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The Five Worst Reasons Why the National Debt Should Matter To You: Part Four, The Three Real Reasons

2:15 pm in Uncategorized by letsgetitdone

This is the concluding post in a four part series on the “Top” reasons why the national debt should matter. In Part One, I considered “Fix the Debt’s” claim that high levels of debt cause high unemployment and argued that this is a false claim. In Part Two, I followed with a review of the historical record from 1930 to the present and showed that it refutes this claim throughout this period, and that there is not even one Administration where the evidence doesn’t contradict “Fix the Debt’s” theory. In Part Three I showed that the other four reasons advanced by “Fix the Debt” also had very little going for them. In this part, I’ll give reasons why the national debt does matter, and why we should fix it without breaking America, or causing people to suffer. Read the rest of this entry →

The Five Worst Reasons Why the National Debt Should Matter To You: Part Three, The Other Four Worst Reasons

3:06 pm in Uncategorized by letsgetitdone

In Part One of this series, I considered “Fix the Debt’s” claim that high levels of debt cause high unemployment and gave a few reasons why this is a false claim. In Part Two, I followed with a review of the historical record from 1930 to the present and showed that it refutes this claim throughout this period, and that there is not even one Administration where the evidence doesn’t contradict “Fix the Debts” theory. In this part I’ll continue my examination of the other four “top reasons” why “Fix the Debt” insists that the National Debt should matter to you.

2. Debt means more expensive consumer credit: home, auto, student loans, as well as credit cards.

Growing federal debt can drive up interest rates throughout the American economy. That means higher interest rates for people across the country who may be taking out loans for a home, a new car or truck, to pay down credit card cards or for education costs. Higher interest costs mean they will all be more expensive, resulting in higher monthly payments.

Response: This is a proverbial red herring. Interest rates in the United States aren’t determined by private markets, they’re determined primarily by the Federal Reserve, or by the Fed in collaboration with the Treasury. That is not to say that markets can’t drive up interest rates if the Fed does nothing about it. But if the Fed chooses to take counteraction, then it can determine the term structure of interest rates across the Board.

3. Delaying action on the national debt means it will be much more difficult to protect Medicare and Social Security from abrupt, severe, and widespread cuts in the future on all beneficiaries.

Social Security’s disability program will exhaust its assets in 2016, the overall Social Security trust funds will be exhausted in 2033, and the Medicare Trust Fund will run out in 2026. Some of those dates may seem like a long time away, but if we want to protect beneficiaries who rely on these programs from severe and abrupt cuts – especially the elderly who have used up all their savings and other vulnerable groups – we need to start taking gradual steps now.

Response: All of this is false. It assumes that we will fund safety net programs in the way we do today, by continuing to issue debt, and it also assumes that continuing to issue debt and having higher levels of debt are problems for a fiat sovereign. They’re not! Fiat sovereigns can continue to deficit spend regardless of their debt or debt-to-GDP ratio levels. And if we want to get rid of or reduce debt for political reasons, then Congress needs to guarantee annual funding for these programs in perpetuity and for the Executive to ensure that funds are there by using Platinum Coin Seigniorage (PCS), to supply the reserves to cover appropriated deficit spending.

Even if these alternatives aren’t available right now, however, it still makes no sense to cut safety net programs now, based on some long-range projections that may never come to pass. If people really will have to suffer later, because Congress and the Executive are refusing to use their power to remove the need for any suffering at all, then why should we, the people just accept that?

Much better to get ourselves a new Congress and a new President who will do what’s needed to remove any need for suffering at all. We certainly should not let today’s politicians rob us now, so we can plan ahead for poverty, when we have as much as 25 years to replace this crew of reprobates with people who will vote in the interests of most of the people, most of the time, and who will take back the gains of the 1% extracted from the economy and the Government through political influence and outright fraud.

4. If we do not address the debt now, federal investments in education, infrastructure, and research will decline.

We currently spend nearly $225 billion each year in interest payments alone on the national debt. And that number will only continue to rise. These payments – which have to be made – reduce our ability to fund critical investments in areas such as education, infrastructure, and research that are vital parts of a strong economy. In addition, the mindless sequester continued to cut spending throughout many of these programs, without making any decisions on where to target the savings and without focusing on the most unsustainable areas of the budget: increasingly-costly entitlement spending and an outdated, inefficient tax code.

Response: Yet another fairy tale for the gullible. Yes, interest payments are at $225 Billion per year. That’s about 1.5% of GDP. During the 1980s that figure was more than 5% of GDP. Why did it go down?

Not because our national debt got smaller; but because the Federal Reserve drove interest rates down, allowing the Treasury to sell securities at lower interest rates. Again, the Fed can drive down interest rates to virtually zero if it wishes to, and can keep the interest bill of the United States as low as it wishes, ensuring that interest on the national debt will never be a threat to the rest of the budget. So, forget about this. Interest payments on Treasuries can never be a threat to the solvency of the United States as long we maintain the present fiat currency system we’ve had since 1971.

But, of course, apart from such action by the Fed, the option of PCS is always open to the Treasury. It can pay back whatever portion of the debt it likes and refrain from issuing any more debt. So, over time, the Treasury can lower its interest costs as low as it wishes if it believes interest payments are becoming either a financial or a political problem.

5. Taking steps to address our deficit now would mean a more robust economy and significant job growth over the next 10 years.

A Congressional Budget Office analysis indicates that $2 trillion in deficit reduction over ten years could grow our economy by nearly an additional 1 percent by 2023. A healthy, growing economy means more good jobs and higher wages for hardworking Americans.

Response: The CBO projections about deficit reduction growing our economy are wrong. First, because CBO projections are mostly wrong. They’re even wrong four months out. For example, compare CBO projections on the anticipated 2013 deficit published in January and May of 2013. CBO failed to project the four years of Clinton Administration surpluses. It failed to project the recession at the end of the Clinton Administration at the beginning of the year 2000. It failed to project the crash of 2008 in early 2008, and even a few months before the crash.

Then it failed to project the seriousness of the recession in January of 2009. It failed to project the Clinton recovery in 1993, or the boom in Clinton’s second term. All these were relatively short-term errors. But, forecasting errors due to false models accumulate drastically over time. So, CBO has nil capacity to project over a period of ten or more years. All one can really count on is that CBO (and all the other well-known projectionistas will be wrong.

CBO’s projections do not take into account the macroeconomic sectoral financial balances. So, it doesn’t even recognize that long-term proactive deficit reduction means reducing Government additions of Net Financial Assets (NFAs) into the private economy. Of course, lower NFA additions over a decade, due to deficit reduction, do not guarantee a contracting economy and high unemployment in 2023. But, in the absence of a private credit bubble, which will bring another crash sooner or later, they make it much more likely that CBO’s projection will prove false.

In short, the idea that $2 Trillion in deficit reduction now will produce a healthier, more robust economy is false. We might have a more rapidly growing economy in 2023, even with deficit reduction, if the private sector, supported by the Fed, blows that big credit bubble. But that growth will not mean a healthy, robust economy. It will mean a sick one on the point of a huge deflationary collapse produced by another debt crisis. And while the new class of Peterson plutocrats might greatly desire such a result so that they can extract most of the rest of the financial resources of the 99%, I think the rest of us would prefer to base our future expansions on the actual additions to private NFAs produced by Government spending that is not offset by tax revenue.

So, we’ve now seen that “Fix the Debt’s” five top reasons why the national debt should matter to you, are actually the five worst reasons why it should matter. However, there are at least three REAL reasons why the national debt should matter, and why we should fix it without breaking America, or causing people to suffer. In the concluding, Part Four of this series, I’ll give these reasons.

(Cross-posted from New Economic Perspectives.)

The Five Worst Reasons Why the National Debt Should Matter To You: Part Two, the Record Since 1930

1:25 pm in Uncategorized by letsgetitdone

In Part One, of a critique of the most important of “Fix the Debt’s” reasons for “Why the National Debt Should Matter To You,” I asserted that high debt levels haven’t caused high unemployment in the United States, and that, if anything causation was in the other direction. I didn’t want to disturb the flow of the argument there with a relatively lengthy survey of some of the numbers in the historical record since the 1930s. But let’s test the idea that High debt causes fewer jobs and lower wages in the United States by looking at that record now.

Hoover, FDR, and Truman

During the early 1930s, in the presidency of Herbert Hoover, unemployment spiked up first; then the deficits, funded by debt issuance, followed. In fiscal 1933, which began in July 1932, unemployment peaked at 24.9%, while the debt-to-GDP ratio reached 39.1%, up from a low of 14.9% in 1929.

During FDR’s first two terms, the increases in the debt-to-GDP ratio level off. But, unemployment declines steadily to 9.9% in 1941, with an exception coming in 1938, the year following his misguided attempt to cut the debt. During WW II, the public debt skyrockets, but unemployment declines to a historically low level of 1.2%, another contradiction to the idea that high debt levels cause fewer jobs and lower wages.

Nor are the Truman Administrations any kinder to this first “fix the debt” myth. During these eight years the debt-to-GDP ratio declines steadily from 112.7% to 60.2% with one exception in fiscal 1949. Meanwhile, unemployment rises until driven down by Korean War spending beginning in Fiscal 1951.

Eisenhower and Kennedy-Johnson

How about the Eisenhower and Kennedy-Johnson Administrations? Again, all the evidence contradicts the “Fix the Debt” myth. Levels of the debt-to-GDP ratio continue to fall while unemployment rates vary cyclically, but generally average a full point higher than in the Truman Administration, and more than three points higher than at the height of wartime full employment. In short, decreasing levels of the debt-to-GDP ratio do not appear to cause more jobs and higher wages than the higher debt-to-GDP ratio levels during WWII and the Truman period.

In 1969, the debt-to-GDP ratio falls to 28.5%, a drop of nearly 3 points from the year before. The budget surplus is 0.3% up from a deficit of -2.9 in 1968. Unemployment is down to 3.5%, a low water mark for the Kennedy-Johnson period. But in FY 1970, unemployment spikes up to 4.9% and continues “high” for the rest of the Nixon-Ford Administration, reaching 8.5% in FY 1975, even as the level of the debt-to-GDP ratio declines to 24.6% in 1974, and then goes up to 28.1% in 1976 before resuming its downward track for a few years.

Nixon – Ford and Carter

The Nixon-Ford Administration, marks a break in the currency system, since in August of 1971 Nixon withdrew from the Bretton-Woods agreement and both ended the convertibility of dollars to gold on the international exchange, and allowed the value of the dollar to float freely on the international exchanges. Since then, the US has had a fiat currency system, rather than a commodity-based system. However, the US has continued to act domestically as if it was still on the gold standard, continuing to issue public debt even though the rationale for borrowing back money created under its authority, and which can be created in unlimited amounts, at will, is based on the idea of a Government Budgetary Constraint (GBC) that no longer exists; and also on the need to “sterilize” excess reserves produced by deficit spending, because these are falsely assumed to be more inflationary than new securities would be.

In spite of the change in the currency system, and the change in political party control of the White House, the Carter Administration was not able to break the pattern of economic stagnation that characterized the Nixon-Ford Administrations, probably because it received bad advice from economists, who did not understand the significance of the shift to a fiat currency system. The general levels of unemployment remained similar over the two administrations.

The mean annual employment rate during the Nixon – Ford period is 6.3%. During the Carter Administration, it increases to 6.65%. We’ve already seen that the decline in the debt-to-GDP ratio reached 24.6% and then increased slightly. The Carter Administration began to reduce it again, but never reached the Nixon low point, and ended at 26.3%.

There’s no noticeable relation here between high debt levels and unemployment. The debt-to-GDP ratio hit a low level and was varying slightly higher than that level after 1974 through 1981. Unemployment, on the other hand, varied cyclically, but was trending upward, with apparently no direct relationship to high debt levels.

Reagan-Bush

The Reagan-Bush years are remembered as prosperous years. But the mean unemployment rate was 7.1%, a half point higher than under Carter and 0.8% higher than in the Nixon-Ford years, and the period ended at 6.9%. So, many people weren’t prospering.

On the other hand, the Reagan-Bush years saw a substantial rise in the debt-to-GDP ratio which increased from 26.3% at the end of Carter’s Administration’s to 49.5% at the end of Bush 41′s. A level that high had last occurred 35 years before in 1958, during a period when unemployment had averaged 4.9%. Comparing the two, note 1) the level is nowhere near the historic high of 112.7% and 2) the level of the ratio is apparently compatible with both relatively low and relatively high unemployment levels, again refuting the idea that “high debt levels = fewer jobs and lower wages.”

Clinton and Goldilocks

The period of the Clinton Administration has been characterized as the period of “the Goldilocks Economy,” and is also considered by many as a time of “fiscal responsibility.” The economy grew at the most rapid rate since the 1960s, but did so in the presence of trade deficits, and decreasing budget deficits, finally ending in Government surpluses.

With GDP growing rapidly and public debt growing slowly, and actually shrinking through four consecutive years, of surpluses, the debt-to-GDP ratio fell throughout the period FY 1994 – 2001, declining from 49.5% to 32.5% in 2001. This happened simultaneously with steadily declining unemployment rates, reaching 4.0% in 2000, before increasing again to 4.7% in 2001, when a new recession, in reaction to the surpluses and the credit bubble of the 1990s began to bite. The unemployment rate over the whole goldilocks period averages 4.93%, the lowest average since the Kennedy-Johnson and Eisenhower Administrations.

Why isn’t the Clinton Administration a confirmation of the claim that high debt causes fewer jobs and lower wages? Well first, the data show the debt-to-GDP ratio falling, along with unemployment, not the ratio rising while unemployment increases. But even if one wants to claim that a falling debt-to-GDP ratio increases employment and wage levels, the data show unemployment falling much faster than the debt-to-GDP ratio, which doesn’t begin declining appreciably until the unemployment rate has declined from 6.9% in 1993 to 4.9% in 1997.

Also, when unemployment rises again in 2001 to 4.7% from 4.0%, the fall in the debt-to-GDP ratio continues, suggesting a lag relationship between unemployment and a falling debt-to-GDP ratio. What would explain this? The answer is the automatic stabilizers. When people go back to work, they cease to draw as much, or at all on the safety net, and they also pay taxes. So, tax revenues increase, government deficits decrease, and GDP increases, meaning that the debt-to-GDP ratio falls.

But a mystery remains, why did the goldilocks economy appear? Why did it create an apparently strong recovery with decreasing unemployment and higher wages, without the assistance of large government deficits, and with the disadvantage of increasingly substantial trade deficits. The answer is that the goldilocks economy was driven by the Fed’s decision to maintain low interest rates, and easy bank credit, and by the increasing willingness of the private sector to run a deficit, and run down its net financial assets, accommodating the Government’s desire to run a surplus.

The private sector balance went into deficit in 1997 when the Government’s deficit declined to -0.3%. Then the four years of Government surplus: 1998, 1999, 2000, and 2001, were all years of aggregate private sector deficit in which the private sector, looked at as an aggregate, lost net financial assets. While this was going on, the “dot com” bubble was bursting and the economy fell into recession, accompanied by the increase in the unemployment rate in 2001, followed by the increase in the debt-to-GDP ratio, as the automatic stabilizers, along with the beginning of post 9/11 homeland security deficit spending, kicked in with a return to deficits in 2002.

So, it turns out that the primary causal factor in the Goldilocks economy and its increasingly low unemployment rate wasn’t deficit reduction, as claimed by many Clinton partisans, and debt hawks, but the credit bubble blown by the Federal Reserve, the banks, Wall Street, and an increasingly optimistic private sector. The economy boomed in spite of deficit reduction, and was itself the primary cause of deficit reduction, and not vice versa. This is another refutation of the narrative behind the theory that high debt levels cause high unemployment and low wages, because the boom was due to a credit bubble that drained net financial assets from the private sector and then burst at the end of the period.

Later, the blowing of another bubble under Bush 43, restored a modicum of prosperity, but only increased the chances for a more serious crash in 2008. Had the expansion of the 1990s been based on much larger government deficits, the recession at the end of the Clinton-Gore period would have been avoided, because the expansion would have been based on a permanent transfer of new net financial assets to the private sector, and not on bubble-generated paper assets that are gone with the wind when the inevitable collapse of a credit bubble occurs.

Bush 43

That brings us to the Bush 43 Administration. In 2002, the Government went back to deficit spending. But the Government deficit was small enough that, given the size of the demand leakage due to the trade deficit, it kept the private sector in deficit. Deficit spending increased in 2003, along with war spending, but since the trade deficit was rising to 5% it wasn’t large enough at – 3.4% to compensate for the trade deficit. Over the next two years, the private sector balance varied around zero, sometimes in deficit, sometimes showing a small surplus.

But beginning in 2005, as the trade deficit rose eventually to 6%, and the Government deficit again was lowered first to -2.6, and then to -1.9 and -1.2% in 2007, the private sector was again in substantial deficit for three consecutive years. Altogether, beginning in 1997 under Clinton and ending in 2007 under Bush, the private sector went through 11 years without ever having a substantial private sector surplus, and for 6 of those years the private sector lost more than 2 – 4 % of GDP in net financial assets, because private sector activity was funded by private sector credit bubbles rather than by government deficits that were high enough to compensate for the Trade deficit.

In other words Government deficit spending wasn’t too high under the Bush 43 Administration, as we hear in conventional economic and political analysis. But rather, it was far too low to sustain a decent level of economic activity without relying on the credit bubble-fueled housing bubble that burst in 2007, and led to the crash of 2008.

No wonder the Bush 43 period had the highest average unemployment rate (5.83%) since the Bush 41 Administration (6.7%). Neither Government deficit spending, nor the private credit bubble were large enough to drive unemployment down to the levels seen in the Clinton period, and unemployment was mostly over 5% hitting 5.8% in 2008, and then in the transition 2009 fiscal year, between the Bush 43 and Obama Administrations, rising to 9.3%. Meanwhile, the debt-to-GDP ratio slowly rose nearly 4% from 32.5% between 2001 and 2007, and then jumped sharply to 40.5% in 2008 and to 54.0% in 2009, as unemployment was rising and safety net spending accelerated.

So, during Bush 43, we see a sharp rise in the debt-to-GDP ratio in 2008 and 2009. But, it’s not this rise in debt levels that causes unemployment, because the sharp increases in unemployment were a result of the financial crash caused by the lengthy attempt over two administrations to fuel economic expansion through increasing private sector debt facilitated by the Fed, the banks, and Wall Street. That attempt led us back to the boom-bust cycles that were prevalent prior to the New Deal and the reform of the banking system — reforms that were largely repealed in the Clinton and Bush Administrations.

The sudden growth in debt in 2008 and 2009 appeared because the rise in unemployment caused by the Great Crash, led to increases in Federal deficit spending resulting from the automatic stabilizers, and the beginning of the economic stimulus provided by the American Recovery and Re-investment Act of 2009. So, once again, job loss came first, and was then followed by higher debt levels, rather than vice versa, another contradiction with the theory that high debt levels cause higher unemployment and lower wages.

The Obama Administration

From 2009 until the present, the results of the sharp spike in the unemployment rate on the debt-to-GDP ratio are apparent. The ratio has increased by nearly 20 points in 2010, 2011, and 2012 to 72.6%, while the unemployment rate has declined from 9.3% to the present 7.4%. So, increases in the debt-to-GDP ratio are inversely correlated with the unemployment rate, yet another contradiction of the austerian theory. Meanwhile, the reduction in unemployment and the increase in both GDP and tax revenues is driving the 2013 deficit toward 4% of GDP, down from 10.1% in 2009.

This result, while touted as good news by the Obama Administration, and nearly everyone else in sight, resulting in a veritable Versailles happy dance, is bad for the economy. While the trade deficit is down to close to 2.5% now, a projected Government deficit of 4% for 2013 is too small to provide for more than a 1.5% of GDP surplus in private sector net financial assets. Most of this is likely to go to continue to repair private sector balance sheets that were damaged so much during the 11 year debt binge over the Clinton and Bush Administrations.

That means there won’t be new private sector financial assets sufficient to support increasing aggregate demand. And this, in turn means that the economy will continue to stagnate or heal only very slowly, or perhaps even turn back to recession, provided there’s no substantial private sector credit expansion to fuel demand. But, so far at least, one can’t see such an expansion getting under way, and without it there’s no substitute for the Government deficit spending that the Administration and Congress are so intent on reducing.

Where’s the Evidence?

It’s astonishing how people just make up stories to support policies they favor. Even though I have the background to use rigorous modeling or statistical analysis methods, and have used them many times in past years, my look at the record hasn’t involved them, because, this is, after all, a blog post meant to be read more widely than a statistical study, and I think the raw numbers since 1930 continuously and conclusively refute the causal theory advanced by the “Fix the Debt” group that high debt or debt-to-GDP levels increase unemployment rates.

Falsification of any theory can never be certain, but the evidence in this case never contradicts the idea that high unemployment comes first, and high debt levels come afterward as an effect of high unemployment, assuming, of course, that deficit spending is accompanied by debt issuance. Given the data, I think one has to reasonably conclude that High debt levels ≠ fewer jobs and lower wages, as the “Fix the Debt” group claims.

If the “Fix the Debt” group disagrees, and thinks that I’ve interpreted the data incorrectly, or that more rigorous analysis expanding the set of variables and using more sophisticated techniques shows that the evidence doesn’t refute their theory, then I challenge them or others in the Peter G. Peterson Foundation-funded network of organizations to produce such an analysis. Until they do, I think we have to continue to ask “Where’s the evidence”?

And we also have to ask whether a theory amounting to no more than a plausible narrative about what causes unemployment, contradicted by many other plausible causal narratives can serve as the basis for a Federal fiscal policy of deficit reduction that will hurt many millions of American citizens for generations? I think not! I think the very idea is ludicrous, and that it’s time to laugh the “Fix the Debt” campaign off the public stage.

In Part Three, I’ll cover the other four “worst reasons” why the national debt should matter.

Data Sources:

Budget deficits/surpluses, 1940 – 2018.

Unemployment rates, annual averages, 1923 -1942.

Unemployment rates, annual averages, 1940 – 2008.

Unemployment Rates, annual averages, 1947 – 2012.

Sectoral Financial Balances.

(Cross-posted from New Economic Perspectives.)

The Five Worst Reasons Why the National Debt Should Matter To You: Part One, High Debt Levels and Jobs

10:34 am in Uncategorized by letsgetitdone

Your Social Security, My Pocket

I came across a post from the “Fix the Debt” campaign last month called “The Top Five Worst Reasons Why the National Debt Should Matter to You.” It’s a post full of debt/deficit lies that cry out for correction. That’s what I’ll provide in this series.

1. High debt levels = fewer jobs and lower wages

In times of fiscal and economic uncertainty, consumers and businesses reduce investment and delay projects because investment is costly to reverse. Higher government borrowing can also drive up interest rates once the economy recovers, reducing the access and affordability of funds for consumers and businesses to borrow and invest in new ventures and ideas. This can hold back the economy, resulting in fewer jobs and lower wages down the road.

Response: What’s with the colloquial use of the ‘equals sign’ in this statement? Is the “Fix the Debt” campaign trying to say that there’s an identity between high debt levels and fewer jobs/lower wages? Is it trying to say that fewer jobs/lower wages cause high debt? Are they trying to say that there’s mutual causation between the two over time? Or are they trying to say something more complex than these things?

The summary statement after the headline indicates that the “equals” is an ambiguous way of making the straightforward claim that high debt levels trigger a causal chain ending with fewer jobs and lower wages. Here are two ways of addressing this claim: is it true, or even likely, given the data; and even if it is true, then so what?

Addressing “truth” first, it’s not! There’s plenty of evidence (See Part Two) refuting the idea that high public debt levels cause fewer jobs and lower wages in nations like the United States that use a non-convertible fiat currency, a floating exchange rate, and have no debts in currencies they do not issue.

In fact, even before 1971, when the United States closed the gold window allowing convertibility to gold on international exchanges and arrived at our current fiat currency system, the data still refute this claimed identity and suggest, that, if anything, the causation is reversed. In Part Two I’ve added a historical addendum dating from 1930 to the present showing that the evidence refutes this theory about the causes of higher unemployment.

Read it and see what’s happened for yourself; but the upshot is that this theory is pure fiction. Its narrative hasn’t happened once in the United States since 1930.

Now, on to “so what.” Let’s, for the sake of argument, say that high debt or debt-to-GDP levels did cause high unemployment, and that Government debt is a problem. The “Fix the Debt” campaign wants to respond to this by cutting Government deficit spending, raising taxes and following a long-term deficit reduction program featuring cuts to social safety net programs.

But why follow that unnecessarily painful economy-contracting, middle-class depriving strategy? The United States is a fiat currency sovereign. It doesn’t have to borrow back its own currency and reserves from people who are holding those.

It doesn’t have to sell any more debt instruments, providing unearned profits primarily to wealthy individuals and foreign nations. Congress can either provide the Treasury Department with the authority to create whatever money it needs to repay the debt as it falls due and to perform whatever deficit spending chooses to appropriate; or the Executive branch can use existing Platinum Coin Seigniorage (PCS) authority to fill the public purse with all the dollar reserves needed to do both of these things.

I’ve outlined how this works in numerous posts at this site and others, also in my kindle e-book. The process is very straightforward, will not cause inflation, and is legal under current law. So, if the “Fix the Debt” campaign is really worried about high unemployment and fixing the debt, then I challenge “Fix the Debt” to support my petition for the President to order the Secretary to mint a $60 T platinum coin immediately to accomplish this without in any way compromising the safety net or hurting the economy.

I don’t think “Fix the Debt” will support this proposal however. The reason why is that “Fix the Debt” is a front group for a very long-term effort by Peter G. Peterson to gut the social safety net and privatize Social Security. Peterson and the various front groups he funds through the Peter G. Peterson Foundation aren’t really interested in fixing the debt. They understand that the public debt is no danger to a fiat sovereign like the US, and doesn’t cause high unemployment.

What they are really interested in is persuading the public that patriotism demands crippling the safety net in the name of fiscal responsibility. If they were not, and they really think that “teh debt” is a cause of high unemployment, then they would join me in supporting one of the two proposals I advanced earlier for “Fixing the Debt.” Read the rest of this entry →

The President’s Leverage: He Can Go Platinum

10:32 pm in Uncategorized by letsgetitdone

Well, that’s over. The President had a chance to go “over the cliff,” bargain hard with the Republicans, get more of what he said he wanted at the price of perhaps some more days of crisis with extreme pressure building on the Republican caucus, and he blinked. I don’t much care that he blinked on tax rates for the top 2% and on inheritance taxes, because tax rate increases for purposes of deficit reduction simply aren’t needed for getting deficit spending needed to create jobs, as the rest of this post will show. Here’s what I care about:

– First, he claimed to be after extending the partial payroll tax holiday; but he didn’t get that, a $125 Billion would-be stimulus failure that is likely to cost at least a million jobs;

– Second, he claimed to be trying to get the debt ceiling issue off the table for at least two years, and he didn’t even get anything to deal with it in the bill;

– Third, he claimed to want to resolve the sequestration issue, but only got that can kicked down the road for two months;

So, in sum, he’s already achieved some unneeded austerity with this “negotiation” and, in addition, he’s set things up beautifully for a truly extreme episode of extortion by the Republican House over the next couple of months, as Congress faces the upcoming sequester, debt ceiling, and Continuing Resolution (CR) conflicts. Why did he insist on making his year-end deal, rather than allowing things to kick over to the new Congress and negotiating a better one?

There are different theories about that. One, is that he wanted, at all costs, to avoid Wall Street panicking and then tanking, even if, only temporarily. A second is that he has good “progressive” motives, but he’s just a lousy negotiator, who just can’t avoid first establishing firm positions and then showing the other side that he will always cave in if they, in turn, stand firm. A third theory, and the one I favor, is that since 2009 he’s been conducting a careful campaign to get Americans to accept austerity through forced deficit reduction including heavy cuts to the social safety net programs that Americans love so well.

During this campaign, he’s ignored the evidence from Europe and elsewhere that austerity doesn’t work and hurts most of the people, most of the time. He’s also ignored all the polling data showing how Americans feel about Social Security, Medicare, and Medicaid. And he has moved slowly, deliberately, persistently, and in concert with allies outside the Administration like Peter G. Peterson, high-level Wall Street Executives, and MSM media personalities and journalists to create a consensus around the idea that “entitlement reform” is both inevitable and necessary for long-term fiscal sustainability. Finally, he has “negotiated” with Republicans during a series of “shock doctrine” crises to try to gradually implement austerity, while making sure that the Republicans, rather than his own party end up bearing the blame for the end result of austerity policies.

The results of the “cliff” negotiations have now set up a confluence of three events: the sequestration; the debt ceiling; and the CR; creating the occasion for the mother of all fiscal “shock doctrine” negotiations over the next three months. This confluence can be seen as an intentional emergence of the conflict between the Republicans and the “progressive” President Obama, or it can be seen as the result of a very long-term conservative campaign setting the stage for austerity, and a comprehensive attempt to weaken the social safety net.

I won’t try to make the case that the dangerous confluence we’re about to face is due to a deliberate staging by the President, even though I suspect that it is. Nor will I try to make the contrary case that the President has excellent motives, but stumbled into this mess due to incompetence at negotiating, and the Republican victories in the House in the past two elections, for which his supporters might say, he was blameless. What, I’ll do instead, is try to show that either way, the President has leverage to get what he wants.

If His Game Is Deliberate Austerity?

Then, of course, he’s maneuvered us into a situation where, he will claim, there either has to be a Government shutdown, frightening to most people, or concessions to Republican demands for cutting discretionary programs and entitlements. He will be in a very good position then, to regale all of us with horror stories about the consequences of shutting down the Government for weeks until the “crazy” Republicans capitulate; compared to the lesser evil of making “balanced” spending cuts among defense, discretionary, and entitlement programs, while he prepares to reluctantly give into the hostage takers to avoid disaster; while constantly letting us know that as the adult in the room he must arrive at a “compromise” settlement. So, if his game is deliberate austerity, then he will have plenty of leverage to get what he wants.

If His Game Is to Avoid Cuts That Will Hurt the Economy and the Safety Net?

Today, most people commenting on the fiscal cliff agreement are assuming that this is his game, and are saying that the President has given away his leverage for future deal-making. Their logic is that he’s already made deals on the tax rate cuts and on the inheritance tax rates, so that he has little left to offer the Republicans except painful cuts in programs most of the American like. This, however, isn’t true.

First, the President still has some leverage when it comes to defense cuts. Republicans don’t want those at all. So, if he’s willing to cut there; he can sincerely threaten cuts and then trade for their sparing popular programs from the ax.

But, second, the main thing being ignored by most of the strategists commenting on the morning after is the President’s ability to change the fiscal context of the coming negotiations from one of apparent scarcity “justifying” austerity to one where spending capacity is so plentiful, that Congress will be hard-pressed to impose austerity, because its justification in the form of apparent limitations on spending capacity will just seem silly. Now, that can translate into leverage in the negotiations!

How can it be done? Through the use of Platinum Coin Seigniorage (PCS).

PCS Variations

Here are some variations on PCS, an idea first proposed by beowulf. (Carlos Mucha).

First, mint a $1.6 Trillion coin and have Treasury use the profits from it to buy all the outstanding debt instruments held by the Fed. This would retire a substantial part of the national debt and immediately create $1.6 T in “headroom” relative to the debt ceiling. This alternative involves the least amount of change in current procedures. The coin, once deposited at the Fed, would remain in a Fed vault, and would not go into circulation.

The Government would then go right back to issuing debt in order to meet its debt obligations and spend previous Congressional appropriations. Of course, this proposal is a solution to the debt ceiling problem alone. It would prevent a default crisis caused by anti-government tea party Republicans. But, it wouldn’t do very much to defeat the austerity mind set in fiscal policy.

A second proposal is to mint a $6.7 T coin to pay back all debt held by the Fed, and all Intra-governmental debt, including that owed to Social Security, Medicare, and a host of other other agencies. That would create $6.7 T in headroom relative to the debt ceiling, that’s more than enough to carry us through the 2016 elections without breaching the ceiling. Again, this wouldn’t result in any “money” immediately going into circulation, but over time SS and Medicare payments to individuals and organizations would be adding to bank reserves without any reserves being withdrawn from the private sector due to debt issuance.

This alternative would render the debt ceiling problem a dead letter for some time to come, and it also might take some of the austerity pressure off. But it probably wouldn’t end the austerity drive, because the deficit hawks would still point to long-term problems in entitlements that would be projected as running up the public debt in future years.

A third proposal for applying PCS is to mint a coin with face value large enough to cover the $6.7 T intra-governmental and Fed debt repayment, plus all debt to the non-government sector coming to maturity during the next four years, and all Congressional Appropriations expected to require deficit spending through the 2016 elections. I’ll estimate, roughly, that a $20 T coin is enough for that, including about $6.2 T to more than close the expected gap between tax revenues and Government spending through the 2016 elections, and the rest for paying down the national debt. Issuing a coin that large, using the profits from seigniorage, and assuming that Congressional appropriations continue the pattern of the past 2 years or so, that would result in a remaining public debt outstanding of roughly a few trillion dollars in long term debt, which would please the bond markets except for the fact that the US wasn’t issuing any more debt instruments, which would probably make the bond vigilantes scream for those safe harbor debt instruments again.

A more important aspect of a coin this large is that it takes the deficit/debt issue very much off the table, since there would be no new debt issuance needed until after 2016, and because most of the seigniorage would be used to pay down debt the US would then have only about 15% of its current debt subject to the limit. In other words, it would take the austerity meme off the table completely over the next four years and even after that there would be a lot of room between the outstanding level of debt and the debt ceiling.

Much of the pressure now being applied to entitlement programs would also be gone. So, progressives could be much more expansive in supporting full employment programs, education, infrastructure, higher entitlement benefits, Medicare for All and other things the country needs.

If, also, Congress does the right kind of spending to bring full employment inside a year, then tax revenues will come back as they did during the Clinton Administration, and then there will be no need for all the profits from the platinum coin to be used completely for deficit spending between now and 2016. In fact, if the right jobs creating program is immediately enacted, as much as $3 T could be left, by the end of 2016. So, this is a much more progressive alternative than the first two. But in itself, it doesn’t provide a continuing ability for the Treasury to create reserves directly to support deficit spending. The nation could still slip back into the regressive money creation practices after 4 or 5 years, and the conservative, neoliberal bias of fiscal politics could be restored.

So far, I’ve discussed three alternative coin seigniorage proposals ranging in scale from a minimal proposal to handle the current crisis to one that would provide enough funds to both pay down debt, and support a gap between spending and taxes that might be sufficient to enable full employment. Now here’s a fourth, enough to handle even generous Congressional appropriations and deficit spending for at least 15 – 20 years, until 2032 and beyond.

Why not mint a $60 T coin?

I favor this fourth alternative above all, because it institutionalizes the idea that there is a distinction between appropriations, the Congressional mandate to spend particular amounts on particular goods and services, and the capability to spend the mandated accounts by having the funds (electronic credits) in the public purse (the TGA). In a fiat currency system, the capability always exists if the legislature provides for it under the Constitution, as it has under current platinum coin seigniorage legislation.

But the value of the $60 T coin, and the profits derived from it, is that it is a concrete reminder of the Government’s continuing ability to buy whatever it needs to meet public purposes, and its continuing ability to harness the authority of the Central Bank to create reserves to support the needs of fiscal policy. It demonstrates very clearly that the Government cannot run out of money, and that the claim that it can is not a valid reason for rejecting spending that is in accordance with public purpose.

So, please keep in mind the distinction between the capability to spend more than government collects in taxes, and the appropriations that mandate such spending. The capability is what’s in the public purse, and it is unlimited as long as the Government doesn’t constrain itself from creating credits in its own accounts. With PCS, its capability could be and should be publicly demonstrated by minting the $60 T coin, and getting the profits from depositing it at the Fed transferred to the Treasury General Account (TGA).

On the other hand, Congressional appropriations, not the size or contents of the purse, but whether the purse strings are open or not, determines what will be spent, and what will simply sit in the purse for use at a later time. So there is a very important distinction between the purse and the purse strings. The President can legally use coin seigniorage to fill the purse, but only Congress can open the purse strings through its appropriations.

This fourth alternative is the one that best solves both the debt ceiling problem and the problem of taking austerity, justified by “we’re running out of money,” off the table. The debt ceiling would no longer be an issue if the Treasury immediately paid off $6.7 T in Fed and intra-governmental debt, and was poised, with the money in its account, to pay off the rest of the debt subject to the limit as it falls due. Nor would there be any justification for austerity policies if the Treasury had a public purse with $44 T of unearmarked funds in it to cover future deficit spending. So, this is the progressive alternative, the one that changes the political context of fiscal policy debates for the foreseeable future. It also gives progressive enough time to fight a major political battle that ought to and must occur; the battle to free the Fed from control by Wall Street and banking interests and to make it accountable to the people by placing it under the authority of the Treasury Department, and our nationally elected executive, the President.

What about inflation? Well using PCS isn’t intrinsically inflationary. For the reasons why, see my previous post. I outline how to justify it politically in the next and final section.

The Speech

If the President wanted to emulate the great Democratic Presidents of the past, end austerity and decide to rise above the debt ceiling controversy, safeguard the social safety net, and do something really, really important from the perspective of history by using $60 T coin seigniorage to short circuit the upcoming fights over the debt ceiling and the budget, then there would be a spectacular uproar in the Congress and the Press over what he had done. All kinds of overblown and downright crazy claims would be made because the President’s action would shock people, everyone would have a tough time getting their minds around it, and the media would report on what was going on in a very sensationalist way using stereotypes created by the neo-liberal perspective that journalists at places like the WaPo, NYT, WSJ, and CNN are superficially well-schooled in. Places like CNBC and Fox would be absolutely foaming at the mouth in response to something like this, and Geithner might very well resign over it, as might Ben Bernanke, since he’d be forced to have the Fed credit the coin.

There would also be an immediate move in Congress to repeal the 1996 law that enabled the President’s action. This would fail however, because even if it got through the Congress, the President would simply veto it. The opposition couldn’t possibly get the 2/3 vote necessary to override the veto. Even if by some miracle, repeal got through, however, it would be too late. The coin would have done its work and the $60 T would be in the Treasury General Account, a fait accompli, and a vivid demonstration that the government can create as much money as it wants, and can only run out of money by choice.

However, the President would then have to defend himself with a political campaign aimed at persuading the public that his move was a bold and liberating move and the first step in finally getting out of this protracted economic depression. And yes, he should use the D-word, whatever the Republicans, and the so-called “fact-checkers” say about it. And he should also begin the campaign by explaining the issuance and deposit of the first $60 T coin in a high profile TV address to the public, the following way.

My Fellow Americans:

1) Until now the Treasury has been borrowing the money the Government created back from the private sector, in order to cover our deficit spending, so the national debt has been steadily growing.

2) That’s silly! According to the Constitution, this Government, of the people, by the people, and for the people, is the ultimate source of all US money. So why should we ever borrow US money back and pay interest on it, since we can create it any time by the authority of the Constitution and Congress?

3) Congress has also imposed a debt ceiling, so, if and when we reach it, we can’t borrow back our own money without Congressional approval, anyway, and lately Congress has been using the need to raise the debt ceiling as an excuse to extort cuts in safety net and discretionary programs that the majority of Americans support.

4) So, on my order, and in accordance with legislation passed by Congress in 1996, and with the US Code, the US Mint has issued $60 Trillion using a single 1 oz. platinum coin, and deposited it at the NY Fed. It’s legal tender, so the Fed credited the Mint’s Public Enterprise Fund (PEF) account with $60 Trillion in US Dollar credits using its unlimited authority from Congress to create them.

5) This is not inflationary because the Fed will put our coin into its vault, and keep it there permanently out of circulation, and the Treasury will use the $60 T in USD credits only to pay back the national debt and to spend what Congress has already approved, which is only a small fraction of these credits and far from the amount needed to cause inflation.

6) My action ends any possibility of a debt ceiling crisis in February or March, because we have no further need to borrow our own money back in the markets, and that’s why we don’t need the tea party or other Republicans, or even my fellow Democrats to agree to raise the debt ceiling any more.

7) Now the Treasury, has plenty of money, much more than we need, in fact, to pay for all appropriations Congress has already approved for 2013, and may approve in March, including all deficit spending and, again, we won’t have to borrow our own money back, either to repay debts or to implement future deficit spending.

8) So, we will pay all Government debts which will come due in 2013 and 2014. Treasury securities and all other debts included. We will also pay back all debts held by other agencies of Government and the Federal Reserve. When we do this we will lower the national debt by about $12 T, reducing the “debt burden” by about 75% by the end of 2014, and creating an actual Social Security trust fund with 2.7 T in cash reserves in it; and again, to do this we don’t have to borrow any of our own money back, and we will also reduce our interest costs on the outstanding national debt all through the remainder of 2013, 2014, and beyond until it is all paid off.

9) None of the $60 T in new credits created by our actions is “money” in the private sector economy until the Treasury spends it. For now it is just capability to spend awaiting the appropriations of Congress to mandate deficit spending, should it need to compensate for the reduction in demand, probably close to 10% of GDP right now, caused by your own desire to save (which we want to do our best to facilitate), and your desire to import goods from foreign nations.

10) We have created $60 Trillion in new credits even though we probably needed less than that to cover anticipated deficit spending and debt repayment until at least 2028. The reason for this, is that I wanted to have enough capability created in the Treasury account, so that the national debt could be completely paid off (except for a small amount in very long-term Treasury debt still not mature by 2028), and all projected Federal deficits covered over the next 15 years, even extraordinary deficit spending needed to be performed without further borrowing over this period.

11) Of course, we can always make new coins if our projections about future deficits turn out to be wrong; but I thought it would be best to ensure that all $16.4 T plus of the “debt burden” can be completely eliminated from our political concerns; and also to provide enough funds in our spending account at the Fed, so that it would be very clear to Congress and all newly elected Representatives and Senators, that even though they, as required by the Constitution, continue to control the purse strings, the national purse is very, very full, and that we would be able to cover from the Treasury General Account whatever deficit spending for the public purpose, including for full employment, Medicare for All, infrastructure, education, and other things, that Congress, in its wisdom, chooses to appropriate now, before the next election, and for some elections to come.

Good night, my fellow Americans! Rest well knowing that our beloved country won’t be defaulting on any of its debts when the debt ceiling is reached, and that I’ve prevented this without going over the legal debt ceiling, or borrowing any more, by providing money for spending mandated appropriations, in compliance with the laws authorizing Platinum Coin Seigniorage, while supporting the Constitution’s prohibition against our Government ever defaulting on its debts. I hope that, in the future, everyone in Congress will obey the 14th Amendment’s prohibition against questioning the validity of Federal Government debts, and think twice before they indulge themselves in loose talk about the possibility of the Federal Government defaulting on its obligations.

America will always pay its debts in US Dollars according to the terms of the contracts it has concluded, and in line with the pension payments and other obligations that it owes. Neither you, nor the rest of the world need ever doubt that again! Nor need you ever think that our Government is running out of money for the things we must do. We can never run short of money unless Congress refuses voluntarily, to use its unlimited constitutional authority to make more of it. But as long as it delegates to me the authority to create high value platinum coins to cover our needs, you can be sure that running out of US money will never happen!

(Cross-posted from New Economic Perspectives.)

Government Financial Asset Addition = “Deficit”; Government Financial Asset Destruction = “Surplus”

12:50 pm in Uncategorized by letsgetitdone

The word “deficit,” when applied to the Government financial accounting of a monetarily sovereign nation, that is, one that issues a non-convertible fiat currency, with a floating exchange rate, and no debts in a currency it doesn’t issue, is a problem, because the label “deficit” when applied to such a Government doesn’t mean what most people think it means. As Michel Hoexter points out:

. . . The word “deficit” is a hold-over from conventional accounting and the era of the gold-standard when currencies were supposed to be fixed in their quantity by convertibility of the currency into a fixed quantity of precious metal. Deficit means primarily a “lack”, an “absence” and in conventional accounting it means being “in the red”, not having taken in enough income to cover expenditures. . . .

Euros on a monopoly board.

Maybe to fix the 'deficit' we must redefine our terms.

The term “deficit” in this sense can be properly applied to households, corporations, other private and inter-governmental organizations, and states and nations that aren’t monetarily sovereign such as the US States and the members of the Eurozone. In all these instances the governments involved can run out of money, and the more deficits they run, the more the risk that they will become insolvent increases. But when that term is applied to monetarily sovereign nations, then the “deficit” notion is profoundly misleading because neither the size of the “deficit,” nor its accumulation over time when it is accompanied by selling debt instruments, makes a bit of difference when it comes to solvency, because monetarily sovereign governments always have unlimited power to issue currency, if they decide to remove all self-imposed constraints on currency issuance and use that power.

There’s a corresponding problem with the term “surplus” as applied to monetarily sovereign Government accounting. Surpluses are supposed to represent the situation where tax revenues exceed spending and the gap between them is described as net “savings” increasing the financial assets of the Government running the surplus. A surplus over a particular time period is viewed as being “in the black” for that time period, as a good thing for the Government doing it, and as reducing the “debt” of that government giving it an increased financial capability to spend in the future.

The term “surplus” in this sense can be properly applied to households, corporations, other private and inter-governmental organizations, and states and nations that aren’t monetarily sovereign such as the US States and the members of the Eurozone. In all these instances the governments involved can accumulate surpluses as financial assets, and the more surpluses they run, the more the risk that they will become insolvent decreases. But when that term is applied to monetarily sovereign nations, then the “surplus” notion is also profoundly misleading because neither the size of the “surplus” during a time period, nor its accumulation over time, makes a bit of difference when it comes to solvency, or adding to the government’s capability to spend in its own currency either currently or in the future.

So, from the viewpoint of Modern Money Theory (MMT), both the terms “deficit” and “surplus,” and also the term “national debt” are misleading when applied to monetarily sovereign nations. Recognizing this, some of us have been kicking around the idea of using new terminology for talking about national financial accounting. In the recent post by Michael Hoexter I referred to earlier he proposes:

Read the rest of this entry →

Stop Using Obama for America Against the People!

8:57 pm in Uncategorized by letsgetitdone

Obama for America, the campaign apparatus with the very large e-mailing list and great segmentation techniques that exploited Romney’s weaknesses to help the President to eke out (yes, I know the electoral vote involved no “eking out,” but the popular vote was something else again) his re-election victory, is now trying to mobilize people who voted for the President to work against their own interests by supporting his deficit/debt cutting activities. So, I couldn’t resist the following commentary on their mobilization e-mail.

From the graphic:

Right now, President Obama is working with leaders of both parties in Washington to reduce the deficit in a balanced way so we can lay the foundation for long-term middle-class job growth and prevent your taxes from going up.

This is just one sentence. But it has more errors in it than a whole book written by some economists. First, it assumes that we should “reduce the deficit.” But:

– It’s fiscally irresponsible to frame and follow a long – term deficit reduction plan (limited austerity) when, as now, both a trade deficit and an output gap between the economy’s potential and its actual results exist. Such a plan is one that must remove more net financial assets, specifically reserves, from the private sector than would otherwise be the case, every year the plan is pursued. Banks can compensate for these reserves by creating new ones when they make loans. But, loans create both assets and liabilities in equal measure and no new net financial assets.

So eventually, if deficit reduction is pursued for long enough, a declining rate of addition to private net financial assets will exacerbate the output gap by lowering aggregate demand and causing both labor and capital to deteriorate. This will eventually dig the US’s economic grave by reducing the productive capacity of the economy, and the Government’s ability to sustain greater levels of deficit spending, producing outputs of real social value, without triggering inflation. Oh, well, President Obama, Timothy Geithner, Jack Lew, Erskine Bowles, Alan Simpson, Alice Rivlin, Pete Peterson, and the rest of us will be able to find consolation by reminding ourselves that our collective trip to the poorhouse was in the service of the neoliberal notion that fiscal responsibility is all about containing the rise of the debt-to-GDP ratio.

– REAL fiscal responsibility is a pattern of fiscal policy intended to achieve public purposes (such as full employment, price stability, a first class educational system, Medicare for All, etc.), 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 our public purposes. Read the rest of this entry →

Trigger Mechanisms To Avoid the Fiscal Cliff? You’re Kidding, Right?

5:15 pm in Uncategorized by letsgetitdone

Robert Reich has been writing a series on “the Grand Bargain” and the “fiscal cliff.” In this post, I’ll do a commentary on his “The President’s Opening Bid on a Grand Bargain (II): Put a Trigger Mechanism in the Legislation”, because I think it’s a good example of self-defeating progressivism or “loser liberalism. Take your choice of epithet.

Reich begins:

When he meets with Congressional leaders this Friday to begin discussions about avoiding the upcoming “fiscal cliff,” the President should make crystal clear that America faces two big economic challenges ahead: getting the economy back on track, and getting the budget deficit under control. But the two require opposite strategies. We get the economy back on track by boosting demand through low taxes on the middle class and more government spending. We get the budget deficit under control by raising taxes and reducing government spending. (Taxes can be raised on the wealthy in the short term without harming the economy because the wealthy already spend as much as they want – that’s what it means to be rich.)

So, the good “progressive” defines the problem pretty much the same way as the rest of the Washington mainstream does. And he just assumes everyone agrees on that, especially on the idea that the budget deficit is out of control and that we need to reduce deficits by raising taxes and reducing government spending. So he gives away half the game by agreeing on essentials with the deficit hawks. But why does he agree that the deficit has to be brought “under control,” implying that the deficit is a problem? Why are WE just expected to accept that? Why isn’t there an explanation? When are we going to make these “progressives” explain exactly why the deficit, debt, debt-to-GDP ratio is such a problem for them?

After all, Robert Reich has been around long enough to know that the Government of the United States is a currency issuer and that no deficit it may incur is beyond its power just to make more money? So why do they think it’s a problem? Let’s go on and see if we get a hint of what the explanation for Reich’s concern with “the deficit problem” comes from.

But before we do that, let’s briefly note that Reich’s easy comment that taxing the rich more won’t harm the economy, isn’t quite true since since for every dollar taxed away GDP does decline by about $.30. Of course, that can easily be fixed by spending an equivalent amount to the amount taxed on something more productive than tax cuts for the rich. But since we can easily spend that amount of money on that more productive thing if we want to, anyway, there’s no reason to tax the rich more arising out of any imagined shortage of dollars. Of course, there are many more reasons to tax them, like justice, fairness, the desire to make them pay for ill-gotten gains, etc. But the need for money in order for the Government to spend on other things is just not one of them.

It all boils down to timing and sequencing: First, get the economy back on track. Then tackle the budget deficit.

Get the economy back on track, indeed. But, again, why is the deficit something that has to be “tackled”?

If we do too much deficit reduction too soon, we’re in trouble. That’s why the fiscal cliff is so dangerous. The Congressional Budget Office and most independent economists say it will suck so much demand out of the economy that it will push us back into recession. That’s the austerity trap of low growth, high unemployment, and falling government revenues Europe finds itself in. We don’t want to go there.

We certainly don’t want to go where Europe has been going lately. They’re a great example of how NOT to manage your way out of a Great Financial Crash. But what makes Reich and other progressives think they can avoid the fate of the Eurozone nations by planning for deficit reduction later ,or at all? The assumption here is that there must and will be a time when we can reduce the deficit without harming the economy. But what if there’s no such time? What if any substantial deficit reduction to under 4% of GDP, a figure envisioned in most of the deficit reduction plans being offered, means making the private sector poorer in the aggregate?

That’s not just a theoretical question. Right now, the US imports more than it exports in an amount greater than 4% of GDP. If we continue to do so, and the Government deficit is forced down to a number below 4% of GDP, then a private sector surplus in the aggregate will be literally impossible to attain, and, if we continue with such a policy, year after year, the private sector will lose more and more of its net financial assets as the Government eats the private economy in a fit of fiscal irresponsibility, that since it’s now way past 1984, the austerity advocates label fiscal responsibility.

Although the U.S. economy is picking up and unemployment trending downward, we’re still not out of the woods. So in the foreseeable future — the next six months to a year, at least — the government has to continue to spend, and the vast middle class has to keep spending as well, unimpeded by any tax increase.

Of course, that’s true, but the “vast middle class” can be impeded from consuming by cuts in discretionary Government spending and in social safety net spending equally effectively, and deficit reduction, without raising taxes on the middle class, is likely to involve a good bit of those kinds of cuts, if there’s any compromise at all with the deficit hawks on the budget.

But waiting too long to reduce the deficit will also harm the economy – spooking creditors and causing interest rates to rise.

Now we’re getting an inkling of what Reich’s problem is. He’s afraid of the “bond vigilantes” and their supposed power to raise interest rates and leave us with a great big interest bill that will further increase the deficit. So, all this concern over a “deficit problem” is due to fear of the markets and, perhaps, Reich would have no problem with running continuous deficits if he thought that the Fed, along with the Treasury, control interest rate targets, and that the bond markets are powerless to impose their will on Mr. Bernanke and the Treasury Secretary if they want to keep rates near zero, or at any other level of interest they would like the US to pay? Well, if that’s true, then let me assure Professor Reich that the bond markets and the ratings agencies are powerless to drive up interest rates against the combined determination of the Fed and the Treasury to keep them low.

We can see this if we imagine what would happen if the Fed continues to target overnight rates at close to zero, and the Treasury issued mostly 3 month debt. We know that short-term debt tends strongly to the overnight rate, and that there’s nothing the markets can do about that. So, if the Fed targets that rate at say 0.25%, and if the Treasury issues only short-term debt, the result will be that the markets cannot drive the rates much higher than that even if Moody’s is follish enough to downgrade US debt to below Japan’s rating.

This is why any “grand bargain” to avert the fiscal cliff should contain a starting trigger that begins spending cuts and any middle-class tax increases only when the economy is strong enough. I’d make that trigger two consecutive quarters of 6 percent unemployment and 3 percent economic growth.

Triggers are a really bad idea, and I’d hate to be among those 6% on the U-3 measure of unemployment, or the likely 12% on the U-6 measure, when the spending cuts and tax increases specified in the trigger mechanism occur, because those levels aren’t ones associated with a booming economy or one that is anywhere prosperous enough to stand against years of reduced Government spending at a deficit level below that necessary to compensate for the loss of aggregate demand due to our trade deficit. A trigger like this would take an already fragile economy, operating at way less than full employment, and would make unemployment higher, while it reduces private sector net financial assets during the years of deficit reduction triggered by such a plan. Depending on the details of the trigger, and assuming there’s no private sector credit bubble putting off the day of reckoning, a recession is a sure thing within an unpredictable, but relatively short space of time.

And keep in mind please, that this notion of Reich’s is a proposal for Obama’s opening bid, which presumably is open to compromise. So, perhaps Reich would be willing to set the deficit reduction at a compromise level of 7% U-3 unemployment? What a “loser liberal”!

But the real mistake here is in having any “trigger” at all. The whole idea is really dumb from an economic point of view. Fiscal policy needs to be guided by our expectations about its likely effects on real outcomes; not by some scheme that assumes that deficits are “bad” and must be minimized. We no longer live under the gold standard Professor Reich! A deficit is nothing more than the amount that Government spending exceeds tax revenue. It’s just a number!

To assess its appropriateness we have to place it in the context of what the private sector wants to save, and how much it wants to import, assuming the willingness of other nations to export to the US. The best fiscal policy is one that spends what the US needs to spend to solve its serious problems and achieve public purposes, and at the same time lets the deficit float as it will given such spending.

Of course, too much deficit spending can cause demand-pull inflation. But the proper remedy for that is to raise specific taxes and lower specific spending in such a way that price stability and full employment, as well as other good outcome result from fiscal policy. The size of the deficit or surplus is not a proxy for such real outcomes, and responsible fiscal policy should not be attempting to maximize, minimize or optimize either deficits or surpluses, rather than the real outcomes of government fiscal policy. In other words, run fiscal policy in accordance with expected real outcomes, and forget about deficits and surpluses per se. They should be treated as insignificant side effects, not as as centerpieces for fiscal responsibility, as they were under the gold standard.

To make sure this doesn’t become a means of avoiding deficit reduction altogether, that trigger should be built right into any “grand bargain” legislation – irrevocable unless two-thirds of the House and Senate agree, and the President signs on.

Please, no more foolish legislation that tries to constrain the freedom of action of future Congresses! The context of fiscal policy is always changing, and the Government must be adaptive to changing conditions. Future governments have to take into account things that have gone or are likely to go wrong. We should not, and really cannot bind them to “triggers” that can’t take into account the future conditions that may present themselves.

The fiscal cliff is itself an example of this principle. The “cliff”, after all, results from the sequestration trigger. And now, after agreeing to it, how’s that working for Congress and the rest of us? It’s made Congress look really, really stupid, and has only made it more obvious that the only crisis is what Congress has manufactured, and now refuses to fix in any way that won’t hurt the economy. And it has put the nation in a bind and subjected Congress to an immediate high pressure situation and the people to more “shock doctrine.” The agreement producing it was the last thing we needed. But we’ve got it, because people resorted to a “trigger.”

Now Reich wants to turn to another kind of trigger. But what we need instead is a return to real fiscal responsibility, and some education about what it means to have a non-convertible fiat currency, a floating exchange rate, and no debts in a currency not our own.

The trigger would reassure creditors we’re serious about getting our fiscal house in order. And it would allow us to achieve our two goals in the right sequence – getting the economy back on track, and then getting the budget deficit under control. It’s sensible and do-able. But will Congress and the President do it?

If the main reason for the trigger is to stop the creditors from reacting badly to attempts to create an economy that produces full employment at a living wage and prosperity for all Americans, as well as a modern economy that fulfills our health care, educational, infrastructure, education, energy, climate change, and environmental needs, then I say let’s stop issuing debt and get the bond markets out of the Treasuries business entirely. That will certainly stop our interest costs from getting out of control and also render the bond vigilantes irrelevant to the finances of the US. Then neither Professor Reich, nor anyone else will have to give a moment’s thought to what “our creditors” think about our deficits, our national debt, or anything else we do.

Last time I looked, comparatively few of the bond market investors were actual American voters. So, why should they have any influence over what we choose to do anyway?

(Cross-posted from New Economic Perspectives.)

The Fiscal “Cliff” and the Real Problem

7:02 pm in Uncategorized by letsgetitdone

so-called cliff

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

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

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

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

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

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

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

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

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

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

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

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

(Cross-posted from New Economic Perspectives.)


Photo by tbennett under Creative Commons license.

An MMT Fiscal Responsibility Narrative: Some Truths After A Second Crowd Sourcing Revision

4:28 pm in Uncategorized by letsgetitdone

Many MMT posts and other writings on fiscal responsibility, including my own, focus on the myths of neoliberalism, pointing out why they are myths and developing an alternative MMT perspective in some detail. Off hand, and I may have forgotten something, I couldn’t think of a brief positive MMT narrative related to fiscal responsibility containing primarily the truths, rather than the myths.

So, here’s my version, revised, a second time, after calling for and receiving comments from readers at New Economic Perspectives, Correntewire, FireDogLake, DailyKos, and ourfuture.org, a second time. Thanks to Tadit Anderson, Mitch Shapiro, Devin Smith, Dan Kervick, Nihat, James M., MRW, Marvin Sussman, joebhed, Clonal Antibody, Calgacus, Ed Seedhouse, JonF, Lyle, Thornton Parker, Sean, Golfer1john, Rodger Malcolm Mitchell, econobuzz, Charles Yaker, Lambert Strether, maltheopia, Ian S., Tyler Healy, PG, for contributing significantly to the critical evaluation of the earlier versions.

More comments, criticisms, recasting in more effective form, are all welcome. But this will be my last round of crowd-sourced revision. I hope all readers will feel free to use this version as they think is best to spread the MMT message about fiscal responsibility. To boil that message down: fiscal responsibility is about the impact of fiscal policy on people; it’s not about the old time religion of its impact on a supposedly limited supply of gold standard-based money.

The Narrative

The first four points in the narrative offer some conclusions

– Austerity requiring budget surpluses cannot work in the United States economy, because surpluses, defined as tax revenue exceeding spending, destroy money in the private sector. Unless these financial assets are replaced through revenues acquired by running a trade surplus; the continuous loss of financial assets by the private sector is unsustainable, eventually leading to credit bubbles, recession or depression, and the return of deficit spending. It is mathematically IMPOSSIBLE for the USA to simultaneously run a government surplus, have a trade deficit and increase aggregate private sector wealth! (h/t Ian S.)

– It is fiscally irresponsible to frame and follow a long – term deficit reduction plan (limited austerity) when both a trade deficit and an output gap exists, because by definition, such a plan is one that must remove more money from the economy than would otherwise be the case every year the plan is pursued. Eventually, if pursued for long enough, a declining rate of addition to financial assets will exacerbate the output gap by lowering aggregate demand and causing both labor and capital to deteriorate, thus reducing the productive capacity of the economy, and the Government’s ability to sustain greater levels of deficit spending producing outputs of real social value without triggering inflation.

– REAL fiscal responsibility is a pattern of fiscal policy intended to achieve public purposes (such as full employment, price stability, a first class educational system, Medicare for All, etc.), 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.

– REAL fiscally responsible policy, if it works generally as expected, creates greater real benefits than real costs for people! It has nothing to do with conforming to some standard simple measure like an acceptable debt-to-GDP ratio that has only a questionable theoretical connection to the actual well-being of people. It is political malpractice to give greater priority to that kind of abstraction than to full employment, price stability, a strong social safety net, and Government programs that will help us solve the many outstanding problems of our nation. Let’s put an end to the domination of Washington by that kind of malpractice. Let’s put an end to the current misguided fiscally irresponsible campaign to promote a “Grand Bargain” that is sure to do nothing but destroy more private sector money and jobs than would be the case if we either did nothing or increased the deficit and created a full employment budget.

– Social Security has no solvency or “running out of money” problems. The SS crisis is a phoney one. No solution to this “fiscal crisis,” bipartisan or partisan, is needed. What is needed is a solution to the political problem of getting SS’s funding guaranteed in perpetuity by Congress, just the way it guarantees funding for Medicare Parts B and D.

– The same applies to the so-called Medicare crisis. It too is phoney, and can be solved easily by Congress guaranteeing funding in perpetuity to Medicare Parts A and C.

– More generally, there is no entitlement funding crisis in the United States, except a political crisis where US politicians are determined to ignore their constituents and cut back on an already inadequate safety net either because they believe in, or want others to believe in false ideas about fiscal responsibility and nature of the Government as a giant household.

And the rest of it provides the reasoning underlying them.

– The US Government can’t involuntarily run out of its own fiat money (USD), since it has the constitutional authority to create it without limit. Congress constrains and regulates this ability. But its existence is still a stubborn fact!

– Greece and Ireland are users of the Euro, not issuers of it. So, their supply is always limited and that’s why they can run out of Euros. The US is the issuer of Dollars; so it’s supply of dollars is limited only by its desire to create them, and its ability to mark up private accounts, and that’s why it can’t become Greece, Ireland, or any other Eurozone nation.

– In addition to taxing and borrowing money, the Government (including the combined activities of the Congress, the Treasury, and the Federal Reserve) has an unlimited capacity to create it. When it taxes and borrows, the Government removes money from the private sector, and destroys it. When it creates money, it adds it to the private sector. A deficit is the net amount of money creation minus the amount of destruction due to taxation. A surplus is the net amount of money destruction minus the amount of creation due to Government spending. (h/t Golfer1john)

– Since this is the case, it’s clear that present proposals to reduce the deficit by an average of $400 Billion/year over the next 10 years are sure to remove money or Treasury securities (assuming deficit spending is accompanied by issuing debt) from the private sector that otherwise would have been created there in the absence of deficit reduction.

– The Government of the United States offers the functional equivalent of interest-bearing savings accounts to investors, usually wealthy individuals, large corporations, and foreign nations. The savings accounts are usually called US Treasury securities, and the sum of their face values is called the debt-subject-to-the-limit; or more colloquially, the national debt, even though comparable savings accounts in banks, are for some reason, not called bank debt. (h/t PG)

– The Treasury can keep accepting deposits (“borrowing money”) and issuing securities if we want it to. There’s no limit on this Government “credit card,” just as there is no limit to the deposits a bank can accept, except the one imposed arbitrarily by Congress in the form of the amount of debt-subject-to-the-limit, otherwise known as the debt ceiling. So, if the US does run out of money, due to a failure to raise the debt ceiling between now and March 31, 2013, it will clearly be the fault of the Congress for refusing to grant further authority to the Treasury to elicit and accept further deposits, also known as refusing to raise the debt ceiling!

– Even though it may seem that foreign nations can place a limit on “the credit card” by refusing to buy Treasury securities at auction, foreign nations holding dollars basically have a choice between continuing to hold them and earning no income, or earning interest on them by buying securities. So, as long as other nations are exporting to the US and accepting dollars as payment; those dollars are likely to be invested in the interest-bearing “savings accounts” known as Treasury securities.

– Bond markets don’t control US interest rates; the Federal Reserve Bank does by exercising its authority to meet its target interest rates. Bond vigilantes have no power against the Fed. If they fight against its interest rate targets by trying to bid them up; then they will “die” in the flood of reserves the Fed can unleash to drive the interest rates down to its chosen target. The Fed can’t control the money supply. But it does control the price of it with its interest rate targeting.

– The bond markets will buy US debt as long as we keep issuing it; but if one insists on considering the hypothetical case where the markets won’t, the US would still not be forced into insolvency; because the Government can always create the money needed to meet all US obligations.

– The US is obligated by the 14th Amendment to pay all its debts as they come due. Nevertheless, our national debt cannot be a burden on our grandchildren; unless they wish to make it so by stupidly taxing more than they spend. This is true because, assuming the debt ceiling is raised when needed, or repealed, we have an unlimited credit card to incur new debt at interest rates of our choosing. So, we can “roll over” our national debt indefinitely. Or, alternatively, we can create all the money we need to pay off the debt-subject-to-the-limit, without ever incurring any more debt. One way to do this is through Proof Platinum Coin Seigniorage (PPCS). A second way is through subordinating the Fed to Treasury and then using the Fed’s ability to create money out of thin air to pay back all debt instruments (“savings account balance”) when they fall due. The first way is legal now. The second is constitutional, but would require politically unlikely action by Congress to authorize it.

– A fiscal policy that measures its success or failure in reducing deficits, rather than by its impacts on public purpose, is fiscally irresponsible and unsustainable. The deficit is a meaningless measure because the US Government has no limits on its authority to create/spend money other than self-imposed ones, so neither the level of the national debt, nor the debt-to-GDP ratio can affect the Government’s capacity to spend Congressional Appropriations at all. Also, a deficit/debt oriented fiscal policy ignores real outcomes relating to employment, price stability, economic growth, environmental impact, crime rates, etc. which actually can affect fiscal sustainability by strengthening or weakening the underlying economy, and, with it the legitimacy of the Government and its fiat currency. In short, responsible fiscal policy is not about its impact on Government debt. It’s about its impact on people!

– 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! So, their supply of dollars is always limited; while the Government’s supply is a matter of its decisions alone.

– However large the Federal Debt becomes, it cannot be a “crushing burden” on our Government, because Federal spending is virtually costless to the Government, if it wants it to be.

Conclusion

Current claims that we have a fiscal crisis, must debate the debt, must fix the debt, and must immediately embark on a long-term deficit reduction program to bring the debt-to-GDP ratio under control, all misconceive the fiscal situation, and smack of a campaign to create hysteria among the public. They are based on the idea that fiscal responsibility is about developing a plan to bring the debt-to-GDP ratio “under control,” when it is really about using Government spending to achieve outputs that fulfill “public purpose.” There is no fiscal crisis that will require “a Grand Bargain” including cuts to popular discretionary spending and entitlement programs. It is a phoney crisis!.

The only real crises is one of a failing economy and growing economic inequality in which only the needs of the few are served, and also one of lack of political desire or will to solve these real problems. MMT policies can help to bring an end to the first economic crisis; but not if progressives, and others continue to believe in false ideas about fiscal sustainability and responsibility, and the similarity of their Government to a household. To begin to solve our problems, we need to reject the neoliberal narrative and embrace the MMT narrative about the meaning of fiscal responsibility. That will lead us to the political action we need to solve the political crisis and eventually toward fiscal policies that achieve public purpose and away from policies that prolong economic stagnation and the ravages of austerity.

(Cross-posted from New Economic Perspectives.)