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Beyond the MSM: the New Wave of Brief Blog Posts on Platinum Coin Seigniorage

9:58 am in Uncategorized by letsgetitdone


A Platinum Coin

A round up of blog posts about Platinum Coin Seigniorage

MSM bloggers and cable hosts weren’t alone in creating the new wave of posts and video segments on Platinum Coin Seigniorage (PCS) at the beginning of December. The blogosphere also produced brief posts from a number of bloggers, as well as a few more substantial ones. I’ll review the brief ones in this post, and the more substantial ones in future posts, but won’t include my own recent posts on PCS during December.

Reviewing the Posts

First off the mark on December 3, was David Dayen at FireDogLake who mentioned the “trillion dollar coin” as something thee President could do to strengthen his hand in dealing with the Republicans. His mentioned was quickly followed by Atrios, later in the morning, who wrote a very short post saying:

I really don’t know why the administration doesn’t take the “mint the trillion dollar platinum coin” option seriously. It is, as far as I can tell, perfectly legal.

This triggered a post by Michael Sankowski at Monetary Realism announcing that the “Trillion Dollar Coin Goes Mainstream” which says that if Atrios knows about the coin that everyone on “the smart left” knows about it!

Mike Sankowski then blogged again on December 6, wondering out loud where Zerohedge’s rant on the Trillion Dollar Coin (TDC) was? In that one Mike refers to the mainstream blogs by Yglesias, Drum, and Carney all on the TDC and then makes fun of Zerohedge for not picking up on the subject.

Cullen Roche at Pragmatic Capitalism, then blogged on the TDC on December 7, in a piece called “Platinum Coin Easing,” which draws its title from some views of JKH’s I’ll be reviewing in a future post. Cullen railed against the debt ceiling conflict calling it “stupid,” and also says that while PCS may look “Zimbabwean” it does solve the debt ceiling problem. Cullen points to JKH’s post and says:

“The coin would replace some of the bonds that the Fed currently holds solving three issues:
1) A non-inflationary way for the US Government to spend.
2) It circumvents the debt ceiling by effectively reducing the debt balance by $1T.
3) It’s a completely legal workaround.”

Donald McClarey at The American Catholic blog also posted on December 7, on “Of Trillion Dollar Coins and Fiscal Lunacy.” calls it a lunatic nostrum, quotes the WaPo article by Plumer, and refers to the “wacked out left.” That’s right, he offers no reasoning at all. Just name-calling and this:

“The country is in debt sixteen trillion dollars. By the time Obama finally leaves office we will probably be at least 20 trillion in debt. Of course this does not take into account dozens of trillions of debt in entitlement obligations coming due over the next few decades. We are rapidly reaching the point where it is mathematically impossible to ever pay off this debt without currency depreciation and/or hyper inflation. This scheme is basically currency depreciation as the US currency swells by two trillion dollars in a year’s time. If attempted I think it would lead ultimately to hyperinflation. The left are not all loons. Something like this will eventually be done by people who realize it is economic poison, but who are willing to do it anyway to get out of dealing with an unpayable debt. The impact on our economy would be likely catastrophic.“

Of course, McClarey, was in too much of a hurry ranting against the coin to notice that the first nearly $6.5 trillion of debt paid off using PCS couldn’t cause currency depreciation because it would not enter the economy at all, since it would be used to pay interagency debt and Fed-held debt. Nor does any other seigniorage spending need to be happen except when debt instruments fall due, and Congress appropriates deficit spending. So, to back his hyperinflation currency depreciation rant, McClarey has to show that PCS-based spending would be more inflationary than normal spending after debt issuance, along with normal scheduled repayment of debt. Of course, he does not, and, I think, cannot show this.

Next, brief mention needs to be made of a post at “Twitchy – Tweet on the Platinum coin.” This post also happened on December 7. The tweets are entertaining but contribute little, if anything to the debate. On the other hand, they do make more sense than McClarey’s post on PCS.

On December 8, James Hamilton at Econobrowser offered a post objecting to using the coin “from an institutional perspective:”

Read the rest of this entry →

Platinum Coin Seigniorage, Issuing Debt, Keystroking Deficit Spending, and Inflation

9:05 pm in Uncategorized by letsgetitdone

The most frequent objections to proposals that we use Platinum Coin Seigniorage (PCS) to create reserves for debt repayment and deficit spending, frequently come back to inflation. Perhaps people can’t get over the association they learned in high school Social Studies, or perhaps in American History, or Economics 101, that when Governments create money and then just spend it without any compensating deflationary action, inflation or hyperinflation happens. Maybe they can’t forget those cartoons about people in Weimar Republic days pushing wheelbarrows full of money to the market to buy some bread. So, I’ve been promising for about a week now, to blog about the likely expected relationship between the different PCS options and inflation using the framework laid out by Scott Fullwiler!

Types of Spending, Methods of Filling the Public Purse and Inflation/Deflation

That framework is reflected in the first column of the table where all but the top row names the categories in Scott’s framework. The table also expands the framework a bit, however. Scott’s post compares using PCS to using debt instruments to add reserves to the Treasury General Account (TGA), the Treasury’s spending account, to make the case that PCS, in, and of itself, won’t add to inflation. I want to expand the perspective a bit by adding a comparison of both these alternatives with the alternative of allowing Treasury to close any gap between the tax credits it receives and the spending appropriated by Congress by creating in its own reserves in the TGA, either directly, or by sending an instruction to the Fed to credit the TGA with the particular amount of reserves necessary to do the deficit spending. So, here’s the table.

Table – Likely Inflationary or Deflationary Impact of Debt Repayment and Government Deficit Spending By Type of Method Used To Credit the Treasury’s Spending Account

Inflationary Impact of Spending

The conclusions in this table are based on only a few ideas:

1. There’s no way reserves paid by the Treasury to redeem old debt can be inflationary unless it is spent into the economy, because there’s no channel for causal impact at all.

2. So, debt repaid to other Government agencies and to the Federal Reserve Banks cannot be inflationary beyond inflation tendencies already built into the regularly scheduled spending into the economy of the agencies involved.

At the end of the 2012 fiscal year the total of Federal Reserve and Federal Agency held debt including Trust Funds was $6.4 Trillion (p. 51). So immediate redemption of that debt would reduce the debt subject to the limit by just under 40%.

3. Debt instruments in the private sector are a form of financial asset that is more inflationary than reserves in checking or savings accounts.

The classical Quantity Theory of Money (QTM) says that increasing the amount of money in circulation is inflationary. But, much empirical evidence shows that this is wrong, and that the expansionary factor in modern economies is increasing Net Financial Assets leading to increased demand beyond the productive capacity of the economy to absorb. NFAs can include income in the form money; but when money is exchanged for an asset of equal value as happens when a security is redeemed, then that’s not inflationary, and may even be deflationary because of the ending of interest payments and securities leveraging that follows if no compensating debt issuance happens.

Here’s Scott Fullwiler’s reasoning on why this is so:

As I previously explained, this is the operational equivalent of quantitative easing (QE). The purchase of Treasury securities by the Treasury would retire the securities and leave banks holding reserve balances. But, as I explained in the previous post, “Banks can’t ‘do’ anything with all the extra reserve balances. Loans create deposits—reserve balances don’t finance lending or add any ‘fuel’ to the economy. Banks don’t lend reserve balances except in the federal funds market, and in that case the Fed always provides sufficient quantities to keep the federal funds rate at its target—that’s what it means to set an interest rate target.

And on the subject of the deposits created by the debt redemptions he goes on to quote his previous post on QE3: linked just above:

“First, sellers of bonds were always able to sell their securities for deposits with or without the Treasury’s intervention given that there are around 20 dealers posting bids at all times. Anyone holding a Treasury Security and desiring to sell it in order to spend more out of current income can do so easily; holders of Treasury Securities are never constrained in spending by the fact that they hold the security instead of a deposit. Further, dealers finance purchases of securities from both the private sector and the Treasury by borrowing in the repo market—that is, via credit creation using securities as collateral. This means there is no ‘taking money from one person to give it to another’ zero sum game when bonds are issued (banks can similarly purchase securities by taking an overdraft in reserve accounts and clearing it at the end of the day in the federal funds market), as what in fact happens is that the existence of the security actually enables more credit creation and is known to regularly facilitate credit creation in money markets that are a multiple of face value. Removing the security from circulation eliminates the ability for it to be leveraged many times over in money markets.

“Second, the seller of the security now holding a deposit is earning less interest and can convert the deposit to an interest earning balance. Just as one holding a Treasury can easily sell, one holding a deposit can easily find interest earning alternatives. Some make the argument that the security can decline in value and so this is not the same as holding a deposit, but this unwittingly supports my point that holders of deposits aren’t necessarily doing so to spend. Deposits don’t spend themselves, after all.

“Third, these operations by the Treasury create no new net financial assets for the non-government sector (and can in fact reduce its net saving by reducing interest paid on the national debt as bonds are replaced by reserve balances earning 0.25%). Any increase in aggregate spending would thereby require the private sector to spend more out of existing income, or to dis-save, as opposed to doing additional spending out of additional income. The commonly held view that ‘more money’ necessarily creates spending confuses ‘more money’ with ‘more income.’ QE—whether ‘Fed style’ or ‘Treasury style’—creates the former via an asset swap; on the other hand, a true helicopter drop would create the latter as it raises the net financial assets of the private sector. Again, ‘money’ doesn’t spend itself. . . .

4. Demand-pull inflation cannot be caused by Government deficit spending, unless Congress appropriates and the Treasury spends, past the point of full employment. Whether inflation or hyperinflation happens generally has nothing to do with the method used to add electronic reserves to the TGA; but as one approaches full employment Federal interest payments and private leveraging of Federal securities resulting from debt instruments are more likely to initiate inflation than using either of the other two methods.

5. Using PCS to fill the TGA with reserves is very similar to the third method of giving the Treasury the authority to mandate the Fed to add reserves to the TGA upon instruction from the Treasury. In fact, functionally, depositing a high value platinum coin into the US Mint’s Public Enterprise Fund Account, and then “sweeping” the seigniorage into the TGA is virtually equivalent to instructing the Fed to add reserves to the TGA. The “big coins” are just a different form of message than a Treasury instruction would be. But the functional financial content of the different kinds of messages is virtually the same. They both mandate the Fed to create the amount reserves specified in the message.

At Bottom A Political Choice

Some readers may look at this argument and agree with everything I’ve said and still prefer to deficit spend only after issuing and selling debt, rather than using either PCS or direct Treasury instructions. They might argue that even if it is true that the other methods are less inflationary, the method of debt issuance 1) is not so inflationary as to create a problem and 2) creates a political climate among the public and in Congress, that restricts government deficit spending, and keeps it sufficiently in check, that we almost always have a good deal less than full employment, and therefore never risk serious demand-pull inflation. And that’s just the way they like it!

That, of course, is a political choice, and the people who make it, knowing that the Administration can use PCS to fill the public purse now, and also that Congress can authorize the third method of direct Treasury instruction if it wants to, are saying that they choose inflation control through using a method that fools most Americans into thinking that we are running out of nominal financial resources, even at the expense of having 28.5 million Americans who want full-time jobs not being able to get them, and even at the expense of having more than 50,000 fatalities per year due to lack of health insurance, and even at the expense of blighted futures for a generation of American young people, and the prospect of increasing poverty for many old people, and even at the expense of : and on and on.

Then I have an answer for them. And I’ll begin by quoting Bruce Springsteen and Randy Wray.

We take care of our own
We take care of our own
Wherever this flag’s flown
We take care of our own

That’s Springsteen; and here’s Wray:

. . . We don’t let old folks sleep on the street. We take care of our own. We don’t let children go hungry. We take care of our own. We don’t exclude the 47%. We take care of our own.

We’re all stakeholders in this great nation. We take care of our own. White, black, brown, yellow and red, we take care of our own. Young or old, healthy or sick, we take care of our own. . . .

We need a good government to help us take care of our own. We need good public services and infrastructure to keep our country strong so that we can take care of our own. Our government spends to keep our country strong so that we can take care of our own. . . .

Sovereign government cannot be forced into involuntary insolvency. It can always afford to make all payments as they come due. It can always afford to buy anything that is for sale for its own currency. It can always financially afford any spending that is in the public interest. It can always afford to take care of its own.

Anything that is technologically feasible is financially affordable for the sovereign issuer of the currency. It comes down to technology, resources, and political will. We’ve got the technology to take care of our own. We’ve got the resources to take care of our own. All that is missing is the political will.

And then I’d go on to say this.

Your method of filling the public purse through selling debt to accumulate credits in the TGA, may provide an extra hedge against inflation by fooling people into thinking we are running out of money and that unemployment and austerity are just the price we have to pay for insuring ourselves against inflation, but that method is anathema to me because it creates a political barrier to taking care of own, and undermines our political will to take care of our own and one another.

The 28.5 million who want full-time jobs at a living wage are our own, as much as you. And they have a right to a Federal Government that will use its full power to see to it that they have full time job offers at a living wage that they can be proud of. And that, in the final analysis is why PCS, and direct Treasury instruction of the Fed, are better methods of filling the public purse than your method of using debt instruments.

The method of direct Treasury instruction of the Fed, isn’t open to us without legislation. But PCS is available now to fill the public purse. We ought to fill it, the TGA, using PCS, with $60 T in electronic credits immediately, so no one can be fooled again by people saying that we can’t afford something for sale in our own currency.

We don’t need to have any public debt subject to the limit if we don’t want it. And we always can have enough money in the public purse to afford to take care of our own, if Congress will only represent most Americans and legislate the necessary programs, while appropriating the necessary funds to open the purse strings of that full purse the Treasury will have! At bottom, it’s a political choice; and, if we want to be real Americans, then we must choose to take care of our own!

(Cross-posted from New Economic Perspectives.)

The Fiscal Summit Counter-Narrative: Part Eight, Narrative and Counter-Narrative For Fiscal Sustainability

6:29 am in Uncategorized by letsgetitdone

(Author’s Note: This is the concluding post in an eight part series on the counter-narrative to the austerian/deficit hawk/long-term deficit reduction approach to fiscal policy that is dominant in Washington, DC today. At the end of this post I list and link the seven earlier posts in the series. I think the eight posts are important because they give the only progressive counter-narrative to the austerians, including the President, that doesn’t share their basic paradigmatic framing; namely that there is a Government Budgetary Constraint on the United States flowing from a danger of forced Government insolvency.)

I started this lengthy series by saying:

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

I then pointed to the first two Fiscal Summit Conferences in 2010 and 2011, identified some of the featured participants in both of these, and the then pending 2012 conference, and identified the primary myths used to form the neoliberal-based deficit hawk/austerian “fiscal sustainability”/”fiscal responsibility” narrative driving the politics of fiscal policy towards debate, discussion and passage of a long-term fiscal policy plan focused primarily on deficit reduction and long-term “fiscal responsibility” and “fiscal sustainability.” I then set out to present a detailed account of the five sessions of the April 2010 Fiscal Sustainability Teach-In Counter-Conference along with comments and references (links) to posts appearing since the Teach-In. The five sessions and accompanying Q & A, covered in posts 2-7 of this series, supplemented by additional post-conference work provide a fiscal sustainability/fiscal responsibility counter-narrative based on the Modern Monetary Theory (MMT) approach to economics.

In this final post of the series, I’ll juxtapose the primary claims underlying the neoliberal austerian fiscal sustainability/fiscal responsibility narrative, and the MMT answers to them. The austerian claims all link to MMT-based posts that critique them. The paragraphs following each austerian claim summarize the MMT answers, and the counter-narrative.

The Government is running out of money

The US Government has the Constitutional Authority to create an unlimited amount of money provided Congress appropriates the spending, and places no constraints on spending such as a need to issue debt instruments when the Government deficit spends, or debt ceiling limits. So, all constraints on spending appropriations are purely voluntary in the sense that they are due to Congressional mandates that Congress can repeal at any time.

Having said that, the constraints mentioned are now in place, and the Teach-In didn’t deal with ways of getting around the constraints within the framework of current law. It didn’t show that without legislative changes, the Executive can always create enough money to pay for whatever spending Congress has appropriated and also repay debt, so that even with a Congress willfully maneuvering for default, the Executive can ensure that the Government doesn’t run out of money even without more taxing and borrowing.

Since the Teach-In in April 2010, the option of using Proof Platinum Coin Seigniorage (PPCS) as one method of getting around the debt ceiling has received a lot of attention. Originally suggested by Beowulf some time ago, there are any number of PPCS options the President can use to generate coin seigniorage profits to use for a variety of purposes. I’ve outlined some of them here. Some PPCS options stop with $1/2 Trillion coins, some go over $1 Trillion up to $5 Trillion, and still others envision very high face value coins ranging to $60 Trillion and up.

For getting around the debt ceiling, coins with face-values up to $5 Trillion will certainly remove the need to issue further debt subject to the limit and break the debt ceiling. However, minting a platinum coin with a face-value of say, $60 Trillion is also a political game-changer, because it results in filling the Treasury General Account with enough in credits to make it obvious to the most concrete thinker that the Government has the capacity to pay all the debt subject to the limit, issue no more such debt if it so chooses, and also spend whatever Congress chooses to appropriate in the way of new programs to solve current problems.

So, issuing a $60T coin, removes the issue (excuse) of whether the Government of the United States can afford to pay for employment programs, educational programs, infrastructure, new energy foundations, a Medicare for All program, new R & D programs, or expansion of the social safety net from the political table. Issuing that coin can and would create a new political climate moving American politics much further to the left within the space of a few months. In short, it would dramatically illustrate the MMT counter to the austerian deficit hawks, namely that the US Government is not running out of money and cannot do so as long as it has the intention to use its authority to create more of it.

The Government can only raise money by taxing or borrowing

Clearly this isn’t true. First, the Federal Reserve, a Government agency can create unlimited money “out of thin air,” as the saying goes, though not for purposes of deficit spending, or directly liquidating Treasury debt. But second, I’ve just pointed out that PPCS can be used in the present legal framework to create money other than by taxing or borrowing.

We can’t keep adding debt to the national credit card.

Again this is false. Congress has placed a debt ceiling on the Government, and it has also mandated debt issuance when the Government deficit spends, by prohibiting the Fed from lending the Treasury money. So, it’s only the self-imposed constraint of Congress that prevents the Government from continuing to add “debt to the national credit card.” There is nothing inherent in the international economic system, or our own Constitution that prevents us from adding debt as needed.

And even if current constraints on debt ceiling constraints remained in place, Treasury can still issue debt without breaching the debt ceiling. Beowulf, the blogger/commenter, who first proposed using high face-value PPCS to get by the debt ceiling, just came up with a new option to avoid breaking the debt ceiling. That option follows:

“Another way to sidestep the debt ceiling is to go the opposite extreme from one-day maturities, issue perpetual T-bonds with no maturity date (what the Brits call consols). Look at the debt ceiling law, the public debt adds up, for all outstanding debt, the face amount of the guaranteed principal. The future interest payments to be paid aren’t counted. (“The face amount of obligations issued under this chapter and the face amount of obligations whose principal and interest are guaranteed by the United States Government“).

“If there’s no maturity date, then there’s no promise to repay principal and thus there’s nothing to add to the public debt total. Tsy could issue an unlimited amount of consols without tripping over the debt ceiling.”

Beowulf has more on consols here. But the possibility of consols is enough to show that the Treasury has an unlimited credit card under current legal arrangements, and can use it without breaching the debt ceiling, though of course, it can’t spend more than Congress has appropriated, and is also required to repay debt and interest that is coming due.

Btw, few public discussion on the size of Treasury’s credit card hardly ever recognizes just how much Federal debt is repaid every year as it falls due. This fiscal year alone, through June 20, $47.6 Trillion in Federal debt was repaid, while $48.6 Trillion in new debt was issued. This isn’t what you’d expect to find if the national credit card was limited by anything other than an arbitrary debt ceiling imposed by a Congress that can remove that ceiling in one hour.

We need to cut Federal Government spending and make do with no more money.

This conclusion follows from the ideas that we’re running out of money and also out of space on “the national credit card.” Since these notions are just not true, why should we cut either Federal Government spending, or Federal deficit spending on grounds of scarcity of money? The austerians have other reasons for wanting to do that; but in the fiscal summit narrative, the reasons given are these two.

If they’re false justifications then the fiscal sustainability/responsibility narrative is both unsustainable and irresponsible, since it leads to unnecessary cuts in Federal spending that will hurt many millions and also the economy for no good reason at all. Austerity is a solution to a problem that doesn’t exist, or to put it a bit more kindly, it’s a solution looking for a problem. Or to put it less kindly, perhaps it’s the solution to the kleptocrats’ problem of how to create an impoverished underclass that will accept its looting without complaint.

In any event, MMT says that we don’t need to make-do with no more money as long as the economy is operating below its full productive capacity and full employment. Since the Government can always make more money, there is no need to make do with less, until there are concrete negative consequences of more spending. In fact, the Government must spend more to lift private sector aggregate demand and enable the Economy to get to full employment. Demand-pull inflation will not occur as a result of Government spending as long as the economy is operating at less than full employment.

If the Government borrows more money, the bond markets will raise our interest rates

The bond markets don’t control US interest rates. The Treasury can flood overnight bank reserves and float short-term debt to meet its targeted interest rates, however low they may be. The Government, if Congress would let it, can even stop issuing debt when it deficit spends (by using PPCS or consols, or by Congress moving the Fed into Treasury where it belongs) in which case the bond market interest rates would become entirely irrelevant.

If we continue to issue more debt, then our main creditors may refuse to buy it, an event that would lead us to insolvency and severe austerity

Our creditors all want export-led economies. This means that they must accumulate dollars, because the US is where the consumption power is, and if they want to keep exporting they must keep the American consumers’ business. Their dollar surpluses can sit idle in their Federal Reserve accounts or be used in a way that makes them money. Buying our debt makes them some money, however little it may be at current interest rates. Buying our goods and services reduces their trade surpluses with us, and goes against their export-led policies. Selling our currency, weakens the value of the USD holdings they retain. In short, they have little choice other than to buy our debt, unless they want to gradually adjust trade balances with us over time.

Even more importantly, as I keep repeating, we don’t need to raise money by borrowing USD from them or anyone else. We can simply spend/create it ourselves if Congress repeals its constraints prohibiting the Fed from “monetizing” the debt, or if the President decides to use PPCS or consols. The result of no more debt issuance, along with use of these other methods, would be paying off the national debt over time, without austerity. So, why don’t we do that? Could it be that the austerians want austerity for political rather than economic reasons, and that the fiscal sustainability/responsibility justifications they give are just part of a complex fairy story they tell to avoid being candid about why they want austerity?

Our grandchildren must have the heavy burden of repaying our national debt

No US generation except one has ever repaid the national debt by running budget surpluses. That generation was rewarded with the depression of 1837. Moreover, each time the nation ran substantial surpluses for a period of time, the country fell into depression or recession, most recently the recession of 2001, following Clinton’s four years of running a surplus. It’s a bad idea to repay the national debt by running surpluses, so our grandchildren won’t do it unless they can do it without discontinuing “deficit” spending. That’s possible, but only if the Congress repeals the mandate to issue debt when the Government deficit spends, or alternatively, the Government freely uses its PPCS power. In both cases the national debt can then be repaid without requiring that tax revenues match or exceed Government spending.

In any event, our grandchildren will not have the burden of repaying the national debt, but if we are so stupid as to attempt to pay it by running surpluses and practicing austerity, then they will have the burden of growing up in poor families, attending very poor schools, living in mal-integrated communities where they’ll be subject to crime and violence, and living in a class-ridden nation run by a kleptocratic elite that monopolizes both the artificially constricted supply of financial wealth, and the increasingly scarce real wealth produced by a stagnant, broken economy. That’s not what any of us want; but that’s what the austerian/deficit hawk policies will produce.

There is a deficit/debt reduction problem for the Federal Government that is not self-imposed.

All together now, there is no such problem. Since the US Government has no limits other than self-imposed ones on spending or borrowing, the level of the national debt or debt-to-GDP ratio doesn’t affect the Government’s capacity to spend Congressional Appropriations at all. These numbers aren’t related to fiscal sustainability in nations like the US with a non-convertible fiat currency, a floating exchange rate, and no debts denominated in a currency it doesn’t issue. Such nations can’t become involuntarily insolvent because they always create more currency to pay debts denominated in that currency.

If the debt-to-GDP ratio were 300% and there were no other changes in current the US would still have the same ability to deficit spend it has now. Conversely, if the debt-to-GDP ratio were 10%, the same would apply. To put this simply, the size of the public debt subject to the limit, and the size of the debt-to-GDP ratio have no impact at all on our capability to deficit spend, because we can always make the money we need, if need be, through PPCS. So there is no need for a long-term deficit reduction plan to lower the debt-to-GDP ratio. There is also no need to run surpluses to decrease the size of the debt, since we can always use profits from PPCS to do that without either borrowing more or raising taxes.

Even though neither the level of the national debt, nor the level of the debt-to-GDP ratio creates a sustainability problem for the US, depending on conditions, the deficit can be too high. But the question of when a deficit is too high isn’t an issue of fiscal sustainability in the sense that we can run out of money, but instead is an issue of the negative consequences of an excessively high deficit. The most important of these consequences is demand-pull inflation, and when that is observed, Federal spending should be reduced to control or eliminate it. However, there are two questions arising here. First, which spending, if cut, will produce the most overall benefit. And second, what’s the impact of cutting spending vs. the impact of doing nothing, vs. the impact of raising taxes.

The Federal Government is like a household and that since households sacrifice to live within their means, Government ought to do that too.

No, the Federal Government is not like a household! Households can’t make their own currency and require that people use that currency to pay taxes. Households can run out of money; but the US can’t ever run out of money as long as Congress decides to appropriate spending and gives the Executive the authority to implement that spending. So, the Federal Government doesn’t have to sacrifice to live within its means, since its “means” to create new currency is limited only by its own decisions and not by any factors external to it. Put simply, Federal spending including deficit spending doesn’t cost anything in the doing. The only relevant question is its real effects on the economy.

The only way to tackle our deficit is to cut excessive spending wherever we find it.

The problem with this claim is that it assumes that deficit spending is a problem that we must “tackle.” But, there is no “excessive spending” per se. And I’ve said enough already to show that whether this is a problem or not needs to be debated. Whether spending is excessive can only be evaluated in context.

The issue is always the effects or impact of Federal spending. Spending is “excessive” when it fuels inflation, or when it provides financial benefits to already wealthy people who don’t need such benefits, or when it funds programs that impose real costs on people and society like negative environmental effects, locking-in dependence on fossil fuels, imposing environmental risks, increasing economic, social, and political inequality, undermining civil liberties, civil rights, privacy, etc. Also, “excessive spending” shouldn’t be cut to lower deficit spending, It should only be cut because of its negative impacts, including inflation.

We should also find a bipartisan solution to strengthen Social Security for future generations

Again, this claim assumes that Social Security funding is a problem and that the program needs to be strengthened by fixing its funding. But that claim is at issue. In parts Three and Four, Warren Mosler and Stephanie Kelton, both argued that Social Security solvency is a fake problem from the MMT point of view and posts since the Teach-In have reinforced this argument.

Apart from the fact, that it isn’t obvious that a bi-partisan solution to a fiscal problem would produce the a real solution, it’s also true that this is a fake fiscal problem. Social Security should be strengthened alright. But the way to strengthen it is to guarantee its funding in perpetuity, and to greatly increase benefits for many seniors whose current benefits leave them scraping the poverty line. Try doubling SS benefits while providing full payroll tax cuts. That will strengthen SS and the economy as well.

We face a crushing burden of Federal debt. The debt will soon eclipse our entire economy, and grow to catastrophic levels in the years ahead

As I’ve indicated above, this view is total nonsense, because federal spending is costless in the spending. If the debt subject to the limit bothers the neoliberal austerians so much, they ought to be supporting full payoff of the debt using PPCS profits. Doing that won’t harm the economy, and it won’t cause inflation either, since the bonds retired are more inflationary then the money paid to redeem them.

The next generation will inherit a stagnant economy and a diminished country

I certainly agree with this claim if the Congress legislates and the Government implements Paul Ryan’s or other austerian budgets and long-term deficit reduction plans. On the other hand, if MMT proposals providing for responsible fiscal policy ending unemployment while providing price stability were adopted, then the next generation will inherit a much more dynamic, growing, yet more sustainable economy and a much happier and freer nation, no longer run by the 1%.

The United States is in danger of becoming the next Greece or Ireland

This one is a real laugher. Greece and Ireland can run out of Euros. California can run out of dollars. But the United States can’t run out of Dollars. Japan can’t run out of Yen. The UK can’t run out of Pounds, and Canada and Australia can’t run out of Canadian or Australian Dollars. So, governments like California, Michigan, Wisconsin, etc. can become the next Greece or Ireland if the Federal Government allows that to happen by refusing to bailout States if they need it, but the US can’t become the next Greece or ireland, because it can always bail itself out if it chooses to do so.

The real danger for the US is in becoming the next Japan and losing a decade of economic progress by following neoliberal deficit reduction doctrines. The US is now approaching four years of the decade we are losing. Why are we losing it? Because, as Warren Mosler is fond of saying: “Because we fear becoming the next Greece, we continue to turn ourselves into the next Japan.” That is, we’re making ourselves a stagnant economy by imposing unnecessary fiscal constraints, rather than creating/spending the money we need to solve our increasingly serious national problems.

Fiscal Responsibility means stabilizing and then reducing the debt-to-GDP ratio and achieving a Federal Government surplus.

No! REAL Fiscal Responsibility is fiscal policy intended to achieve public purposes while also maintaining or increasing fiscal sustainability viewed as 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. So, the REAL Government fiscal responsibility problem 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, 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 our leaders in Congress and the Executive Branch, to remove fiscal constraints and use the fiscal powers of the Federal 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 all the other serious problems we face, but now will not handle because we claim a non-existent fiscal incapacity of the Federal Government. There is no incapacity! We have not run out of money! We have only run out of smarts, will, and courage! We need to get those back, and do what must be done to reclaim the future for working Americans.

Federal Government austerity will create jobs.

Well, let’s see. We’ve got austerity now in Ireland, Spain, Portugal, Italy, the Baltics, and, of course, Greece, among nations in the Eurozone, and also in the UK. Is it creating jobs anywhere? Is there even one case, in which the “austerity will create jobs” theory isn’t being refuted by events? Some may think that Latvia is beginning to recover because it’s unemployment rate has now fallen to 15%; but that’s because 200,000 Latvians (10% of the population) have chosen to emigrate, a particularly effective way of both leaving the labor force, and lowering the rate of unemployment. Bet we could lower unemployment here too, if we first ran the economy down by 30%, drove U-3 up to the 20% level, and then had 31,000,000 people leave the United States for parts unknown. Oh austerity, will thy wonders never cease?

Conclusion: Saying No to Neoliberal Austerity

This post marks the end of a lengthy journey through the proceedings of the Fiscal Sustainability Teach-In Counter-Conference I’ve offered to you. I wrote this series because I think an answer was needed to this Spring’s lobbying for austerity and long-term deficit reduction by the Peterson Foundation-associated politicians, lobbyists, and intellectuals who are still, even after three years of the Obama Administration, dominating the Washington conversation about fiscal responsibility and fiscal sustainability, and still pushing these issues to the center of our concerns, even after years of high unemployment, and the destruction of 40% of the accumulated wealth of middle class Americans, the continuing decline in the quality of our schools, our collapsing infrastructure, the continuing decline in social and economic mobility in the United States, the continuing subversion of the political system by monied elites, both personal and corporate, the continued failure of our health care system to deliver health care to all Americans that works, and doesn’t economically devastate those who enter the health care system, and the continued exacerbation of many of our other problems. Why do the partisans of austerity and long-term deficit reduction say that the fiscal sustainability problem is a more important problem than all of the others, or even a problem at all?

It’s because they say that the US Government is constrained in its spending by its need to raise revenue from taxing and borrowing, and its dependence on the bond markets for reasonable interest rates when it borrows. This is the Government Budget Constraint (GBC) which is at the very center of their story, and which drives their reasoning to the conclusion that unless we get the national debt under control so that the debt-to-GDP ratio stops growing and stabilizes at some reasonable level, our financing from the bond markets well carry prohibitive interest rates. And that if we continue borrowing beyond that our credit will finally collapse preventing us from funding many of of our essential programs and even our common defense.

All the claims, I’ve reviewed here, except perhaps for the last, are based on the idea that this GBC exists. There’s plenty of evidence that it exists, they say. Look at households, look at private businesses, look at non-profit organizations, look at state Governments, look at Greece, Ireland, Spain, etc. They all have GBCs don’t they, and since the Government is just like an enormous household, it has a GBC too, right? Wrong!

MMT says that for a Government with a non-convertible fiat currency, a floating exchange rate, and no debts in a currency not its own, there is no GBC. That claim is at the heart of the counter-narrative asserting that the US has no budget constraint except for self-imposed ones.

Some rightly point out that even though the Constitution allows creation of financial wealth without limit, a GBC does exist in the US because Congress has imposed it, by locating the power to create money “out of thin air” in the Fed, and by requiring that the Fed not extend credit to the Treasury, by either allowing it run a negative balance in its accounts, or by monetizing Treasury debt by buying it directly. However, these claims don’t hold up because 1) Congress can always remove these constraints since they are political rather thah economic, and 2) they ignore the 1996 legislation allowing the Secretary of the Treasury to mint proof platinum coins of arbitrarily high face value, e.g. $60 Trillion.

Treasury can use that law to fill the public purse, pay off all debt subject to the limit, and cease to issue any new debt. Since this capability exists, even without Congress removing its constraints on Treasury money creation, Treasury can still create whatever it needs to close any gap that might appear between tax revenues and federal spending.

So, here we are, a Government without a GBC that can never run out of money involuntarily, and we’re facing a persistent, well-funded and powerful consensus in Washington that wants to impose austerity on all of us in the name of a non-existent GBC that it passionately asserts will cause the nation to “go broke,” if we give priority to all of our major problems while forgetting about their fantasy that we are doomed if we don’t reach some entirely arbitrary level of debt-to-GDP ratio, that they have no way of even deriving in any rigorous way from their neoliberal theory.

With increasingly grave warnings of doom they try to make us believe that we are facing a national crisis that must be met with a bipartisan solution that will be impervious to the inevitable protests that will arise from most people when their solution causes suffering — as it inevitably will since as MMT shows, deficit reduction and government surpluses will inevitably cause destruction of private sector financial assets in the private sector.

Since the elites are in a better position to protect their financial assets than other Americans, the burden of austerity will inevitably fall on most of us. We will be sharing the sacrifices, while they will be getting richer from their efforts in the international gambling casino, and from seizing everyone else’s property when austerity renders debtors unable to pay their debts.

Negotiation of that “bipartisan agreement” they are seeking will probably use Bowles-Simpson as a framework, even though that framework was never adopted by the “Catfood Commission,” and even though it has received great resistance in Congress since it was published, by the two Chairs in the absence of agreement needed to make it a commission product. In any event, the main thrust of the austerians/deficit hawks: that fiscal policy should focus on a long-term deficit reduction plan cutting back the social safety net, is still very much alive politically in Washington, DC and another attempt to implement it is likely in the lame duck session, barring an implosion in Europe before then, that could change the priorities of the deficit hawks.

So, the importance of continuing to counter austerian propaganda like The Fiscal Summit of 2012, and other non-partisan organizations allied with the Peterson Foundation remains. We, who believe in the MMT counter-narrative must continue to fight to try to break through the screen of their closed system. One of the popular slogans for the austerians this year is “Debate the Debt.” There’s a petition web site urging politicians to debate the debt. There’s a proposal demanding that the presidential candidates devote a whole presidential debate to the debt and deficit issues.

What is it the austerians want us to debate? They want us to debate how we should reduce deficits over the medium and long-terms by spending less and taxing more. But they most emphatically don’t want to debate whether the debt, deficit, and debt-to-GDP ratio, represent real problems relating to fiscal sustainability or fiscal responsibility. Put simply, they don’t want us to debate whether there problem is really a problem for our capacity to spend in the future or for government solvency.

They say there’s a government solvency problem and that all of us must and should suffer to solve it. MMT says that there is no solvency problem and there’s no reason for people to suffer any more than they have already due to the crash of 2008. That’s the debate about the debt we badly need right now, When they say debate the debt, they mean debate how we should all suffer to get rid of it. When I say “debate the debt,” I mean debate whether the public debt subject to the limit is a real problem, or a just a massive distraction from coming to grips with our real problems. I think that my debate question is clearly prior to the austerians’ because it doesn’t assume the conclusion that there is a problem and that focusing on it isn’t a distraction.

But, I think it is a massive distraction; and I can prove it! Just mint that $60 T platinum coin and the debt problem will go away. Then the Peterson Foundation will need to invent a new fairy tale to distract us with; or maybe they’ll do all of us a favor and just go out of business, so we can re-build our country without having to deal with their insolvency fantasy first!

The Fiscal Summit Counter-Narrative: Part One

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

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

The Fiscal Summit Counter-Narrative: Part Four, The Deficit, the Debt, the Debt-To-GDP Ratio, the Grandchildren, and Government Economic Policy

The Fiscal Summit Counter-Narrative: Part Five, Inflation and Hyper-inflation

The Fiscal Summit Counter-Narrative: Part Six, Policy Proposals for Fiscal Sustainability

The Fiscal Summit Counter-Narrative: Part Seven, Policy Proposals for Fiscal Sustainability, the Q & A

(Cross-posted from

The Fiscal Summit Counter-Narrative: Part Seven, Policy Proposals for Fiscal Sustainability, the Q & A

5:26 pm in Uncategorized by letsgetitdone

My last post covered the Session 5 presentations of Professors L. Randall Wray and Pavlina Tcherneva to the Fiscal Sustainability Teach-In Counter-Conference. The subject of both presentations was the MMT Job Guarantee a policy proposal at the core of out developing Fiscal Sustainability/Responsibility Counter-narrative to the story told by Peter G. Peterson’s Fiscal Summits and the neoliberal ideology they exemplify. This post will cover the Q & A Session following the presentations.

SESSION 5: “Policy Proposals for Fiscal Sustainability” – Q&A

Dennis Kelleher, Rebel Capitalist, kicked off the Q & A by asking whether the Job Guarantee (JG) wage would eliminate the need for minimum wage laws because the government was setting the minimum wage. He also asked whether the minimum wage could be regionalized by basing it on a HUD index measuring the cost of housing.

Warren Mosler replied that if the political will was there the JG wage could certainly be indexed according to regional variations. Warren also added something to Pavlina’s presentation. “The size of this employed buffer stock, we’d expect it to be much smaller than the pool of unemployed for a given level of price stability. So for right now, if maybe the mainstream would think maybe we needed maybe 4 or 5 percent unemployed for price stability under normal circumstances, this might be only 2 or 3 percent because it’s a much better buffer stock than unemployed because labor can actually flow back and forth and so it becomes more of a transitional job between unemployment and private sector employment than it does…there still would be elements of just a career public service job.” He then goes on to point out that benefits can be introduced from the bottom up by the Government through the JG. For example, two weeks vacation, child care, health care. If you did that then competitive markets would move those benefits up the scale. The JG “. . . . gives us a tool for that which is the American approach to things so it is a hybrid type of approach that gets rid of the moral hazard aspects of other approaches.”

Bill Mitchell added that in the South African case he used poverty lines and nutrition rates to design a minimum wage framework “. . . which would embed in the public works program we’ve been working on.” And he goes on:

”And, of course, then you find out that there’s objections from the government: 30% of private employers are paying well below what you’ve suggested as your minimum wage. And, I said this to the Treasurer of the country, that what you’ve got to decide in any nation is that aims to be a civilized, sophisticated country is what is the minimum price you want people to be able to do business at? And that minimum price has to be a wage that provides people with an inclusive capacity to interact in society, and if your private sector are paying below that then you don’t want them in your country.”

LetsGetItDone Comment: I like to say that insofar as workers are being a paid less than a living wage, the businesses paying them are getting subsidized by the workers so that those businesses can stay in business. I think it should be illegal for workers to pay such subsidies and that businesses that, in effect, ask them to do so, don’t deserve to exist because they don’t produce a net gain for society. I’d rather see those businesses fail, and see their workers employed in a JG program any day in the week. We don’t need, and should not have such businesses in the United States.

”That’s the reality. Otherwise, you’ve got no aspirations to be a sophisticated, civilized country. And so the job guarantee wage is, you don’t do away with the minimum wage, it becomes the minimum wage. And then you can add on whatever, like Warren says in political terms, you can add on whatever, in Australia we call them social wage benefits: child care and access to all sorts of other benefits that are outside the direct employment contract. But it is the minimum wage and you have got to set it at a level that you aspire to be the actual living minimum, not some penurious sort of penalty rate.”

Roger Erickson remarked that we’ve described options here, but not how we can get people to explore or take up these options. “. . . The problem is scaling up to large populations. The only thing we’ve learned, I’ve learned today, is how we address this is we either have a war or a severe depression. We have to find a mechanism where a population can become self-aware enough to address this kind of…what it’s leaving on the table, short of having a major depression or a war, and the only example I can think of, of groups that have done this very large scale, are large military groups and they do what you would expect from any systems theory, they drive interaction and awareness through absolutely political or operational decisions.”

Bill Mitchell: “I mean, as Pavlina said, India’s got a bigger population than the U.S. and India has introduced the rural Job Guarantee, as a national employment guarantee, it’s employed millions of people, already . . . They did it because the growth in the Indian economy, which was urban-based in technology and construction. . . . They were faced, the motivation was that they were faced with an urban crisis because the rural poor had no option but to try to flood into the cities to enjoy the growth that was occurring there and they knew that wasn’t sustainable for housing and other reasons and so they suddenly realized that the reason this migration is occurring is the lack of jobs in the rural sector. . . . Solution: Create jobs. Who’s going to do it? The private sector isn’t going to do it, we’ve got to do it and they did it. Millions of jobs have been created in the second largest population in the world.”

Roger Erickson: ”So the hundred dollar question is what do we have to do to make the existing Congress aware of things that it has taken them years to become aware of?”

Bill Mitchell: “That’s a good question.”

Unidentified: “Well that’s a serious political question and I…it’s going to take a grass roots effort. It’s going to have to come from the grass roots because of, we’re talking about, our political system is seriously dysfunctional. To get anything, something like this out of our current political system is just unrealistic. So it will be an incredibly difficult endeavor to do something like this but it doesn’t mean we don’t undertake the effort to do it and to start advocating this on several needs, several levels.” He goes on to talk about the difficulty of breaking through media and other political screens.

Marshall Auerback: says he disagrees because when he’s presented this idea in speeches and conferences it “. . . actually got a lot of bipartisan support.”

“Funnily enough, a lot of times I get, I’ve had objections from unions rather than from on the Right because what the unions think is that you’re trying to create a slave class of labor that’s going to undercut their wages and you have to try to explain you’re trying to fill the gap and create a full employment pool which ultimately enhances their pricing power. So, in the first instance it can be a little bit deflationary because if you have someone who’s been paid, say, $40 an hour and all of a sudden he’s lost his job and he has to go to $8 there is a once off adjustment but then the adjustment mechanism the other way which is much easier. So I actually think this is one of our winning ideas which actually could get much greater political acceptance than you think.”

Jeff Baum says that this sounds like a socialist idea, so when it’s proposed all we get is a lot of noise. But if this becomes the minimum wage why won’t every minimum wage worker go to work for the government because they can’t be fired and why won’t “private industry” charge that the JG is competing with them and will either drive wages up or private industry won’t be competitive with government?

Warren Mosler replies saying:

“Look, we’re going to have active fiscal policy that keeps, for a given size government, keeps taxes low enough so that the private sector will be able to have the means to hire everybody which means they’re going to have to still have the means to pay a higher wage. So if we start off at an $8 an hour, first of all that’s not going to be disruptive. I don’t think anyone quits their private sector job for that or very few people.

“Well yeah. It’s full-time work. There are still people who are going to work baby-sitting and whatever. So — you’ll get a few and then we conduct discretionary fiscal policy so that this pool, the private sector hires these people away and maybe they’ll have to pay ten or eleven or twelve dollars so it will be some spread but then that spread will stabilize and then that will be the stabilized private sector wage, let’s say, unless we over stimulate…we have too much aggregate demand, we allow too much aggregate demand and then our pool of buffer stock workers shrinks to zero then, of course, it’s no longer a buffer stock and then you lose control of prices on the upside just like with any other buffer stock.

“But if we conduct policy to keep it at two or three percent, whereas before we had unemployment at four or five percent we’ve actually reduced the public sector because the unemployed are in the public sector. Look the thing is, and don’t forget when I told you about my cards in creating, if there’s a tax to get out of this room and of, whatever, and then I don’t hire enough, I don’t offer enough jobs so you can get the money to get out of this room, why did I do it? Something’s really wrong with my policy, I should be lowering the tax or giving you more work. Right? I should be increasing my spending or cutting my taxes. We got to get discretionary fiscal policy to the point where these people we’ve taken out of the private sector and not used in the public sector because either we don’t want them, we don’t want to spend, whatever, has got to be minimized.

“We want to minimize it but we also want to have a buffer stock as a price anchor. Now, every monetary system uses a buffer stock policy, a gold standard is a gold buffer stock, unemployment is an unemployed buffer stock. What we’re saying is an employed buffer stock is far superior to an unemployed buffer stock and far superior to a gold buffer stock. It’s larger, deeper more flexible, and most important, whatever your buffer stock is, it’s always fully employed. There’s always a bid for the buffer stock. On a gold standard, gold is always fully employed, you can always take an ounce of gold and sell it to the government and get money for it, you can always monetize it.

“In a wool buffer stock, where Bill started, there’s always a bid for wool. Sheep are fully employed. [Laughter] No, it’s true. So, right now, we use unemployment as a buffer stock, this clearly shows we don’t have any idea what we’re doing. Not only do we not understand the monetary system we don’t understand that, well that’s part of it. We don’t understand a buffer stock always anchors a monetary system. We should be using an employed buffer stock.”

LetsGetItDone Comment: The point that there’s always some “buffer stock” in an economy, and that it’s a matter of choosing the best one, rather than not having one became a critical point later in the debate between mainstream MMT and a group of bloggers who argued that the JG wasn’t part of the MMT core. Warren argued cogently, I think, that the best “buffer stock” from the standpoint of public purpose is a fully employed one. See here for the best summary of the argument.

L. Randall Wray:

”I wanted to correct a misunderstanding because a lot of people do jump to this. We’re going to guarantee a job offer for anyone who is ready and willing to work. And then they say, oh, well then they’ll never get fired. No. We never said that.

“They don’t show up, they show up drunk, they don’t do their work, they are fired. Anything that the private employer can do, legally do to their employees, the employers in this program will do. And socialist, I think if you tell most Americans what we’re going to do, we’re going to require that people who ought to be working, define disabilities I think very narrowly, they’re going to have to work instead of welfare. And you ask them, “What would you call that system?” All Americans are going to call that, “Oh, that’s capitalism.” They wouldn’t call it socialism.”

LetsGetItDone Comment: This point also is very important. People objecting to the JG proposal often come up with the objection that it is a guaranteed job and that people who can’t or won’t perform still get the pay check. But, again, the JG provides a guaranteed job offer, not a guaranteed job. So, the objection is just false, provided that the JG program is well-run.

Having said that, it is important that if a JG program is passed, that it’s Administration not be placed in the hands of its political enemies, because they will destroy it first, by turning JG jobs into “featherbeds” with lax performance standards and little social value, and second, by attacking the program as providing sinecures for people who are producing nothing of value.

So, if we ever do get enough support to get the JG passed, everyone supporting it must realize that its passage will not be the end of the fight for the JG, but will only be the beginning of an unending effort to make the JG a Federal program that works as advertised, and that contradicts the lies that those who want to return to an unemployed buffer stock so that they can pay lower wages will tell about it. They will be unremitting in their efforts to destroy a program like this because it gives the lie to everything they believe in. So, we must be unremitting in our efforts to make sure that the JG becomes an exemplar of what we can do collectively to secure the economic bill of rights that FDR envisioned for us all.

Warren Mosler also points out that the JG is not the government owning the means of production, but only providing for public infrastructure. “Public infrastructure is all the things you hire people for and then you’ve got this transition pool where you facilitate the transition from…back to the private sector and that’s what this does.” In Argentina, more than half of the people among the 2 million employed by Jefes went to private sector employment within two years, allowing the economy to expand rapidly without labor bottlenecks, unlike the normal situation in which “it takes a lot of demand pull to get that done.”

Bill Mitchell replies:

“Well as Warren said, I got the idea sitting in my fourth year at Melbourne University and I was sitting in an agricultural economics class and at that time the Australian government was running what’s called the wool price stabilization scheme. And it worked by the federal government when the private market didn’t want to buy as much wool as was put onto the market the government bought it up and stored it in big sheds. And when the markets were strong the government wanted to stabilize the price, it just released the wool out of the sheds and back into the market. And it was very successful, it was used to satisfy the rural lobby to stabilize their income so they weren’t fluctuating. It was very successful. And I remember sitting in this very cold winter day in Melbourne, in Victoria, where I grew up, thinking well I didn’t really care about…it seemed like a full employment of wool scheme. Every bit of wool that was produced was employed, either in the shed or in the private sector somewhere. And at that time Australia was just going into very high unemployment, it was 1978, and I said I don’t really care about wool so much but I care about labor and we could use a buffer stock to do that for workers.

“But the point about business is, I often give talks to the business community and they’re as right wing in Australia as they are here and I’ve given talks in the Netherlands where they are as right wing as they are in South Africa and elsewhere and its more to Warren’s point. I ask them the question, they’re all in suits and what have you, and I say where are the unemployed now? And its a question they’d never really asked I don’t think and eventually I get them to admit or understand that the unemployed are all ready in the public sector. Now you are having debates in Congress somewhere down there or up there, I’m not sure of the direction, about extending unemployment benefits. Well, that’s a recognition, and you’ll obviously do that again, given the skull and the crosses I would imagine, but in Australia we have the unemployment benefits guaranteed. But that tells you where the unemployed are, they’re in the public sector. So then I say to the assembled businessmen, typically men, I say, “Well what are they doing in the public sector?” And I can get them to chant, “Nothing.” And then I say, “Well are you happy about that?” And I can get them to say, “No. The bastards.” [Laughter]

“And I say, “Well wouldn’t you rather they’d be doing something productive in the public sector?” And they say, “Yes.” And once you go through this logic you can sneak up on them. [Laughter] And in the end they become supporters of the job guarantee doing community-based development work, doing environmental care services, doing aged care services, because they would rather, their ideologies and their prejudices would rather see them doing something than nothing. It’s very easy to persuade them.”

Unidentified: Reports his right wing friends confirm Marshall’s view. They’d like people put to work so they can pay taxes.

Marshall Auerback: “By the way work-fare, work-fare with the state-administered program and one of the reasons why it didn’t work goes back to the old argument that states don’t create currency so it creates, there was an external constraint. But even at that it did reduce the welfare rolls for a time when you had employment being created, but it can be administered on the local and state level but it has to be funded at the federal level. That’s a key point.”

LetsGetItDone Comment: So there also is an argument from conservative values for the JG, as Bill, unidentified, and Marshall indicate. It wouldn’t be the argument I’d find attractive. But it is important to recognize that insistence on an unemployed buffer stock and opposition to the JG, may not be based on conservative values at all, but only on the naked self-interest of people who want to keep their costs low and their profits high.

Bill Mitchell adds:

“I meant to say something about work-fare, in Australia, we call it “work for the dole.” And its nothing like a job guarantee because it’s… a job guarantee is an unconditional offer, the government sets the price and says we’ll take anybody. Work-fare and “work for the dole” are compliance programs to force people to do sort of like Shylock in the Merchant of Venice. The government wants you to do something for the pittance of welfare they offer. It’s typically not anything like a living wage. It’s a program, not an entitlement. It’s usually short term projects not doing very much at all. Whereas a job guarantee is an ongoing guarantee and people say to me, “Well what if someone wanted, liked working in the job guarantee?” And I say, “Well, what’s wrong with liking your job? It sounds to me like a good thing if you actually settled into the job guarantee for life and made it a career move. What’s wrong with that?

“Most people won’t do that but some people might. And then it’s up to the private sector to restructure their jobs, and their wages and conditions offered to make themselves competitive. What’s wrong with that, that’s going to increase productivity.”

Pavlina Tcherneva adds: “Just one final note on the work-fare. It was considered a success only because of the reduction in welfare rolls but when you look at the actual conditions of the recipients, poverty did not change and, in fact the income they received was less than if they had remained… The income through jobs was less than what they would have gotten on welfare. So it was considered a great success through the Clinton Goldilocks years, right? But now it is a whole different ballgame. And so you have also these additional issues if you would like to facilitate this transition from the public to the private sector as well, you also have to provide certain protective services if you will. You gotta provide some sort of transportation, day care services that will facilitate this transition into the private sector so there are things to do.”

Unidentified said: “Yes. I want to ask, well not a job guarantee related question. I have a friend, an Australian economist, and he told me he had to give up on his academic career because he had not mainstream views. So I want to ask did you have to hide your true views in order to advance in your, obviously you’re professors so you teach students? Did you have to initially hide your true vision in economics in order to get the jobs?”

L. Randall Wray: “I don’t think anyone here did, but we were special cases. Let’s say that our goal was to get a position at Harvard, Yale yes, you absolutely would have to hide this and wait until you had tenure and then you could finally promote this and write the kinds of things, I mean the things related to this. But none of us made that choice.

“But we know lots of people who have suffered the slings and arrows, these kinds of things. We’ve seen university departments, economics departments implode over differences between those who hold these kinds of views and those who hold the more conventional views. And I think we all know people…yeah at Notre Dame.”

Unidentified then said:

“This is more of an idea than a question but just on the question of how do we kind of implement getting this idea on to the mainstream, I think everyone knows the President’s debt commission is going on right now, I don’t know if everyone knows that since they have no budget they’re actually outsourcing their roles to the Pete Peterson Foundation, including the listening tour is actually going to be the listening tour that AmericaSpeaks is putting together that the Pete Peterson Foundation is paying for. The Foundation went to AmericaSpeaks with a bag of money to do it all themselves and they said they wouldn’t do it if it were just the Peterson so they got MacArthur to lend their name but it’s all Peterson money. We know what Peterson wants to do with it. There are twenty hearings around the country on June 26 and the thing is they’re all open to the public.

“So this is the exact type of thing that if there is a coordinated effort, if we can get people into those meetings then we can raise this and at least pull the discussion to a more balanced place than where Pete Peterson wants it and he paid millions of dollars to make sure they end up with the recommendations that he wants. So, again, the organization is AmericaSpeaks and I feel like this is something that this group could do by email and try to get folks into as many of those meetings as possible with this idea offered up as something that the people want.”

Warren Mosler: “Any bloggers in here?”

Unidentified: “One or two.”

Joe Firestone: “We got all kinds of bloggers. Not everyone is raising their hands.”

Warren Mosler: “Can’t hurt, can’t hurt.”

LetsGetItDone Comment: As it happens there were quite a few bloggers or future bloggers at the teach-In. Outside of the panelists themselves, they included: Dennis Kelleher, Darrell Dellameade, Lynn Parramore, Bryce Covert, Jason Rosenbaum, Alex Lawson, Lambert, DC Blogger, Roger Erickson, Joe Bongiovanni, Matt Franko, Ed Harrison, one fairly well-known blogger who wanted to remain anonymous, and myself.

Stephanie Kelton: “I understand, and Randy and I heard yesterday some things like you’re talking about but I understand these are very difficult to penetrate, that the groups are pre-screened. It may be even an invitation-only although it may have the appearance of being open to the public and a mix of everyday common Americans. But my impression is there is a gatekeeper and it might be pretty difficult to penetrate those meetings.

LetsGetItDone Comment: Actually, it wasn’t. Later I penetrated those meetings and wrote a blog series critically evaluating the AmericaSpeaks process and content from an MMT point of view.

Joe Firestone: “Just a question. You focused really, wholly on the job guarantee with respect to the policy implications or policy considerations. Could you comment some on the health care issues and the environmental issues and some of the other policy issues where we are not attempting to meet any of our problems due to budgetary considerations? Those considerations always come in first and seem to control the agenda, they’re kind of in the background but, this is off the table because it costs too much or that is off the table because it costs too much.”

Warren Mosler: “I think you just said it all.” [Laughter]

Stephanie Kelton: “I was…”

Joe Firestone: “I’d like to hear you say it. I say it all the time but I don’t hear you say it” [inaudible].

Stephanie Kelton replies:

“I think this comes back to what we’ve been hammering at all day long which is that there are all kinds of self-imposed constraints. If you say that you’re only going to fund Social Security out of the payroll tax and you use, you establish these Trust Funds and you say the Trust Fund must have a positive balance or else we’re not going to clear the checks at the level that’s been promised then we’re only going to be able to meet 77 percent, or so, of promised benefits after some date. I was rereading, I was telling Warren yesterday, I was looking at the Trustees Report from 2009 for Social Security and Medicare and what the Trustees are projecting for the Old Age Survivors Insurance Trust Fund OASI, the Disability Insurance Trust Fund DI and you put them together and you get OASDI and you get what everyone commonly refers to in everyday language as the Social Security Trust Fund.

“Those are both projected to go bankrupt at some future date. In the 2009 Report, the day of doom is now 2037 on those two programs. Health Insurance Trust Fund, the Medicare care side is also projected to blow up. That’s supposed to go bankrupt. The Supplementary Medical Insurance Trust Fund (SMI) is projected to be solvent into the indefinite future. As far as the Trustees can see, 75 years and beyond, there is no problem with the SMI Trust Fund which is Medicare Part D and Medicare Part B. Why is there this difference? Why are the other three going broke but this one is perfectly fine? And it happens to be that the government has guaranteed to make all payments for Medicare Part D and Medicare Part B out of General Revenue and tied the payment of benefits for other Medicare payments, hospital benefits, and Social Security to the availability of the funds in the Trust Funds. And so, I mean it’s crazy, it’s right there in the Trustees Report and they say it very clearly that the reason Supplementary Medical Insurance plan is solvent as far as the eye can see is because the government says so. It’s as simple as that.”

LetsGetItDone Comment: Stephanie blogged a good bit about this later, and so did I. But thus far to no avail. The Petersonians and the whole establishment of Washington career progressives seem to be having a great deal of difficulty in grasping the idea that a government like the United States, sovereign in its own fiat currency, can’t run out of money involuntarily whatever the level of its national debt or debt-to-GDP ratio. Occasionally some members of these groups will get an inkling that this is the case. But from there, to the idea that entitlement reform need not involve any cuts in entitlement spending at all, seems to be a leap that either their preconceptions, or their self-interest will not allow them to make.

Joe Firestone: “So the whole problem with respect to Social Security and also Medicare is just to have the government say so?”

Warren Mosler: “Yes.”

Stephanie Kelton: “Exactly, it is an accounting problem, it’s not a financial problem.”

Warren Mosler: “So look, I think we also tend to agree that unemployment is a large cause of the environmental degradation. Nobody cuts the trees down when they don’t need the money and don’t need the jobs. So, so many of these things that go on are in the name of creating jobs when that shouldn’t be the case, we should be at full employment anyway, and then the pressure for that would go away.”

Bill Mitchell then added a long comment on policy:

“Here’s a snippet of policies that are current and that I’ve written about and that are on my blog. Health care, America has a crazy health care system. It’s a dysfunctional health care system and you could be very well advised to look at the Australian system, Universal Health Care. The poorest person in Australia has immediate access to first class health care whenever they want it. And nobody suffers from lack of income in relation to health care. So I think Universal Health Care is something you should aim for. The government will always be able to afford that if there’s enough real health care resources available and if there’s not, then you could redeploy people who I’m just about to be put out of jobs in the financial sector as doctors and health care professionals.

“Environment, I’ve written that, and your government is toying with the same sort of nonsense as my government. Emissions trading schemes, market-based trading schemes are ridiculous. You need rules-based schemes. That is you need to identify, in say Australia’s case, it’s the biggest coal exporter. Coal is not a viable long term industry in environmental terms. Give it twenty years and then close it down. It’s a rules-based approach. The sort of emissions trading systems that Europe has been implementing are dysfunctional and will create a worse problem.

“Financial sector, we need radical reform of the banks. Banks need to go back to being financial intermediaries, not speculators. And I would immediately outlaw almost all OTC trading and redirect those workers into other jobs that might help us solve cancer and create environmental care solutions and things like that. The only speculation I would allow is that there can be readily attached to the real sector, for example, forward markets provide a counter-party for a manufacturer who wants to hedge exchange-rate exposure on some manufacturing contract that crosses borders, that’s fine. That’s speculation that serves a real purpose. Any speculation that doesn’t should be outlawed and I would create public sector jobs to provide gambling advice to those that I’ve outlawed. [Laughter]

“So there’s some policy initiatives. I would…The future to our inter-generational challenge dependency ratio challenge is first class education at all levels and public education in my country services, by far, the greatest majority of people and I’m not so sure here but probably secondary school still does here. And I would have massive injections of public spending into education to increase their productivity. As our dependency ratios will surely rise we will be able to get more output per unit of worker and not have to worry about the real resource shortages that might arise. But as we said this morning the irony is the solution we’ve adopted is to trash our education systems and therefore we are undermining our future when we think we’re actually supporting it. So there’s a few snippet policies.”

LetsGetItDone Comment: So, Bill added a whole range of policy options to the Job Guarantee focused on by Randy and Pavlina. That provided much needed perspective, because up until that point full SS payroll tax cuts, State revenue sharing, and the JG had been the MMT policies mentioned. However, the focus of MMT on public purpose, along with its guiding notion that fiscally responsible economic policy is the kind that we think will enhance public purpose, implies that the range of MMT policies goes far beyond the three main policies discussed at the Teach-In. Again, Bill recognizes that in his comment, and more generally in his work. I’ve written about a bit about the range of MMT policies here, and Warren has developed policies in various areas of concern at his site.

Also, since the Teach-In Counter-Conference; MMT writers have focused to a much greater extent on the importance of policies designed to remove control and mortgage frauds from our economy. Randy has written quite a few very trenchant posts in this area, including some co-written with Bill Black. Also, Bill Black is now one of the most active bloggers at the NEP site, which is MMT central for, at least, the US. So, it’s pretty clear that the pure financial, modern money, and economic aspects of MMT have now been supplemented by the idea that for the economy to respond to MMT-inspired policies as we expect, and specifically to achieve public purpose, its criminogenic aspects need to be purged to the extent possible.

Unidentified continues asking about the difficulty of spreading the MMT message: “This should be a short question. We’ve added now three countries as examples of that social unrest provided the impetus to get policy makers’ minds focused on this. We all know, most of this audience knows about different parts of the United States so, at least I’m very curious to know, is there any significant difference in the resistance of people to discussing these ideas in Australia as compared to the United States?”

Bill Mitchell: “No. With all due respect, the dialog is more civilized in Australia. Fox News couldn’t exist in Australia.”

Unidentified: “What do you mean? He came that way.”

Bill Mitchell: “The boss exists, that’s why we got rid of him. [Laughter] But the type of journalism wouldn’t survive in Australia, we would think it was a joke. Even the, what I would call the extreme right in Australia is more civilized than Fox News. And one of, we were having a conversation with someone this morning, one of the differences might be I sense there is much more of a religious zeal here than there is in Australia. We don’t have the fundamental sort of puritanical origins. We were criminals after all. [Laughter] And I think you’ve commented, Randy, when you’ve come across, when you’ve been interviewed by our press, that you were surprised by the sort of questions the press and the way in which the public discourse and policy discourses is played out. It’s more civilized.”

L. Randall Wray: “It’s more intelligent.”

Bill Mitchell adds:

“It’s more intelligent Randy’s saying. Well I wasn’t going to sort of say it [Laughter]. But at the end of the day the neo-liberals invited us too. But our welfare state has been degraded but not destroyed. And I think that they haven’t been successful in getting rid of Universal Health Care, they haven’t been successful in getting rid of a decent minimum wage system, they haven’t been able to completely trash public education. They’ve tried all of those things, they haven’t succeeded in doing that and they never will. It’s too culturally embedded in us, in our, we’re a more collective society than the U.S., we have a more, we have this concept called mate-ship, and everybody’s a mate, even your enemy is a mate in Australia. And that’s a very strong collective tradition, goes back to the settlement, goes back to our war efforts, and our ANZAC tradition and all of that stuff. At the end of the day we will not allow a fellow worker to go without health care if they don’t have income, we won’t allow them to go without housing if they haven’t got income, it just wouldn’t happen.”

Joe Firestone: “There is one last question.”

Unidentified: “Just one. Just to follow-up on that. All my life I’ve seen the right-wingers arguing for things that are plainly destructive and you just said they were trying it in Australia and they couldn’t succeed but what are they doing it for? Why do we have so many people trying to do this kind of stuff?”

Marshall Auerback: “You know I’m Canadian and just a little anecdote. One of the reasons we almost didn’t avoid the sub-prime bubble was because AIG came up to Canada when the Harper Tory government come into power in 2006 and they argued for us to liberalize our insurance markets so they could offer programs like Credit Default Swaps that was AIG’s doing. And the Tories were no more ideologically predisposed to do this than the previous Liberal government was. Maybe they just wanted to expand their money-making machine across the world and maybe they always want to do that.”

Unidentified: “So is it just like when you have a two year old who can crawl all over you and do terrible things but the reason he does that is because he doesn’t know he can hurt you. I mean, are these guys like just children trying to get what they can and do what they want and not know that it has consequences?”

Bill Mitchell: “I don’t think there are any psychologists on the panel.” [Laughter]

Warren Mosler: “I think they do it for the funding.”

Unidentified: “It seems to me it’s somewhat for the fun. To make it more exciting, to make life more interesting.”

L. Randall Wray: “But a big part of it is, so you can step back and look at the big picture but there are little stories about each one of these, so each individual firm, each individual sector is trying to get a bigger share. And so, they’re advocating for things they see as in their own individual interest and then we can step back and we can say, “When you add all these things together it’s a disaster.” I think that’s part of it. Now, I do believe in conspiracies, too — but I don’t think you have to go there to explain why, if you’re Goldman Sachs and you’re going to be peddling Credit Default Swaps and you’re betting against your customers, you would like to see that allowed.”

Unidentified: “There used to be moral, there used to be things you wouldn’t do. . . . . Yeah, and there used to be regulation too.”

Warren Mosler: “But the other thing is you have a lot of successful people who think that it was because of their own doing and then fund organizations that support self-reliance and all these things we consider right-wing types of things, less government and that type of thing. And you’re not going to stop that, it’s just human ego.”

And then Bill Mitchell ended the conference with a great comment:

“Yeah, I think the question about regulations is important. I mean the big difference between Australia to here in the financial sector is we really kept the regulations on the banks. And not one bank went close to failing in Australia. I mean we didn’t even have a recession because the financial implications were very muted in Australia. And that’s because we still maintained most of the regulations. Like you ditched your 80/20 rule, we didn’t have an 80/20 rule we had a 75/25 rule, we didn’t ditch it. The modification we had was anybody who wanted to go without a 25 percent deposit had to insure. And the banks had to insure them. And that’s a fundamental difference.

“And the other big difference, of course, was that, and I think you’ve made this point sometimes too, Warren, is that when did the sub-prime crisis become a crisis? When did we get this sort of debt melt down? We got it when we, there was no doubt at the margin that people who should never have got loans. But when did good debt become toxic debt? When people lost their jobs. You could have avoided a whole lot of the bad debt problems if you had an earlier and more substantial fiscal intervention. Whereas in Australia we had a very early fiscal intervention and a relatively large fiscal intervention. And the deficit terrorists were saying, “This is ridiculous. What are you doing? You’re going to kill us.” But it saved us. And it stopped a lot of the good debt becoming bad debt. You didn’t do that here. And that’s cultural and, whoa, intelligence, as Randy says, I didn’t say it.

LetsGetItDone Comment: And we would have been saved too, if President Obama hadn’t turned fiscal policy over to neoliberals like Geithner and Summers and instead had followed MMT policies. A few days ago, the Fed announced that “. . . the median net worth of families plunged by 39 percent in just three years, from $126,400 in 2007 to $77,300 in 2010.” Most of this loss could have been headed off if the Government had taken the banks into resolution, investigated and prosecuted the control frauds, written down the principals on homes to their real market value, and put through the MMT economic programs dicussed above. Instead, the Government decided to implement neo-liberal fairy tales and then play footsy with austerity when the US needed an MMT-based Green New Deal.

In my next post I’ll end this series with a summary of the Petersonian narrative and the MMT counter-narrative, and with more discussion of where policy ought to go now.

(Cross-posted from

The Fiscal Summit Counter-Narrative: Part Six, Policy Proposals for Fiscal Sustainability

8:20 pm in Uncategorized by letsgetitdone

The way we designed the program of the Fiscal Sustainability Teach-In Counter-Conference, was to introduce the fundamental ideas of Modern Monetary Theory (MMT) in the first three presentations on defining fiscal sustainability, whether or not there are spending constraints on governments sovereign in their currency, and whether deficits, debts, and debt-to-GDP ratios are really a problem for entitlement programs and our grandchildren. Then Presentation Four, by Marshall Auerback, was given to consider the main critique of MMT’s stance on deficit spending, the possibility of inflation or hyperinflation.

Finally, Presentation Five, which we’ll cover in this post was designed to highlight the proposals for full recovery favored by the MMT economists. These proposals are the counter to the austerity proposals of Paul Ryan, Pete Peterson, Erskine Bowles and Alan Simpson, David Walker, Barack Obama, and the rest of those convinced that the US Government has solvency/debt/deficit problems that must be solved by some combination of spending cuts and tax increases.

Of course, there are disagreements in details among the people named above, and even more variations and nuanced disagreements among them and many of the Washington DC think tank career progressives. But all of them share the Peterson neoliberal worldview that eventual deficit/debt reduction is essential for fiscal sustainability. So, all of the above spend their time devising budgets that plan for deficit reduction “over the long-term.” Naturally, “the long-term” varies greatly among them, with their appetites for subjecting the mass of Americans to governmental austerity. But all who share this Government Budget Constraint (GBC) perspective want to implement austerity eventually, because they believe, or say that they believe, that austerity is central to fiscal sustainability and responsibility.

In contrast, the MMT counter-narrative, emphasizes that indicators like the size of the national debt, or the debt-to-GDP ratio have nothing to do with the spending capacity of a government sovereign in its own currency, and that even the deficit can’t be evaluated as too large or too small in the abstract, but only relative to its impact on the economy. Given this orientation, MMT economists, don’t spend time formulating long-term plans for either deficit reductions or deficit increases; but instead propose fiscal sustainability policies based on their anticipated impact. This is the orientation underlying the final presentations by Professors L. Randall Wray and Pavlina Tcherneva which I’ll review in this post.

Audios, videos, presentation slides, and transcripts for the presentations are available at selise’s site and a slightly different version of the transcripts is available from Corrente as well.

Presentation by Professor L. Randall Wray

Randy Wray begins his presentation with this overview:

“. . . I’ll talk about the causes of unemployment; the appropriate goals for a sovereign government – and by that we mean what we’ve been talking about all day, one with a sovereign floating exchange rate, non-convertible currency; cause of unemployment – Bill was getting into this in his last comment; some lessons from the New Deal – which we gradually forgot; and then abandoning the commitment to full employment – and this is almost the exact title of a book written by Bill Mitchell that is very good talking about this period. And then Pavlina will take over and talk about the Job Guarantee program in both theory and practice and how this can be used to achieve what we think are the appropriate goals of a sovereign government and contrast that with the view that growth alone is an appropriate goal, and then conclude.”

He then outlines the causes of unemployment, which he initially divides into short-run causes of unemployment and long-run causes. In the long-run he mentions two problems: demand gaps and structural unemployment.

Short-run causes: Randy points to the Great Recession and approaching losses of 9 million jobs by April 2010. He also says there would be continuing losses for “many years,” and mentions that even official projections and experts predict a best case that unemployment would remain high for years. We are two years now into that prediction with no end in sight, given the government austerity policies we are seeing.

Randy then mentions the lost opportunities both for people, and for young people just coming into the labor force, including for college graduates, who had been having a very difficult time finding jobs. Randy then points out that if one does a careful assessment of the number of jobs needed one would find that the number is “well above 20 million jobs.”

LetsGetItDone Comment: This is probably a conservative estimate for today (2012). We are probably closer to needing 27 or 28 million jobs.

Randy says people are thinking about creating jobs on far too small a scale. He mentions Obama’s 2 – 3 million, but that nobody in Washington was thinking in terms more than “. . . tens or maybe hundreds of thousands of jobs.” So nobody was thinking big enough about the problem. More than two years later, that’s still the case, and we still need programs that will create “. . . a massive number of jobs.” The problem is that Washington wasn’t focused on Main Street, but on saving Wall Street.

“Maybe it needed to do that; we probably have different opinions over whether that was necessary or not. But in any case the problem is that right now both the politicians and the population at large believe we’ve already spent so much money, how can we possibly afford to create 20 million jobs now. It’s too late. We’re not going to be able to save Main Street because we spent too much on Wall Street.

The confusion that more government spending isn’t affordable is the “major barrier,” now to a job creation. There’s always resistance to the idea to be discussed later “. . . that the government should be responsible for ensuring full employment. But the affordability/deficit hysteria issue is the main barrier to getting out of the deep recession, likely to continue for years. That’s the source of our major short-run employment problem.

LetsGetItDone Comment: And two years later, the politicians are still saying we can’t afford jobs programs, while they entirely ignore the much heavier both real and financial costs of not having a full employment program.

Randy then moves on to the long-run employment problem. First, unemployment has come to be used as a policy tool to deal with inflation. Governments have deliberately tried to keep unemployment high enough to either prevent inflation, or prevent its acceleration. The unemployed are being used as “a buffer stock,” Marx’s “reserve army of the unemployed” to hold down wages and consequently keep prices from rising.

Then there’s structural unemployment. The ILO claimed that at the peak of the business cycle in 2007, there were still “200 million unemployed people around the world.” Randy says that’s “a vast under count,” but even so it’s a very large number. So, in spite of strong economic growth, the world has no solution to the unemployment problem which continues to exist. Why?

It’s because economic “. . . growth fuels productivity growth. . . ” but not necessarily employment growth at the same rate. In the past decade productivity grew 26%, but employment by 16.6%, which isn’t keeping pace with population growth. So, productivity growth, along with population growth are causing higher unemployment, because we don’t need as many workers to have economic growth.

Randy then turns to the question of the goals of a sovereign government. He cites John Kenneth Galbraith’s idea of “public purpose, and mentions some aspects of it: “. . . decent social security for the aged . . . full use of domestic resources.” Government “. . . has the fiscal capacity to do this. Economic growth and promoting economic growth alone is not going to give us full capacity use.”

“So, we think that government ought to be focusing on full employment because it is much more important to have labor fully employed than it is to have, say, our agricultural resources fully employed — although we ought to aim for that too. But let’s make full employment a primary goal. And, as Warren keeps emphasizing, for political reasons, not really for economic reasons, we need to make price stability also a goal. The problem is that for a very long time orthodoxy has thought these two goals are completely in conflict. You cannot have both of these at the same time. You either can have full employment and then you’re going to have inflation, or you can have price stability but you’re going to have to have a lot of unemployment. Okay, so, what we’re trying to do is to promote a program that can give you full employment with price stability, okay, and that this should be the goal of sovereign government. And our argument is that it has the capacity to do this.”

Randy then points again to the economic costs of unemployment in terms of tremendous net income and GDP losses, and continues to other losses mentioned by political scientists and sociologists: poverty, social isolation, crime, regional deterioration; health issues, family breakdown, school dropouts, violence, ethnic hostility, homelessness, even terrorism, “the loss of human capital, because when people are unemployed for long periods of time they become unemployable”.

So, the benefits of full employment aren’t just adding to GDP and producing more goods and services, there will also be more job training and skill development and increase in human capital, poverty alleviation, community building and social networking.

LetsGetItDone Comment: This is a very important point. When debating economic policy people focus on unemployment and GDP statistics. They also spend a lot of time talking about the dangers of inflation and the “fiscal responsibility” issue focused on the national debt, the deficit, and the debt-to-GDP ratio; but there is very little discussion among economists of the human, and social costs of high unemployment, or of the possible longer-term political costs of developing political instability, increasing political authoritarianism, and potential civil violence at the end of a long road of economic and national or international decline. The MMT focus on the costs of unemployment is a much more holistic one than most of what we see today in the discussion of economic policy and its impacts.

Randy continues:

“. . . . Pavlina will talk very briefly about Argentina. We went down there and we saw the benefits to communities of creating jobs in areas that had had no jobs before a jobs program was created. Social, political, and economic stability are all promoted by full employment. And then finally there’s this notion that our colleague Mat Forstater has written about — and unfortunately he was going to be here, but he couldn’t. There are positive feedbacks, reinforcing dynamics, so in a sense there is a multiplier effect of all these things. So, if you just add up the benefits, we get more GDP, we get poverty alleviation, and so on. There also is a multiplied impact greater than the sum of these individual benefits from achieving full employment.”

Randy next points to the experience we had post-Great Depression and during the Post WW II period and to two major reforms. The first was downsizing and constraining the financial sector of the economy, and most of that was done by the market. This time around the Government prevented the markets from downsizing finance by bailing out the banks and Wall Street. But during the New Deal and the Post-war period the Government let that happen and passed regulations constraining finance which worked for a very long time.

The second class of reforms was in direct job creation. The New Deal created 13 million jobs (See Randy’s slide 10) which greatly reduced the unemployment rate, even though many now claim this is not true because they refuse to count the Government jobs provided by the New Deal as “real jobs,” and so continued to count those employed by them as “unemployed.” This is just ideological bias however, intended “to understate the true impact of the New Deal.”

LetsGetItDone Comment: I couldn’t agree more with this point. The idea that a job you have to work at everyday and that produces a paycheck should not be counted as a job, simply because it was provided by the public sector is both silly and inconsistent with the idea that permanent civil servants, consultants, and State civil service employees, are all considered part of the employed work force.

Back to my summary of Randy’s narrative. Since the de-regulation started in the 1970s and accelerated in the 1980s, the first reforms constraining financial institutions eroded or were repealed. So, now the financial sector is huge and the old New Deal constraints on it are gone. The second reform of direct job creation programs was abandoned during the post– WWII period of rapid economic growth, when people came to believe that growth could create full employment and that we didn’t need these programs.

Randy says this about the very successful post-War period:

”In the post-war period, for the first two decades or so, we had the golden age of capitalism, the highest sustained growth rate. We had no financial crises in a twenty year period. Normally in US history, every 20 years we had a depression. We not only didn’t have a depression, we had no financial crises. We had minor recessions, but we recovered quickly. But It wasn’t true just for the US, and Bill could tell you the same story about Australia. And it wasn’t just true for the developed nations. The developing world also had the highest sustained growth it had ever experienced. In fact, it was better than our Industrial Revolution. The developing world was growing faster than the UK did during the Industrial Revolution. So, in a sense, it was a golden age of capitalism.

“We had a commitment to high employment. Now Bill would talk about a commitment to full employment in Australia and they probably came close to achieving that. In the US, we never really embrace that, but we did embrace high employment. We achieved unemployment rates for white males of 3%, almost as good as Australia. But it was only white males. We were not really committed to full employment, including women and especially African Americans, and so their unemployment rates were much higher than this. We had the… A lot of people misname the 1946 act, they say the Full Employment Act, but it wasn’t the Full Employment Act, it was the Employment Act. But it did commit the government to trying to maintain a low unemployment for most groups, if not full employment.

“We had the creation of the US middle class over this period that was sustained by jobs and decent wages. The problem is — Minsky started writing in 1957, arguing that, yes, we have created the conditions for economic stability, a generally high-wage economy, a high-consumption economy, a constrained-finance economy, and all of these things are conducive to rapid economic growth with financial and economic stability — the problem is stability is destabilizing.”

Randy also says that Minsky predicted that the financial institutions would get rid of the constraints on them and then engage in “riskier” activity and also that inflationary pressures would build before full employment is reached given our type of economy. Meanwhile the US rediscovered that poverty still existed by way of Michael Harrington’s The Other America, leading the “War on Poverty” which Minsky participated in.

Minsky wrote many letters to Sargent Shriver and Hubert Humphrey, and also papers and books warning that attempts to stimulate economic growth, coupled with training, programs designed to get rid of “the culture of poverty,” an idea popularized by anthropologists Oscar Lewis, and Daniel Patrick Moynihan (who was part of the Kennedys’ “Irish mafia,” and still later helped shape Nixon’s policy of ‘benign neglect” of the poor, and also greatly helped to advance the emergence of the “New Democrats” and their fiscal responsibility/sustainability orientation), and finally welfare payments for people who aren’t able to work, would NOT work to solve the problem of poverty.

Why? Because 1) it’s demoralizing since you’re telling people to remake themselves, but aren’t supplying a job at the end of the process; and 2) he calculated that providing one minimum wage job to each poor family “. . . would lift two thirds of all poor families out of poverty.” So, Minsky said, give ‘em jobs, not the War on Poverty. Randy and Stephanie, using data from the Clinton boom got a similar result. “One minimum wage job per family would eliminate two thirds of poverty.” And 3) Minsky also objected to the War on Poverty’s welfare component on political grounds: “The problem is that Americans are not going to support a generous enough welfare safety net in order to lift people out of poverty. And of course that prediction turned out to be true.”

So, Minsky believed that Americans will support giving people jobs to get them out of poverty, but won’t support giving welfare to end it. The poverty rate did fall from 1962 to 1973, almost in half. But as it turns out, that wasn’t due to the War on Poverty, but to Social Security payments to the elderly, and the civil rights movement which “. . . . increased the labor market outcomes, mostly for African Americans.” The rate continued to fall until Reagan for African Americans, but the US as a whole “. . . . it stopped falling in 1973.” So, Minsky was right, the War on Poverty failed.

LetsGetItDone Comment: I thought this was a great short summary of what was wrong with the War on Poverty; but, as I remember it, it’s failure was also due to something else, and that was LBJ’s insistence that Americans could have both guns and butter and his continuing increasing expenditures on the Vietnam War. War spending did compete with “War On Poverty” spending during much of Johnson’s tenure, and, I think that a reluctance to spend more on eradicating poverty has to be counted as part of the reason why the poverty program was unsuccessful. In the end, the motivation and commitment to make the program successful wasn’t strong enough in the Democratic Party, especially since much of its vitality was sapped by the split among its supporters over the Administration’s commitment to the Vietnam War.

Randy goes on:

“From ‘73 forward, the US, and — Bill argues in his book, most — or is it Bill — all other developed nations abandoned the commitment to high employment and full employment outside the US. And this was associated with the rise of free market ideology. We can all remember Reagan’s campaign against welfare queens who supposedly drive Cadillacs, government is the problem, supply-side/trickle-down economics is all we need, Clinton arguing that we need to end welfare as we know it — and I actually think there was a very good aspect to Clinton’s agenda here. He said we need to change the way Americans look at poor people. We need to make them see them as deserving poor, and the only way to do that is to get them off welfare and into jobs. I think that was completely correct. The problem is Clinton didn’t give them any jobs. He said we’re going to take away welfare, now you go get a job. But he didn’t provide the jobs. If he had provided the jobs it would have been, I think, a successful policy.

“Bush, of course, talking about the ownership society — If you’re interested, you can go to the Levy Institute. I wrote a paper in 2005 that said this promotion of the ownership society, for most Americans the only thing they own is their house, and what we have got going on in the United States, writing this in 2005, is a way that is going ensure that Americans are just going to lose their homes. Okay, so it’s actually going to reduce ownership in society.

“And, then, finally, under Clinton, the Democrats sort of very strangely and ironically became the party of fiscal responsibility, which has always been the role of the Republicans. Now it became the primary policy of the Democrats: We’ve got to balance the budget. And they learned the wrong lesson from the Clinton years, when we ran a budget surplus, because the economy performed very well in terms of growth. Of course, it was a debt, household debt, fueled boom which was absolutely destined to eventually collapse. But the lesson they learned was, oh, budget surpluses lead to rapid growth, when actually it was the rapid growth that created the budget surpluses. So, anyway, the Democrats become the party that’s always advocating tightening fiscal policy.

“And finally we had the rise of something that takes a variety of names. Jamie Galbraith called it the predator state, many people call it financialization, or neoconservatism, or neoliberalism. Minsky actually called it the rise of money manager capitalism, and that that over the past decade — well, longer period than that — but over the past decade has built up the conditions which finally led to this crisis. This is my last sentence.”

LetsGetItDone Comment: One of the great ironies of modern times is that the Party of FDR became the party of fiscal responsibility. Randy, implies above that this happened during the time of Clinton. But I think that Clinton’s administration was the culmination of a transformation that had been going on for a long time. The Carter Administration was rather fixated on fiscal responsibility and tried but failed to achieve budget balance during its four years. Also, Alice Rivlin rose to prominence as the first Director of the CBO in 1975, and had great influence at least since the early 1980s in spreading the doctrine of fiscal responsibility. Also, prominent Democrats like Bill Bradley, Dick Gephardt, Paul Simon, Bob Kerrey, Max Baucus, Tom Daschle. Al Gore, Harry Reid, Kent Conrad, Chuck Robb, Lloyd Bentsen, Sam Nunn, and John Glenn, were all supporters of deficit reduction, if not balanced budgets, during the 1980s.

During the Reagan/Bush41 Administrations, Democrats used fiscal responsibility rhetoric against the Republicans. In doing so they began to commit the party to the priority of fiscal responsibility. During the Clinton Administration, Democrats had these tendencies reinforced by the Administration and its success in achieving budget surpluses. By the time, the Party lost to Bush43 in 2000, a majority of its members in both Houses of Congress were “fiscal responsibility” fixated. The Bush43 Administration’s deficits and Cheney’s statement that “deficits don’t matter” only confirmed that orientation. So, by the time Obama took the White House, the Democrats as a party were confirmed fiscal responsibility advocates, if not deficit hawks.

Presentation by Professor Pavlina Tcherneva

Now, with Randy’s outline of the sorry history of the failure to provide full employment and eradicate poverty, especially since the War on Poverty, in mind, we come to Pavlina Tcherneva’s half of the counter-narrative policy presentation.

”So, now we get to the vision. How do we utilize this operational understanding of government expenditures to get past the obsession with the financial ratios, with these numerical measures of government success, and actually get to the real thing? Talk about financial ratios in context of what is happening to the real economy. So our vision is, I’d say a Smithian vision, Adam Smith’s vision. Adam Smith said that the wealth of a nation rests within its people. This is what Bill was talking about, not wasting human resources. So how do we do that?

“So this is what we think of features of responsible fiscal policy. We don’t use unemployment and human livelihoods as means to check inflation. This whole idea that Randy was addressing that somehow unemployment is a necessary evil, and we have to put up with it in order to maintain price stability. The empirical evidence first of all, is very spotty on this. Economists constantly redefine their NAIRU or their inflationary barriers and you look at the data and its very difficult to find this particular level. So let’s just measure fiscal policy in terms of employment creation effects. This is how we tend to see things. And so long as we are living in a monetary production economy, where the access to livelihood is a wage-paying job, then that should be the criteria for responsible fiscal policy.

“But we can debate that. These are the questions that sort of emerge from the historical perspective that Randy provided, and also you will see how we believe that this kind of approach utilizes this operational knowledge that we’ve just built to build a very sustainable system. So we are redefining sustainability in terms of employment creation, price stability, as opposed to certain debt/GDP ratios.

“We have to switch the conversation, we really need to re-orient our thinking about fiscal policy. . . .

“We have no sense of the sort of dynamic forces that are determining output. So we would like to measure potential output in terms of men and women put to work. So the way to flip fiscal policy is not to target a demand gap, because that’s not very clear what that means, but instead to target a labor demand gap.

“And you know we’re arguing that this delivers more bang for the buck. We do not know today how much more, even if we agreed that maybe deficit spending is sustainable, even in the most sympathetic, I would say, commentators to the deficits I would say ‘look we need to push further, we’ve got to deficit spend. We still don’t know how much we need to spend, how large deficit spending is large enough to produce the real outcomes that we are aiming for. So what we are proposing is that we actually tie deficit spending directly to the objective and you know exactly how much you need to spend.”

LetsGetItDone Comment: So, this is that important MMT point again. Deficit spending isn’t bad or good in itself. It has to be judged by its outcomes and impacts. It’s fiscally responsible and sustainable if those outcomes lead to full employment, price stability, and/or other benefits. It’s less responsible when it leads to bad outcomes. This, the standard that MMT would use to evaluate any Government fiscal policy, can be used to evaluate the fiscal policies advocated by the austerians who agree with The Peterson Fiscal Responsibility narrative.

Put simply, whether or not their idea of fiscal responsibility is a valid one, isn’t just a matter of definition. You can tell whether austerian policies are fiscally responsible by their fruits. We see these all over the the industrialized world these days, and clearly we have to conclude that their notion of fiscal responsibility isn’t fiscally responsible. Or, to put this another way (h/t Mandy Patinkin playing Inigo Montoya in The Princess Bride): “You keep using that word, but I do not think it means what you think it means.”

Pavlina continues:

”How many people do you want to put to work? Obama wants to save and create 3 to 4 million people, OK, put them to work, you know exactly what your wage bill is going to be, you’re going to find out your materials and your costs. If you want to create ten million jobs you know what your budget is going to be and you have directly achieved the goal as opposed to going backwards through this vision of producing growth and hoping that somehow the growth will lift up all boats and trickle down to the economy and produce the kind of job growth.

“So we see a responsible fiscal policy as an employment stabilization via direct job creation, and we see direct job creation as a permanent feature of policy making, because the objectives are to guarantee full employment, not for the short run but also for the long run. In other words this is very different from depression economics, which is Paul Krugman’s euphemism, finally the return to Keynesianism is because we’re in a depression. No, we would like to achieve sustainable fiscal policy throughout the short and the long run.”

LetsGetItDone Comment: In election after election Democrats criticize Republicans by pointing out that the Rs keep advocating “trickle down” economics, which they certainly do. But the truth is that when it comes to stimulus programs as a cure for unemployment, Democrats and progressives also advocate and practice “trickle down” as well. Pavlina is saying that if you want to create 4 million or whatever number of jobs, then use deficit spending to create those jobs directly; don’t just use various measures to put more money in the private sector that may or may not stimulate people with money in the private sector to invest and “trickle down” some jobs to people. So, we need a real end to “trickle down” economics when it comes to job creation, and that means spending that directly create jobs, not spending that will “encourage” or incentivize private parties to create them. Why can’t Democrats and progressives see that? Why have they bought so strongly into the fable that the only real jobs are those created by private businessmen? Now on to Pavlina’s treatment of the theory of buffer stocks, and the superiority of a Full Employment buffer stock:

”Okay, so what is the job guarantee in theory? Let me just synthesize some of these ideas very quickly. There is an alternative to the NAIRU, that is, we can use an employable, or employed pool of labor as the buffer stock, not the reserve army of the unemployed. So I’ll explain a little bit about what that means. This is the job guarantee Bill refers to. This program is a job guarantee, there are various other – public service employment, direct job creation, you name it. But what that basically means is that you provide an unconditional offer of a public sector job at a minimum wage to anyone who wants to work. This way, as a permanent program, and an unconditional program it attains and maintains full employment.

“Okay, so essentially the features of the job guarantee is that this is a bubble up policy, this is not trickle down economics. It is a policy that hires off the bottom. It deals precisely with those that are either never employed or the ones that are last into a job and first out of a job. So, it’s a bottom up approach. It operates with flexible markets via a buffer stock mechanism, so this is the part that we need to explain how the job guarantee serves as this buffer stock. And I’m using Bill Mitchell’s terminology here, who basically made the case a number of years ago that, just like any other commodity buffer stock, you can stabilize the price of that stock by simply selling it when the price is too high, and buying it when the price starts falling. So you can envision labor as being a kind of a buffer stock where you offer employment to all those who want a job at a base wage. And that would be your stimulus, essentially, that produces growth.”

”As that demand trickles up to the economy and the private sector rejuvenates and starts demanding labor, then the private sector will be able to hire from the public sector pool, by bidding up the wage. Once the private sector has been saturated, or has hired as much as they desire, if you observe sort of an overheating economy, inflationary pressures, the private sector decides that it needs to downsize, then those workers will be laid off and instead of moving into unemployment they move into the public sector buffer stock. So essentially what this program does is it establishes a wage floor to labor. Today the wage floor of labor is essentially zero, because you can hire somebody that is willing to work at a premium above the zero wage that they are earning at the very moment.”

LetsGetItDone Comment: So, that’s the full employment buffer stock idea. It establishes wage and benefit floors for labor, and indirectly for prices in an economy and for aggregate demand. With the JG in place, and provided it pays a living wage, it is impossible for the bottom to drop out of an economy. Recessions can still occur, collapses like the Great Depression, and the Great Recession cannot. Also, price stability has two sides to it; and upside and a down side. The JG limits the downside and so contributes to price stability. The JG limits the upside too in a way explained in a bit.

Other benefits of the JG are that it deals with any kind of unemployment: cyclical, structural, seasonal, and entrance into the labor market, and also that it maintains and enhances human capital. The JG provides jobs, but also an opportunity maintain and improve skills. Also, the JG is targeted to local areas where the workers are. It also takes them as they are, no training in hopes of finding a job later on. “So this program can be seen as a transitional employment program. It’s a safety net that captures the unemployed and prepares them for private sector work if they so desire. Of course the projects have to be useful and valuable. . . . .”

Firms also benefit from the JG, because they can always recruit from a stock of employable labor whose work experience is clear. In addition, the JG contributes to solving the economic inequality problem, because it improves the economic distribution by lifting the wage floor, provided of course the JG wage rate is set at a living wage lifting people out of poverty.

The JG also has a built-in inflation control mechanism dealing with the up-side of price srability. Specifically, “when the economy decelerates the budget expands as those workers enter the public sector, so it has an expansionary effect. When the economy grows the JG budget automatically contracts as workers move out into private sector jobs. So that’s the counter-cyclical mechanism.” That is, the former public deficit spending stimulus provided by the JG goes away, and assuming taxes remain at the same level, that will have a net effect of removing net financial assets from the private sector.

“So full employment and price stability also promotes currency stability. And the idea here is that we are establishing better anchors than the current system. We use labor as that anchor. This is not a solution for all labor market problems. We can use this program as an institutional vehicle, as a program to address specific goals. We may want urban inner city renewal, maybe you want green infrastructure investment, you can use those resources then to direct them to the specific things you want to do. There will be other things that you might want to deal with, labor market discrimination, and other things. This is not a panacea for all labor market problems, but it’s definitely better than the unemployment buffer stock.”

Then Pavlina turns to Argentina as a case relevant to the JG proposal. Its program isn’t a JG program, but it “mimics” one. It is a limited program, but was large-scale, and Randy, Pavlina, and other MMT economists have been looking at its project impacts and macro effects. The Jefes program in Argentina was implemented after people took to the streets to protest austerity measures. The government then got the jefes program up and running in a few months and gave them government jobs. The jobs were part time, offering “. . . 4 hours of community work to the unemployed heads of households at a minimum hourly wage . . . “ About 13% of the labor force, or 2 million people accepted the jobs offered. The level of unemployment was similar to the level of actual US unemployment, not just our U-3 or U-6 levels. Women and minorities in particular benefited from the Jefes program.

”It was counter-cyclical, it stabilized output, prices, and currency. You look at the data and you find all of those indicators stabilize. GDP growth was between 8 and 12% between from 2003 to 2007 and only in the last year it dipped to 5%. So it’s job creation that produces growth as opposed to the other way around. The government budget moved into surplus. There were a variety of things going on there; but of course you’re generating large amount of incomes which are being taxed. The multiplier effect of this program, I’ve looked at some of the measures and some of the more conservative measures is 2.57. Meaning that for every dollar spent on the program you’re creating 2.6 dollars of output.

“Now, and what happened? Did people get stuck in the public sector? No. Actually what happened was that as the economy recovered, many workers transitioned into private sector jobs. It was organized in a very interesting way. I can tell you about all those institutional details, how it was administered, how the resources were mobilized, but suffice to say it was federally funded, locally administered, the government actually maintained a database of skill and experience of the unemployed, helped them to transition to private sector jobs as well, and from our visits as well it was obvious what kind of impact this program had on the poor, it empowered, it provided on-the-job training, every project that we went to see had an adjacent room with literacy education, with training, with various other courses that they could take. I like to see this as a new form of microfinance, as opposed to lending to people you just give them a grant for the wages and for the materials, get them on their feet, get them to produce something, and pretty much every project that we saw was some people that set up shops, carpentry shops or baby clothes tailoring shops or toy shops, or something that they could then sell on the market. But they were also products that were freely distributed to the poor. Lots of food kitchens, daycare center, public libraries, elder care, centers for the abused etc.

“Again, the employers hired from the pool. The economy, the economy stabilized very quickly. One benefit of this was that it formalized the informal sector. In Argentina actually there’s a very large share of the economy that is a gray economy. Those that used to work under the table were issued social security tax cards, they would be– when they transitioned to private sector jobs, now they were working under contract. The program established a wage floor. From all the people that transitioned … sort of a wage floor, because it was a limited program. But from all the people that transitioned from the public sector job to the private sector, they were all hired at a premium, 97% of those were hired at a premium.

“And communities were transformed. I can give you lots of examples, but what was interesting was the unemployed themselves proposed a lot of these projects, they were the ones that actually invented the kinds of things that they did. They did massive landfill cleanups, and recycling initiatives, and on and on and on. So these are some pictures of projects that we visited, and lots of food kitchens. There were lots of poor communities, but there were things like health promotion programs, subsistence farming, there were a lot of projects outside of the greater Buenos Aires area which we visited that dealt with agricultural projects, water irrigation, clay pits, etc.”

LetsGetItDone Comment: Since the Teach-In Counter-Conference there’s been a lot more discussion of the JG program eliciting both supportive and critical comments. But I think it’s fair to say that these previous quotations and summaries from her presentation anticipate and do much to address and answer many of the critical comments that have been made on various blogs. For some reason, the presentations of the Teach-In Counter-Conference have been largely ignored in recent discussions of MMT and the JG program. That should end, right now, and the points made by Pavlina here ought to be addressed by JG critics.

After this discussion of the impact of Jefes, Pavlina sums up:

“So again, growth itself is not the appropriate target, you have to wed it to job creation. It can promote inequality, this sort of pro-growth, or growth at all costs approach can promote inequality, it can harm the environment. We haven’t really said anything about the environment yet. So we are really looking at a bottom up approach that looks at full employment through direct job creation, a job guarantee. We view this as a program for shared prosperity. You can set an environmentally sustainable growth path and maintain price and currency stability.

“We can do it, we have done it once in the past, as have other countries in one form or another. It’s the right thing to do. I think we could debate this, but you know I want to get back to the point about having access to a job as a basic human right. And in my opinion I think Obama just needs a Rooseveltian resolve. We can talk more about this later, but just the wage bill, just the wage bill of hiring 20 million people at a – I think Warren has proposed $8 an hour – where you could do a living wage of $10-$12 an hour, we’re looking at 350-500 billion dollars. Compare this to the other expenditures.”

LetsGetItDone Comment: Compare it to the ARRA of 2009. The $787 Billion stimulus bill has reduced U3 unemployment from a high of 10.2% to the current 8.2% and left U6 unemployment at 14.8%. But for $750 Billion spent on a JG program we could have provided JG jobs at an average of $12.00 per hour with full fringe benefits for the 17.6% of the work force, or 28.598 million people, Hugh estimates are “dis-employed,” leaving pretty close to zero percent of people wanting full-time employment either unemployed according to the U-3 and U-6 measures or “dis-employed” using Hugh’s measure, and the Great Recession would have been over by the end of 2009. This is the difference between a “trickle down” stimulus and direct job creation program in effectiveness and economy.

I should add here that the standard MMT policy recommendation is NOT to use the JG alone to facilitate full recovery, but to use a full payroll tax cut for employers and employees and say, $1000 per person in revenue sharing grants, to stop State and local Government lay-offs, as well as the JG. In that scenario, and assuming a JG wage rate of $12 per hour, I estimate that deficit spending would have been about $500 B for the payroll tax holiday, $310 B for the revenue sharing, and about $250 B for the JG to “mop up” the remaining “dis-employed.” So, for less than $1.1 Trillion, or a little more than $300 B more than was spent on the ARRA, we could have had all this over and done with.

In this scenario, it might have taken 6 months to get to full employment at the outside, so that by October of 2009, the Great Recession could have ended in the US. I should add that Warren Mosler, more than anyone else my mentor in MMT, thinks the period of recovery would have taken only 90 days. Whether one estimates 3, 6, or 9 months, however, it’s fair to say that if an MMT fiscal policy had been followed to implement the recovery, then many of the bankruptcies, foreclosures, and homelessness, that led to the 40% reductions of median wealth experienced in the United States, would have been avoided. Such is the cost of bad, timid, and just plain stupid economic policy in a time of crisis.

And Pavlina ends:

“But I want to emphasize, costs here are not in terms of financial costs, it’s not necessarily the problem. I just want to show you that in perspective you get, you deliver so much more bang for the buck in real, in real terms, if you target your programs. So we have a deficit in convictions, I think, a deficit in cleverness, not necessarily in the ability to fund. And let me end with a couple of quotes. One is by FDR that says that

”. . . the liberty of a democracy is not safe if its business system does not provide employment, and produces and delivers goods in such a way as to sustain an acceptable standard of living.”

“And the last quote is a quote from Keynes. This is something we as academics constantly run against, and that’s this idea that we have to keep 5% or 10% of the population in idleness,

“The Conservative belief that there is some law of nature which prevents men from being employed, that it is rash to employ men (or women) and that it is financially ’sound’ to maintain a tenth of the population in idleness is crazily improbable, the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years.”

LetsGetItDone Comment: Those are good quotes from Pavlina to end her presentation, but to my mind, the most powerful quote would have been FDR’s Economic Bill of Rights:

“This Republic had its beginning, and grew to its present strength, under the protection of certain inalienable political rights—among them the right of free speech, free press, free worship, trial by jury, freedom from unreasonable searches and seizures. They were our rights to life and liberty.

“As our Nation has grown in size and stature, however—as our industrial economy expanded—these political rights proved inadequate to assure us equality in the pursuit of happiness.

“We have come to a clear realization of the fact that true individual freedom cannot exist without economic security and independence.”Necessitous men are not free men.” People who are hungry and out of a job are the stuff of which dictatorships are made.

“In our day these economic truths have become accepted as self-evident. We have accepted, so to speak, a second Bill of Rights under which a new basis of security and prosperity can be established for all regardless of station, race, or creed.

“Among these are:

“The right to a useful and remunerative job in the industries or shops or farms or mines of the Nation;

“The right to earn enough to provide adequate food and clothing and recreation;

‘The right of every farmer to raise and sell his products at a return, which will give him and his family a decent living;

The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad;

“The rightof every family to a decent home;

“The right to adequate medical care and the opportunity to achieve and enjoy good health;

“The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment;

“The right to a good education.

“All of these rights spell security. And after this war is won we must be prepared to move forward, in the implementation of these rights, to new goals of human happiness and well-being.”

The over-riding importance of the Job Guarantee, apart from its economic advantages, is that it implements many of these rights. And one of the great strengths of the MMT counter-narrative is that in its advocacy of the Job Guarantee it connects once again to the best of America, and to making real the hopes and dreams that underlie FDR’s vision. We have, over the years forgotten or given up on that vision. But, MMT brings it to us again, highlights it, and tells us how to implement it. And, once again, when the Petersonians, whether they go by the name of Hoover, Ryan, Romney, Clinton, or Obama, talk to us about “fiscal sustainability” and “fiscal responsibility,” we have to say to them:

You keep saying those words, but we don’t think they mean what you think they mean! Instead, what they mean is that the fiscal policy of the United States is sustainable when it does not compromise the future ability of the United States Government to deficit spend by destroying US productive capacity and human capital, and it is responsible when it is directed at the goal of public purpose as this is expressed in FDR’s Second Bill of Rights. So, when you advocate or practice budgetary austerity for its own sake and without regard to its likely impact then it is you who are advocating and/or practicing fiscal policy that is fiscally irresponsible and fiscally unsustainable, and that will lead to the decline and destruction of the United States and its proud democracy. So, we say to you stop confusing public sector austerity with private sector discipline and morality. What you’re advocating is destructive and immoral. Just stop, and do it now!

The presentations by Randy and Pavlina were followed by a Q and A session. I’ll go through it and add comments in my next post. And, I’ll end this one by providing some follow-up references on the subjects treated in their presentation appearing since the Fiscal Sustainability Teach-In. Recently, Randy completed a lengthy blog series comprised of 16 posts on the JG. The series begins here, and all its posts are accessible from here (Posts 42 – 50 including Randy’s responses to the comments on each post). Pavlina also continued her work on the JG with a number of outstanding efforts including posts, papers, and interviews: here, here, here, here, here, and here.

Bill Mitchell also had a number of characteristically carefully reasoned and very illuminating posts here, here, here, here, here, here, and here. Warren also has some contributions here and here. And I’ve also written extensively on JG issues; links here, here, and here.

There have also been a number of critical treatments of the JG. You can find references to these in the links I’ve already given, and can see the full range of arguments over the JG if you follow those references. Many of the posts I’ve linked to above include answers to these critical efforts.

(Cross-posted from

The Fiscal Summit Counter-Narrative: Part Five, Inflation and Hyper-inflation

1:46 pm in Uncategorized by letsgetitdone

One of the raps on deficit spending in neoliberal circles is that it will trigger substantial inflation or hyper-inflation. Even when mainstream economists grant the MMT point about the impossibility of the US becoming involuntarily insolvent, they will still insist that sustained deficit spending is a bad idea because it will inevitably lead to unmanageable inflation. A variant of their critique is that especially “pure deficit spending,” I.e. deficit spending without issuing debt instruments to absorb the increase in the money supply created by deficit spending, will be an inflation trigger.

In developing the counter-narrative of the Teach-In to the inflation/hyperinflation risk story, Marshall Auerback Corporate Spokesperson of Pinetree Capital, and a very well-known Modern Monetary Theory (MMT) blogger, gave the presentation on the topic in the title of this post.

Audios, videos, presentation slides, and transcripts for the presentation are available at selise’s site and a slightly different version of the transcripts is available from Corrente as well.

Marshall Auerback’s Presentation On Inflation and Hyper-Inflation

Marshall begins by acknowledging previous work by Rob Parenteau and Bill Mitchell on hyper-inflation in Weimar and Zimbabwe, and calls himself the hack in comparison to Rob, Bill, Randy, and the other panel participants. He then continues:

“So will the US turn into a modern day Weimar Germany? So let’s start, I know some of this is stuff we’ve gone through it before but I’m going to start with a few operational points that been already made, to show that we’re not the only ones making it. I’ve got quotes here from an economist called Abba Lerner, he is often known as the father of functional finance. He was a Keynesian, I think it’s fair to say that he’s one of the progenitors or forbearers of modern monetary theory.

“So his comment, and it is as Warren gave you an illustration of it before, he said, “The modern state can make anything it chooses generally acceptable as money… It is true that a simple declaration,” as Warren showed you, “that such and such money will not do, even if backed by the most convincing constitutional evidence of the state’s absolute sovereignty. But if the state is willing to accept the proposed money in payment of taxes and other obligations to itself, the trick is done.””

LetsGetItDone Comment: That’s the very important MMT idea of tax-driven money. discussed also by Stephanie, and Warren, and in this important post of Randy’s.

“The other point, we talked about the purpose of taxes, we said they serve to regulate aggregate demand, not to raise money so that government can afford to spend. And again, the other idea that I think was a very important insight by Lerner is that he said that, “The central ideas of government fiscal policy is spending and its taxing, its borrowing, its repayments of loans, its issuance of new money,” etc. etc. “should be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrines of what is sound or unsound.” So we look at the impact of policy, the effects of policy. That’s ultimately what we’re looking at. We’re not particularly interested in some vague notion of a debt-to-GDP ratio which is considered unsustainable or the general concept of fiscal unsustainability.”

“The constraint as we’ve said is inflation. It’s not fiscal largesse or fiscal profligacy per se.. . . . “

LetsGetItDone Comment: And this too, is a very essential idea of MMT. When planning fiscal policy or legislation with fiscal implications, try to project the likely impact on real things like unemployment, price stability, crime, poverty, family integration, education, health, etc; not abstract financial indicators such as the debt, the deficit, or the debt-to-GDP ratio, which have no consequences in themselves for Governments like the United States which are sovereign in their own fiat currency. Marshall goes on:

”Okay, let’s go into the history lesson. So when we look at Weimar… let’s take a step back. When we talk about these operational realities that I’ve mentioned earlier invariably, I mean I can tell you 9 times out of 10, ah, you look at the Huffington Post blog yesterday you could, we get comments saying, Well you’re just going to get hyper inflate you’re going to turn this country into a modern day Weimar Germany. So I’ve heard this so many times, and so did Rob, that we decided to actually look at the history. Clearly, Weimar Germany came into existence after WWI, a very damaging war, hugely more damaging in many respects than WWII. The country’s productive capacity was absolutely shattered, and more importantly virtually the entire world was really pissed off with Germany and as a result the war reparations claims that they imposed on the country were extremely punitive.

“And many people at the time, such as Keynes, for example, realized that this imposed a tremendously harsh economic consequences on Germany and that the imposition itself was going to be impossible to be repaid. As I say here in 1919 it was reported that the German budget deficit was equal to half GDP. Half GDP. And what are we talking about in the US today? We’re talking about 8% of GDP I think it may have peaked at 10% and that’s including TARP, so let’s get a sense of perspective here.”

LetsGetItDone Comment: Marshall’s reference above is to one of his slides.

“By 1921 in Germany, war reparation payments equaled one third of government spending. One third. So I think that is an important consideration to look at and I think more importantly is that the payments were demanded in a foreign currency. They weren’t being demanded in Deutsche Marks. They were being demanded in, the governments demanded huge gold reparations.

“Now by contrast as I said in the US you’ve got a fiscal deficit this year, I think it’s projected at, I think the latest out of the CBO is about eight and a half per cent of GDP, assuming that GDP is what everyone thinks it will be.

“So the scale of the fiscal responses, although large, are nothing like they were in Weimar Germany. So there is a big difference right there. Weimar Germany then didn’t have the gold so they had to aggressively sell their own currency, buy the foreign currency in the form of the financial markets. You keep doing that over, and over again, it drives down the value of your own currency, which causes the prices of goods to go ever higher, and that starts the inflationary process. As I said earlier the US does not do this. The US gets to use debt in its own free floating non-convertible currency. You can’t exchange the dollar into anything, much as some people would like that. So there’s no external constraint along the same lines as Weimar Germany.”

Marshall goes on to point out there is also a big difference between the contemporary US and Weimar in the economic and political power of the trade unions to negotiate wage increases to keep up with any inflation that might occur. He intends no negative evaluation of trade unions and says “. . . in fact I think if we had more unions in this country, and stronger unions it would actually be better.” But he makes the point that In Weimar Germany the power of the unions created “. . . . an automatic feedback mechanism from price inflation to wage hikes and it keeps going on and on and on.” He points out that we don’t have that in the US or any other country right now, and that without such mechanisms nominal wage and salary growth can’t keep up with inflation, so if prices go up, deflation, not hyper-inflation will follow. And he continues:

“So what finally broke down Weimar Germany, the straw that broke the camels back was by May 1921, the so-called London Ultimatum. The Germans were asked to make an annual installment in payments of 2 billion in gold or foreign currency, in addition to a claim on just over a quarter of the value of German exports.

“So an extremely punitive measure, it was a condition virtually impossible to fulfill. The Germans attempted to fulfill it. They accumulated foreign exchange by paying with treasury bills and commercial debts denominated in marks, but the mark simply went into free fall. So they finally said, “You know, we can’t pay up anymore.” You are seeing a small parallel to, with that today in Greece, its not to the same degree but obviously its… the positions are reversed, it’s the Germans imposing conditions on the Greeks, saying “You know you have to pay X” even though the Greeks don’t have the money, so they’re trying to get blood out of a stone. But we don’t clearly have hyper-inflation in Greece, but it is an interesting parallel.

So, then French and Belgian troops occupied the Ruhr, a region employing 25% of the German workforce, the largest chunk of its manufacturing capacity, and accounting for very much of its exports, and then sums up by saying that first the War destroyed much of their manufacturing capacity, then the troops take away much of what’s left of their manufacturing capacity, “. . . and then you say, “Now pay us the money.” And you can see why a central bank printing money in that situation, or creating currency in that situation, is not going to be able to do so, won’t be able to call forth goods and services. And you do create the conditions for inflation, and then hyperinflation. So again, it’s a very different situation from what we have today in the US.”

Next, Marshall moves on to Zimbabwe, and gives a history. Zimbabwe had a civil war lasting through the 1960s and 70s. It was a low intensity guerilla war which became more serious and ended when the British brokered an agreement. Mugabe became President in 1980, heading a coalition government, but even then “a large chunk” of its “productive capacity had been destroyed, even before the onset of the land reform.”

Zimbabwe recovered some under Mugabe, at first. Growth was at 11% in 1980, was positive “…. until a severe drought in the early 1990s. Again, there was recovery, and a growing economy in spite of some problems with productive capacity. But Zimbabwe had a legacy of colonialism and the white farmers had “. . . absolutely gorgeous palatial mansions,” lots of staff and “. . . . a cushy life style.”

“And 250,000 whites basically controlled over 70% of the most productive agriculture in the country, a nation of six million people, so that’s clearly a socially unsustainable situation.

“There were many attempts by the government to coax the white farmers into giving up a little then in order to make for a more equitable situation later and there was no give. As an aside, I think we talk a lot about income inequality in this country and to me, if its not something that’s addressed in a decent amount of time, you do get a huge socially unsustainable situation which will beget an even more extreme political response later. So I think it is in that regard the situation of what’s happened in Zimbabwe in terms of the misguided reforms that were subsequently introduced, it’s a legacy of the fact that we didn’t deal with the problem of inequality much earlier in that country.”

Mugabe begins a misguided land reform program. “He seizes land from the whites, gives it to, mostly . . . . his cronies in the ZANU party.” But they don’t know how to run farms, so agricultural production collapsed “. . . by almost 50%.” So, Zimbabwe had to use foreign exchange reserves to import food, and it didn’t have any reserves left to pay for “. . . . raw materials, so manufacturing capacity absolutely collapses and the end result is that you have about 80% unemployment.” Marshall points to statistics “. . . from Bill Mitchell, output fell by 29%… manufacturing output fell by 29% in 2005, 18% in 2006, 28% in 2007. It’s worse than what you had in Latvia over the last few years, again, though self-inflicted.”


– the land reform destroys domestic food production,
– foreign exchange is used to buy food to prevent starvation,
– there’s no foreign currency to buy raw materials, so
– manufacturing output collapses, and
– you have 80% unemployment.
– Mr. and Mrs. Mugabe use foreign exchange reserves for personal shopping trips to London
— the government uses the rest of the foreign exchange reserves to increase net spending without adding to productive capacity
– So, then Mugabe starts printing money, with no productive capacity to back it, and an inability to collect taxes to drive the value of the currency, and we have the famous hyper-inflation.

The situation there, of course, is wholly different from the US case. “There are other examples of this. The loss of taxing authority during the civil war by the Confederacy is another example of a situation where a government’s inability to impose a tax ultimately did create hyper-inflationary conditions.”

And he follows with:

”Any bad government can wreck an economy if it wants to, that’s quite evident. A sensible government using fiscal, the path of fiscal capacity provided by a fiat monetary currency system can always generate full employment and yet sustain price stability. Now I know we’re going to be talking about this later, but one of the things I’d like to talk about briefly is productive capacity.

“We talk about calling forth productive capacity and, as a few people have mentioned earlier, the most effective means of calling forth productive capacity is by ensuring that you have a productive labor force. And one of the means by which you insure that you have a productive labor force is by establishing a government job guarantee program, which I think will be discussed at greater length later. The point is that if you have a government that has shovel-ready labor, ready to be piled back into the private sector when private sector demand arises, not only is this good social policy but it actually means that you do create non-inflationary conditions because it means you are effectively retaining productive capacity, which can be used.

“If you have long-term unemployed, the social pathologies build up and you actually… these types of workers lose their productivity. So in fact even though you might have significant output gaps via unemployment, if you have long term unemployment it does create, it can potentially create difficulties if you don’t have these people in a position where they can actually call something back, bring something back into the economy as a whole. So I think that’s an important conclusion to draw as well.”

Marshall then points out that he and Warren Mosler often talk to people who compare the US to Greece and Portugal and who say that the US will eventually “default” on its debt. They then ask then whether they mean the US will fail to make SS or bondholder payments when due.

The doubters of debt then reply by saying: “No, no what we mean by that is that the currency is going to fall so much that you’re going to get huge amounts of inflation and therefore that is tantamount to insolvency.” Marshall and Warren have heard this from Caroline Baum of Bloomberg, Martin Wolf of the Financial Times, and also Charles Goodheart, and Marshall says:

”The only point I’ve made to these people is that if you buy a credit default swap in a country like the US or Germany, or any country in fact, you don’t get paid out if they run a rate of inflation. It’d be nice, I mean I’d love to, I’d buy credit-default swaps in every single country that I could find, actually, because anytime they run an inflation, any rate of inflation I can get paid. But clearly that’s not the way that we define default. So again, misleading terminology, misleading hints, are all examples. You can always call people on that and I think we should do so much more aggressively in the future.”

LetsGetItDone Comment: So, that’s the answer to the causes of hyper-inflation. “Printing money,” may be one ingredient in causing hyper-inflation; but it is not sufficient to cause it. Also, necessary, is the destruction or loss of a large percentage of a nation’s productive capacity, and, a strong need to get foreign exchange for some essential purpose. In addition, it helps to feed hyper-inflation if labor is in a position to increase wages in response to price increases, creating a feedback loop feeding price increases. Under these conditions, both demand-pull inflation, and cost-push inflation can feed hyper-inflation.

Marshall Auerback’s talk was followed by a Q and A session. I’ll go through that and add comments. But before I do, I’ll provide some follow-up references on the subjects treated in Marshall’s presentation appearing since the Fiscal Sustainability Teach-In. Marshall Auerback hasn’t written very much inflation and hyperinflation that I could find since the Conference. However, Bill Mitchell, Randy Wray, and Scott Fullwiler written some excellent posts. Here, here, and here, are Bill’s posts. Here, here,, and here, are Randy’s.

Scott Fullwiler also made contributions: here, and here. John Harvey and Eric Tymoigne contributed two posts on the quantity theory of money here, and here. Cullen Roche also did an important paper using 10 case studies to examine the claim that printing money causes inflation.

Finally, I’ve done some posts relating to MMT and Inflation too: here, here, and here.

SESSION 4: “Inflation and Hyper-inflation” – Q&A

Warren Mosler:

“Maurice [Samuels] and I went to Rome in 1993, after coming up with the idea that governments don’t default because, in their own currency, because all they’re doing is spending first and then collecting later. The securities function for interest rate maintenance and not to fund the debt. And a paper came out of that called Soft Currency Economics, and afterwards, I ran into Randy and Bill and Pavlina and then they all started looking up the history of these ideas. And so it’s interesting we came up with ideas first and then found the history afterwards. Which is not necessarily normally the way things work. We then discovered Lerner, we discovered Knapp, we discovered Innes.

“Now we’ve discovered somebody last week, Ruml, is that his name? From 1946 the Federal Reserve president of New York, who said the same thing we’ve been saying about quantitative easing. You notice things, we see how they work, then we go back in history and find reasonably prominent people who’ve said the same thing. Secretary of the Treasury Memminger, from the Confederacy, said the same thing about how currency worked and explained that’s how he was going to set it up. So what happens is, I think historians who don’t know how the currency works don’t find these things because they’re not looking for them. You have to have enough knowledge of what, when you’re looking at something, about circumstances to be able to recognize them as any kind of value.

“What’s that thing that was found back, the ball with the holes in it from some four thousand years ago, which they’ve all said was a means of accounting. It was a clay ball with holes in it where pebbles would fit in. And I’m saying no, those were used for money because you would, what you do is you have the clay ball and the stone would fit in when you took it out and spent it that would be the thing you’d accept for taxes. You knew it was the same stone when it fit into that clay ball. Now that’s a monetary mechanism. All the record books show that this thing was an accounting mechanism to keep track of things with these stones you stuck in. I think history is going to more and more find the things we’re talking about.”

LetsGetItDone Comment: This reminds me of a story told of Karl Popper. (I read it, I believe, in work from Bill Bartley, or Peter Munz, but can’t locate it right now. Anyway, it is said that Popper would begin his class on scientific method, by walking to the lecture hall and saying to his students “observe,” and then walking out. Some moments later he would come back into the room and get the inevitable question: “observe what?”

He would then use that as a jumping off point to teach the lesson that “observation” could not be performed without theoretical presuppositions guiding us toward what it is we’re supposed to observe. To observe, we must know what we ought not to see, and what we ought to see. Above Warren tells us that the MMT theory about how currency works leads people to observe and find things they would never have observed otherwise.

Bill Mitchell:

”I think the point about Marshall’s talk is very clear and really easy to understand in terms of the public debate now and the simple way of saying it. Not to say that Marshall wasn’t exquisite in his oratory [laughter] but the simple way of saying it, if you take an economy, you trash about 60 or 70% of its productive capacity then any spending will start to generate inflation. And if you wanted to avoid hyperinflation in Zimbabwe then you would have had to have had mass deaths of the population from starvation. Private investment would have had to come to virtually a sudden halt, because you’ve just lost all that supply side. So, whenever anyone raises at your dinner parties about Zimbabwe. It had nothing to do with demand. It was a supply issue. They trashed their supply.

“And the last I know, in the US you’re doing a pretty good job of trashing your supply at the moment, running down the capacity of your work force and your industrial structure, but you haven’t done it yet and the companies are still out there, there are still workers that will work for them if there’s enough demand for the products and all you need to do is get the production, your supply side working again. In Zimbabwe they lost it. It was non existent. About 60-70% was lost. That’s why they had hyperinflation.”

LetsGetItDone Comment: Bill’s summary is admirably simple. If you trash your supply and then try government deficit spending, then you risk hyper-inflation. But in the two years, since the Teach-In, the US and other industrial nations have been “trashing their supply,” in the name of “fiscal responsibility,” and also avoiding deficit spending which they think will lead to inflation. If they continue to do that for a decade without taking decisive action to create full employment, we may create the preconditions for serious inflation and have only the neoliberals to blame.

L. Randall Wray:

”I’ll add something on the Confederacy because it helps to drive home points we’ve made in every one of these sessions. So yeah, the Secretary of the Treasury was trying to tell the government, look we need the taxes to support the currency, because taxes drive the currency. But the government was saying, well hold it, we’re already putting such a huge burden on our population because they’ve got to fight the war and we’re taking all the resources away from them for the war effort and we don’t want to burden them also with the taxes. Okay, but see, our point is you’ve got to have the taxes in order to match the resources that you’re withdrawing. Okay, it’s in real terms. You’ve got to reduce the demand with the tax system and you also have to have a reason why people will accept the currency. And so people would not accept the currency and that is why they had to just continually print out more and more and more.”

Pavlina Tcherneva:

“On the point of hyperinflation, I think the key components here are a supply shock, a tax collection fall out, but also I think you have to have a ratchet that you could have something that fuels additional expenditure. And in most cases that you observe around the world that have hyperinflation, what was the initial inflationary shock was fueled by some sort of indexation, whether it was of wages or prices. And I think that falling off of the tax base will do that too, but you could fuel it artificially as opposed to what we were saying earlier that you have to let inflation dissipate by one mechanism or another through the economy.”

LetsGetItDone Comment: Pavlina adds the general idea of “the ratchet,” which Marshall talked about in the particular historical case of Weimar Labor Unions. There’s no ratchet in the US with the power to stop the bursting of an inflation bubble long before hyper-inflation is reached.

Next, came two questions from Edward Harrison and the ensuing dialogue. His first question is how the indexing of SS and “things of that nature” plays into the possibility of hyper-inflation. Warren replied that the real issue is whether it causes a shortage of real resources or not due to “over-provisoning” a sector of the population? Randy agrees that it might be a problem in the future once full employment is reached.

Ed’s second question relates to whether a country with a sovereign currency that issues debt could have an increasing interest rate scenario that would cause “imported inflation via currency depreciation”. Warren replied that the Federal Reserve could set interest rates “politically,”and that Japan has kept them “at zero for 20 years.” to which Ed replies:

”Then, you know, they set the short-term rate but the long term rate is effectively the imputed Federal Reserve funds rate going forward.”

Warren Mosler: replies by saying “Right, right. But let me suggest they also can set the long rate if they want to.” Ed, says he just said that, but it is “an ideological, a political decision.” Warren reiterates that if the Fed says that the Fed Funds Rate will stay at zero for 10 years, than a 10-year bond will be at zero. And Ed, again agrees but says that he wouldn’t support that, and lots of other people wouldn’t either, and that he thinks that’s a political problem. And then Warren says:

”Okay, and the Treasury does the opposite when it issues long. It’s setting rates higher than otherwise, so either way the government is setting long-term rates now — either by default or by active policy, or lack of it.”

And then Warren goes on to argue that zero rates are likely to be deflationary. It is a long and good argument and you should see the transcript or the video for it at selise’s site. He ends with:

”A monopolist always sets price and lets quantity adjust. With a currency monopoly we do the opposite. We set the budget and let the price adjust, well of course it’s going to be chaotic like it is, but we have the ability to set price and let quantity adjust. In other words just be on the bid side of the market and not pay the offered side. And that’s where Bill’s JG and Randy’s ELR comes in, where in a market economy you only need to set one price, in this case it’s the price of unskilled labor, and we can get into that later, I think it’s . . . .” [inaudible]

And then Bill Mitchell adds:

”Well if I keep talking I’ll stay awake, so [laughter]. There’s just a couple of points I’d make and Ed, your first premise is disputable. It’s the premise that’s always wheeled out, but it’s not necessarily inevitable.

“First of all, a depreciation in the currency is not inflation. It’s a once-off price adjustment, inasmuch as import prices are weighted in your CPI or whatever your measure of inflation is, it’s just a once-off. For that to become inflationary there has to be some secondary effects where the participants in the real income distribution don’t agree to share the real income loss. . . . .

“Yeah. So depreciation isn’t inflation; that’s a myth. That’s a myth that’s commonly put out there.”

Ed replies with “If your currency goes down, doesn’t that almost naturally mean…: and Bill replies: “It doesn’t naturally do anything.”

There follows an exchange among Ed, Warren, and Bill, about the price of real resources going up. With Bill and Warren pointing out that Ed is talking about a one-time price shift upwards and Warren saying that inflation means continuous rice increases. Ed points out it’s a definitional question, and Warren and Bill agree with this but stick with their definition.

LetsGetItDone Comment: This exchange over definitions didn’t quite get to the point as I see it. Here are some price increase phenomena: 1) one-time price adjustment to a shock to the economy; 2) a constant rate of price increase from one time period to another, say 3%; and 3) an increasing rate of the rate of price increases, say 3%, 4%, 5% etc, every time period. Now, the historical cases we call hyperinflation correspond most closely with 3). When it comes to inflation, historical cases we can point to seem to fit 2). But usually we don’t view 3% a year as “inflation,” no matter how long that rate of increase continues. In fact, we’d probably call that “price stability.” 1) is a price increase. It may be a substantial one. It may trigger 3), but, in itself, it seems a pretty loose use of terminology to call it “inflation.” To do so, seems more like labeling an event with a pejorative, rather than offering a reasonable proposal abut how to use the term “inflation.”

Bill Mitchell expands on the subject of “myths” about inflation.

”. . . That’s one of the myths out there that should be addressed. The second point is that there’s no intrinsic or inevitable relationship between a deficit position of government and the exchange rate. All the empirical work shows that there’s no systematic relationship between the fiscal balance and the exchange rate. And it’s quite plausible that you could have a strengthening exchange rate with very large deficits as a percentage of GDP if those deficits were creating conditions that allowed the capital account to improve. And if you really want to think about a country with — and I think Warren mentioned it — with a very strong currency and huge public debt, the highest in the world, and ongoing relatively large deficits think about Japan. They haven’t had any systematic meltdown in their currency; they’ve had deflation all of those years.”

Ed then points out that the yen did fall to 150 to the dollar and then rose later to 94, and says that’s a reduction in the real income of people, which Warren answers by saying that it was active policy caused by government intervention. When they abandoned the policy it went to 94. Randy Wray then joins in and offers:

“Can I try a different way of responding? Let’s put it in the framework of how does the central bank tend to react to inflation and currency depreciation? I think that you’re correct that they do tend to raise the interest rate, because they accept two — what we’re calling — myths. One is that if you raise interest rates that fights inflation, and that they should fight inflation that could result from currency depreciation and rising price of the commodities that you import for example, because raising interest rates is going to increase government spending on interest. And so you might actually stimulate the economy thinking you’re going to slow it down to fight inflation. And then the second belief is that raising interest rates helps your currency to appreciate and what Bill is telling you — there are no variables out there that economists have ever been able to find that are correlated with the currencies. There is no model that works. So there actually is no evidence that raising your interest rate appreciates your currency and as Bill was saying there’s no evidence that budget deficits are correlated with currency depreciation. Just plot the US budget deficit against our currency and there just isn’t any correlation. Sometimes currency appreciates with a budget deficit, sometimes it appreciates with a budget surplus. There just isn’t a correlation for this. But yes, I agree with you, central banks think this way and so these are to try to dispel.”

Bill Mitchell and Warren then provide a couple of jokes, about Australian currency appreciating, before the next question.

Dennis Kelleher, Rebel Capitalist: “I have a hypothetical question – I don’t know if I should have disclosed that, but – let’s assume that a government has been enlightened and started practicing modern monetary operations and understanding it, and the link between wage growth and productivity was restored. What impact or potential impact would that have on inflation?” Warren then asked Dennis to clarify which “link” he meant, which Dennis then said is the “. . . . linkage between wage growth and productivity,” which was severed in the 70s or 80s.

“It’s the same the world over. And the empirical studies have never been able to come up with a systematic relationship between wage share movements, which is what you’re really talking about, because the wage share is just the ratio of the real wage to labor productivity, and that clearly in all countries has diverged in — depending where you start — but in the eighties and nineties clearly, and there’s never never been… prior to that, you had a very close correspondence with that. I mean that was in a way the capitalists, if you like the terminology, they were smart enough to realize that you had to have someone to buy the stuff, and in the eighties and nineties they worked out a different way and that was to load the workers up with debt, and get a double whammy: steal the productivity in the first place and then load them up with debt so they could still realize the production. But we didn’t have major inflation breakouts in the fifties, in the sixties, in the seventies when there was an extremely close correspondence in all of our countries between real wage growth and productivity growth. The wage share in Australia used to be 62%, now it’s 51%. And that’s been a systematic erosion of workers’ entitlements. And prior — when it was 62% for years — I mean Nicholas Kaldor used to call it one of the stylized facts — the constancy of the wage share. And it’s only in this neoliberal era that that is no longer a stylized fact. We saw no inflation during those periods. Inflation occurs — sorry Warren — inflation occurs if expenditure nominal demand growth outstrips the real capacity of the economy to respond to that.”What’s that? . . . .

“. . . Or a supplier price shock that’s not isolated from the distributional system. And it’s quite possible that if workers are enjoying… You know in Australia we’ve had a system of national arbitration, national wage determination like a Scandinavian system, and it’s always considered that real wage… productivity growth provides the real space for nominal wage adjustments. And as long as the real wages don’t grow faster than productivity growth, you’re unlikely to get nominal demand outstripping real capacity. And the only way you could actually get ongoing aggregate demand growth that will engage your real capacity without indebting your household sector is to make sure real wages do grow in line with productivity growth.”

Warren Mosler:

”Do you know the game theory story? The other thing is, it’s a basic mainstream game model — the first year, week, of game theory tells you that the labor market, whatever that is anyway, isn’t a fair game, because people have to work to eat, and business only hires if they feel they can make an acceptable rate of profit. So the idea is, as the unemployment goes down, then people who are left unemployed, their bargaining power goes up and they’re able to negotiate higher wages, and therefore as we get to lower… you know, there are productivity differences also, but the fact is, if you’re the last guy waiting for a job, and everybody else has one, and you’re offered a job and you don’t take it, you’re still going to starve. So you don’t have any more bargaining power because the unemployment pool is lower. And we saw unemployment fall below four percent in the late nineties even with the core inflation coming down, so that whole idea that there’s this NAIRU, etc – I don’t see the support for it either in the data or in mainstream theory itself, where once you take a look at rudimentary game theory, there’s no reason to expect real wages to do anything except stagnate, unless there’s some kind of support, either through some kind of Australian type of thing, or some kind of support to at least make it more of a fair game.”

Bryce Covert: “Hi, I’m Bryce Covert, I’m with New Deal 2.0, . . . . I understand the differences between the hyperinflation of Zimbabwe and Weimar Germany but in the US, how much of a risk do we have of that, and are there things that should be done or can be done to prevent inflation that we’re not doing? Are we going to run that risk or do you think we’re pretty safe?”

Warren Mosler:

”Let me just say I think we’re very safe. But the risks of inflation are political, they’re not economic. If we’re wrong and inflation goes up to four or five percent, when we thought it was going to go to one or two, we don’t lose any wealth as a nation, we might lose at the ballot box. We don’t lose anything in terms of employment and output, and in fact most studies show it’s actually more likely to improve things. And we don’t get hurt in terms of investment or anything else like that. Again, studies show that it helps those things. But you do lose at the ballot box. So we do come up with policies that will cater to what voters want and how voters feel good about living their lives.”

Marshall Auerback:

”I’ll make an additional point. Jamie Galbraith makes this point very well, I’ve seen him make it a number of times, and he talks about the asymmetry of risk. And he simply says that, look, if you don’t spend enough, there’s a major danger of a relapse and that’s coming at a time when we already have, officially, nine and a half percent unemployment, unofficially by any honest measure it’s close to twenty percent. You have very high debt levels in the US, you still have an ongoing housing crisis. So that’s the… you have a possibility of a significant relapse, 1937 style, if you don’t spend enough. Now, if you spend too much, what’s the risk? Well you’ll get fuller employment, you’ll get a lot more capacity being used, and you might eventually get inflation. Okay, you get the inflation, you can solve that through a tax. It’s a very easy problem to solve. Or you simply stop spending, or, equally likely, the automatic stabilizers start taking care of themselves; the economy begins to grow again, more revenues come into the government, social welfare expenditures come down. So that in itself will start to create a fiscal drag on the economy so it seems to me that risks are so stunningly asymmetric in regard to not spending, and that can be done either through direct government spending or by massively cutting taxes, that if I was a trader making a bet right now, inflation-deflation bet, I think it’s still heavily weighted towards the deflation side for all the reasons I’ve outlined.”

LetsGetItDone Comment: These points by Warren and Marshall are very important. The idea that people who have no job have a weak bargaining position even in a strong economy so long as there is unemployment is right on its face for those sectors of the economy in which there’s no skill shortage. Your bargaining power is about your being able to eat and pay rent without that job offer that’s grossly inadequate.

If you can say no because you’re working for a Job Guarantee program that already pays a living wage and good benefits, then and only then is there any kind of freedom in the bargaining relationship between an employer and a prospective employee. You have to be able to say to the unreasonable employer: “take your job and shove it,” or “freedom” becomes only the freedom of the employer to coerce you.

And Marshall’s point about the asymmetric risk between continuing to have an economy with real UE rates at nearly 17%, rather than having one with zero UE and the risk of inflation at say 5% per year, is an essential one that gets very little attention. During the years between the end of WWII, and the 1970s, the public clearly preferred lower UE and substantial minimum wage rates with a risk of inflation that was not too great, but above 3%, to a stagnating labor market with very little inflation. The oil-driven cost-push inflation of the 1970s scared people, however.

And even though it wasn’t demand-pull inflation caused by Government deficit spending, which under Jimmy Carter was very low. And even though it was made much worse by the ratchet of the Fed under Paul Volcker, trying to control the money supply rather than the interest rates to break the inflation, those points escaped people, and an opening was created to sell people on the idea that inflation was a more important enemy than UE, and that fiscal policy in the form of government deficit spending on job creation wasn’t an appropriate tool for Government to use.

This was successfully done by the market fundamentalists during the Reagan Administration. And that idea has governed politics in most “advanced” Western countries since the Reagan/Thatcher successes made neo-liberalism the economic ideology of choice. Since then very few people have talked about the asymmetric level of risk between maintaining a high level of UE and having FE with some risk of moderate non-accelerating inflation, exceeding 3% annually. It’s a story we have to tell more often, because the imagined enemy of inflation has frightened Americans into accepting the real and much more dangerous enemy of high UE, lower wages, labor market stagnation, excessive inequality, and developing plutocracy.

L. Randall Wray:

”Yeah, see, we really need to get into what we mean by inflation, and we need to distinguish between different things that might cause prices to increase, even sustained price increases. So Keynes had this definition, “true inflation”. True inflation only occurs when aggregate demand is too high, that is where you’ve already fully employed your resources and you continue to increase spending. That is true inflation, and the way to fight that is by reducing aggregate demand. So that is when you need to raise taxes, cut government spending, or somehow get the private sector to stop spending, maybe clamp down on banks so they can’t lend, so people can’t borrow and spend. Okay. That’s how you fight that.

“Now what happens if you have an oil price shock? Do you fight that by reducing demand? No, that would not make any sense. You have to find another method. Now, as Bill keeps alluding to, in the kinds of institutional arrangements we have in the United States, an oil price inflation is going to end itself very quickly, because we don’t have very much indexing of wages in our society, or of government spending in our society, that is going to cause an oil price shock to lead to a wage-price spiral, or something like that. But we could have those and if we did, then the way to fight that is through institutional change, not by clamping down on aggregate demand. You want to change the institutions, maybe centralize wage bargaining would be a way to do it, and figure out how you’re going to share the costs of adjusting to higher oil prices.

“So we really need to identify why we got the inflation. If it’s because the currency is depreciating, again, in the United States this isn’t very plausible; in a country like Mexico, they have very high feed-through impacts of currency depreciation into rising prices, so they’ve got to deal with that problem, something that we don’t have to deal with. And then finally, what everyone is talking about is the current outlook, the current situation in the United States, it’s just about impossible to identify a way that we could get inflation going even if we wanted to. And this is where Japan has been for a very long time. We have to remember that we just had two billion people come into the market economy, and they all want to produce stuff and sell it to us, and they’re willing to work at very low wages, and their firms are willing to sell at very low prices. It’s just not a plausible argument, even if we got closer to full employment, that we’re going to get significant inflation pressures, other than, yes, commodities prices could go up and we could have a very short-term increase of prices, which is what Bill was trying to get to, that’s not inflation, but it is going to cause a redistribution of income.”

Bill Mitchell:

“I think it’s really telling that — and it’s sort of building on Warren’s point — that we’re always talking about inflation threats, when you’ve got, maybe — I’m not sure in America, it’s about 17.2 percent currently, I’m not sure, you use six measures? In Australia it’s 13.2. In some countries, in Spain it’s at least 30 percent once you add in underemployment — of your labor resources unemployed. And we’re worried about inflation. I mean, one of the greatest successes of the neoliberal period has been able to convince us, and as relates to — Marshall said that the risks are just asymmetric, well, so are the costs. The costs of unemployment dwarf any other economic costs you can possibly identify. And this goes back to a famous interchange between the American economists Arnold Harberger and Arthur Okun, and I think it was Tobin who said it, yes?, “How many Harberger triangles can you fit into one Okun gap?” And, for non-economists, the Harberger triangles were these measures of inefficiencies, microeconomic inefficiencies, of the sort that you might get with some inflation. And the Okun gap was the lost output from having unemployment below — above full employment. And the answer to the question, “How many of these microeconomic inefficiency measures can you fit into one macroeconomic inefficiency measure,” the answer is “Lots.” [laughter] And the point about it is that the macro costs of unemployment and lost income and all of the related social pathologies and intergenerational pathologies that follow are massive. And you’re sitting here in this country, and my country, and other countries idly sitting by wasting forever billions of dollars of income generation every day. And the only thing you can come up with is worrying about inflation. Even if inflation was a risk I wouldn’t worry about it right now because the relative costs are just not even commensurate. And that’s the big success of the neoliberal era, to get us to, to disabuse us of the notion that unemployment is a cost, and unemployment should be a policy target. We now under our central banking inflation-targeting, inflation-first type policy emphasis, we now use unemployment as a policy tool. We’re now using the most costly pathology of market-based economies as a tool to discipline something that is nowhere near the scale of cost. And that’s the success of the neoliberal era, and it’s a damn shame.”

L. Randall Wray: “You’re giving our presentation.”

Bill Mitchell: “Sorry.” [laughter] [applause]

Warren Mosler:

“It’s probably fair to say that the losses from unemployment over the last two years just in terms of lost output are far higher than all the costs of all the wars the US has ever fought in its history combined. Seriously. That’s just gone forever. Plus the ongoing losses because it’s all path-dependent. Once you change your path, you’ve lost it, the growth rates have to be much higher to get back onto path.”

Bill Mitchell: “And millions and millions of dollars a day, every day, our countries are forgoing. Millions of dollars a day. Inflation will never go anywhere near that.”

Warren Mosler: “Well, if we have twenty percent unemployment, I known not everybody’s equally valuable, but it wouldn’t surprise me if the losses are twenty percent of GDP every year, or something close to it.”

Bryce Covert: Maybe that’s the graph we need.

Warren Mosler: “Yeah, well, the output gap. So what they do, is when they compute the output gap, is they assume some minimum level of unemployment for inflation control. So even the output gaps, which are huge now, far underestimate what the actual output gap is if they didn’t have that artificial constraint of five percent unemployment, for what they call the NAIRU. And now they’re talking about moving that up to six and seven and eight percent, where Europe’s been at nine for how long? Forever, right? Ten, yeah.”

Unidentified: “I think it was Keynes who used the example of paying people to dig ditches and then paying other people to fill them up again, and I always thought it was curious that it was politically acceptable to discuss something as useless as that in a serious idea, and I gather that one of the reasons for that is that the thought of government paying people to do something useful which would compete with the private sector is kind of what makes you go into that sort of nonsense realm. And basically what I’m thinking is that there is a sort of minimum profit margin that the private sector demands, and they don’t want government competing and employing people and lowering their profit margins. And where I’m going with this is that we have repealed the laws against usury and made profit margins in certain financial endeavors very very high, and everything pales in comparison. People who would become engineers instead become bond traders. And if we’re ever going to focus people on doing useful work at perhaps lower margins, don’t we have to get a handle on usury?”

Warren Mosler: “I’ll be the first to say that the financial sector is, by and large, a total waste of human endeavor [laughter], but I’ll let Randy — my tag line is “the financial sector’s a lot more trouble than it’s worth” — but I’ll let Randy comment on putting Keynes in context. But the other thing is, the size of government is a political choice, how much we want, and it’s there for public infrastructure. Digging holes and filling them in is not public infrastructure. Go ahead and put Keynes in context.”

L. Randall Wray: “He was being sarcastic, he was saying, if you guys are so stupid you can’t think of anything useful for these people to do, we could at least hire them to dig holes and bury money, so that wasn’t his proposal. He wanted to hire people to do useful things. And let me just tell you, the next panel we’re going to talk about the job creation program, and so the people will do useful things. But the other thing is, they won’t compete with the private sector. You want to ensure that they won’t compete with the private sector; you want to complement the private sector. So I just want to clear that up, but that will be addressed in the next panel.”

Unidentified: “Do you have any notion that by repealing the laws against usury is part of what’s wrong?”

L. Randall Wray: “Well of course, what Keynes wanted was full employment, and euthanasia of the rentiers. Euthanasia of the rentiers. He wanted to drive the overnight interest rate down to zero, and I think many of us up here support that. And I think that that is a way to put finance back into its place. It’s only part of the answer. So downsizing finance, we agree with you, well I think we all agree with you, probably all of us.”


If and when the mainstream and the Petersonians accept the MMT view that a government sovereign in its own currency cannot become involuntarily insolvent, then they will still cling to the dogma that “printing money” causes inflation and hyperinflation.

That’s why it was an important part of the development of the MMT counter-narrative to examine this old quantitative theory of money, which Keynes refuted during the 1930s. Marshall’s presentation considered that question and presented plenty of reasons to think that much more is necessary than simply “printing, it also made very plain the very important ways in which the US and other currency sovereign nations differ from nations that don’t have their own sovereign currencies; including most visibly today, the nations of the Eurozone.

I think the most striking thing about this 4th session of the FS Teach-In Counter-Conference of 2010, is the very nuanced MMT view of the causes of inflation and hyperinflation, in contrast to the remarks about inflation you find in the Petersonian narrative, that came out of it. The distinction between demand-pull and cost-push inflation is very important because Government deficit spending or tax cuts are often blamed as sources of inflation and hyper-inflation, but supply problems caused by cartels or monopolies receive little discussion. Institutions which may create supply bottlenecks, and institutions which don’t regulate the development of bubbles in supply markets also don’t receive much attention. Also, the importance of a “ratchet” in keeping inflation going is often a key element in either hyperinflation or serious, but less than hyper cases.

The discussion also pointed out how inflation debates suffered from a regrettable vagueness and ambiguity when the “inflation” meme is used against policy proposals that involve deficit spending. If the types we called 1), 2), and 3) earlier aren’t distinguished, then it’s much easier to sound reasonable when claiming that government deficit spending causes inflation or hyper-inflation. But if one is restricted to type 3), an accelerating rate of price increases from time period to time period, then we can quickly understand that there hasn’t been a historical case of hyperinflation or even serious inflation in a nation like the US since fiat currencies were adopted. It also becomes plain that type 1) really isn’t inflation either; but only a substantial one-off rise in the cost of something that will just work its way through the economic system without triggering a damaging positive feedback leading to a sustainable inflation process.

Finally, the presentation and discussion were very successful in raising the issue of the trade-off between the risk of inflation under full employment vs. the reality of heavy costs paid by working people, when Government supports fiscal policy that allows an unemployed buffer stock to continue to exist. A UE “buffer stock” isn’t just some statistic. It represents millions of people who can’t find jobs for protracted periods of time, who can’t pay rent, who must be dependent on others, and frequently whose lives, education, family life, and future well-being are damaged severely by the experience. If the Government can do something about that, then I think it is obligated to do so, even at the risk of inflation.

In Part 6, I’ll cover the 5th and last session of the Fiscal Sustainability Teach-In Counter-Conference, in which Professors L. Randall Wray, and Pavlina Tcherneva presented major MMT policy initiatives including the Job Guarantee.

(Cross-posted from

The Fiscal Summit Counter-Narrative: Part Four, The Deficit, the Debt, the Debt-To-GDP Ratio, the Grandchildren, and Government Economic Policy

9:56 pm in Uncategorized by letsgetitdone

The neoliberal austerian ideology often emphasizes the consequences of excessive deficit levels, a high national debt, and a debt-to-GDP ratio. Among those supposed consequences are rapidly increasing and high interest rates in the bond markets, inability to “borrow” to pay for imports, inability to maintain spending levels on entitlements like Social Security, Medicare, and Unemployment Insurance, an increasing threat to government solvency, and a growing national debt burden that will have to someday be repaid by heavily taxed children and grandchildren.

These have been the main themes of the annual Peter G. Peterson Fiscal Summits, the latest of which was held on May 15, 2012. This series is presenting a counter-narrative to the austerian ideology being spread by Peterson and his associates, including David Walker, Robert Rubin, Bill Clinton, and President Obama, who mouth the myths of the austerians frequently and uncritically. The counter-narrative was developed at the Fiscal Sustainability Teach-In Counter-Conference held on April 28, 2010.

In developing the counter-narrative of the Teach-In, Warren Mosler, President of Valance Co. Inc., Financial Management Services, often credited with originating the synthesis of different perspectives that became Modern Monetary Theory (MMT), gave the presentation on the topic in the title of this post. My role at the FS Teach-In was to act as a non-interventionist MC and facilitator of the proceedings. So, I had the pleasure of hearing all the presentations including Warren’s lunch time effort.

At the time, I thought his presentation was very successful and much fun due to Warren’s conversational, and very open manner. But, perhaps, in part, due to my involvement in conference details, I didn’t appreciate its brilliance fully until later when I read the transcript, and perhaps not even then, since I’ve found that writing this review involved a fresh realization of the depth of Warren”s understanding of the MMT paradigm, and the breadth of his knowledge about how financial systems work both in the United States and globally. In the vernacular, Warren did “a bang-up job.”

His presentation refutes a number of popular austerian myths including: the government is running out of money; the Government can only raise money by taxing or borrowing; We can’t keep adding additional debt to “the national credit card”; We need to cut spending and entitlements; our main creditors, like China will cease to buy our debt making it impossible for us to raise money for deficit spending; our grandchildren must have the heavy burden of paying our national debt; Government deficit spending isn’t sustainable because the Government is like a household and that since households sacrifice to live within their means, Government ought to do that too; and “printing money,” i.e. deficit spending without selling debt instruments in corresponding amounts, is necessarily inflationary. Audios, videos, presentation slides, and transcripts for the presentation are available at selise’s site and a slightly different version of the transcripts is available from Corrente as well.

Warren Mosler’s Presentation On The Deficit, the Debt, the Debt-To-GDP Ratio, the Grandchildren, and Government Economic Policy

Warren begins by providing his own take on fiat currency systems. He asks: “How do you turn litter into money?” He goes on to ask if anyone will buy his business cards at $20 apiece. Seeing no takers he asks if anyone wants to stay after his talk, clean the carpet, and tidy up the room and offers to pay one per hour, and then notes there aren’t a lot of takers. But then he adds:

“. . . Look, there’s only one way out of here and there’s a man at the door with a nine millimeter machine gun. Okay? And you can’t get out of here without five of my cards.

“Now things have changed. I’ve now turned litter into money. Now, you will buy these, you will work for these things if you want to get out. The man at the door is the tax man and that’s the function of taxes. Stephanie talked about how taxes do it. But you can recreate that…”

Warren next talks about a currency called the buckaroo introduced at the University of Missouri at Kansas City (UMKC) “ten or fifteen years ago” to replicate a currency to help students understand National Income accounting, currencies, and the idea that currencies can work the same way in small open economies as in large open economies like the US. You earn buckaroos by doing public service or community service. The rate of pay is one buckaroo per hour. The buckaroos are freely exchangeable. There’s a buckaroo tax of 20 per year. And you can get them by working for them or buying them from other students. The schools ran a deficit, and at the end of the first year 1100 buckaroos were earned and 100 buckaroos were paid in taxes. The deficit didn’t affect the school’s credit rating.

The deficit is equal to the savings in buckaroos by the students, the first lesson they learned. “The government’s deficit equals non-government savings of financial assets. To the penny. . . . Was it a problem that more community service was being done than was needed to pay the tax? Of course not.”

Also, Warren points out that the value of the buckaroo has been fixed to the value of one hour of student labor for fifteen years, but in the market where students buy and sell them they started out at $5.00 apiece, and now sell for $15.00 apiece. The price of the buckaroo in dollars and Euros has increased, and the buckaroo has greatly outperformed the S & P 500 over 15 years. So, the buckaroo appreciated because it works for its original function which is “. . . . provisioning the community with student labor — to move labor from the private sector to the public sector. And of course to teach National Income accounting and how a currency works to the students.”

So, Warren moves on to the question: “What is money?” He points out that we’re not the gold standard, but we still think we are, and says that: “There is no such thing as a government saving in it’s own currency.” He again points to the value of the buckaroo rising from $5 to $15 apiece, also says that UMKC has an infinite amount of buckaroos and asks: “Does that mean the School is infinitely wealthy? No. Was the School collecting them from these students to get the buckaroos to be able to pay them? No.”

Warren also points out that UMKC had a Zero Interest Rate Policy (ZIRP) on the buckaroos it issued including the excess 100 issued in his example. “Did that cause hyper-inflation? No, the currency gained in value. It appreciated. It didn’t go down in value. And do we see that happening in the real world? Sure. We’ve had Japan with a zero interest rate policy for twenty years. It’s been one of the strongest currencies in the world. With the lowest interest rates.”

Warren asks next whether UMKC should try to run a surplus in buckaroos if it anticipates paying them out in the future, and then makes another key point of MMT: “There is no such thing as accumulating a reserve in your own currency when it’s a floating exchange rate like that.” And he then asks whether UMKC can even run a surplus, and points out that on day one of the program they could not, because they have to spend first, in order to collect taxes in buckaroos. He points out further, that the Fed has to buy securities the same day its selling them to provide the money people use to buy them at auctions.

Warren then takes up the issue of printing — “the P word.”

”There are three ways to spend with a gold standard: tax financed, debt financed and money financed which was called “printing money.” Tax financed was easy. You taxed and then you’d spend. Debt financed you’d sell bonds and then you’d spend. And the last way was “printing money” and that’s where the term “printing money” comes from. It has no application to whatsoever with today’s currency arrangements but it’s still used and it still has the same connotations.

“The reason they used to debt finance was because if the government spent by printing money and didn’t sell bonds to get that money back — that was a convertible currency, you could get gold from the treasury, you could cash it in. So they were always at the risk of running out of reserves and going broke and that type of thing. So any government deficit spending had to be…. and that’s why the rules that Randy was talking about that are left over from the gold standard include the requirement that Treasury borrow money before it spends. Inapplicable with today’s currency arrangements.”

Warren then gives evidence that we’re still on gold standard thinking.

”Why did the Democrats cut Medicare? Why did the Democrats raise taxes? Why did the Democrats visit China? . . . .

“Why did the Democrats form the bipartisan committee to report back on ways to reduce the deficit? Why did the Democrats put Social Security and Medicare on the table? Why are we here? Right?

“Gold standard thinking. They think the government has run out of money. It’s not because they are worried about inflation, although they are or they might be. They think the government is spending now limited by how much it can borrow from the likes of China, leaving that debt to our children to pay back. We’ve all heard this many many times. We’ve seen President Obama, Secretary of State Clinton, Treasury Secretary Geithner go over to China to negotiate with our bankers to make sure everything is okay because they believe we are dependent on them to fund everything from Afghanistan to health care.”

Warren then emphasizes that the point of the currency is to provision the public sector of a nation. He says there are a lot of ways to do that: a command economy with slaves; a lump on your head and you’re in the British navy. Now the more civilized way to do it is to impose a tax, “. . . . with a man at the door with a 9 mm to enforce it, and then show you what you have to do to earn the money to pay the tax. And that’s how we provision our public sector.”

Warren continues with the point that “taxes create unemployment,” because when taxes are imposed money must be earned to pay those taxes, and there’s no guarantee there would be enough money available to pay for full employment. “We take people out of the private sector, we get their time out of the private sector with taxes. Government spending then employs those we just unemployed. . . . The whole point of getting the students unemployed with the buckaroos was to get student labor to help out in the hospital.”

And he continues:

”If we’re going to tax, and then not hire all of them and leave 20 million people looking for paid work who can’t find it, and because of our monetary system can’t support themselves, and we’re destroying our entire social fabric, why are we doing this? We should lower the taxes. . . .

“Unemployment is the evidence that the budget deficit is too small, that the government has not spent enough to cover the demand to pay its own tax, plus any residual savings demand that comes from that tax liability. Unemployment can always be eliminated with a fiscal adjustment. You either cut the tax and the people go away, or go ahead and hire them to do what you wanted them to do, which is the reason you started the tax to begin with.”

Warren had much more to say:

On monetary operations: “The federal government neither has nor doesn’t have dollars. Government spending: . . . they just mark up the numbers in our bank account. It doesn’t come from anywhere; it doesn’t use anything up. Government taxing: they simply mark down numbers in our bank accounts. They don’t get anything; they don’t pile anything up.”

On Deficit spending: “. . . the guy in Treasury has changed more numbers up than the guy at the IRS has changed numbers down. That’s called the deficit, We can call it whatever we want. The national debt is that difference from the beginning of time, 13 trillion dollars.”

LetsGetItDone Comment: Not from the beginning of time, I don’t think. What Warren defines here is the gap between tax revenue and spending and he equates that to the debt. But there have been times in our history, namely during the Civil War, World War II, and if I recall correctly, for a brief time during the Kennedy Administration, when the Treasury created and spent money without issuing debt. Even today, Treasury revenues come partly, though in small amounts, from coin seigniorage profits. In addition, the national debt, some of which was probably denominated in foreign currency was paid off completely during the Administration of Andrew Jackson. So, any current debt subject to the limit, denominated in US dollars, can only date from 1835.

The more important point here, however, is that the negative gap between tax revenues and spending need not equal the national debt subject to the limit. It only does so when that gap is closed with credits resulting from the sale of debt instruments redeemable in a specified period. If spendable revenue is generated from other sources, then the cumulative deficit, defined as the gap between spending and tax revenues isn’t equal to the national debt subject to the limit. In fact, if sufficient money is created without issuing debt instruments specifying a period for repayment of principal, “the national debt” could be completely retired, while the cumulative deficit could continue to increase as needed to fuel private sector savings. This possibility is illustrated by the buckaroo example where deficits can occur every year, but no debt instruments are ever issued.

Warren then continues by raising the issue of inflation. He offers a slide saying WARNING! OVERSPENDING CAN CAUSE INFLATION!!! and explains that he doesn’t want anyone saying he forgot about inflation, even though he knows they’re going to say it anyway. And then he says that when the Government spends they put money in a checking account at the Federal Reserve Bank called a reserve account so that people can sound professional when they that “. . . our reserve balances went up . . . .“ The national debt is in another kind of account at the Fed called Treasury Securities. That’s a savings account because “You give them money; you get it back with interest. . . . Cash is the exact same information as your checking account but it’s written on a piece of paper, so instead of getting your balance on a computer screen or bank statement, you get to carry it around with you. . . it’s a thing you can use to make payments to the government for taxes.”

”Once the government has spent, that money appears in one of those three forms. So if the government spends without taxing, just spends, that’s called deficit spending, say on day one the government just spends a hundred dollars, it’s going to be one of three places. It’s going to be cash in circulation, or in a checking account, or in your savings account, somebody’s savings account. There’s no other choice: the dollar has no other existence, other than those three places.

“And all of this equals the world’s net savings of dollar financial assets. There are thirteen trillion dollars or so in the savings accounts and checking accounts and cash equal to the penny to the cumulative deficit spending. That’s how much the government has spent and stuck into those accounts, but hasn’t yet taxed and taken out of those accounts. Spending puts the money into the accounts; taxing takes it out. If you put it in and don’t take it out, it’s a deficit; it’s our savings; it’s held by you, me, China, whoever owns Treasury securities.

“A little diagram to explain it here: to see how it works, just to make it graphic, that I did a long time ago. It appears in Randy’s book Understanding Modern Money. Up at the top, you have (I’ll do it from here so I have the microphone I guess). In the middle you have the non-government sectors; that’s all of us, everybody except the government. Now let’s start at the bottom: the government imposes a tax. We have to pay this tax or we can’t get out of the room; we’re going to lose our house and our car. When I say tax, just think of a property tax, because that’s easy. If you start thinking of an income tax, what if you work, what if you don’t work, it works, but you’ll lose track of the rest of what I’m saying. Trust me, it does work, but think of it as a head tax or a property tax, just to keep it simple.

“So the government levies a tax, and now we need the money to pay the tax. Notice I have taxes going out — down into the drain. I don’t circulate them back. There is no such thing. We ship real goods and services to the government — the government’s doing this because it wants to provision itself — and the government gives us the money we need to pay the tax. Goods and services to the government, money to pay the tax, some gets paid in taxes, some gets saved. Where does it go? It goes to the tin shed in Canberra — the warehouse over on the right. In Australia, it’s this tin shed; over here we’ve got a big concrete building. And that’s how it’s held: it’s held in one of those three forms: cash, reserves, or Treasury securities. All that Fed operations do is shuffle around the difference between cash reserves and Treasury securities. When the Fed buys securities from the private sector their securities go down and their cash reserves go up. When the public wants more cash the reserves [sic] go down and the cash goes up. The total is always the same; it’s always equal to the deficit.

“The only place that net financial assets can come from is government deficit spending. This is all accounting; no theory, no philosophy; ask anybody at the CBO, and they’ll say, yeah, that has to add up to the penny, or we have to stay late and find our arithmetic mistake.

“So last year the government spent a trillion and a half dollars more than it taxed, that money went into the warehouse, it’s now held as Treasury securities, reserves, or cash, otherwise known as savings, and sure enough last year savings went up by exactly that amount, to the penny, when you include all the non-government sectors.
“Deficit spending adds to our savings. I think I just said that.”

MMT high-level flow

LetsGetItDone Comment: Sorry for the long quote. But my appreciation for this passage is boundless. It is so clear and down to earth. And it has both the virtue of simplicity and the ring of truth. If you study it and comprehend it, you will have gone a long way toward understanding MMT.

Warren continues his presentation with a simple illustration. I’ll skip it here, but you can go to the transcript for it. The bottom line is: “Government deficits add to savings, to the penny. The deficit clock could be renamed the savings clock. This has already been covered — the same thing.” This last is a reference to Stephanie’s presentation and her world savings clock.

Warren then goes on to review the fiscal sustainability implications of what he says echoing both Bill Mitchell’s and Stephanie Kelton’s views covered in Part Two and Part Three.

“Fiscal sustainability review: Spending is not constrained by revenues. Spending is changing numbers up; putting numbers into our checking accounts. Taxing is changing numbers down, taking numbers out of our checking accounts. Borrowing is moving numbers from our checking account to our savings account. There is no numerical limit to any of this. Paying interest is changing the number up in our savings account. The government can always make any payment of dollars it wants to make. This is all we’re talking about; it’s a nominal system; we’re talking about there are no nominal constraints.

“The risk is inflation, and not insolvency or not-solvency; there’s no solvency risk.“

And then he briefly reviews the self-imposed political constraints discussed in the first two presentations.

LetsGetItDone Comment: So, Warren’s telling us that there is no problem of nominal fiscal sustainability at all. The level of debt, and the level of the debt-to-GDP ratio don’t count at all. And deficits also don’t count from a solvency point of view. Where they count is with respect to inflation. As he says: “WARNING! OVERSPENDING CAN CAUSE INFLATION!!!”

This highlights the more general MMT point about Government spending, including deficit spending. What counts is the impact of such spending on a variety of things including employment, inflation, poverty, crime, social integration, energy foundations, education, and so on. We have to evaluate Government spending by its impact on the real world, not by its impact on purely nominal indicators like the debt subject to the limit and the debt-to-GDP ratio that have no economic importance for a nation sovereign in its currency.

Having said that however, it’s important to emphasize that people have a visceral reaction to the “national debt” notion and the idea of “borrowing” because of the false analogy between everyone’s household budget and the Government’s budget, so even though the debt and the debt-to-GDP ratio aren’t economically important from the MMT point of view they are politically very important because of the way people react to them. It will take years for people to accept that the national debt doesn’t mean anything economically if persuasion alone is involved. But if we can demonstrate that the national debt isn’t important by paying it off using the unlimited currency creation power of the Federal Government, then that will do more than anything else to persuade people that the Government’s budgetary and spending capabilities are very different from their own because the Government is the currency issuer and not just a user of its own currency.

As it happens, and paradoxically, this demonstration can be performed at any time by the President, if he has the courage to do it. All he has to do is use current law to order the US Mint to produce a $60 Trillion dollar coin and deposit it at the Fed. I’ve written about this many times; for example, here and here. The eventual result of his action would be to fill the Treasury General Account with $60 T in electronic credits. This amount can then be used to eliminate the national debt as a political issue and can probably cover all deficit spending for the next 15 – 20 years.

These points also have implications for REAL fiscal sustainability. One of the real effects of misconceived fiscal policy such as austerity, is that if it is applied over a number of years it can degrade the capacity of the economy to produce real goods and services domestically. If that happens then the output gap, the space between what we can produce and what we are failing to produce due to unemployment and inadequate demand, can close over time by destroying our capacity to produce. If that happens, then the capacity of the Government to add nominal wealth to the private sector without causing inflation declines.

So, austerity in Government spending can create REAL fiscal unsustainability, in the sense that lack of Government spending when it’s needed to create full employment can shrink the amount of Government deficit spending that can later be applied without experiencing serious demand-pull inflation. REAL fiscal sustainability is government spending whose effects maintain or increase the ability of the government to spend without causing inflation or other side effects that compromise our economic future. Unfortunately this is not what the President and the other members of “the Peterson Party”, whether Republican or Democrat mean when they talk about fiscal sustainability. Their theory of fiscal sustainability is about the wrong problem. It is about the problem of running out of money. For the US, that can happen. But what can happen is that Government austerity can produce idle and decaying productive capacity, so that the ability of the Government to spend to help create full employment without causing high inflation is severely damaged.

Getting back to Warren’s presentation, he says:

”So now we can get to the main thing, to why we’re here: is Social Security broken? Well, we have to define what broken is: first, what’s the public purpose? What’s the presumed problem; what is the real problem?

“Public purpose of Social Security: Well why do we do this? To provision seniors at a level that makes us proud to be Americans.

And he goes on to talk about the real issues and choices involved in allocating nominal wealth to seniors, pointing out that we have no shortage of food, no high standard of living provided by SS, no housing problems, but many vacant homes, and he points out that we want to provision our seniors at a level that makes us proud to be Americans, but not at a level so high that it’s embarrassing. He also points out that seniors aren’t happy when they to tap their children for money, and their children aren’t happy either. Also, SS gives seniors a feeling of independence, even though they’re getting money from us collectively, and that means some consumption is being shifted to them. And he says that he likes collective provisioning for seniors rather than individual provisioning, and points out that this is a political choice. But he asks:

”So what is the presumed problem? Are they living too well, which is what I was just talking about? Are the opportunity costs too high, that is, are they using resources we need? And the answer to those are no.”

“Is the trust fund a limiting factor? Absolutely not.”

Why not? Because the Trust Fund is just a record resulting from the man at the IRS debiting a private sector checking account and crediting the “Trust Fund.”

”But it’s not “the money”. The government never has or doesn’t have “the money”; there isn’t any such thing; those are not dollars. “Accounting” means a count; it’s record-keeping, it’s a record, it’s not a constraining factor. If it goes negative, it goes negative; a light doesn’t go on and — you know — something breaks open and Bill gets drowned in the flood.”

The real problem, if there is one, is the dependency ratio. That’s the ratio of workers to retirees. “If, in thirty years, we’ve got three hundred million people retired and one guy left working, that guy’ going to be really busy. [laughter] “. . . And so, what do they say, and the mainstream economists agree, they say, therefore, we’ve got to make sure everybody’s going to have enough money to pay this guy, but, uh uh, that’s not going to matter.” The only real thing that will be useful in 50 years is our knowledge and our education. Hardly anything we produce now physically will be “of any value fifty or a hundred years from now. The one thing that we have, that people left us from fifty or a hundred years ago, is our technology, our know-how, our software, and that type of thing. It’s not the hardware.”

However, because we think it’s a money problem, we think the problem is these guys are all going to need a lot of money, because look at how high the prices for laundry services are going to be when there’s only one guy doing it for three hundred million people, we need to cut back and sacrifice today and run surpluses and tax more than we spend, put twenty percent of our people out of work, and, ironically, the very first thing we cut is the only thing that they would agree they’re going to need, which is education.

“More on Social Security: The trust fund is record-keeping. Social Security contributions are regressive taxes that function to reduce take-home pay and aggregate demand. Why is a Democratic administration supporting a tax that taxes those people at the lowest income levels the most? It’s not even a fair tax, it’s completely regressive. Why are they doing that? They’re not trying to do that, it’s not their agenda. They believe we’ve run out of money.

“Social Security payments are progressive distributions that add to take-home pay and aggregate demand. Why are they cutting these? Why did they just cut 500 billion out of Medicare? Not because they think we shouldn’t have it, or because they think there’s something wrong with a progressive distribution to help aggregate demand. Because they think we’ve run out of money.

“Why are they contributing to the unemployment problem? Who is unemployed? We just grew at 5% for a quarter, at six percent, maybe another five percent this quarter. That’s very high real growth. Well, who’s getting all that real wealth? It’s sure not the people who’ve been losing their jobs or seeing real wages fall. It’s not the lower income group. Well then, who is it? It’s somebody else.

“We’ve seen a Democratic, populist administration preside over the largest upward transfer of real wealth from low-income to high-income people in the history of the world. That is not what they were elected to do, and not what they intended to do. It’s because they don’t understand the monetary system and monetary operations. It’s not even theory. They don’t understand actual operations.”

Warren then moves to inflation, and says that right now (end of April 2010) the risk is deflation in the CPI and in the housing market, and points out that “. . . hyperinflation because somebody spent an extra dollar. . . “ isn’t how it works. And then he drops a bunch of facts.

”If you look at the worst financial collapses in the last twenty years, let’s look at Mexico in approximately 1995, I forget the dates. The peso was three-to-one, something like that, three and a half to one, absolute collapse, the currency up in smoke, no faith in government, no faith in everything, and it went to nine. They had about a sixty percent drop. It didn’t drop to zero, the peso didn’t go to a million-to-one. Russia totally collapsed. The ruble machine was shut down. Everybody turned out the lights, pulled out the plug, and left the central bank for six months. The ruble went from 645 to 28, a seventy-five percent drop. It didn’t hyper-inflate, or do anything like Zimbabwe, or Germany, which Marshall explained, which were entirely different situations. So even in situations far more extreme than anything we can imagine, which were fixed-exchange-rate regimes blowing up, which we don’t have, you don’t get sudden jumps in inflation; there just is no such thing.

“What happens if Social Security checks get too high? What happens if we are over paying? How would we know? Well, unemployment would get too low from all the spending, whatever that means. The economy would grow too fast, whatever that means. Seniors would be living too high. Prices would start going up, we’d start seeing the inflation. And then what happens?”

Then it might make sense to raise taxes or cut benefits, but not right now. He says we only do that when it doesn’t make sense to spend any more. It’s a political choice and doesn’t have anything to do with running out of money. Why are SS cutbacks on the table?

”Our leaders don’t understand the monetary system. They don’t know spending is not constrained by revenues. The think that to spend what we don’t tax we have to borrow from the likes of China, for our grandchildren to pay back. It’s all a tragic mistake of epic proportions.”

And that’s his transition to discussing the issue of “borrowing” from China, and the grandchildren. He asks how China gets their dollars, and then explains that they sell goods in our department stores and the money they get paid goes into their checking (reserve) account at the Fed. At this point we owe them “. . . . a bank statement that shows how much they have in their checking account. Then Treasury auctions off Treasury securities which China buys.. And the Fed do? They move the money from China’s checking account to China’s savings (securities) account at the Fed. So, now we owe China all that money with all that interest.

“How can we pay back the whole 13 Trillion in savings accounts? Just like we do every week when tens of Billions come due: we transfer that balance plus interest back to the checking accounts at the Fed. Paid debt paid back. They have three choices with what they can do with that checking account: leave it alone, put it back in the savings account or spend it.”

LetsGetItDone Comment: Not many know just how much debt we pay back every year. Ben Strubel shows that $437 Trillion was paid back between 2001 and 2011.

Warren goes on. If they spend it they’ll buy something. If they buy other currencies then we transfer their dollars to the reserve account of someone else, and their central bank transfers the currency bought by China into China’s account at that central bank.

”So, what is the problem? What are we leaving to our children and grandchildren? They’re just going to need one accountant like we do to debit and credit these accounts. The whole thing could be done on one spreadsheet. You could run that whole part of the Fed with about $100,000 out of your budget if you wanted to. There’s nothing to it.

“People say, “Well, what happens if China dumps all their dollars and the dollar goes down? Whatever are we going to do?” At the same time, the same people are saying that we need China to revalue their currency. Their currency is under valued by 50%. On the one hand they want us to revalue their currency up, which means have the dollar go down by 50% and on the other hand they are panicked over what will happen if the dollar goes down by 50%. Guys, you can’t have it both ways. Figure out what you want.”

LetsGetItDone Comment: Warren put his finger right on it. Our policies towards China are often schizophrenic. We can’t decide whether we want them to devalue their currency relative to ours and cut those cheap exports, allowing some private sector jobs to come back; or whether we want them to help us maintain “a strong dollar,” to help us fight our wars, import all those cheap goods, keep gas prices down here, and enrich our elites who are benefiting from international trade and finance. So we talk out of both sides of our mouths all the time. We’re as silly as the French and German elites who want to impoverish Greece, but also want to keep exporting goods to the Greeks.

I know what I want. I want us to take that cheap real wealth from abroad, but only on the condition that we implement a job guarantee at a living wage with full fringe benefits here, and only on the further condition, that we don’t allow free trade in industries important for future innovation and national security.

Right now we’re practicing “trade unsustainability.” Not because, it’s financially unsustainable. It is fully sustainable as long as people in foreign nations want to send us real wealth in return for electronically marking up their accounts at the Fed. However our patterns of trade are politically, socially, economically, and culturally unsustainable in that they are causing decay in our politics, our local communities, our economic futures, our levels of social and economic justice, our levels and quality of education, and even our national security, since we have been hollowing out our heavy manufacturing base.

So, in short, while it’s true that in the aggregate, over a specific relatively short period of time, imports are real benefits and exports are real costs, there is an issue of societal sustainability here in the broadest sense of the term. And the side effects of the kind of trade policies we’ve been following aren’t accounted for by the truth that when real wealth is given up in exchange for nominal financial assets in one’s own fiat currency; it’s the real wealth that counts, at least in the short run.

Warren next moves on to “What’s wrong with the euro zone?” He starts by pointing out that Greece is not like the US, UK or Japan, because it is a currency user like all the other euro nations, “. . . revenue dependent like US States, businesses and households.” Warren points out the US has recovered better than Europe, because it had not only a central bank, but also a Congress/Treasury to run deficits which went to the States and the people in them. Without these federal deficits, the deficits of state governments would have been much higher. He points out that the States could not have sustained the kind of deficit spending done by the federal Government.

But the Eurozone States have had to do that. “They’ve been in true ponzi. Ponzi is when you have to pay somebody back from getting the funds from the next person.”

”The US government, Japan — Japan with 200% debt to GDP is not in ponzi — they don’t pay people by getting the money from somebody else. They just change the numbers up like we do. That is not ponzi. Ponzi is when you have to get it from somebody else.

“Europe has put themselves in ponzi from day one. And we’ve been pointing it out from day one. Now, ponzi works on the way up. Madoff went a long time before he collapsed. So did Stanford. It’s on the way down where it all comes apart.

“We’re seeing the back end of this coming apart. . . . “

Warren continues with an account of some the details of the faulty Eurozone structural defects and then ends with:

The shoes will have to fall. They don’t have credible bank deposit insurance. If Greece goes down and people realize they are going to lose their 50,000 euros in their bank account, the rest of Europe can be in a big problem. They are already having runs on the banks and it gets a lot worse. It shuts the whole payment system down.

There is no credit worthy government entity to act counter cyclically…

LetsGetItDone Comment: It’s two years later, now, and Europe’s even worse off that it was then. The ECB and other Eurozone authorities have tried to bail out creditors in various nations while imposing austerity on the other citizens of various nations. Now, all the PIIGS nations are facing increasing difficulties and some are close to collapse. The ECB still seeks band-aids, and there are no proposals on the table yet, that can stabilize market lending to the Eurozone members. Warren recently produced his own proposal for ending the crisis, but it’s too early to say whether it will break through elite filters in Europe.

Warren Mosler’s wide-ranging presentation was followed by a Q and A session. I’ll go through that and add comments. But before I do, I’ll provide some follow-up references on the subjects treated in Warren’s presentation appearing since the Fiscal Sustainability Teach-In. The most important from Warren include the revised version of The 7 Deadly Innocent Frauds of Economic Policy. Warren blogs nearly every day, providing news articles on significant world financial events and policies, and his commentary on them. He emphasizes Eurozone events very heavily, and his evaluations and qualified predictions are always pretty much on target. Here, here, here, here, here, here, here, and here. are updates on the subject matter from Warren.

And: here, here, here, here, here, here, here, here, here, here, here, and here, are contributions from Bill Mitchell, Stephanie Kelton, Scott Fullwiler, Pavlina Tcherneva, and Randy Wray.

And finally, several of my own: here, here, here, here, here, and here.

SESSION 2: “The Deficit, the Debt, the Debt-To-GDP Ratio, the Grandchildren, and Government Economic Policy” – Q&A

Maurice Sanders: “Just a quick question for you, Warren. When you describe the moral hazard in the Eurozone, would your description then be different if there were a political superstructure to encompass all those nations in one political structure?”

Warren Mosler: “Yeah, if the deficit spending was done at the new fiscal authority, call it the European Parliament, then you don’t have the race to the bottom. It’s when you split things up, it makes them compete with each other. For example, if you have federal pollution control laws you don’t have a race to the bottom, but if you have state pollution control laws then the state that allows the most pollution gets the most business. So yeah, that consolidation would take care of it.”

Joe Bongiovanni, Kettle Pond Institute: “When you floated your proposal on your blog about the European central bank paying out a trillion dollars, I asked you the question, “Is anybody going to issue any debt to do that?” And eventually you answered me back and said, “No, there would be no debt issued.” Am I right about that?”

Warren Mosler: It’s just a payment. It’s not a loan, it’s a payment.”

Joe Bongiovanni: “So, does that hold true for deficit spending by us, then? That is to say, our central bank, when we’re going to deficit spend, can they also just make the payment without issuing any debt?”

Warren Mosler: “What I’m saying is, if the federal government pays you money, it can either pay you money or loan it to you. If it pays it to you, you have no debt. If it lends it to you, you have a debt. So when the European central bank pays… makes a per capita distribution of a trillion euro [to] the member nations, it’s not added to their debt, they don’t owe it back to the European central bank. When the Federal Reserve makes a payment, it goes into someone’s checking account. We can call that a debt, if we– it’s how you define which account that money is in. We don’t count that as…”

Stephanie Kelton: “It’s like helping our state governments.”

Warren Mosler:

“Right, right. But if the Federal Reserve makes a payment to anybody, whether it’s a payment to the state of Connecticut or a payment that goes out and buys a box of pencils, it goes into somebody’s checking account. It goes into a reserve account at the Fed, through your member bank. We don’t call that “debt.” It’s only when we move the money from the checking account to the savings account that we call it “debt.” So, what’s called “debt” at the Federal level I would not call it “debt.” I never would have called it “debt” from the beginning. It used to be called “debt” because we owed the gold that were in reserves. Once the gold was gone, it’s no longer debt, it’s payment in kind. It’s just a store of nominal wealth for the other guy. It’s not a debt. The European central bank hasn’t started on a gold standard, so they don’t automatically call something debt that isn’t debt, so they don’t have the problem of creating debt when they spend. It’s a little bit of a technical answer, but the answer is that a payment from the European central bank is not booked as debt anywhere, because they never have booked it as debt. We book it as debt because we have a gold standard tradition that caused us to book it as debt. It’s both– they’re all the same thing.”

LetsGetItDone Comment: I find this an enormously interesting comment. Its implication is that if the European Central Bank does begin to “deficit spend” on direct payments to the member States, then it will not incur any debt in doing so, as other sovereign fiat currency nations do because of their silly hold-over views from gold standard days. So, in that case, the national Governments in the Eurozone will raise taxes and borrow money to fund their spending. And they will also get direct payments from the ECB. The member nations will have “national debts” and debt-to-GDP ratios; but the Eurozone itself will maintain a debt-to-GDP of zero due to its “printing money.” Wanna bet that won’t be a source of inflation in the Euro?

Unidentified: “Question for Warren Mosler: since I’m a foul-mouthed leftist blogger, I’m going to frame this as polemically as I can. Speaking to the question of the Tragic Mistake theory, is there a reason to choose the theory of the Tragic Mistake, as opposed to a theory that this is a deliberate act of policy that’s meant to cause as many people as possible to suffer and die? How would I choose one theory as opposed to the other?”

Warren Mosler: I forget the saying, but it’s better to presume innocence than to– how does that go? You know, my book up there that I’ve got, called “The Seven Deadly Innocent Frauds,” it’s John Kenneth Galbraith’s last book. “The Economics of Innocent Fraud,” and he said it more eloquently than I did, but it’s the idea that when you presume innocence, you’re making a much stronger statement than imputed guilt.

Unidentified: “You would have evidence to back this up?”

Warren Mosler: “Which?”

Unidentified: “Why should we p
resume innocence, based on the record of the last thirty years or so?”

Warren Mosler: “Only as a point of logic, that you’re better off presuming innocence. As part of the argument.”

Unidentified: “As a rhetorical tactic?”

Warren Mosler: “To say the person is… I’m not sure how to… Yeah, sure, as a rhetorical tactic, you presume innocence.”

Unidentified: “As a foul-mouthed leftist blogger I can completely accept that.”

Warren Mosler: “Presuming innocence is more powerful, is a far superior rhetorical technique. Especially if it’s something that’s really simple to understand, because then you’re really throwing the onus on the other guy: “You’re either a complete idiot, or you’re subversive, which is it?””

Bill Mitchell:

“Someone asked me at lunchtime whether the European leaders knew about options to solve their current issue, and I said to them that if you read the documents, and the debates going back to the Delors papers, and then subsequently, you will be left with the unambiguous impression that they know all the options. Most recently, the German Finance Minister was interviewed and it was in German, I couldn’t find it in English. I was going to try to put it in the English version, but it was in German, but fine.

“And what he said in the interview was that when they framed the common currency system, they had a choice. And they had a choice to add elements that would have made the current crisis much less a crisis. And those elements were a system to deal with asymmetric shocks, in other words, a fiscal redistribution system; and also, as Warren said, a single fiscal authority. And he said that that was debated, and if you go back to the original debates you see the debate there. And they chose, as an explicit choice, to exclude those characteristics from the system, the very characteristics that would have made the current crisis significantly less severe. They chose explicitly to exclude them from the system.

“And as soon as the common currency came in, Germany then introduced their so-called Hartz reforms. And these were reforms that — because previous to that, they were able to maintain their export competitiveness through exchange rate movements. Once they lost that capacity because of the common currency, they had to work out another way to stay one up on the other countries, and so they brought in the significant deflationary measures in their labor market: casualized significant sections of their labor market, reduced workers’ real wages and conditions, the whole Hartz agenda. And these were all very explicit choices and decisions they made within the context of the institutional system they were setting up. They knew the alternatives. And they knew that once the crisis hit, then the weaker countries — in a trade sense — would melt down, as they are. So, I’m not so sure I agree with Warren in emphasis. I think that they…”

Warren Mosler: “It’s rhetoric, though, just rhetoric.”

Bill Mitchell: “I understand the rhetoric. I think that I prefer to say that they aren’t innocent. They took an ideological decision. They were scared to death. There’s a cultural animosity within Europe stemming back to the Latin and the Germanic cultures. The second World War’s had an incredible influence on the way they’ve structured the evolution of the European community, and now the EMU, and the ideology surrounding all of that led them … The Germans dominate, they don’t trust the Italians and the Spanish, and particularly the Greeks. And they set up a system that would punish those countries in the event of a crisis, and they deliberately did it, and they know the options. They know all of the options that could reduce the pain, but they don’t want to do it.”

Warren Mosler: “There have been statements out of Greece that they owe us these loans for war reparations. . . . “

LetsGetItDone Comment:Based on what Bill said; perhaps Greece and some of the other PIIGS should sue the Euro zone in the International Court of justice for allowing them to join it while knowing full well that the system would punish them in the event of a crisis?

Bob Hahl, Kilowatt Cards:

“You said that, and it’s pretty clear, that raising taxes reduces demand for goods and services, but it also seems to reduce other kinds of things like greed, or power, unbalanced power — very rich people have enormous influence. I think back to the situation after World War II when the upper tax rate was 90%, and people always talk about that as if there were a lot of people paying 90% marginal rates, and I don’t think very many, if anyone, ever did. I don’t think anyone made that much money. What happened was, faced with a choice, if you’re an employer, of taking money out of your company and giving 90% of it to the government, or distributing some of it to the workers instead, and getting something for it, that was a better choice. And so I can understand the idea of lowering taxes, but at the same time you’re also unbalancing society, and you’re letting people accumulate so much money and we don’t know what kind of crazy thing they’re going to do with it.

“How do you control that? We don’t let people keep bazookas and land mines to protect themselves, but we’re letting people get rich enough to compete with countries.”

Warren Mosler: “Second amendment. No, those are all very legitimate political decisions. Those are political decisions. Those are the consequences of policy, but it doesn’t mean the government’s going to run out of money.”

Unidentified: “How does that jive with the notion that tax rates should be used to regulate aggregate demand?”

Warren Mosler: “We didn’t say tax rates– . . . “

Unidentified: “Ok, taxes. The tax code has been used to redistribute income, and in my opinion, right now it has been hijacked to favor upper-income households. Now we have huge income inequality in this country, so again, how does that jive with this notion of regulating aggregate demand?”

Warren Mosler: “There’s a bigger problem with that, because what also tends to happen is people wind up with the same after-tax money, so when you raise tax rates, and let’s say wages stay the same, tax rates go up, and government stays the same size, that means the higher incomes go high enough to adjust for the taxes. So after the Clinton years, you see, “Oh gee, look, we collected an extra trillion in taxes because of the higher rates.” Yeah, but those people earned an extra $5 trillion in income. So, it’s a moving target as well. There’s a lot of intuition, I guess we called it, and illusion as to what’s going on, when you dig down into it. Everything government does has distributive consequences, and those should be the first and foremost political decisions, not whether we’ve run out of money or not, or whether we’re going to borrow from China.

“What these myths have done is taken our eye off the ball of what I would consider are the important decisions. I did a paper with Randy and James Galbraith, we gave it to the GAO and FASB on sustainability, and we said, “Look, the problem is 100% of your time, money and effort is going into figuring out government solvency, and none of it’s going into the inflation problem. So what you’ve got is 100% of your resources going into the thing that doesn’t exist, and nothing going into the thing that could actually be a problem.” And that’s indicative of what’s going on at all levels of government, because they don’t understand the monetary system.”

Unidentified: “But this is more than hypothetical, more than just political, we are talking economic. Income inequality is an economic issue that is challenging… In my opinion, it’s one of the biggest challenges to our democracy.”

Warren Mosler: “Right. But what I’m saying is it’s not getting the attention it deserves because they’re worried things that shouldn’t be getting any attention. We’re not going to get attention to those issues until we get rid of the things that are taking all of our attention, like China, and the budget deficit. If we stop thinking about those, we’d have time in Congress to talk about something else.”

L. Randall Wray: “I want to add a couple of things. So, we’re arguing taxes drive money, taxes don’t pay for government spending. So that’s the fundamental point. And then the question is, “What kind of taxes?” And Warren said the head tax is actually the best thing to drive currency from inception. But once we–“

Warren Mosler: “I said it’s the easiest thing to understand.”

L. Randall Wray: “It’s also the best thing to drive it. But once we’ve got a monetary economy, then we can use an income tax, we can have an inheritance tax, and so on. So then the question is, “What other things can taxes do?” And so yes, we use taxes to punish certain kinds of behavior, “bads.” And then we can use tax breaks to encourage other kinds of behavior. We could use inheritance taxes to try to prevent accumulation of dynasties of wealth. We could try to use taxes to address income inequality. One word that you said that I don’t like is “redistribution” because we can always raise the income of people at the bottom, without taking from income at the top. The reason is because we don’t really take income and give it, because taxes don’t pay for the government spending. We can always have as much welfare as we want without taxing the rich at all.

“Then just the final point I would make, I’ll just state it as a claim, and I think that you said this: in fact, taxes never reduced income at the top. It does not work. They have too much political power. They get the exceptions written into the tax laws. So you never achieve the 50% tax rates on the rich. So we should think about a different way to prevent income inequality, I don’t think the tax system will work. Prevent the income in the first place, that’s the best way to do it.”

The next issue raised was how there could be a stronger voice out there to spread the word about MMT. Marshall Auerback then proceeded to outline what MMT advocates had been doing up to that time to get MMT views “out there.” I’ll leave you to read that exchange in the transcript. But since the FS conference, efforts to spread the word have accelerated along with the number of people blogging about MMT and the number of MMT videos and presentations being created. In the two years since the conference, MMT has received some mainstream attention, some of it dismissive; some of it favorable, but either way the frequency and intensity of MMT-related communications seem to be increasing exponentially.

The Q & A session ended with this statement of Roger Erickson’s

Roger Erickson:

“I want to get back to the question that was raised by the person that was behind me, “How do we protect our systems against these kinds of disconnects?” And actually, if you go outside the narrow field of economics, there is very rich literature on this very question. If you look at the field of ecology, systems theory, anthropology, many others, and all the way up to military operations, there are literally thousands of tomes and books and theories, mathematical models, physics models written about this, and what ties them all together is system stability. So eventually, as people are saying, we’ll wake up and we’ll realize that things are going south. The general response about how you protect it is, the simple answer is, that in any complex system, what keeps system stability is eventually interaction, and the knowledge throughput, the data shared throughout the system.

“So the simple mantra that comes out of this is “Interaction drives awareness.” Until we have more crosstalk among these different professions, our electorate and our elected officials are not going to have a general consensus on it.”

LetsGetItDone Comment: I think this comment is very important because it emphasizes the complex adaptive system context of macro-economics, and also suggests that spreading the MMT paradigm in such a way that it can replace the destructive neo-liberal paradigm may well depend on our creating new systems of interaction that allow both distributed problem solving and rapid communication of the new knowledge created to all in the complex adaptive system who need it. Roger Erickson posted more on interaction and awareness very recently,
and I’ve done some posts on this in the series ending here, as well.


In the introduction, I pointed out that Warren’s presentation refutes a large number of popular austerian myths including: the government is running out of money; the Government can only raise money by taxing or borrowing; We can’t keep adding additional debt to “the national credit card”; We need to cut spending and entitlements; our main creditors, like China will cease to buy our debt making it impossible for us to raise money; our grandchildren must have the heavy burden of paying our national debt; Government deficit spending isn’t sustainable because the Government is like a household and that since households sacrifice to live with their means, Government ought to do that too; and “printing money,” i.e. deficit spending without selling debt instruments in corresponding amounts is necessarily inflationary. These myths are at the heart of the austerian message being delivered by the deficit hawks and the whole range of Peterson efforts including his annual fiscal summit conferences.

So, the importance of Warren’s presentation to the counter-narrative cannot be over-estimated. His refutation of so many myths, along with his placing them in the context of both the buckaroo experiments and so many real world events, provides a great deal of the counter-narrative needed to defeat the austerian paradigm and adopt a more rational economics as the framework for policies that will help us build a society that delivers social justice, and turns away from plutocracy and back towards democracy.

The presentation and Q & A thereafter also reinforce the aspects of the counter-narrative given previously by Bill Mitchell and Stephanie Kelton, so all three together provide a coherent view in opposition to the Peterson/neoliberal line, showing that there is no fiscal sustainability problem for the US in the sense that insolvency can involuntarily happen because of accumulated debt or present deficit spending. Instead, if there is any REAL fiscal sustainability problem at all it lies with the possible effects of government austerity, since it can reduce the room for future deficit spending by destroying real private sector productive capacity, so that fiscal efforts produce inflationary effects sooner then they would have, before austerity was implemented.

In Part Five I’ll cover Marshall Auerback’s presentation on “Inflation and Hyper-inflation.” We’ll see how his version of the MMT counter-narrative strengthens and extends what we’ve already learned from the proceedings of the first three sessions of the Teach-In, while also responding to one of the most common attacks on MMT, which is: “OK, OK, so there is no solvency problem, but continued spending and “printing money” will surely lead to the kind of hyperinflation we’ve seen in Weimar and Zimbabwe, so we still can’t keep on running deficits. Marshall’s presentation will directly confront that very popular criticism.

(Cross-posted from

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

8:29 pm in Uncategorized by letsgetitdone

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

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

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

Stephanie Kelton’s Presentation On Spending Constraints

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

So looking at:

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

And back again to the solvency question

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Unidentified: “I was asking about Argentina…”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

(Cross-posted from

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

2:44 pm in Uncategorized by letsgetitdone

(Cross-posted from

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

Austerity / Household Tax protest. Photo by William Murphy.

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

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

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

Bill Mitchell’s Presentation on Fiscal Sustainability

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The Fiscal Summit Counter-Narrative: Part One

8:58 pm in Uncategorized by letsgetitdone

(Cross-posted from

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

Austerity Road Sign

Photo by 401K


The 2010 Fiscal Summit

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

The 2011 Fiscal Summit

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