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Is the MSM Blackout on Inequality, Plutocracy, and Oligarchy Ending?

11:29 am in Uncategorized by letsgetitdone

The first occurrence of this I’m aware of was Chuck Todd, reacting on his Daily Rundown show to the spectacle of Republican candidates traveling to Vegas to seek funding from Sheldon Adelson and his well-heeled friends..

All of a sudden MSNBC cable commentators are talking about plutocracy and oligarchy. Surprisingly, the first occurrence of this I’m aware of was Chuck Todd, reacting on his Daily Rundown show to the spectacle of Republican candidates traveling to Vegas to seek funding from Sheldon Adelson and his group of hugely wealthy Jewish Republican donors. Todd began to explore the implications of that event. He seemed exercised, and more than the slightest bit upset, about its meaning for Democracy and used the words plutocracy and oligarchy. Andrea Mitchell also discussed it later and she, too, registered apparent dismay, while using the “p” and “o” words.

Chris Hayes has been on leave during this period, so we haven’t heard from him about this. But Chris Matthews, the “oh so very slightly left-of-center insider” has been making very unfriendly noises about Adelson, the Kochs, and the Supremes, culminating today (April 3rd) with nasty references to plutocrats, oligarchs, and candidates, kissing oligarchs somewhere or other, on both his program and Al Sharpton’s.

Read the rest of this entry →

Stop “the Great Betrayal”: Kabuki Update

10:19 am in Uncategorized by letsgetitdone

It now looks like the big media and leaders in both parties are no longer focusing on the Government Shutdown crisis, but are now moving on to the notion that the shutdown is melding with the upcoming probable breaching of the debt limit to create a combined mother of all fiscal crises. Along with this, the media and many politicians, encouraged by the President’s standing “strong, strong, strong,” are now directing attention away from whether ObamaCare will be delayed or compromised, to other types of ransom the Administration might pay in return for both re-opening the Government and also providing an increase of an undetermined amount in the debt limit. Meanwhile there are reports that under increasing Wall Street pressure John Boehner is preparing to negotiate with House Democrats and allow a vote to pass a CR and a clean debt limit increase bill, in return for concessions he can take back to his caucus.
We need to get this to the Fiscal Cliff! What could go wrong?
TINA does not apply in this case, and the President’s choices are not limited to just refusing to negotiate or giving in to ransom demands whether focused on Obamacare, the Keystone Pipeline, entitlement cuts,“tax reform frameworks” or any other measures that give “tea party” Republicans “the respect” they think is due them. By continuing to frame things in this way, the media and politicians in both parties are echoing the Administration’s framing of the situation and absolving the President of his share of the blame for the debt limit crisis. They are also preparing the way for a compromise, that will, almost certainly, result in hurtful cuts to Government spending including renewed consideration of “the Great Betrayal,” also known as the Grand Bargain, and probably passage of the chained CPI cuts to Social Security over the objections of a large majority of the American people.

In two previous posts, here and here, I listed the five options the Administration can use to lessen or nullify the impact of Republican intransigence on increasing the debt limit. I’ll now list them again to emphasize that there is no TINA. The President has options to defeat the debt ceiling without doing the “Great Betrayal.”

1. A selective default strategy by the Executive, prioritizing not paying for things that Congress needed, and perhaps not paying debt to the Fed when it falls due and working with the Fed to get the $2.05 Trillion in bonds that it was holding canceled;

2. An exploding option involving selling a 90-day option to the Fed for purchasing some Federal property for $ 2 Trillion. Then when Congress lifts the debt ceiling, the Treasury could buy back the option for one dollar, or the Fed could simply let the option expire; Read the rest of this entry →

The Fiscal “Cliff” and the Real Problem

7:02 pm in Uncategorized by letsgetitdone

so-called cliff

Like many others, I’m not worried about the so-called fiscal “cliff,” and the ravages to the economy that are likely to occur if Congress doesn’t do something about it before the end of the year. That’s because a lot of the impact can be cushioned in the short run by Executive Branch manipulations while negotiations continue to go on. But if measures aren’t taken to reverse the contractionary effect of the sequestration-induced changes, we’re looking at deficit cuts of $487 Billion over 9 months of the fiscal year.

By comparison, the American Recovery and Reinvestment (ARRA) of 2009 produced only $350 B in stimulus during its first year. And, if the full sequestration were allowed to proceed unmodified, then it would result in a “claw-back” of about 60% of the total ARRA stimulus.

Fortunately, if we do go over the “cliff” heavy pressure will then be on both parties to reintroduce the middle class tax cuts, and make them retroactive, and to restore some of the other cuts as well, so it may be possible to mitigate much, if not most, of the damage, if the Democrats are aggressive enough in pushing the negotiation advantages they appear to have now. So, the real danger of the manufactured “fiscal cliff” is more long-term.

That danger is the constant bleating from both deficit hawks and “progressives” that we have to do something long-term about the deficit/debt problem. So, they put up these long-term plans to delay deficit cutting for a year or two and then want to cut even more down the road to ‘stabilize’ the debt-to-GDP ratio. This is a non-existent problem, and any plan providing for deliberate polices to force deficit reduction by constraining Government spending to some arbitrary level is bound to damage the economy seriously when the prescribed spending cuts and increased taxes for lowering deficits take effect.

People have to come to accept reality, which is: if we want to import more than we export; and also want the private sector as a whole to save money (i.e. bank savings, pensions, other savings) then there is no alternative to having the Government deficit spend. Further, how much the deficit ought to be, without incurring the penalty of demand-pull inflation is dictated by how much we want the private sector to save, and how much of a trade deficit we want to continue to run. If we want to have a trade deficit at 4% of GDP, and we want to save 7% of GDP, then we must allow the Government to run a deficit of approximately 11% of GDP. And we must do that year after year after year, for as long as we want to save that much and import that much.

Do I need to point out that our deficits are not now anywhere near 11%? And that as a result we not only have high unemployment, an output gap of more than $3 Trillion annually in GDP, but also less in both savings (financial wealth being accumulated) and imports (real wealth being accumulated) then we otherwise would have? What will happen if even the “liberal” Center On Budget and Policy Priorities (CBPP) hits the economy with its proposed total of $3.7 Trillion (the $1.7 Trillion already agreed to last year and the additional $2 Trillion it is proposing) in deficit reduction? That is an average of $370 Billion per year in enforced deficit reduction which will come right out of savings and imports. That, in the absence of credit bubbles creating unsustainable demand, will condemn us to a stagnant economy as far as the eye can see.

We don’t have to run those 11% of GDP deficits, and also have them drive 11% of GDP further debt accumulation. Deficits and debt accumulation are not the same things, and can be decoupled. We can have the deficits and use Proof Platinum Coin Seigniorage (PPCS) to underwrite the deficit spending; or we can change the rules preventing the Fed from monetizing deficit spending by just creating the necessary credits for spending Congressional deficit appropriations and placing them in the Treasury General Account (TGA) when needed. So having the increased debt along with the continuing deficits isn’t necessary. And if we don’t like the debt, then we can get rid of it.

But, again, if we want the imports and if we want the savings, then we must have the deficits, and we must never have deficit reduction unless we also have savings reduction and/or trade deficit reduction. So the bottom line here is: We need to have the “loser liberal” message we’re hearing from Bernie Sanders, Robert Reich, The Center On Budget and Policy Priorities, and various “progressive” pundits and organizations, just stop!

Keynes’s idea that a fiscally responsible nation incurs deficit/debt in bad times, and pays it back in good times with surpluses, is wrong in the context of fiat currency nations. The gold standard’s been gone since 1971. Nations have much more fiscal space. Some nations want to run trade surpluses all the time, and accumulate nominal financial wealth, and others want to accommodate them and accumulate the real wealth of their imports instead.

So, this makes it impossible for those others to have both aggregate private sector savings and full employment, without Government deficits compensating for the demand leakages. The accommodating nations need to run permanent deficits to serve their own populations. And, if other nations, object to that, then they need simply to stop having export-led economies.

We have no national debt, or debt-to-GDP ratio problem, because we are a nation with a non-convertible fiat currency, a floating exchange rate, and debts in currencies not our own. This means we can always generate new currency to pay our obligations using the methods I just mentioned. And it also means that 1) our levels of debt and debt-to-GDP ratio have no impact on the fiscal sustainability of our fiscal policy; and 2) fiscal responsibility can’t mean targeting fiscal policy at particular levels of the national debt, or the debt-to-GDP ratio.

Nor can the bond markets create rising interest rates on US public debt because “we,” that is the Fed and the Treasury together, control those rates and can keep them as low as they want to even if every ratings agencies downgrades US paper to its lowest rating. Put simply, our creditors have zero power over our interest rates. Reich’s talk about persuading our creditors that we’re serious about getting our fiscal house in order is just errant nonsense. What we really need to do about them is to use PPCS to fill the public purse, repay our debt instruments as they come due, and take their bond market in USD away from them entirely. It’s only a source of “welfare” payments to rich people and foreign nations anyway. What do we need it for, anyway?

(Cross-posted from New Economic Perspectives.)


Photo by tbennett under Creative Commons license.

Beowulf: Notes on the Miniwage

8:35 pm in Uncategorized by letsgetitdone

Marshall Auerback recently posted in support of raising the minimum wage, joining Jamie Galbraith in advocating for it. This caused some disagreement among bloggers sympathetic to Modern Monetary Theory (MMT).

In particular, Rodger Malcolm Mitchell expressed his disagreement with Marshall in a straightforward critique, proposing an alternative and much more comprehensive initiative designed to move the economy toward the 5 goals Marshall set out in his post. The dispute received a very good discussion at Mike Norman’s site, with the main point being that everyone would favor Rodger’s alternative if it could be passed, but that Marshall’s proposal was much easier to get passed.

To this point, beowulf, a blogger and commenter much respected in MMT and Modern Monetary realism (MMR) circles, added a number of lively comments about the desirability of raising the minimum wage that I think are worth blogging here. He said:

“Minimum wage laws are like hummingbird wings. In theory they shouldn’t work at all, in the real world they work pretty well.

Australia’s minimum wage was just bumped to A$15.96 an hour, US$16.84.hr at today’s exchange rate. Unemployment rate is 5.2%.

Think about that, their U3 rate is three points lower AND their minimum wage is more than double ours. Either the Coriolis effect makes neoclassical economics work backwards in the Southern hemisphere, or mainstream economists are a bunch of astrologers who think they’re Carl Sagan.

$16.84/hr is high enough that a full time worker making that here would be means-tested out of food stamps, section 8 and other income security programs.

So what’s going on is Australia puts the cost of a living wage for the working poor on their employers instead of taxpayers, enabling govt spending to be focused on other needs– like universal Medicare and a Social Security system so broad it would impress even Rodger Mitchell.

Then later on he added:

“One other thing, this John Stossel post last month may be the most mendacious thing I’ve read all year.

“Statists say that Australia is proof that minimum wage laws help workers. They point to Australia’s 5.1% unemployment rate… But statists ignore the details.

“Most people who earn minimum wage are young, unskilled workers. How are they doing in Australia?

“In June, Australia’s unemployment rate for workers age 15 to 19 was 16.5%.”

“That’s digging pretty deep for an unemployment stat. Curious that Stossel neglected to mention the comparable US stat (for workers 16 to 19). In June, their unemployment rate was…26.6%.

That Coriolis effect is CRAZY.”

And then he added a bit more:

”OK, this is really the last one…

“According to the Heritage Foundation/WSJ “2011 Index of Economic Freedom”, Australia’s “government spending as a percentage of gross domestic product (GDP)” is less than that of the United States; 34.3% vs 38.9%.

“Stop and think about that… universal Medicare (with dental!), a jumbo size Social Security system, a defense policy of jumping into the same wars we do (including Vietnam and Iraq) and Australia still spends less on government than we do. At risk of sounding hyperbolic, I”d say that Coriolis effect is strong enough to move hurricanes (and cyclones). :o)”

These are great comments, and I’ll draw out their implications a little further.

– First, Australia is one of many nations with minimum wage rates way above our own. They’re no exception. Internationally, they’re closer to the rule; and among major nations, we are the shameful exception.

– Second, a recent Credit Suisse study shows the United States is 24th in the world in Median Wealth per adult. One of the reasons for this certainly can be the sad state of the minimum wage rate compared to other nations.

– Third, when a prediction is correct in theory, but not in the real world; then the most likely explanation is that the theory that says it won’t work is wrong. Capish? And

– Fourth, when will American legislators, politicians and political parties treat American citizens and their constituents at least as well as the legislators, politicians, and political parties of other democracies?

That is the question that has been blowin’ in the wind for at least 35 years now. Time to retire this group of bozos, crooks, and corporate ideologues.

And while we’re at it, let’s not forget the Justices of the Supreme Court. At least five of them need impeachment badly before they complete the turnover of this country to the corporations!

(Cross-posted from Correntewire.com.)

(MMT − JG) + Medicare for All ≠ MMT

10:24 pm in Uncategorized by letsgetitdone

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

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

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

Beowulf then remarks:

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

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

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

Beo goes on with the details:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(Cross-posted from Correntewire.com)

Dialogues with Jamie Galbraith and the MMT Job Guarantee

10:40 am in Uncategorized by letsgetitdone

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

Dialogue 1, Jamie Galbraith/TomThumb

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

Here’s that reply:

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

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

Later FDL commenter TomThumb replied this way to Jamie:

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

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

To which Jamie replied:

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

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

TT quickly shot back:

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

To which Jamie replied:

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

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

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

Dialogue 2, Jamie Galbraith/Beowulf

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

To which Jamie replied:

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

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

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

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

To which Beo replies:

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

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

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

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

The Upshot of the Dialogues

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

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

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

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

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

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

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

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

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

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

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

Beowulf’s Proposal

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

(Cross-posted from Correntewire.com)

The WaPo MMT Post Explosion: Matthew Yglesias’s MMT

11:54 pm in Uncategorized by letsgetitdone

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

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

The 1970s Inflation

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

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

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

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

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

Types of Inflation

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

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

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

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

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

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

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

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

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

Unit Labor Costs

Matty Yglesias continues with his remarks about inflation:

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

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

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

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

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

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

UNIT_LABOR_COSTS = PRICE_LEVEL × LABOR_SHARE_OF_OUTPUT

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

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

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

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

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

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

Time for a Change in Regimes?

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

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

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

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

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

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

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

(Cross-posted from Correntewire.com

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

11:44 pm in Uncategorized by letsgetitdone

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“None of these views would be correct.

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

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

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

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

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

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

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

(Cross-posted from Correntewire.com

WaPo Covers MMT, But Does Its Usual Bad Job: Part Three, Banking, and Default vs. “Hyperinflation”

3:25 pm in Uncategorized by letsgetitdone

This post continues my critical evaluation of Dylan Matthews’s, post published on Ezra Klein’s blog called “You know the deficit hawks. Now meet the deficit owls.”

Other Issues

Here’s the next exchange envisioned by Dylan:

“According to Galbraith and the others, monetary policy as currently conducted by the Fed does not work. The Fed generally uses one of two levers to increase growth and employment. It can lower short-term interest rates by buying up short-term government bonds on the open market. If short-term rates are near-zero, as they are now, the Fed can try “quantitative easing,” or large-scale purchases of assets (such as bonds) from the private sector including longer-term Treasuries using money the Fed creates. This is what the Fed did in 2008 and 2010, in an emergency effort to boost the economy.

“According to Modern Monetary Theory, the Fed buying up Treasuries is just, in Galbraith’s words, a “bookkeeping operation” that does not add income to American households and thus cannot be inflationary.

“It seemed clear to me that . . . flooding the economy with money by buying up government bonds . . . is not going to change anybody’s behavior,” Galbraith says. “They would just end up with cash reserves which would sit idle in the banking system, and that is exactly what in fact happened.

“The theorists just “have no idea how quantitative easing works,” says Joe Gagnon, an economist at the Peterson Institute who managed the Fed’s first round of quantitative easing in 2008. Even if the money the Fed uses to buy bonds stays in bank reserves — or money that’s held in reserve — increasing those reserves should still lead to increased borrowing and ripple throughout the system.”

Evidently, Gagnon has no idea that increasing the amount of reserves does not lead to increased borrowing, because banks don’t need more reserves to make loans. All they need are credit worthy borrowers and access to the Fed discount window to make whatever quantity of loans they want to. This is one of the main points about the banking system MMT makes. Put simply: lending is not reserve constrained! It’s constrained by bank willingness to lend to credit worthy borrowers.

Dylan’s next point is:

“Mainstreamers are equally baffled by another claim of the theory: that budget surpluses in and of themselves are bad for the economy. According to Modern Monetary Theory, when the government runs a surplus, it is a net saver, which means that the private sector is a net debtor. The government is, in effect, “taking money from private pockets and forcing them to make that up by going deeper into debt,” Galbraith says, reiterating his White House comments.

“The mainstream crowd finds this argument as funny now as they did when Galbraith presented it to Clinton. “I have two words to answer that: Australia and Canada,” Gagnon says. “If Jamie Galbraith would look them up, he would see immediate proof he’s wrong. Australia has had a long-running budget surplus now, they actually have no national debt whatsoever, they’re the fastest-growing, healthiest economy in the world.” Canada, similarly, has run consistent surpluses while achieving high growth.”

Gagnon must be kidding, or at least totally ignorant about Jamie’s background, and the major contributors to the MMT synthesis, Of course, Jamie is quite familiar with Canada having close ties to the land of his father’s birth, and MMT economists know all they need to know about Australia, since MMT leader Bill Mitchell is constantly writing about the Australian economy and its various tragedies. However, the point here is that Gagnon doesn’t see that these two nations show that MMT’s Sectoral Financial Balances (SFB) model is exactly right in its explanations, since they are able to run surpluses without disaster, only because, unlike the United States, the foreign sectors of their economies run deficits (that is Canada and Australia run trade surpluses) large enough to accommodate the private sector savings desires of Australians and also the Government’s desire to run a budget surplus. The US however, currently has a need to run Government deficits of 10% to support both our private sector savings desires of 6% of GDP, and our foreign sector’s desires to export 4% of US GDP to US consumers so they can accumulate US dollars in the form of electronic credits.

Default vs. Hyperinflation?

“But MMT’s own relationship to real-world cases can be a little hit-or-miss. Mosler, the hedge fund manager, credits his role in the movement to an epiphany in the early 1990s, when markets grew concerned that Italy was about to default. Mosler figured that Italy, which at that time still issued its own currency, the lira, could not default as long as it had the ability to print more liras. He bet accordingly, and when Italy did not default, he made a tidy sum. “There was an enormous amount of money to be made if you could bring yourself around to the idea that they couldn’t default,” he says.

“Later that decade, he learned there was also a lot of money to be lost. When similar fears surfaced about Russia, he again bet against default. Despite having its own currency, Russia defaulted, forcing Mosler to liquidate one of his funds and wiping out much of his $850 million in investments in the country. Mosler credits this to Russia’s fixed exchange rate policy of the time and insists that if it had only acted like a country with its own currency, default could have been avoided.

“But the case could also prove what critics insist: Default, while technically always avoidable, is sometimes the best available option.”

Well, this last is a mouthful. Yes, Warren Mosler made a lot of money on his “bets” on Italy, and lost a lot on Russia. But what this shows is that Governments can voluntarily default if they choose to. MMT economists have always said this and still say it. So why is political stupidity or perfidy counted against the truth of the MMT proposition that Governments sovereign in their currency have no fiscal solvency problems, only voluntary constraints and political problems?

On the contrary, I think the Russian case is one of the primary illustrations of a point that deficit owls have been trying to spread far and wide. Namely, that sometimes default is due to stupidity and perfidy and not to economic forces and that citizens in a democracy need to be aware of that, and of the full capabilities of currency sovereign Governments to always pay debts incurred in their fiat currency and to spend whatever is necessary to enable full employment in their nations. They are never, never, out of money except by choice. So, the real questions are:

– why are they choosing to default?
– Who will benefit from this political choice?
– And who will be asked to pay the price?

And how does the Russian case “prove” that: “Default, while technically always avoidable, is sometimes the best available option”? Is Dylan, through this quote from Gregory Mankiw suggesting that “public purpose” in Russia was better served by its voluntary default than it would have been if the Russians repaid their ruble debts in the rubles they might have created had they wished to? I’m afraid that both Dylan and Mankiw will have to prove that statement to me, since Russian citizens seem to have suffered quite a lot by taking the default choice and accepting austerity when they didn’t have to do so.

WaPo Covers MMT, But Does Its Usual Bad Job: Part Two, Inflation/Hyperinflation

10:06 pm in Uncategorized by letsgetitdone

This post continues the critical evaluation of Dylan Matthews’s, post published on Ezra Klein’s blog called “You know the deficit hawks. Now meet the deficit owls.”

The Inflation/Hyperinflation Bogeyman

“And while Modern Monetary Theory’s proponents take Keynes as their starting point and advocate aggressive deficit spending during recessions, they’re not that type of Keynesians. Even mainstream economists who argue for more deficit spending are reluctant to accept the central tenets of Modern Monetary Theory. Take Krugman, who regularly engages economists across the spectrum in spirited debate. He has argued that pursuing large budget deficits during boom times can lead to hyperinflation. Mankiw concedes the theory’s point that the government can never run out of money but doesn’t think this means what its proponents think it does.

“Technically it’s true, he says, that the government could print streams of money and never default. The risk is that it could trigger a very high rate of inflation. This would “bankrupt much of the banking system,” he says. “Default, painful as it would be, might be a better option.”

Well, Krugman has argued there is a danger of hyperinflation where deficit spending lasts for many years, but in a really balanced piece, the counter-arguments of MMT economists to his conjecture would at least be mentioned. Dylan doesn’t say what these counter-arguments are.

And as for Dylan’s reference to Mankiw, it’s easy to wave off MMT by saying there is a risk of inflation in using deficit spending to create full employment, but it is entirely another matter to say what the level of risk is, and to provide compelling arguments about why that risk is appreciable, and more costly than the effects of chronic unemployment in a stagnating economy. This Mankiw doesn’t begin to do. I think Dylan should have pointed this out, rather than just mentioning Mankiw’s opinion. Who cares about his opinion? It’s his arguments, his theories, for expecting inflation that we care about. So, why doesn’t Dylan outline what these are and critically evaluate them?

When Mankiw tells us that default might be a better option than risking inflation by printing money, he is going way beyond his claimed area of expertise in economics. The 14th Amendment to the US constitution prohibits even questioning Government debt, much less defaulting on it. Mankiw in his capacity as an economist is unqualified to say whether a violation of the US constitution is a better option than taking the risk of triggering hyperinflation by “printing money.”

“Mankiw’s critique goes to the heart of the debate about Modern Monetary Theory — and about how, when and even whether to eliminate our current deficits.

“When the government deficit spends, it issues bonds to be bought on the open market. If its debt load grows too large, mainstream economists say, bond purchasers will demand higher interest rates, and the government will have to pay more in interest payments, which in turn adds to the debt load.”

Well, this is what the mainstream says. But what do MMT economists say in return? Why doesn’t Dylan mention that?

What MMT replies is that bond issuance isn’t an inevitability, but a result of choices made by the US Congress and the Executive Branch of Government. The Congress could place the Fed under the authority of the Treasury Secretary in the Executive Branch, and then no debt would have to be issued to deficit spend, since the Fed could just mark up the Treasury General Account (TGA) under orders from the Secretary.

MMT also points out that the Fed controls the Federal Funds Rate which, in turn, heavily influences all bond rates. If the Fed targets a near zero FFR, and the Treasury issues no bonds longer than say, three months in duration, then bond interest rates can be kept near zero no matter how much debt is issued. Japan has proved this is the case since its debt-to-GDP ratio is now in excess of 200% while its interest rates are very near zero on short-term debt instruments.

Finally, Mankiw seems not to know that even if neither of these alternatives is pursued, the Executive Branch still has options to avoid further borrowing and paying higher interest rates and ro repay debt without either cutting spending or raising taxes. Here, I refer to Proof Platinum Coin Seigniorage (PPCS).

As I’ve outlined in numerous posts including this one, the President at his option could require the Treasury and the US Mint to create a coin of arbitrary face value and deposit it at the Fed. The coin’s value is limited only by the President’s specification. For example, a $60 T coin might be minted. The Fed must provide $60 T in electronic credits in return for the US Mint deposit of the coin in its Public Enterprise Fund (PEF) account. The Treasury can then “sweep” the PEF for the difference between the Mint’s cost in producing the coin and its face value, and place that difference in the Treasury General Account (TGA). Treasury could then use this “seigniorage” to repay all US debts as they fall due, and to implement all spending in excess of tax revenues appropriated by Congress. Using the PPCS option would require no new legislation. The President can use it at will to fill the public purse awaiting Congress’s appropriations providing authority to spend the electronic credits already in it to secure goods and services from the non-Government sector. Of course, there’s no possible inflationary effect of purse filling as long as Congress’s appropriations and the ensuing deficit spending aren’t inflationary.

Next, Dylan says:

“To get out of this cycle, the Fed — which manages the nation’s money supply and credit and sits at the center of its financial system — could buy the bonds at lower rates, bypassing the private market. The Fed is prohibited from buying bonds directly from the Treasury — a legal rather than economic constraint. But the Fed would buy the bonds with money it prints, which means the money supply would increase. With it, inflation would rise, and so would the prospects of hyperinflation.”

Again, Dylan only tells the mainstream side of the story and not the MMT reply to it. If the Fed buys bonds with money it prints, this will increase reserves in the private sector, but it won’t increase Net Financial Assets (NFA), because buying the bonds is just an asset swap. So with no new NFA being added to the private sector by the Government, this sort of Fed operation won’t be inflationary, as its massive QE programs have just demonstrated empirically. In fact, by removing the payment of interest on bonds from the private sector, and given that most of the Fed profits are returned to the Treasury, some MMT economists say that the end result of such operations may well be deflationary.

Dylan continues:

“Economists in the Modern Monetary camp concede that deficits can sometimes lead to inflation. But they argue that this can only happen when the economy is at full employment — when all who are able and willing to work are employed and no resources (labor, capital, etc.) are idle. No modern example of this problem comes to mind, Galbraith says.

“The last time we had what could be plausibly called a demand-driven, serious inflation problem was probably World War I,” Galbraith says. “It’s been a long time since this hypothetical possibility has actually been observed, and it was observed only under conditions that will never be repeated.”

Note, that Jamie refers to demand-driven inflation above. He doesn’t say that cost-push inflation can’t happen as the economy approaches full employment. MMT economists recognize this possibility, and consider that the 1970s inflation was of this type, but point out that cost-push inflation has little to do with Government deficit spending per se, and must be combated with anti-speculation law enforcement, price controls, targeted taxation, and sometimes even de-regulation (See: [01:03:29] and [01:03:47]) in the effected or related sectors, rather than by raising taxes or cutting spending.

(Cross-posted from Correntewire.com