this Administration. It was loyal to the neoliberal point of vew and followed the prescriptions of neoliberals for fixing the problems it created.

However, the failures of neoliberalism continue. We see the disaster in Europe now taking shape, we see the extreme discontent among so many in American society, including most importantly the young who cannot see any acceptable future. The stresses grow with each passing year of injustice and maintenance of levels of real unemployment that haven’t been seen in this country since the 1930s.

Washington is still the old Washington, and it is terribly resistant to changes in thinking. But OWS is a movement that will come back with renewed vigor this Spring, and related movements will grow more and more intense in Europe, and the Administration’s latest attempt to bail out the big banks with the mortgage settlement will be undermined by those very banks themselves as they accelerate their immoral and illegal seizures of properties and evictions of the homeowners whose homes they have literally “stolen” through forged documents that they continue to forge.

The worst of the anger is yet to sweep this country. When it does, when the banking system falls either in Europe or here, when the big banks are taken into resolution and the serious investigations start under a new Attorney General, the changing of the guard in Washington will come; and the old regime, along with their neoliberal paradigm, will be swept away. And it is then that MMT will be accepted in Congress and the Executive Branch sufficiently, so that its policies will get a chance. If those policies succeed, then neoiberalism will be gone, hopefully for good.

(Cross-posted from

The WaPo MMT Post Explosion: Dean Baker’s Second Try On MMT (2)

11:11 am in Uncategorized by letsgetitdone

This is the second installment of a critical review of Dean Baker’s second reaction to the debate kicked off by the WaPo’s piece on Modern Monetary Theory, written by Dylan Matthews. The first installment discussed Dean’s views on using the monetary channel to boost aggregate demand, and began criticism on his views on devaluing the currency and increasing exports. This post continues that critique, and later takes up his views on work sharing.

Expanding US Exports at the Expense of Decreasing Real Wealth? (continued)

Dean goes on:

”To see this point, imagine a more extreme case. Suppose that we had a trade deficit equal to 50 percent of GDP. If the countries who were buying up dollar assets then decided that they had enough, so we could no longer rely on imports to meet half of our domestic demand, does anyone believe that the U.S. economy could quickly and painlessly replace our imports with domestic production?”

No, of course not! But, why do economists like Dean and Paul Krugman insist on relying on far-fetched scenarios to try to argue against simple truths that may apply today? The current account balance will probably be around 4-5% of GDP this year. As the economy recovers it will probably rise to 6% of GDP again, which represents a very real benefit to the United States. But there’s no reason to expect that this growth would continue indefinitely or ever reach 50% of GDP. Why should it? What are the dynamics that would drive things this way, and make other nations value the dollar so much, that they will keep their own populations barefoot?

China, India, and Japan are all under pressure domestically to change their policies and make more of their production available to their own people. Europe may also abandon austerity soon, as they experience its ravages.

The long-term trend in the current account balance won’t be up, It will be down, gradually down, for reasons I mentioned above. It just doesn’t make sense for foreign nations to continue giving more than they’re getting from the US. So, the 50% GDP scenario is just ridiculous. Why even bother suggesting it? What does the thought experiment prove, except that Dean Baker isn’t thinking through a realistic model of the forces accounting for the international trade patterns we see?

In fact, Dean isn’t even really serious about suggesting that this scenario somehow corresponds to a result of MMT economics. He says:

”I would not attribute this view to the MMTers, but then the question becomes one of a degree. Perhaps a trade deficit of 6 percent of GDP is okay, but presumably somewhere between 6 percent and 50 percent we get into a problem. It seems the question then has to be how quickly the U.S. economy could adjust to a much lower trade deficit and what is the risk that foreign countries will slow or stop their purchases of U.S. assets? We may differ on the answer to these questions, but they are the questions that must be asked.”

I think these are important questions. We should ask them. But, has Dean answered them? And do his answers indicate any serious problems for the United States economy? And if so, how does that relate to MMT? If these changes could possibly produce cost-push inflation in the United States, then MMT has some answers for that kind of problem. On the other hand, if other nations stop exporting so much to the US, then that may create less demand leakage for our economy. In which case, MMT predicts that we will get closer to full employment and also that we will have to moderate deficit spending as full employment is approached.

Dean continues with more scenarios about what would happen if foreign nations began to charge us more from imports. I won’t reproduce each of these here or critique them. But, invariably, there is a general pattern to them.

It is: suppose “A” happens involving a decrease in US imports, and a rise in the price of those imports, then that would reduce real living standards in the US. But the impact on Americans wouldn’t be uniform. Specifically those who compete with foreign workers would find their wages increasing much faster than the decline in standard of living for the general population.

In presenting examples of this pattern, Dean doesn’t discuss any possible feedback effects of the assumed changes. For example, if US imports rose in price by 20%, what would be the feedback effect of such a price rise on US exports? Maybe nothing, but maybe, also, the net effect on changes in living standards would be much reduced.

Also, what is the effect on productivity? Dean points out that the decline in living standards could wipe out 40% of productivity gains, but what if the rise in prices stimulates unexpected productivity gains in the areas where imports are an important part of the economy?

Ultimately the details in discussions like this are very important. But we need to remember that scenarios of the kind posed by Dean make certain detailed assumptions about what might happen, but invariably ignore the possibility of the full range of side effects that may also occur. Without having good models that can predict both direct impacts of changes in import/export posture of trading partners of the US and the short-term feedback effects of these impacts, we really can’t say what the final outcome would be in lowering living standards. But Dean Baker doesn’t have such models.

Dean goes on by pointing out that critics of his position who claim that if we implemented it we would have to lower our standards of living to the Chinese level are just wrong about this because there is no mechanism that would cause this to happen given our higher levels of productivity. He is right about this, in my view. But MMT economists wouldn’t make such a claim. They’d just claim, instead, that his proposed currency de-evaluation posture would cause us to send more real wealth to other nations and receive less real wealth from them, long before we would have experienced that if we did not follow his suggested policy. So, they would ask how this effect benefits us in the short run?

Dean would probably reply by saying that it would strengthen our industries and create higher paying manufacturing jobs. And then MMT economists would respond by saying: that’s true, but we can also create good jobs, even manufacturing jobs, and strengthen our industries if the Government uses the right combination of stimulus measures and a Federal Job Guarantee (JG) implemented at a living wage with a full fringe benefits program to create effective demand.

They’d add that this kind of stimulus would bring back private sector expansion here, and eventually would result in very few workers in the JG program within a year of its implementation. So, they’d argue: why not do full employment here first. Then other nations would either like the return of prosperity to the US and continue to export to us as they have been doing; or they will become alarmed at the size of the initial Government deficit. In which case, they’ll de-value our currency themselves by raising their prices. In this way they’ll implement Dean’s proposal for us, but at a later date than otherwise. So the question becomes, why preempt their devaluation of the dollar with our own devaluation at a much earlier date at the cost of free space for the Government to help employ people on projects that will create goods and services that may serve public purposes?

Dean then continues with other arguments about re-balancing trade and its effects which are largely correct. But his remarks on the devaluation strategy not being “a beggar thy neighbor” strategy are only correct if we assume that such a strategy would not lead to negative compositional effects at the higher level of the international economic system.

If US attempts to devalue were followed by other nations responding in kind, then a race-to-the-bottom could result which would harm workers in all the major nations of the world. In this context MMT would probably say, don’t devalue. Instead use fiscal policy to fully employ all of your working people, and then let other nations devalue your currency as they please. There will be far less danger of a race to the bottom in this scenario, since your attempt to employ all of your own people to domestic tasks producing valued outcomes, can hardly be viewed as an attack on the desires of other nations to continue to export to you.

Is Work Sharing a Separate Channel for Raising Aggregate Demand?

”In my original comments I did not mention work sharing, but it really should be included in any discussion of full employment policies. There is nothing natural about the current length of work weeks and work years. They are the result of a set of historical processes and policy decisions which could well have been otherwise. In Western Europe, the standard work year for full time workers is around 20 percent shorter than in the United States. . . .

“In this context, it is difficult to see why we should not look to meet a shortfall in demand in part by encouraging employers to reduce work hours. The government already subsidizes layoffs through unemployment insurance. What can be the logic in saying that the government will pay half wages for workers who have lost their jobs, but not compensate for lower pay due to a reduction in work hours?

“There are strong arguments that it is better for workers, employers and the economy as a whole to keep a worker on the job where they can be continually upgrading their skills rather than risk the possibility that they endure a long period of unemployment. This is a well-researched topic. The long-term unemployed have great difficulty finding new jobs and many will never be re-employed. If we have a route to avoid this risk, why would we not take it?

“If it ends up being the case that increased use of work sharing leads to changes in the standard work week or work year, that would be great in my view. This would lead to more family friendly work places and likely better lives. The basic point would be that workers would be getting the benefits of increased productivity growth partly in the form of more leisure, not just higher income. (This assumes that we can restructure the economy so that workers do get the benefits of productivity growth.) Also, this should be great news for the environment. There is a very solid correlation between income and greenhouse gas emissions. If people can get more time off in lieu of higher take home pay, it would be a relatively painless way to reduce greenhouse gas emissions.

I find myself in complete agreement with the proposals in the past few paragraphs and the arguments for the benefits of work sharing. I have only one problem with it, and that is why Dean classifies this proposal as a separate channel from the Government deficit spending channel?

From my point of view, making the standard work week 35 hours and mandating the kinds of fringe benefits they have in Europe and compensating workers directly with Government subsidies for the reduction of 5 hours of work per week they receive, is definitely using the Government channel to raise aggregate demand, since the increased demand comes from the Government subsidy assumed by the proposal. It’s not a proposal the economists developing MMT have put forward. But I’ve put forward a similar proposal, and I see nothing in it that is in conflict with MMT.

So, I think we’re back to three channels, not four, and given the objections I’ve recorded above to the first two channels, I think it’s time to move to Dean’s problems with “exclusive” reliance by MMT on the fiscal policy channel.

(Cross-posted from

The WaPo MMT Post Explosion: Dean Baker’s Second Try On MMT (1)

10:42 pm in Uncategorized by letsgetitdone

Dean Baker added to his previous discussion on MMT in a second post in reply to some of the comments on his first one.

He begins by implying that the comments didn’t persuade him that MMT is any different than the Keynesian Theory he learned 30 years ago, There were, however, many good comments from people who are fairly knowledgeable about MMT, and pointed to many distinctions between MMT and Keynesianism. Since he says he wasn’t persuaded by them, but doesn’t engage them directly in this second post, my first reaction to itt is to conjecture that he’s not open to recognizing that MMT is different, but has a vested interest in saying that there is nothing new there. If he were really open to changing his view, then I think he would have directly exchanged with the MMT commenters to see if they had answers to his specific criticisms of their replies. Instead he just went on to provide a discussion of MMT vs. his own views in a framework of his own choosing that doesn’t engage MMT basics.

In his first post he recognizes that in Keynes:

“. . . . there were three channels to raise the economy back towards its potential:

1.Government spending and tax cuts;
2.Expansionary monetary policy; and
3.Devaluing the dollar to increase net exports.

and then adds:

”. . . a fourth channel that can move the economy to full employment by reducing the average workweek or work year: work sharing.”

Dean says that MMT economists advocate focusing on the first channel and “disparage” using the other two, while not recognizing the fourth at all. Dean goes on to discuss his views compared to what he thinks is the MMT position on the “four” channels beginning with the monetary channel.

Like MMT Says: Monetary Policy Would Be Ineffective

He replies to criticisms saying that the monetary policy channel would be ineffective in creating recovery by saying that he was only claiming that the Fed can do more than it has so far done, and not that monetary policy could produce full employment. He offers a number of arguments and measures the Fed could take. I won’t go into the details here, but the bottom line seems to be that he thinks the Fed could add $20 Billion to aggregate demand mostly through mortgage refinancing arrangements.

My own bottom line is that what he outlines might work, but only proves the MMT point that monetary policy can do very little to help solve our present economic problems. We have about a 28 million person U6 employment problem, which could take as much as $1.2 Trillion in carefully formulated deficit spending. So, adding $20 Billion in aggregate demand to the economy makes very little contribution compared to the scale of the problem. It’s the proverbial drop in the bucket and justifies the lack of emphasis MMT places on this channel. In short, just as MMT says, Monetary Policy would be ineffective, taking into account the scale of the problem. Using it should at best be an afterthought.

Dean says further:

”I can see no reason why we would not want the Fed to push the monetary channel as far as possible. There is no obvious downside and considerable potential benefit.”

From the MMT point of view, there is a downside to emphasizing monetary policy. That is, it’s a blunt instrument, with a very small impact, which isn’t targeted on effective demand, and one result of it is to pay much more in interest to bond holders than would otherwise be the case. Many MMT writers believe that such interest is unnecessary and represents risk-free welfare to wealthy investors and foreign nations. The interest paid doesn’t deprive the Government of money, because there is no solvency consideration, given MMT assumptions. However, the distribution of wealth is more unequal than it’s been in a very long time, and since there’s no need to issue bonds and pay interest, and exacerbate this inequality, why continue the practice of welfare for the rich?

Expanding US Exports at the Expense of Decreasing Real Wealth?

Dean next goes back to the idea that a more expansionary (higher interest) monetary policy would lead to a decline in the value of the dollar and that would carry the further benefit of expanding US exports. But I think this chain of causation is very questionable. Why would the Chinese, Japanese, Eurozone and Oil trading partners allow us to depreciate the dollar so we could import relatively less from them. and export more of our own products? For years, their policies have been diametrically opposed to this. So why would they back off in the face of a more expansionary monetary policy by the Fed?

Dean says he doesn’t understand the MMT objections to devaluing the dollar in order to balance trade better and says specifically:

”Certainly the United States can run large trade deficits for periods of time, but this does have real consequences. If we assume that other countries will not subsidize our consumption indefinitely, then we will at some point have to adjust to a world in which we have some semblance of balanced trade.

I don’t see how we can think that going from large deficits (e.g. the 6 percent of GDP we ran in 2006) to balanced trade can be painless. Industries do not just spring up overnight. The process of adjustment will inevitably mean some inflation and reduction in living standards, as the goods that we used to get cheaply from abroad will be replaced by higher priced domestically produced goods.”

Well, try this Dean. The MMT argument is that as long as other nations are willing to send us more real wealth in return for dollars, than we send them, then that is a net benefit for American consumers. Certainly, our willingness to accommodate their desire to exchange exports for dollars has caused real damage to US industries, and the erosion of skills and capabilities among workers and has also cost the jobs of Americans.

All these are big negatives. But they exist, in large part because our self-destructive theories about our economy and the role of fiscal policy stand in the way of using the Government’s fiscal power to enable full employment on all manner of projects that would help us rebuild our nation, its skills, its educational system, its energy foundations, its environment, its infrastructure, its health care system, and also to help us act collectively solve the other problems that beset us.

In other words, the big negatives that are related to our positive current account balance with the rest of the world (colloquially known as our trade deficit) are costs that we don’t have to bear, according to MMT, to get the benefits of imports. We could employ Americans fully, our people could be developing new skills and experiences, our wealth in facilities and social conditions we all share could be vastly increased, if the Government used its capability to help us fulfill the opportunities the current account balances give us to turn to other things that badly need doing, rather than making televisions, toys, clothes, and all the other things we no longer make. MMT says that the Government’s deficit will equal private sector savings plus the current account balance. So, if both are high that makes room for large Government deficits, and, in fact, actually demands them, since if we try to reduce them the end result will be less real wealth coming from imports and less nominal wealth accumulated from savings.

As for the idea that the current situation is temporary and that the day will come when the current account balance is smaller or even negative so that we export more than we import, MMT certainly recognizes that sooner or later that will happen. But MMT economists don’t think that kind of change will happen overnight or will necessarily be a really painful adjustment. Why should it be?

Our trading partners have vested interests in exporting to us. They also have large holdings of nominal wealth denominated in USD. They won’t want to see that wealth devalued suddenly. They will continue to prop up the dollar, and will gradually adjust the trade balance situation.

That adjustment will involve their consuming more of their own real wealth. It will result in our own businesses becoming more competitive with their goods and services on offer here, and abroad, so it will drive up production here and create more private sector jobs here, which is what would happen anyway if we followed deliberate policies at this point to devalue our currency to decrease imports and make our exports more attractive.

Summing up, there are advantages in our having a positive account balance that’s very large and there are other advantages in having one that’s smaller or negative. I think the position of MMT is let’s enjoy other nations sending us real wealth in return for electronic credits for as long as this situation lasts, and let’s make good use of the opportunities it gives up to do all the things we need to do to solve problems here at home. And when the world turns and other nations want to consume more of their real wealth and send less to us, then let us vigorously respond by shifting our capabilities to producing real goods and services that we need and want to have available to us domestically. Everything should all work out well in the end, as long as don’t, in either trade situation, waste the lives of our own human beings who want to live rewarding lives through work and attachments to their families, communities, and America itself, by keeping them unemployed, barefoot, anxious, and servile so that a very few people can continue to enjoy domination over the economic and political system we share.

I’ll continue my critical review of Dean’e second post in twi more upcoming installments.

(Cross-posted from

The WaPo MMT Post Explosion: Matthew Yglesias’s MMT

11:54 pm in Uncategorized by letsgetitdone

Matthew Yglesias posting in Slate, also gave us a few words on Dylan Matthews’s post about Modern Monetary Theory (MMT). He starts with this thought:

”Is the inflation of the 1970s a myth? I don’t think it was, but something Dylan Matthews’ excellent overview of Modern Monetary Theory illustrates is that some people think it was. That to me is a mistake, and people should try to separate the merits of heterodox macroeconomic theory (which I think are considerable) from a handful of incidental political commitments that its adherents have. The core point of MMT is that if you have a freely floating fiat currency then the sovereign can’t “run out of money” and the point of taxes is to regulate demand not to finance government activities. But even though this is a “heterodox” view, I think few mainstream people would actually deny it. Instead they think that talking in these terms will lead to dangerous inflation. I think that fear is overblown, but not as overblown as Jamie Galbraith thinks it is.”

The 1970s Inflation

Reading this, I had the definite feeling that the old aphorism about people who fight new paradigms and ridicule/marginalize their adherents, and often opine later that there is nothing new there, is all too true. Matty ought to give everyone a break and admit that the mainstream has been beating the drums of insolvency terrorism since shortly after the Obama Administration began and still is. So, mainstream people have been saying that there can be an insolvency problem in very large numbers, and if they are doing so less now, it’s only because any fool can plainly see that austerity is failing all over the world, as MMT predicted when the austerity craze started, and also because many more people are reading MMT blogs than was the case two years ago, and they are beginning to pick up some of the core insights.

To say that “. . . few mainstream people would actually deny it. Instead they think that talking in these terms will lead to dangerous inflation” is to to imply that most mainstream people are elitist liars who have been engaged in deficit terrorism because they thought it was a more effective political tactic than using the inflation bogeyman.

That may, in fact, be true. But I wonder what the mainstream would have to say about Matty’s implication, that its economists haven’t really been being ignorant and dumb; just elitist, dishonest, and manipulative.

I lived through the inflation of the 70s, and I can attest to its reality, and severity for some people, but relatively mild impact for others. I also think that the causes of that inflation were not simply increases in nominal unit labor costs, but increases in interest costs caused by the Federal Reserve’s policies, the actions of the oil cartel, and particularly the Saudis, the activity of speculators, the constraining regulations on Natural Gas production, and the failure of the Carter Administration to employ price controls and rationing due to its neoliberal biases.

The other factors I’ve mentioned were much more important in causing the inflation than rising nominal labor costs, which were primarily reactive to the cost-push inflation caused by the other factors. Government deficit spending had almost no role in the 1970s inflation, which was due much more to cost-push than to demand-pull factors.

Types of Inflation

Matty next quotes Galbraith from Matthews’s article pointing out that we haven’t seen a serious demand-driven inflation since WWI and that one occurred under very unique circumstances unlikely to happen again.

”I think this contains some insight. Unfortunately the standard concept of “inflation” runs together two very different scenarios. In one kind of “inflation”, China abandons Maoist economic policies, its population gets richer, as it gets richer they start eating more meat, and this pushes the worldwide price of meat, dairy, and grains upward. That’s a real thing and it hurts real people in their pocket books, but these kind of global commodity price fluctuations aren’t effectively addressed by demand regulators. And one story some people have about the seventies is that it was just a global commodities issue. OPEC pushed up the price of oil, so we got “inflation” but this is nothing like the World War One case where dodgy government financial practices eroded the value of money.”

To me, this was really an “off the wall” response to Galbraith’s view, since Galbraith was clearly talking about the likelihood of demand-pull inflation inflation occurring in the United States, and was also implying that the Weimar and other WWI aftermath inflations had nothing to do with that policy. Also, in referring to “dodgy government financial practices” in the last sentence, Matty seems to be saying that the Weimar Government was guilty of such practices, but given the size of their Versailles-imposed reparations to be repaid only in goldmarks or foreign exchange, what could the German Government have done to recover from the War, except try the money-printing strategy to try to get the foreign exchange needed? If anybody was guilty of “dodgy financial practices” it was the Versailles peacemakers who, in imposing a Roman peace on Germany, insisted on payment conditions that the Germans could not possibly meet, especially since the French and Belgians seized control of the Ruhr and with it much of Germany’s industrial capacity in 1923.

But, that aside, Matty glosses over the fact that demand regulators can’t very well control worldwide demand-pull inflation in the international economic system from a legislative foundation in a single country, as long as they’re committed to maintaining a free market in the commodities that are the object of such inflation. That is, the China example basically says that when people in many nations other than the US and the previously developed nations get wealthy enough to create greater effective demand on certain commodities in a relatively free market, and that demand outruns supply, then price increases that hurt people will result.

But why is this a criticism or reflection on the MMT view, or what Galbraith had to say? Galbraith and the MMTers have clearly been talking about regulating demand-pull inflation in the United States caused by excessive deficit spending.

Moving to Matty’s example, MMT would certainly predict that when an economic system has no common currency, but a relatively free market in certain commodities, and also limited supply, then increasing demand might well result in inflation. As for the ’70s oil inflation, that wasn’t the result of either a free market or increasing worldwide demand for oil, but rather of the factors I called out above being called into play by the Oil Cartel’s control of the world supply of oil. So, that inflation was an instance of cost-push, not demand-pull inflation, and requires different measures to control.

I hesitate to say what MMT might recommend in the two cases of increasing world-wide demand, highlighted by Matty, because I’m not sure that all of us would say the same thing, nor am I one of the economists developing the MMT approach. But, speaking as someone who’s been researching MMT for some time, in the ’70s case, I would have placed domestic price and wage controls on commodities except on foreign sales to oil exporting countries, where prices of exports would have been pegged to increases in the prices of their oil exports. I would have also recommended de-regulating natural gas, and oil rationing to cut demand for the cartel-restricted supply. I would not have implemented higher interest rates as the Fed did. Until the very end, when the economic system was driven into recession, that only “fed” the inflation fire, while creating “stagflation.” I think such measures, consistent with MMT as I understand it, would have “choked off” the ’70s inflation in a much shorter time than the policies followed in the 1970s and the early 1980s.

As for the present increasing demand on the world’s food supply, that’s certainly not being caused by deficit spending by an International currency issuer, since there is none. And the only remotely similar entity to that is the ECB which is gradually choking off economic activity in the Eurozone to save its financial elites. I think commodity inflation must be fought by Governments legislating and enforcing existing laws against speculation, preventing cost-push inflation of the kind we saw in the 70s using the measures outlined, and by allowing commodity markets to adjust to the need for more supply, or producers to create substitutes for commodities in short supply. I also think control of speculation and market forces will probably suffice to relieve the pressure we’ve been seeing in commodities.

If that fails, however, then Governments whose economies can produce abundant supplies will have to place export controls on commodities necessary for their own populations in order to contain domestic inflation. That will not be popular. But we do still live in a nation state system, and the first responsibility of national governments still is to the general welfare of their own populations. Of course, such measures will result in other nations placing their own export controls on abundant commodities, and nations will have to negotiate bilateral agreements to serve their respective populations.

Unit Labor Costs

Matty Yglesias continues with his remarks about inflation:

”That’s why my favorite indicator of inflation is “unit labor costs”:

“Unit labor costs are basically wages divided by productivity. It’s not the price of labor, in other words, but the price of labor output. If productivity is rising faster than wages, then even if wages themselves are rising, unit labor costs are falling. Conversely, if wages rise faster than productivity than unit labor costs are going up. Clearly there’s nothing wrong with a little increase in unit labor costs here or there. But over the long term, growth in unit labor costs needs to be constrained or else it becomes impossible to employ anyone. And you can see that in the seventies it’s not just that gasoline got more expensive, we had an anomalous spate of high unit labor cost growth. That was inflation and it’s what led to the regime change that’s governed for the past thirty years.”

Now that way of putting things is strange. Not that the general point is wrong, but if real unit labor costs exceed real labor productivity over the long term, that would create survival pressures for business. But, if there was an anomalous rise in labor costs in the 1970s, there was also an initial anomalous rise in the cost of oil before that rise, and later there was an anomalous pattern of interest increases implemented by the Fed that hasn’t been seen before or since, as well as anomalous rises in commodity prices. To read the quote above, one would think that the rise in unit labor costs was itself inflation, rather than just an adjustment of the cost of labor to all the price increases going on around it.

The truth, again, is that the inflation of the ’70s was caused by a complex of inter-related phenomena and the rise in unit labor costs was only one of these. It may have been the one that neoliberals focused on in the ’80s to avoid pinning the blame for what happened on the Cartel, the failures of the Carter Administration and the Fed’s policies, and to claim that the inflation was due to demand-pull factors, but that doesn’t mean that their analysis was correct.

Today, we know that Paul Volcker and Jimmy Carter handled the 1970s inflation incompetently, and we also recognize that the behavior of the Cartel, and the excessive regulations on natural gas made this a cost-push and not a demand-pull inflation, and that the Fed policy of targeting the unit cost of labor as a trigger for raising interest rates for the next 30 years or so was part of its low inflation at the cost of high unemployment policy that it illegally engaged in, in violation of the Humphrey-Hawkins Act. In his post, critiquing Matty’s missive, Steve Randy Waldman (SRW), had the following to say:

“. . . Yglesias has fallen into a trap. Unit labor costs are not “basically wages divided [by] productivity”. That’s not the right definition at all. [See update.] Unit labor costs are nominal wages per unit of output. With a little bit of math [1], it’s easy to show that


An increase in unit labor costs can mean one of two things. It can reflect an increase in the price level — inflation — or it can reflect an increase in labor’s share of output. The Federal Reserve is properly in the business of restraining the price level. It has no business whatsoever tilting the scales in the division of income between labor and capital.

Yet throughout the Great Moderation, increases in unit labor costs were the standard alarm bell cited by Fed policy makers as an event that would call for more restrictive policy. And all through the Great Moderation, except for a brief surge during the tech boom, labor’s share of output was in secular decline. (More recently, the Great Recession has been accompanied by a stunning collapse in labor share. Record corporate profits!)”

SRW continues his discussion in this vein pointing out the Fed’s hawkishness on unit labor costs has had a heavy constraining influence on the presidency because Presidents have wanted to be very careful about economic policies that might increase unit labor costs and cause the Fed to activate contractionary reactions. He says further:

“. . . . In this environment, the decline of labor unions and their shift in focus from wage growth to working conditions was understandable. If workers won on wages, they would lose when the recession put them out of work. As long as wages were contained, monetary policy was “accommodative”, and workers could supplement their purchasing power with borrowings and asset appreciation. During the Great Moderation, wage growth was rendered obsolete. A superior means of middle class prosperity had been invented. Or so it seemed, until we experienced the toxic after-effects in 2008. Now we have grown skeptical of debt-fueled pseudoprosperity. But the covert hostility to wage growth that underpinned Great Moderation monetary policy remains unchallenged.

“I imagine some readers saying to themselves, “But still. If the labor cost of ’stuff’ is allowed to grow, how can that not be inflationary? It’s common sense.” And that’s true, as far as it goes. But if the capital cost of stuff grows, that must also be inflationary. Suppose we define the complement to unit labor costs, unit capital costs. Unit capital costs might be defined as “business profits per unit of output”. Would it be politically tolerable in the United States to have a central bank that prevented expansions of business profit per unit sold? Is restraining profitability of investment a proper role for a central bank? If suppressing returns to capital would be improper, why on Earth do we tolerate a central bank that opposes returns to labor?”

Very good questions. Why have we allowed the Fed aided by presidents to implement policies that increase returns to capital, but suppress returns to labor? Is this what Americans think has been going on and what they approve, or has this been made possible only because of “the independence” of the Fed, its systematic lack of transparency to the public, and the unwillingness of Presidents to contest the power and “independence” of the Fed either legally or informally?

Time for a Change in Regimes?

Even though Matty Yglesias seems convinced of the importance of increases in nominal unit labor costs as a primary cause of inflation needing to be constrained in the long run, he, nevertheless agrees with SRW and I that the approach to constraining such costs that the US has followed for the past 30 years and more cannot be continued. He says:

”In the wake of the Great Recession, I think we need another change in regime. We can’t continue with an approach that always delivers on price stability but frequently leads to prolonged spells of mass unemployment. But I think to push for that regime change credibly, people need to acknowledge what went wrong in the past and need to explain why it won’t happen again. I would say, for example, that one of the great virtues of the more globalized economy of 2012 rather than 1972 is that the freer flow of goods across borders makes inflation much less likely.”

I agree that the approach we’ve been following won’t do, and with SRW’s notion that Fed policy should not be biased in favor of returns to capital and against returns to labor. It is very plain to me that the severe economic inequality that has developed in the United States, and that now threatens our democracy, is in great part due to the Fed’s policies in past decades and to its fixation on inflation control. But I also think that changing these policies to ones that would be more neutral won’t work to redress the inequality that has already been created. What needs to be done instead, is to positively bias Fed policy toward returns to labor for some time to come, as part of a more comprehensive policy to lessen the levels of economic inequality that beset the American social, economic and political systems.

I also agree with Matty Yglesias’s call for people to acknowledge what went wrong in the past and to explain why it won’t happen again. But as I said earlier, my thinking about what went wrong in the ’70s, and also MMT thinking about it are both very different from his. As a result, I think corresponding explanations of why it won’t happen again are likely to be very different also. Again, I don’t think what we have to acknowledge is that increases in unit labor costs caused the ’70s inflation.

In fact, I think that is a very partial, and therefore false narrative of what happened then. And I’m afraid I also think that Matty ought to take his own advice and acknowledge the roles of 1) the Cartel, 2) the Federal Reserve, and 3) the Carter Administration as all being much more important in the severity of that cost-push inflation then the rise in unit labor costs was.

And, I think an explanation of why that is unlikely to happen again, will have to be conditional on the wisdom of future Federal Reserve Governors and Presidents in providing the right responses to any reconstitution of the Cartel, or aggressive moves by the Saudis and oil speculators to drive prices up. If the ’70s are not to happen again, it will not be enough to rely on the more globalized economy of 2012, with its cross-border competition among workers, creating a race to the bottom in wages, and untoward returns to capital.

The Federal Government will have to be much more aggressive in implementing a response, recognizing that an inflation like that in the 70s would be cost-push and not demand-pull. And that to manage it, policies that choke off government deficit spending, and tighten credit, will be much more costly than policies involving trade retaliation, price controls, rationing, substitution of commodities subject to cost-push, and above all continuous and very substantial investments in government programs developing alternative energy sources.

(Cross-posted from

The WaPo MMT Post Explosion: Kevin Drum’s Take on MMT

11:44 pm in Uncategorized by letsgetitdone

Kevin Drum, posting in Mother Jones, also threw his hat into the ring of discussion about Dylan Matthews’s post about Modern Monetary Theory (MMT). Kevin begins by characterizing MMT as “. . . . an economic model that, roughly speaking, says government deficits are always good unless there’s a risk of runaway inflation.” He then favorably quotes Jared Bernstein’s post, which I recently evaluated, coming out against the idea that deficit reduction is “pure virtue,” and also coming out for the view we need to use Government’s ability “. . . to run large deficits in times of market failure” to replace lost aggregate demand. But Kevin doesn’t get why Jared says this is MMT’s greatest contribution. Kevin wonders why this is any different from what “ Old Keynesianism. And post-Keynesianism. And New Keynesianism” say, and he asks: “If that’s really MMT’s most important contribution, who needs it?” And then replies:

The more important side of MMT is its insistence that we should run substantial deficits even when the economy is in good shape. Only when inflation appears ready to run out of control should we use budget surpluses to rein things in.

And then through quoting Matthews and Jamie Galbraith as quoted by Matthews, Kevin makes the point that we haven’t seen a serious case of demand-driven inflation since World War I and that involved, as Jamie said: “. . . conditions that will never be repeated.” And then Kevin goes on:

In some sense, this all comes down to a question of how scared we should be of inflation. Mainstream economic opinion says that a strong focus on full employment will inevitably risk high inflation, just as our current obsession with low inflation produces generally high unemployment. If we were focused on, say, a target unemployment rate of 4%, we’d see some periods where unemployment fell below that rate and some where it rose above it. But as the chart on the right shows, that’s not what we’ve had over the past few decades. Instead, because our economic policy has been focused strongly on low inflation, we see only a couple of brief periods in which unemployment barely got close to 4%, followed immediately by a recession that kicked it back above 6%.

So should we focus instead on a genuine target of 4% unemployment, reining in budget deficits only when we fall well below that? That depends a lot on what you think the productive capacity of the country really is, and the mainstream estimate of NAIRU, the highest unemployment rate consistent with stable inflation, is around 5.5% right now. If that’s the right estimate, then you could argue that we’ve been doing OK for the past few decades. But if full employment is really more consistent with an unemployment rate of 4%, then we’ve been wasting an awful lot of productive capacity for nothing.

It is about our fear of inflation and our assessment of the risk of it. But it’s also about how we prioritize the risk of inflation against the reality of unemployment other than a “frictional” rate due to job transitions of 1 – 2%. Even 4% Unemployment measured by the U6 would still leave about 7.2 million Americans unemployed after a vigorous post-Keynesian expansion.

Those people would pay the price for the rest of us who are more concerned with containing inflation than with employing them. How serious is this price? Martin Watts and Bill Mitchell (one of the earliest and still leading developers of MMT) offer us a very good idea of how high this price is for those selected to pay the price of a 4% U6 target, much less a 4% U3 target which is what I suspect Kevin is referring to.

Kevin Drum refers to the NAIRU, as if he and all economists agree that there must be a trade-off between inflation and unemployment at a to be determined NAIRU level. But, I wonder if he knows that MMT economists view the Non-Accelerating Inflation Rate of Unemployment, as both “a crock” and as closely tied to the neoliberal economic paradigm that MMT opposes, and specifically to its acceptance of the idea that there must be an unemployed “buffer stock” of people who want to work, but must stay unemployed, in order to contain inflation?

Bill Mitchell points out that MMT argues against such a buffer stock and the NAIRU by:

“. . . proposing a way to achieve full employment with price stability. As Randy Wray noted in the speech referred to earlier MMT, in part, “turned the Phillips Curve on its head: unemployment and inflation do not represent a trade-off, rather, full employment and price stability go hand in hand”. . . . .

“And the way MMT does that is intrinsic to the theoretical framework and logically consistent with it. It is crucial to understand that notions of price stability all have some buffer stock underpinning them. . . . the mainstream NAIRU theories deploy a buffer stock of unemployment to control price inflation. . . .

“ . . . the theoretical offering that MMT provides . . . is that if we are concerned about efficiency and price stability then there is a superior buffer stock available to a public currency issuing monopoly.

“That is, if we really understand the way the currency works and the way the labour market works then we can have both full employment and price stability by using an employment buffer stock rather than an unemployed buffer stock.

“Then you have a direct route into the current policy debate. The governments think that large deficits are bad so they spend on a quantity rule – that is, allocate $x billiion – which they think is politically acceptable. It may not bear any relation to what is required to address the existing spending gap.”

It may help to note at this point that this is exactly what President Obama did in passing the ARA in 2009. He received advice providing stimulus estimates as high as $1.8 Trillion in deficit spending achieved through either tax cuts or government spending for ending the recession, but he evidently wanted that bill to come in at around $900 Billion and to have some bipartisan support. So, he did the thing that seemed politically expedient using an arbitrary quantity rule, even though he knew, based on the advice he received, that it was unlikely to end the recession and bring the economy to full employment.

Bill goes on analyzing the MMT proposal to offer a Job Guarantee (JG) to any unemployed person who wants a job, and Full Employment with Price Stability:

“MMT shows you how it is far better to conduct fiscal policy by spending on a price rule. That is, the government just has to fix the price and “buy” whatever is available at that price to ensure price stability. But what is the price the government would be fixing?

“Answer: the price it offers labour to enter the employment buffer stock – that is, the JG wage. . . .

“In the face of wage-price pressures, the JG approach maintains inflation control by choking aggregate demand and inducing slack in the non-buffer stock sector. The slack does not reveal itself as unemployment, and in that sense the JG may be referred to as a “loose” full employment. . . .

“So in a fiat monetary system, price stability is maximised using employment buffers rather than unemployment buffers.

“There are those who might consider that the MMT proposal that national governments should first bolt down the nominal anchor via an employment buffer stock amounts to a disagreement with Post Keynesian policies of public infrastructure investment . . .

“Some might even think that the proposal to introduce an employment buffer stock amounts to a preference for “small government” in the Hayekian tradition.

“None of these views would be correct.

“What we argue is that to turn the Phillips curve on its head – and thus thwart the use of unemployment to control inflation – you need a different nominal anchor. Generalised expansion does not provide that.

“Once you have that anchor in place then your ideological preferences will determine what other public spending you might entertain within the capacity of the economy to embrace further nominal demand expansion.

“As I have said in the past I favour strong public sectors with lots of investment in first-class infrastructure to advance the prosperity and well-being of the citizens. Others, who consider MMT to be a valuable contribution (that is, get it) may have different preferences.

“My JG pool would be small (but sufficient for the purpose as a nominal anchor) others might have a larger JG pool and less public sector spending elsewhere.

But the essential point is that independent of our preferences with respect to the size of government we would maintain an effective and highly liquid employment buffer.”

In short, if MMT policies are adopted, including the JG proposal, then there would be no unemployment buffer stock, no one paying the price for one, and no estimates at all of the fictional NAIRU suggesting targets of 4% UE. But there would be Full Employment WITH Price Stability. So, Kevin, and other newly interested writers who are writing about MMT after the WaPo article; please note that the basics include no UE targets, just Full Employment. And no deficits and surplus targets either, just responses to demand-pull and cost-push inflation, and private sector cutbacks in employment, through automatic safety net and taxation stabilizers, and other responses to such effects.

MMT is always about policy, mostly fiscal, not monetary, that will enable certain economic, social, cultural, environmental, and political outcomes, and disable other outcomes in each of these categories. It is never about running deficits or surpluses as targets for their own sakes. Whether deficits, or surpluses occur are byproducts of MMT policy impacts, and are largely endogenous to the economy. In themselves they mean nothing. Only the economic policies and outcomes that drive them are important.

(Cross-posted from

The WaPo MMT Post Explosion: Dean Baker Weighs In on MMT

10:09 pm in Uncategorized by letsgetitdone

Dean Baker weighed in on MMT in the aftermath of Dylan Matthews’s, MMT post on Ezra Klein’s blog. Dean said:

I consider many of the leading proponents of MMT to be friends and generally find myself on the same side of political debates. However, I have to confess to being a bit unclear as to what exactly separates MMT from the good old Keynesian economics I learned in my youth.

As it happens I did an analysis of the distinction between MMT deficit doves and Keynesian deficit owls last June. So here it is again, an explanation which I hope will clear things up for Dean.

Here are some differences that are very significant for policy activism between a Keynesian deficit dove approach employed by people like Paul Krugman, Brad DeLong, Robert Reich, and Dean Baker, and a Modern Monetary Theory (MMT) approach employed by people like Warren Mosler, L. Randall Wray, Bill Mitchell, Jamie Galbraith, Stephanie Kelton, Marshall Auerback, Scott Fullwiler, and Pavlina Tcherneva. So, here are some contrasts between the two approaches on seven important issues.

1. Government deficit spending for recovery — Keynesian deficit dove position: provide high fiscal multiplier Government deficit spending or tax cuts to stimulate aggregate demand.

MMT position: provide high multiplier Government deficit spending: targeted on payroll tax cuts that will get more money into the hands of working people quickly; providing revenue sharing grants to States for maintaining existing State-level jobs; and direct job creation (job guarantee for anyone who want to work)

Significance: MMT says it’s not just about increasing aggregate demand and GDP. It’s about targeting and getting rid of unemployment!

2. Government fiscal policy over the business cycle — Keynesian deficit dove position: deficit spend in bad (less than full employment) times; have government surpluses in good (full employment) times.

MMT position: Government surpluses withdraw net financial assets from the private sector. Therefore, they should only be run when the private sector is over-heated and demand-pull inflation exists. Since the size of the Government deficit, without explicit Government attempts to raise taxes, is determined by 1) the level of savings of the private sector; and 2) the level of the trade deficit (surplus), it is perfectly possible that the Government may have to run deficits continuously to maintain full employment, if there is demand leakage from a trade deficit and/or private savings that the Government must make up for by deficit spending.

Significance: MMT says: ”Don’t worry about this simple fiscal rule.” Whether deficits are needed depends on the situation and specifically on our trade balance and our desires to save in the private sector.

3. Long Term Deficit Reduction Planning — Keynesian deficit dove position: We can and should engage in long-term deficit reduction planning since the fiscal policy can control the deficit, and since there is a long-term Inter-temporal Governmental Budgetary Constraint (IGBC) on deficit spending due to the potential of the bond markets to impose an insupportable interest burden on the budget when continuous deficits, increasing national debts, and increasing debt-to-GDP ratios accelerate too fast and/or get too high.

MMT position: We cannot and should not formulate or implement plans for long-term deficit reduction. First, because such plans assume that Government fiscal policy can accurately predict the effect on deficits of its attempts to close deficits by austerity measures. In fact, however, raising taxes or cutting programs always reduces net financial assets in the private sector, which in turn reduces aggregate demand and the level of economic activity, which, in its turn, drives up Government expenditures and, inadvertently increases its deficits. We already see this in the UK. the austerity measures of the Conservative/Liberal coalition government aren’t decreasing its deficits, but are increasing them, and driving the UK closer to a double-dip recession.

Second, because we should not be distorting fiscal policy by targeting it at deficits and surpluses, national debts, or debt-to-GDP ratios at all. Fiscal policy should, instead, be targeted on fulfilling public purposes including full employment, price stability, the elimination of poverty, providing universal health care as a right, maintaining public safety, creating an excellent educational system for all of our children, strengthening the social safety net, re-inventing the energy foundations of the economy, and so on. These, and not deficit reduction or debt-to-GDP ratio stabilization should be our real goals, because for fiat currency systems with floating exchange rates, non-convertibility of currency, and no external debts in any other currency or pegs to any external currency or basket of such currencies, there is no IGBC on deficit spending imposed by previous deficit spending.

That is, it doesn’t matter what such a Government’s national debt is, or what it’s debt-to-GDP ratio is. It still has the same capacity it has always had to buy anything it wants to buy for sale in its own currency, since it can always spend/create what its legislature appropriates.

Third, unlike Keynesian deficit doves, who evidently think that without long-term deficit planning and control of deficits, interest rates will rise catastrophically, and eventually consume the Federal budget; MMT deficit owls, point to the capability of the Government to spend without issuing further debt, use coin seigniorage, or issue only short-term (3 months or less) debt as measures the Government can take to either eliminate Treasury bond interest costs altogether, or to lower them to a level arbitrarily close to zero. MMT deficit owls say: Governments sovereign in their own currency are “in charge” in the bond markets, not bond market vigilantes, whose very existence depends on the sufferance of the Government.

Significance: MMT says: long-term deficit reduction plans are a no-no and should be opposed! They’re based on false theories and put constraints on Federal deficit spending that are sure to damage the economy. Most importantly, they hinder progressives in solving real problems

4. Long Term Deficit Reduction Projections — Keynesian deficit dove position: Organizations like the CBO can produce useful long-term projections of deficits and debts that can be used as the basis for long-term deficit reduction plans

MMT position: Organizations like the CBO can produce long-term projections based on certain assumptions; but they aren’t and can’t be useful because the assumptions are always unrealistic, often self-contradictory, and always fail to take into account the emergent character of political and economic reality.

This is apparent when we look back at CBO, OMB, and other fiscal projections in the past. In 2002 and after, where were the surpluses as far as the eye can see being projected by CBO at the end of the Clinton Administration? Where were the projections of the housing bust of 2007 and thereafter and its effects back in 2006? Where were the projections in 2007 of the great crash of 2008? Where are the projections right now of what happens if the United States suddenly decides to stop issuing debt instruments while doubling its deficit spending? The answer is that projections like these could not be made by CBO because their projections are always based on assumptions that cease to hold because of their sensitivity to unanticipated political occurrences.

Significance: MMT says: Since long-term deficit projections are invalid, and since they don’t affect the Government’s fiscal capacity. Stop doing them! And stop worrying about them! Worry about jobs, poverty, education, energy foundations, health care, global warming, the environment, the rise of global plutocracy, etc. These are the real problems!

5. Funding Government spending — Keynesian deficit dove position: Government spending must, over the long-term, be funded by some combination of taxing and borrowing.

MMT position: Government spending isn’t “funded.” It occurs under the authority of the Government to issue currency, which authority is unlimited by any constitutional requirement for “funding.” There is therefore no intrinsic Government Budgetary Constraint, (GBC) either static or inter-temporal. This means that we never need to ask the question, “how will we pay for it?” when considering Government deficit spending. There are many things we do need to consider: the likely results of such spending, how it’s targeted, its implications for full employment; its impact on inflation. However, we never have to ask “how will we pay for it?” or worry that “the Government is broke and can’t afford it,” because the Government of the United States is the currency issuer, not the currency user and it always spends and simultaneously issues “currency” when it does so.

Significance: MMT says: We never have to worry about the Government finding financial resources or “how are we gonna pay for it!” So, we can just do what’s right when it comes to balancing off the real resources being used to create real wealth!

6. Social Security Solvency — Keynesian deficit dove position: The Keynesians accept the Government’s projections that Social Security will become insolvent and unable to pay full benefits by 2037. So they advocate doing something about that by raising the current salary cap on FICA taxes, and sometimes even raising the retirement age, though not by as much as deficit hawks want to see it raised. Even if a Keynesian deficit dove opposes all changes except for raising the FICA salary cap, they still acknowledge that there is a long-term SS FICA revenue shortfall that must be met either with increased taxes, or by cutting Social Security benefits, and which ought not to be handled through deficit spending.

MMT position: In contrast, MMT says that since Government spending isn’t and need not be “funded,” there is no Social Security revenue shortfall problem. The only problem is Congress and whether it is willing to guarantee Social Security at present or increased levels for retirees. Stephanie Kelton has put this very well:

”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.”

Significance: MMT says: There is no revenue shortfall problem for Social Security because SS payments need not be funded, only appropriated, by Congress. The real problem is a Congressional and presidential guts problem; not a Social Security revenue problem!

7. Proposed progressive reform programs — Keynesian deficit dove position: Whatever programs are proposed must fit within “progressive” deficit reduction plans and their projected glide path toward a declining public debt-to-GDP ratio. However, important the programs, the problems they address, and the expected benefits from them, the overall deficit reduction plan with its various targets must have priority and provides spending constraints for the various progressive reform programs.

MMT position: Progressive reform programs must always be evaluated in the specific economic and social context of the proposed legislation and the key issue is always the assessment of their likely impact and the real benefits and costs (including side effects) of this legislation. Considerations of the size of deficits, debt-to-GDP ratios, or trends in such statistics are not among the impacts that are relevant. Impacts on employment, inflation, and a whole host of social, economic, and political factors are all relevant. And whether or not there is deficit spending, is certainly important because Government deficit spending adds to private sector net financial assets. However, prioritizing a long-term deficit reduction plan over progressive measures that will result in greater benefits for Americans is fiscally irresponsible because it sacrifices real increases in well-being to an erroneous theory about non-existent Governmental Budgetary Constraints.

Since Keynesian deficit doves as well as deficit hawks are doing just that with their long-term deficit reduction plans, they too are committed to fiscal irresponsibility over the long term. And in their willingness to compromise with deficit hawks out of a shared belief that their really is a long-term deficit problem, they also are willing to allow a certain amount of deficit reduction activity in the short and medium term, even though they know this is likely to be damaging to our already suffering economy.

Significance: MMT says: Escape from real fiscal irresponsibility (trying to target abstract fiscal indicators of budget performance rather than real outcomes of spending) and fiscal unsustainability (pursuing fiscal policy that reduces real economic capacity by destroying industry, manufacturing, and people skills) to true fiscal responsibility (targeting government spending at full employment, price stability, and other real public purposes) and true fiscal sustainability (Government spending that at least maintains and generally increases the real, rather than nominal capacity of the economy to produce the goods, services, and conditions that people value and fulfill public purposes).

So, those are the differences I see between the MMT position and the deficit dove position most often expressed by Dean Baker. Now, let’s move on to some of Dean’s other points.

Expansionary Policy Will Often be In Order?

”My reading of Keynes is that economies will often be constrained by demand, absent intervention from the government. That means that expansionary fiscal and/or monetary policy will often be in order to keep an economy running near full employment.”

Well, first, if monetary policy involving manipulation of interest rates alone is used then MMT’s position is that any expansion toward full employment that’s achieved that way will be at the expense of increased private sector debt, because the money created through increased bank loans won’t expand net financial assets in the private sector. So, if we rely solely on monetary policy, then even if there’s success, there will also be a debt bubble somewhere in the system that will need to be dealt with. So, second, fiscal expansion becomes critical in reaching full employment, if we want to achieve it without increasing the private sector debt-to-GDP ratio, which is not a good thing for future private sector stability.

Also, third, according to MMT, there’s more to this story than just “. . . expansionary fiscal and/or monetary policy will often be in order . . . “ Specifically, Government deficits, will have to occur, year after year if the private sector always wants to save and to import more than it exports. That follows from the Sectoral Financial Balances (SFB) Model:

Domestic Private Balance + Domestic Government Balance + Foreign Sector Balance = 0.

There’s no escaping such a deficit, if the private sector is to be a net saver, even if the foreign sector balance becomes zero. That is, the foreign sector balance, must become negative (the US has to have a trade surplus), if the private sector is going to save, and the Government sector is not to run a deficit. Further, the deficit in the foreign sector will have to be greater than the surplus in the Government sector, for the private sector balance to net save. Given the present terms of trade, and the private sector’s desire to de-leverage, it’s pretty plain that it will be some years before an expansionary fiscal policy won’t be necessary, if we are to have full employment in the United States. So, the more accurate way to say the above is: “. . . expansionary fiscal and/or monetary policy will be in order for the foreseeable future . . .“

Keynes’s Three Channels

Dean next points to:

”I see three channels through which expansionary policy can boost demand. One is that budget deficits can lead to more demand directly by increasing government spending and indirectly through more consumption spending induced by tax cuts. The second channel is that lower interest rates from the Fed can boost demand by increasing consumption and investment. The third is that a lower-valued dollar can lead to increased net exports.

I don’t think that MMTers dispute the existence of these three channels of boosting demand, all of which can be found in the writings of the true Maestro (Keynes). They tend to focus on channel number one for reasons that I confess not to fully understand. This pushes them toward larger government deficits than we would see if we also aggressively used channels two and three.”

Dan Kervick did a good job of explaining why MMT generally prefers the first channel rather than the second and third. To be brief, when interest rates are near zero as they are now, the second channel can’t be used any more. Also, even if it could be used, for reasons I’ve already stated the cost would be increasing private sector debt during a time when people want to save. Not good.

As for the third channel, as Dan Kervick points out, why would we want to create full employment at the price of lower wages for people here, when we can use the first channel and avoid that consequence.

But moving back to the first channel, Dean Baker envisions it as involving tax cuts and government spending to create deficits. But, from the MMT point of view there are other alternatives.

The first is placing the Fed under Treasury and enabling Treasury to create money through the Fed without needing to issue debt. So, if this is done, even though Government spending would exceed tax revenues, there would be no technical “deficit” of funds available to the Treasury without borrowing.

MMT also recognizes another variation on that theme that is in the Executive’s present authority to fill the public purse beyond what has been appropriated by Congress by using Proof Platinum Coin Seigniorage (PPCS). I’ve explained that in a number of places, but this post will do so well enough.

Most MMT writers don’t favor using this option in the expansive way I do, but that doesn’t affect my point, which is that PPCS created by depositing platinum coins with arbitarily high face values at the Fed will produce enough revenue credited to the Treasury General Account (TGA) to close any future gaps between tax revenues and Government spending that occur, while still adding net financial assets (in this case, reserves) to private sector accounts.

I hope these considerations explain why MMT writers prefer fiscal policy to the other channels.

Just Sayin’

”I think most of the conventional arguments over the deficit are very much wrongheaded, but on the other hand, a large deficit is not an end in itself. I suppose my preference for also pushing channel two and especially channel three is what separates me from the MMT crew.”

I think you agree with MMT that the deficit is not an end in itself. In fact, many of the considerations above should make clear that neither the deficit, nor a balanced budget is an end in itself for MMT.

The end for MMT is achieving public purpose including full employment with price stability as one aspect of it. Since the MMT view is that fiscal policy is much more useful for doing this than monetary policy MMT focuses on how fiscal policy should be set.

Its general view is that alternative budgetary plans have to be assessed from the viewpoint of their anticipated outcomes, without regard to deficits or surpluses as outcomes valued in themselves. Of course, full employment is positively valued and unemployment negatively valued, but a whole range of valued outcomes is relevant for such assessments. Those are the ends, and fiscal policy is the means. Monetary policy and trade policy are also means, but are not nearly as important as fiscal policy in their effective short-term impact.

Last Thing

While it was good to find out that most of the leading MMT economists are Dean Baker’s friends and that they’re mostly on his side in political debates, I think it’s fair to conjecture that in spite of these relationships Dean’s post suggests that he knows very little about what MMT economists think in any specific terms. I hope this post succeeds in making this lack of knowledge clear and in suggesting that a very worthwhile thing to do would be to remedy that and find out about the MMT view of the world, since, in my view, it builds way beyond Keynes to a new synthesis of post-keynesian macroeconomic thought.

(Cross-posted from