Image: chrstphre ㋛ campbell / Flickr

Got this in an e-mail yesterday from my brother, Hal:

“June food stamp Recipients Hit All Time High As Three Times As Many Americans Enter Poverty As Find Jobs, bringing the total to a new all time high of 46.670 million and once again rising fast.”

This headline, circulating via e-mail, seems to be picked up from Zero Hedge by merging the title of one its posts with a phrase from the body of the blog post. The way it’s constructed can easily be misinterpreted as suggesting that 46.670 million are now receiving Food Stamp assistance. But actually that’s the BLS number for the number of people in poverty. The Food Stamp number is 22.4 million households.

Apart from wondering about the accuracy of the headline being circulated, and noting the sky is falling tone of the whole thing, I had the following brief reaction.

Those Republican bastards want to cut food stamps as part of their continuing program to make the middle class poor and get the poor people to die quickly (h/t Alan Grayson of course).

But, the Government safety net including Food Stamps is the bread and butter of people who have fallen on hard times; and there’s only one primary reason for unemployment: there aren’t enough jobs.

You want to get rid of unemployment? Then, quit yer complaining about the Food Stamps and make the jobs!

Doesn’t matter if they’re public or private: who gives a shit besides neo-liberal, Ayn Randian ideologists?

The only thing that matters is that people who want them get jobs at a LIVING wage, which means: Make sure those new jobs aren’t at Walmart or McDonald’s!

And, yeah, we can afford it!

Cross-posted from Correntewire.com.

Anatole Kaletsky in Reuters has been advocating Quantitative Easing for the People (QEP) in two recent posts (h/t to Lambert for alerting me). In the first, he begins by making the point that QE hasn’t worked to lift the economies of the US and the UK, and suggests new and more radical measures must be considered. Then he says:

”One such radical measure is too controversial for any policymaker to mention publicly, although some have discussed it in private: Instead of giving newly created money to bond traders, central banks could distribute it directly to the public. Technically such cash handouts could be described as tax rebates or citizens’ dividends, and they would contribute to government deficits in national accounting. But these accounting deficits would not increase national debt burdens, since they would be financed by issuing new money, at zero cost to government or to future generations, instead of selling interest-bearing government bonds.

“Giving away free money may sound too good to be true or wildly irresponsible, but it is exactly what the Fed and the BoE have been doing for bond traders and bankers since 2009. Directing QE to the general public would not only be much fairer but also more effective.

“Suppose the new money created since 2009, instead of propping up bond prices, had simply been added to the bank accounts of all U.S. and British households. In the U.S., $2 trillion of QE could have financed a cash windfall of $6,500 for every man, woman and child, or $26,000 for a family of four. Britain’s QE of £375 billion is worth £6,000 per head or £24,000 per family. Even if only half the new money created were distributed in this way, these sums would be easily large enough to transform economic conditions, whether the people receiving these windfalls decided to spend them on extra consumption or save them and reduce debts.”

So, by QEP Kaletsky means Central Banks distributing cash grants to people directly for the recipients to spend or save as they will. In his second Reuters post, he points out that “. . . radical ideas about monetary policy suddenly seem to be gaining traction . . . “ so he’s returning to the subject of QEP. And he says further:

“The radical alternative discussed here last week – QE for the People (or QEP, for short) – would bypass banks completely by distributing newly created money straight to the public. It is not yet on anyone’s agenda, but neither is it any longer dismissed as a joke.

“Given the clear political attractions of giving money to citizens, rather than bankers, it may start to gain attention, at which point there will surely be powerful objections to this idea. Apart from the obvious observation that bankers and financiers are very powerful interest groups, there are four genuine arguments against QEP as a way to stimulate economic recovery.”

The four arguments are:

– It wouldn’t work to stimulate the economy because people wouldn’t spend it but save it. Kaletsky thinks this would be fine because it would de-leverage US households to the debt levels of the early 1990s.

– It would work too well and create inflation. He answers that one by saying that eventually more and more QE may cause inflation, anyway.

– A stronger version of this objection says that the moral hazard attached to QEP would lead to politicians bribing voters before election time. He points that permanent QE and any popular fiscal policy can also produce moral hazards, and that the cure for the moral hazards of QE, QEP, and any other popular policy is inflation which democracy will punish and eventually control.

– The final objection he considers is the one that says that “there is no free lunch.” Kaletsky replies that there are free lunches, and that economics has been pointing them out since the days of Adam Smith.

I think there are a number of things wrong with Kaletsky’s proposal. Let’s take them one-by-one.

First, “independent” Central Banks, including the Fed, have no legislative mandate to give people net financial assets, in the form of monetary grants with no consideration in exchange. Quantitative Easing works through exchanges with central banks. The banks supply reserves. The recipients of the reserves swap assets such as bonds and property for the new reserves. So, in suggesting cash grants using newly created money, Kaletsky is suggesting something different from QE, something that central banks don’t have the authority to implement.

Why not give them that authority? Because the central banks in most nations, and certainly in the United States are independent in name only. In fact, they’re closely aligned with banking interests and have made it very clear in the recent crisis and “recovery” period that they serve those interests and prioritize them over the interests of the 99%. In addition they’ve been designed as undemocratic institutions, not accountable to the people, staffed by supposedly non-political, technical functionaries, who nevertheless, always seem to make decisions that are partisan in favor of the big banks.

Rather than legislators giving central banks the authority to make monetary grants to people, that authority should remain in the hands of legislators. The authority to create money should be transferred to the Executive function, by placing the Central bank under the supervision of the Treasury. The legislation appropriating cash grants for the people could reorganize the Federal Reserve so that the Board of Governors becomes an agency within Treasury. The Secretary could then require the Fed to create the reserves necessary to implement Congressional appropriations without issuing bonds or other securities. This would produce the same result as Kaletsky’s proposal, but clearly under the authority of the accountable Congress and the Executive, rather than based on decisions made by an unaccountable Central bank.

The second problem with Kaletsky’s proposal is that it involves infrequent cash grants given to people in economic emergencies. It’s directed at “people;” but not at direct job creation for them. It leaves that creation to “the market,” which is currently a globalized, manipulated market stacked against American working people. Nor does his QEP proposal propose any additions to the network of automatic stabilizers, so that there ‘s a continuing counter-cyclical element that lift us in downturns and stabilize the economy when it becomes over-heated.

I agree with Kaletsky’s wanting to use the government’s ability to create fiat currency to ease the financial difficulties of people who suffer from serious financial crises that they haven’t created; but there are other ways to do that besides cash grants from unaccountable central banks. I propose instead an enhanced Medicare for All program, revenue sharing grants to State and local governments, an end to payroll tax withholding for employers and employees until full employment is reached, and a Job Guarantee program offering a full-time job at a living wage with full fringe benefits to anyone who wants one.

The program’s jobs would be defined at the community-level with participation of people in the program, and non-profit groups, so creation of the substance of the job guarantee program would be bottom-up, with funding provided by the Federal Government. The JG program would not replace other safety net programs. These would all remain in place; but it would add a new counter-cyclical automatic stabilizer to the safety net.

Medicare for All would eliminate 55,000 fatalities per year in the US due to lack of insurance coverage, and would also provide 2 million new jobs, the revenue sharing grants would provide enough money to States to allow them to restore government employment to pre-recession levels, the full payroll tax cuts would provide a very substantial stimulus to individuals and employers directly, and the unemployment still left after these measures were implemented would be ended with the JG program.

This recovery program doesn’t directly address the debt overhang resulting from the housing crash including the underwater mortgages caused by the crash and the toxic assets in the banking system. To address these I like the proposal that underwater mortgages be eliminated by having local governments use their power of eminent domain to take the effected properties from the banks paying current fair market value for these properties. The notes would then be written down to fair market value eliminating the worst of the housing debt overhang.

This idea has recently received a good bit of discussion, and favorable comment, but a problem with it is that local governments lack revenue to pay for these properties due to the crash itself. Some communities are trying to implement an eminent domain-based solution by using private investor capital to finance the seizures of property. I propose instead, that the Federal Government commit to financing all local government takings of underwater properties, because this would be cleaner and would avoid the possibility of private investors driving up the cost of the written down mortgages to secure profits.

If Congress were to approve this recovery program, and appropriate the funds for it, but refuse to place the Fed within Treasury, then I favor using the fiat currency capability of the government to avoid further debt issuance to provide the reserves the Executive will need to implement the appropriation. This can be done using the $60 Trillion Proof Platinum Coin Seigniorage (PPCS) plan I’ve outlined here. This is a way of bringing the power of the Fed to bear in service of the Treasury’s need to implement Congressional appropriations. That plan is fully explained here, and requires no further legislation to implement, as would Kaletsky’s proposal for creating money to make direct cash grants.

(Cross-posted from Correntewire.com.)

(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 Correntewire.com)

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 Correntewire.com)

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 Correntewire.com)

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)

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)

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

Pitfalls of the Fiscal Policy Channel

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

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

Next, Dean says:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Dean’s Conclusion and Mine

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

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

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

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

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

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

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

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

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

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

(Cross-posted from Correntewire.com

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

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

Dean goes on:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Is Work Sharing a Separate Channel for Raising Aggregate Demand?

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

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

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

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

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

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

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

(Cross-posted from Correntewire.com

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

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

In his first post he recognizes that in Keynes:

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

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

”

and then adds:

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

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

Like MMT Says: Monetary Policy Would Be Ineffective

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

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

Dean says further:

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

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

Expanding US Exports at the Expense of Decreasing Real Wealth?

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

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

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

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

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

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

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

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

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

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

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

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

(Cross-posted from Correntewire.com