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Rationalization and Obligation, Part III: Premium Bonds, and Asset Sales

7:34 pm in Uncategorized by letsgetitdone

In Part I of this six-part series I presented the President’s explanation of why he can’t use alternative options for coping with the default threat arising out of refusal to raise the debt ceiling, a summary of the kinds of difficulties characterizing it, and discussed two of seven options, selective default, and the exploding option, the President has to deal with it, apart from the way he seems to have chosen. In Part II I discussed the next three options, platinum coins, 14th amendment, and consols, and commented on the legal issues related to them. Here, in Part III, I’ll cover two options which have started getting attention most recently.

Premium Bonds

6. Premium Bonds (See wigwam’s discussion):

“. . . are those whose interest rates are sufficiently high relative to their principal that they are expected to sell at a premium (i.e., negative discount), bringing their full issue price (principal plus premium) to the Treasury while adding only their principal to the national debt.”

Matt Levine explains the idea in more detail here, and here. But what it amounts to is that the debt subject to the limit is the total face value of all the unredeemed fixed maturity date debt instruments of the United States. So, if the Treasury auctions off a bond and sells it for more than its face value, then it gets enough money to not only roll over debt equal to the face value, but also to pay down additional debt, or deficit spend, as well. But, how can it sell a debt instrument by more than its face value? The answer is to offer interest rates higher than the rates offered for conventional bonds.

How high the rates would need to be, and the duration of the premium bonds offered, would need to be determined by how much in additional funds would be needed to stay under the debt ceiling and spend all appropriations. Levine suggests a “. . . 10-year at a 1.836% yield and the 30 at 3.026%” for example. So, interest rates for the premium bonds would not have to be sky high. Nevertheless, there is a problem with the idea of premium bonds:

”Of course then you’d have to pay the interest! This would be a fairly short-term solution; after a year of doing this you’d be incurring an extra $250+ billion in interest payments that you’d have to fund by issuing ever-higher-coupon Treasuries, leading I suppose to a death spiral. If I were doing this on a tabula rasa I’d probably bump the interest rate a bit at the cost of deferring payments for a year or two, making this a breathing-room rather than permanent solution, but obviously the further you get from regular-Treasury-bond structure the weirder this looks.”

And there is another problem too. The Federal Reserve controls interest rates in the United States by targeting its Federal Funds Rate, which is currently very near zero. This rate in turn influences Treasury offering which are only a bit higher for short-term debt instruments, and progressively higher for longer-term instruments. These rates, in turn, percolate throughout the economy and keep interest burdens where the Fed thinks they should be in the current fragile economy. However, if the Treasury begins to offer securities at much higher interest rates, than this will affect other investments throughout the economy that will have to offer rates higher than Treasury premium rates throughout the economy. In short, premium bonds will undermine Fed monetary policy even as they stave off default.

Kevin Drum also offers some negatives to the premium bonds idea after remarking favorably on it. He hints at legal difficulties and wonders about what a judge would say about it. But he has no real legal objection to this. He also remarks on the confidence issue. I’ll take that up below.

sales of material and cultural assets to the Fed,

7. The last option, sales of material and cultural assets to the Fed, just arose out of a multi-party e-mail exchange about debt ceiling issues. Warren Mosler pointed out:

the coin is about the fed buying an asset from the govt.
they could buy other gov assets as well? national parks? military equipment? spr? etc. etc. any asset sale to the Fed by the gov. works same? legal restrictions?

And L. Randall Wray expanded on the idea and shortly thereafter blogged this piece offering the following proposal, a bit tongue in cheek.

. . . We’ve got museums and national parks shut down. Why not sell them to the Fed? We can find a few trillion dollars of Federal Government assets to sell–and the Treasury can pay down enough debt to postpone hitting the debt limit for years. Heck, if we run out of Parks and Recreation facilities to sell, why not have the Fed start buying up National Defense? How much are our Nukes worth? That should provide enough spending room to keep the Deficit Hawk Republicans and Democrats happy for a decade or two.

This proposal shares with Jack Balkin’s “exploding option” proposal the idea that the Treasury Department can sell assets to the Federal Reserve to raise revenue. I’ve been able to find no prohibition in law that would make this illegal. And, as long as a fair price reflecting likely market value is paid by the Fed, I don’t think such transactions would raise legal problems.

This option is a temporary one. But it might buy enough time for Congress to become Democratic again, whereupon the Democrats could repeal the debt limit legislation, ending debt ceiling crises.

There is a problem with this option relating to who within the Fed system buys Treasury’s assets. The Federal Reserve Board of Governors is a self-funding Federal Agency; but it is nevertheless Federal, so the sale of Government property to it still leaves the assets in the hands of Government. But what happens if the assets are sold to one or more of the regional Fed Banks. These are agents of the Federal Government, but they privately owned. The transfer of Federal assets would surely raise the issue of turnover of federal property to the private sector. Also, if the regional Fed Banks ever sold any of those assets to private organizations that are not agents of the Government, for example, the big banks whose representatives sit on the regional Fed Bank Boards, we would see immediate charges of corruption and private sector looting of Government property. The next post, Part IV, will cover differences among options in their likelihood of having severe legal problems, or seriously undermining loss of public confidence in debt instruments.

(Cross-posted from New Economic Perspectives.)

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Reply to Reinhart and Rogoff’s NYT Response to Critics

7:27 pm in Uncategorized by letsgetitdone

Warren B. Mosler

By Warren Mosler

(Cross-posted with permission of the author from The Center of the Universe)

The intellectual dishonesty continues. As before, it’s the lie of omission.
R and R are familiar with my book ‘The 7 Deadly Innocent Frauds of Economic Policy’ and, when pressed, agree with the dynamics.

They know there is a more than material difference between floating and fixed exchange rate regimes that they continue to exclude from their analysis.

They know that one agents ‘deficit’ is another’s ‘surplus’ to the penny, a critical understanding they continue to exclude.

They know that ‘demand leakages’ mean some other agent must spend more than its income to sustain output and employment.

They know federal spending is via the Fed crediting a member bank reserve account, a process that is not operationally constrained by revenues. That is, there is no dollar solvency issue for the US government.

They know that ‘debt management’, operationally, is a matter of the Fed simply debiting and crediting securities accounts and reserve accounts, both at the Fed.

They know that if there is no problem of excess demand, there is no ‘deficit problem’ regardless of the magnitudes, short term or long term.

They know unemployment is the evidence deficit spending is too low and a tax cut and/or spending increase is in order, and that a fiscal adjustment will restore output and employment, regardless of the magnitude of deficits or debt.

Carmen’s husband Vince was the head of monetary affairs at the Fed for many years, serving both Alan Greenspan and Ben Bernanke. He knows implicitly how the accounts clear and how the accounting works, to the penny. He knows the currency itself is a case of monopoly. He knows the Fed, not ‘the market’ necessarily sets rates. He knows that, operationally, US Treasury securities function as interest rate, and not to fund expenditures. He knows it all!

Carmen, Vince, please come home! I hereby offer my personal amnesty- come clean NOW and all is forgiven! As you well know, coming clean NOW will profoundly change the world. As you well know, coming clean NOW will profoundly alter the course of our civilization!

Carmen, Vince, either you believe in an informed electorate or you don’t!?

Framing Platinum Coin Seigniorage: Part Five, Institutional Objections

7:50 am in Uncategorized by letsgetitdone

This series provides a framing document for Platinum Coin Seigniorage (PCS). In the four previous parts of the series, I pointed out that there are three classes of opponents of High Value Platinum Coin Seigniorage (HVPCS, $30 T and above). The first and largest group opposes all Platinum Coin Seigniorage (PCS) of whatever type. The second, opposes HVPCS, but favors using the Trillion Dollar Coin (TDC) for the limited purpose of avoiding the debt ceiling. The third, opposes HVPCS, and doesn’t really favor using the TDC either, except, perhaps, as a last resort to avoid the debt ceiling. It favors an incremental approach to PCS beginning perhaps in the millions or billions in face value, and over a long period of time, after giving people years to adjust to Treasury using platinum coins with unusual, and unprecedented, face values, eventually building up to a TDC.

Parts two, three, and four, and this post (Part Five), and the remaining post in this series considers further objections to HVPCS brought forward by people in one or more of these categories, and my replies to them. As you’re seeing, if you’re following the series, the opponents of HVPCS are throwing everything but the proverbial kitchen sink at it. In this post, I’ll consider some objections to PCS and HVPCS based on their predicted institutional impact.

The platinum coin is “the first cousin of defaulting on our debt”

This objection is from Ezra Klein; he says:

. . . It is a breakdown in the American system of governance, a symbol that we have become a banana republic. And perhaps we have. But the platinum coin is not the first cousin of cleanly raising the debt ceiling. It is the first cousin of defaulting on our debts. As with true default, it proves to the financial markets that we can no longer be trusted to manage our economic affairs predictably and rationally. It’s evidence that American politics has transitioned from dysfunctional to broken and that all manner of once-ludicrous outcomes have muscled their way into the realm of possibility. As with default, it will mean our borrowing costs rise and financial markets gradually lose trust in our system, though perhaps not with the disruptive panic that default would bring.

The “banana republic” stuff is just name-calling. What does using HVPCS, which is authorized by legislation passed in 1996, have to do with being a banana republic? Sure, we’ve never used HVPCS before to pay down debt and cover deficit spending, but why is it not a superior way to do these things than issuing debt instruments, which require us to deal with bond markets and to provide risk-free interest payments mostly to wealthy elites and foreign nations? It seems to me that it is that method of financing that is much more consistent with the methods used by the Latin American banana republics in the 20th century than HVPCS would be.

And why is the platinum coin the first cousin of defaulting on the debt? Ezra Klein says that it proves to the financial markets that we can’t be trusted to manage our economic affairs in a rational and predictable way. But why would it prove that?

It would prove that we’ve changed our way of paying off debt instruments and deficit spending alright; but that doesn’t mean that our new way of doing things wouldn’t be predictable and rational, and that financial markets wouldn’t know exactly what we were going to do. They’d know, for example, that the US wouldn’t be rolling any more debt by issuing new debt instruments, even though they may not like that as well as they like what we’re doing right now. They’d also know that with austerity off the table; we’d be likely to deficit spend a lot more to create full employment here, which they might guess would also be good for their flagging export-based economies.

As for our borrowing costs rising; just how does Ezra Klein suppose that would happen since 1) we’d use HVPCS to end sales of debt instruments altogether; and 2) our interest rates on still outstanding debt are mostly fixed, except for the relatively small volume of bonds that are inflation-protected?

This last notion of Ezra Klein’s makes two things clear. First, he’s fixated on using Trillion Dollar Coins or less; and has never thought through the implications of using a $60 T coin, having freaked out over the small-ball TDC proposal. And second, he hasn’t yet figured out that our bond interest rates can only go up if the Federal Reserve raises the Federal Funds Rate which it, and it alone, controls. He still thinks that the bond vigilantes and their “confidence” in US bonds determines our interest rates.

Compromises the independence of the Federal Reserve

That’s true. But, the vaunted independence of the Fed has not served us well over the years. What it has amounted to is that the Fed has not been accountable to the public. Its independence has meant independence from the Treasury and, largely, from Congress. But it has not meant independence from the big banks and Wall Street, which the Fed fails to regulate to any visible extent to protect the economy and the public, and whose interests the Fed has served ahead of the interests of the public at large. I am all for the President ordering the Secretary of the Treasury to use HVPCS, because I think the constraints imposed by that upon the Fed, and also the filling of the public purse to such an extent that it will be clear to people that the US can never run out of the currency it alone has the authority to issue, will make the Congress, the Fed, and the Executive Branch all much more accountable to the wishes of the American people.

Destroying the institutional structure of the financial system

I don’t know about its destroying the institutional structure of the system; but I will point to a few critical impacts I think HVPCS is likely to have. First, as Warren Mosler has pointed out in his characteristically pithy way,

“And all the coin does is shift interest expense from the Treasury to the Fed. . . “

This is Warren’s assessment of the financial system impact. But, second, an HVPCS coin would have a critical impact politically, because as I have pointed out time and again, it would end austerity politics for good, because it would end the debate over the national debt.

Third, it would make Treasury financing operations much more transparent than they are now. “The secrets of the temple” would be much more out in the open. That’s important, because right now the Federal Reserve and the banks escape accountability, since the American people don’t understand their role.

Fourth, the Federal Reserve Banks would have to pay IOR to maintain their target Federal Funds Rate. From the viewpoint of the public, that kind of operation would look like the bank savings accounts that people are familiar with. The Fed holds reserves and pays depositors an interest rate. Right now, when the Treasury pays interest on securities, that looks like debt to the public, not like the savings accounts that security accounts are like functionally. So, IOR replacing securities in response to HVPCS would greatly improve the political optics of government financing deficit spending.

And fifth, John Lounsbury makes this important point:

The reason Mosler’s one-liner is so significant is that, once discovered that it is no longer necessary for private banking to create the credit to pay for government appropriations when they exceed tax revenues, the banks have lost their umbilical cord to the federal government. The government will have demonstrated that private banking is not necessary to fund government operations.

A primal fear of private banking: The government might discover that public finance and private finance can be divorced. An entitlement can be ended: the need for government to pay interest to private institutions to finance operations would be no more.

That might well be beginning of the end for today’s institutional structure of the financial system. And I have to confess that after the many banking fiascos of the past 30 years, I can’t view that as a bad thing for either this country, or the rest of the world.

But that’s just me; maybe Ezra Klein has a different opinion?

(Author’s Note: h/t to Jack Foster for proposing a framing document for HVPCS. This is it; but divided into 6 parts for blogging convenience. The rest of the series will continue with objections made to HVPCS and my answers to them.)

(Cross-posted from New Economic Perspectives.)

Origin and Early History of Platinum Coin Seigniorage In the Blogosphere

12:15 pm in Uncategorized by letsgetitdone

This post records the history of platinum coin seigniorage in the blogosphere through the debt ceiling agreement on August 2, 2011. Its purpose is to correct errors in the record about the history of this idea appearing on mainstream blog posts by Joe Wiesenthal, John Carney, and Brad Plumer, during the past week. The idea of using coin seigniorage, the profits made from minting proof platinum coins, depositing them at the Fed, and receiving electronic credits in return, to remove the need for issuing debt, and so to always stay under the debt ceiling is due to a commenter (and occasional blogger) on economics and politics blogs whose screen name is beowulf (Carlos Mucha). Beowulf”s first comment on Platinum Coin Seigniorage (PCS) was on Brad Delong’s site on July 6, 2010 (h/t Cullen Roche, 01/05/13). But, the first comment of his I noticed on PCS was at New Deal 2.0. Unfortunately, when The Roosevelt Institute redid its New Deal 2.0 site, it wiped out the record of beo’s comment. However, I quoted his ND 2.0 proposal in a post on November 12, 2010 discussing a possible Government shutdown due to the debt ceiling. I cross-posted this at Correntewire too where beowulf commented further on the platinum coin option.

Beowulf continued his work on the coin seigniorage proposal as the weeks went by in various comments made at blog posts such as this one at FDL, and this one, also at FDL. Then on 12/15/2010 there was an exchange between beo and I about platinum coin seigniorage.

Following that beo wrote me, and we corresponded by e-mail from 12/15/10, roughly until the Christmas break, exchanging views about PPCS, with me urging beo to blog it, and telling him that I would blog in support of him soon after he did. On January 3, 2011, he posted the seminal blog on coin seigniorage. I followed two days later, raising the question of whether President Obama would use it to forestall an attempt to use the debt ceiling to extract cuts in the social safety net or not.

These posts were noticed by Warren Mosler, one of the originators of the Modern Monetary Theory (MMT) approach to economics, who sponsored what turned out to be a wide-ranging and very high quality discussion of the coin seigniorage option at his site. Beowulf contributed extensively and very creatively to this discussion, which remains one of the most important resources on the coin seigniorage option.

Throughout the next six months, I pushed platinum coin seigniorage in blog posts at Correntewire, FDL, and DailyKos from time-to-time and in comments at various sites. Then, in late June and July a spate of posts on platinum coin seigniorage appeared, beginning, I think, with wigwam’s at FDL and DailyKos.

He’s followed up since with a number of other posts including this one with a variation on how coin seigniorage might be applied by buying $2 Trillion in debt from the Fed to create “head room” relative to the debt limit.

Other important posts appeared in the first two weeks of July 2011 by Mahilena, DC Blogger, ubetchaiam, Cullen Roche, and Scott Fullwiler.

Accompanying the last two are extensive discussions of coin seigniorage and constitutionality of the debt ceiling with contributions from beowulf. Scott’s post also received extensive discussion with beowulf contributing at Cullen’s site. Trader’s Crucible, presented a post on the unconstitutionality of the debt ceiling. Its comment thread however, focused very much on platinum coin seigniorage with beowulf and myself making contributions.

In addition, I added a couple of my own posts, one on constitutionality of the debt ceiling and coin seigniorage (06/29/2011), and another on the President’s obligation, if no agreement on the debt ceiling is forthcoming (07/11/11).

At this point, the platinum coin seigniorage debate began to hit the mainstream blogosphere. Felix Salmon at Reuters provided the opening blog post (07/14/11) and he was followed a day later by Matty Yglesias at Think Progress. I replied to Salmon and Yglesias in this post, presenting a fairly comprehensive view of platinum coin seigniorage up to that time, with critiques of their posts (07/17/11).

My post appeared in an abbreviated form at Naked Capitalism, and was also cross-posted at MyFDL, New Economic Perspectives and Global Economic Intersection. It appeared amidst an explosion of blogosphere posts on the subject, including posts on the subject by many mainstream bloggers and others including: Tom Hickey: “Coin Seignorage Breaks into Mainstream,” (07/18/11) Scott Sumner: “Is coin seignorage Obama’s magic bullet?” (07/19/11) Joshua Holland: “There’s a Solution to the Debt Fight That Could Avert Catastrophe — Why Is Everyone Ignoring It?” (07/20/11) Darrell Delamaide: ”Smoke and mirrors with the federal deficit,” (07/20/11) Mark Kleiman: “Phony problem, phony solution,” (07/20/11) wigwam: “Mark Kleiman calls Coin Seigniorage a phony solution; to a phony problem,” (07/23/11) upyernoz: “Platinum Pieces Were Always My Favorite,” and Yves Smith: “We Discuss the manufactured UD Debt Crisis at the Real News Network.” (07/25/11)

These posts were an immediate wave, so to speak, of responses to the Salmon and Yglesias posts. But there was more to come in July. I posted again, presenting a variety of platinum coin seigniorage face value options, along with differing political and inflation implications of the options (07/20/11).

Then I followed with an open letter to Congress and the President on getting around the debt ceiling (07/25/11), and a post on the President’s apparent views on the debt ceiling. (07/26/11)

Meanwhile, Jack Balkin, a Constitutional Law Professor at Yale, had blogged about coin seigniorage telling a good story in an important post (07/18/11).

And Balkin next did a post at CNN, where he reviewed a number of options for getting around the debt ceiling (07/28/11). And, in doing so, brought the platinum coin seigniorage idea into the mainstream discussion.

Balkin’s efforts seemed to fuel another wave of the July 2011 platinum coin seigniorage explosion. These include:

”Capt. Fogg: Billion Dollar Coins and Exploding Options — oh my!” (07/28/11)

Logan Penza: “(Platinum) Pennies From Heaven (UPDATED);” (07/28/11)

Jonathan Chait: “The Coin That Will Save The World;” (07/28/11)

Matthew Yglesias: “The Platinum Coin Option;” (07/28/11)

Brad DeLong: ”The President’s Obligation to Take Care That the Laws Be Faithfully Executed Requires Him to Start Minting Large Denomination Platinum Coins” (07/28/11)

upyernoz: “platinum, baby, platinum” (07/28/11)

Master of Interesting Links: “The meme that will not die!”; (07/28/11)

Tyler Cowen: “Crank up the mint for the platinum coin!” (07/28/11)

Edward Harrison: “The #trilliondollarcoin meme”; (07/28/11)

Matthew Yglesia: Neutralizing Platinum Coin Finance; (07/29/11)

The Economist: “The trillion dollar coin solution;” (07/29/11)

Eric Hayden: “A $1 Trillion Coin Seems Like a Nice Idea” (07/29/11)

Paul Krugman: “Lawyers, Coins, and Money” (07/29/11)

Annie Lowery: “The $5 Trillion Coin” (07/29/11)

Johnsonville: “Debt Watch/Coin Trick: the Trillion Dollar Coin” (07/29/11)

Seneca Doane: “Cut the Gordian Knot with the Platinum Sword;” (07/30/11) This Post was a particularly important because it recognized the key political implications of PCS, and also was enormously popular at DailyKos and elicited 569 comments there.

Laurence Lewis: “The Debt Ceiling Dance and the Trillion Dollar Coin.” (07/31/11)

David Weigel: “The Platinum Coin Hysteria of 2011;” (07/31/11)

So, that was the second wave of responses by mainstream bloggers, and others, to the Platinum Coin Seigniorage idea. In addition, I added two posts on 07/31/11:

What If a Debt Limit Extension Is Voted Down?” (07/31/11) and

Progessives In Congress: Vote for The President To Do It!” (07/31/11)

Also, the last notable post on Platinum Coin Seigniorage (08/01/11) before the debt ceiling settlement of 08/02/11 was Scott Fullwiler’s Coin Seigniorage and Inflation. It’s still the most comprehensive and rigorous discussion available of the relationship between the two.

But then, and lastly, there was Beowulf responds to Dave Weigel of Slate.” (07/31/11) I think this reply is worth quoting, because, in a way, Weigel’s reaction is pretty typical of most mainstream posts, reacting to the idea in what only can be described as a superficial way, part brush-off; part poking fun, almost as if mainstream bloggers were afraid of discussing the idea without an obligatory heaping slice of skepticism accompanying their mention of it. Obviously beo’s reply doesn’t apply to everyone, so I don’t want to over-generalize it. But if you read all the posts, I think you’ll see that Weigel’s reaction is pretty common, so beo’s reply is pretty broadly applicable.

There’s nothing fanciful about it. The strange thing is that the USG is constrained by debt ceiling but a part of the USG (The Fed describes itself as “an independent government agency”) is unconstrained by a debt ceiling. Even more anomalously, Fed-held Treasuries are counted against the USG debt ceiling.

This isn’t about selling drilling rights on the moon but a practice almost as old as the Republic. The US Mint has used coin seigniorage continuously since the Coinage Act of 1792 (in a legal sense, a single $1 trillion platinum coin is the same as trillion $1 coins but with far less expense and effort). It violates no laws nor federal regulations nor prior obligations for the USG to transfer debts from the constrained whole to an unconstrained part (that is violates all logic is the fault of Congress).

The idea actually originated in a note I sent the Department of the Treasury on a collateral issue (as it happened, I had “buried the lede”). I posted about this on Firedoglake (and Correntewire) only after discussing the issue at Warren Mosler’s blog (Incidentally, I’m hardly a lefty. I voted for Romney in the 2008 GOP primaries, will probably do so again next year).

Writer Joe Firestone suggested to me that the platinum coin seigniorage issue was something worth posting a blog about and bugged me until I did (after which, Joe took the leading oar on developing the idea). I’d point out that Warren Mosler also picked up on the economic ramifications very early. But I trust that every reader here with an interest in economics has already read his book The Seven Deadly Innocent Frauds (you can download for free from his site if you haven’t), so that should come as no surprise.

http://moslereconomics.com/2011/01/20/joe-firestone-post-on-sidestepping-the-debt-ceiling-issue-with-coin-seigniorage/

Of course, there is historical precedence for using coinage to pay the national debt, the Legal Tender Act of 1862 authorized the issuance of fiat currency, US Notes or “Greenbacks” (the predecessor of today’s Federal Reserve Notes) required that Tsy pay debt service only with US Mint-issued coins. Of course Nixon freeing us from the gold standard changed everything, but if our politicians understood that, we wouldn’t have a debt ceiling now would we?

And finally, I should note, that once the debt ceiling compromise was agreed to on 08/02/11, the sudden explosion of posts on platinum coin seigniorage quickly faded away, as I predicted it would then. I’ve blogged a lot about it, since, trying to develop the political context further and to make people aware of the policy variations available in the platinum coin seigniorage toolbox. But bloggers doing posts on it were few until just this past week.

Now people are starting to see that there may be a fiscal cliff settlement and immediately afterward a new debt ceiling crisis for us to cope with. So, suddenly the mainstream has taken up where it left off with platinum coin seigniorage in early August 2011. It’s again in a frenzy about it, and it’s again making errors in its analysis of it and in the information it’s spreading about the history of the platinum coin seigniorage idea.

In future posts of mine, I’ll look at the new wave of blog posts and discuss the issues they raise. But for now I want to correct one immediate thing. Joe Wiesenthal, Brad Plumer, and John Carney have been saying that the platinum coin seigniorage idea originates with Cullen Roche’s blog post of 07/07/11 cited earlier with a commenter on that post. Plumer even says:

*Update: Cullen Roche appears to have been one of the first people to discuss the platinum coin idea in 2011 ― it came from one of his readers. See also here.

If Plumer had read the first of his references with the accompanying comment thread, he would have found a host of links to earlier work on PCS. And if he had read the 07/17/11 post of mine he references (also linked to in the review above), he would have found that the first statement of the PCS idea by beowulf, Cullen Roche’s commenter, was on November 4, 2010, more than 8 months before Cullen’s own post. As it turns out even this date is too late, since Cullen, himself, (h/t to Cullen Roche, 01/05/13) discovered an even earlier occurrence at Brad Delong’s blog in another comment of beowulf’s, a full 12 months earlier than Cullen’s first post on PCS.

Also the first full blog post on PCS, as you can see from both Plumer’s reference and the account above is on January 3, 2011. And after that, there are numerous blog posts on the subject before Cullen’s post on 07/07/11. So, I think that Wiesenthal, Plumer, and Carney, all got it wrong. Probably because they relied on each other, rather than on reading their own links, or on using “the google.”

(Cross-posted from New Economic Perspectives.)

Photo in the public domain.

A Counter Narrative to Peterson’s

4:54 pm in Uncategorized by letsgetitdone

Stephanie Kelton writes:

The US is broke. Government deficits are de facto evidence of a government gone wild. We’re careening toward Greece. Entitlements are the root cause of our fiscal woes, and the Chinese are coming for our grandchildren. How many Americans believe this garbage? My guess? Most of them.

Pete Peterson has won and the American people have lost. There is no effective counter narrative, not even from the left. Nearly all “progressives” have accepted the fundamental premise that the federal government is like a great big household. That it faces the same kinds of constraints that you and I face. That it should spend only what it takes in and that deficits are morally and/or fiscally irresponsible. President Obama told the nation, “We’re out of money.” . . .

Stephanie knows that there is a counter-narrative out there to Peter Peterson’s take on fiscal responsibility, because she’s one of the people who best expresses it. But she thinks it can’t be called “effective,” because we’ve been unsuccessful so far in getting the fiscal responsibility counter-narrative developed by Modern Money Theory (MMT) economists communicated broadly enough to create a break in the Washington/New York political consensus, which insists that now our most urgent need is for austerity to bring the deficits and the public debt under control. I agree with Stephanie, of course. We’ve not been successful in persuading enough people yet.

So, in this Post, I’ll make yet another effort to counter the neoliberal austerian fiscal responsibility ideology by juxtaposing the primary claims underlying the narrative, with my construction of the MMT answers to them. The austerian claims below all link to MMT-based posts that critique them. And they are all juxtaposed against an MMT-based claim that refute them. The paragraphs following each pair of claims, summarize my version of MMT answers, and together provide a counter-narrative.

The Government is running out of money

MMT answer: The Government cannot involuntarily run out of money

The US Government has the Constitutional Authority to create an unlimited amount of money provided Congress appropriates the spending, and places no constraints on spending, such as a need to issue debt instruments when the Government deficit spends, or debt ceiling limits. So, all constraints on spending appropriations are purely voluntary in the sense that they are due to Congressional mandates that Congress can repeal at any time, and not to financial limits inherent in the Government’s authority.

Having said that, the constraints mentioned are now in place, and, so, it’s important to emphasize that even with them, and without legislative changes, the Executive can always create enough money to pay for whatever spending Congress has appropriated and also repay debt, so that even with a Congress willfully maneuvering for default, or brandishing the threat of it, the Executive can still ensure that the Government doesn’t run out of money even without more taxing and borrowing, because the Executive can use the option of Proof Platinum Coin Seigniorage (PPCS) as one method of getting around the debt ceiling. Originally suggested by Beowulf some time ago, there are any number of PPCS options the President can use to generate coin seigniorage profits to use for a variety of purposes. I’ve outlined some of them here. Some PPCS options stop with $1/2 Trillion coins, some go over $1 Trillion up to $5 Trillion, and still others envision very high face value coins ranging to $60 Trillion and up.

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

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

The Government can only raise money by taxing or borrowing

MMT answer: The Government can create money; so it can never involuntarily run out

The austerian claim is false. First, the Federal Reserve, a Government agency can create unlimited money “out of thin air,” as the saying goes, though not for purposes of deficit spending, or directly liquidating Treasury debt. But second, I’ve just pointed out that PPCS can be used in the present legal framework to create money other than by taxing or borrowing. And third, if Congress doesn’t want to use PPCS, it can authorize the Treasury to spend appropriations without issuing debt instruments any time it wants to take an afternoon off to get that done. So, plainly the Government can “raise money” without taxing or borrowing it by just creating the necessary money while spending.

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

MMT answer: We can if we want to. There’s no limit on the credit card except the one imposed arbitrarily by Congress.

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

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

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

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

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

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

MMT answer: The bond markets don’t control US interest rates.

The Treasury can flood overnight bank reserves and float short-term debt to meet its targeted interest rates, however low they may be. The Government, if Congress would let it, can even stop issuing debt subject to the limit when it deficit spends (using PPCS or consols, or by Congress moving the Fed into Treasury where it belongs) in which case the bond market interest rates would become entirely irrelevant to the United States.

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

MMT answer: They’ll most probably buy it for the foreseeable future; but if they don’t we won’t be forced into solvency because we can always create the money we need to meet our obligations

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

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

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

MMT answer: We’re obligated to pay all US debts as they come due. But since we have an unlimited credit card to incur new debt at interest rates of our choosing, or, alternatively can create all the money we need to pay off debt subject to the limit, without incurring any more debt, our national debt cannot be a burden for our grandchildren unless they wish to make it make it so by stupidly taxing more than they spend. So, let’s educate them well in MMT-based economics, so that they never make that mistake

No US generation except one has ever repaid the national debt by running budget surpluses. After the debt was paid off in 1835, that generation was rewarded with the depression of 1837. Moreover, each time the nation ran substantial surpluses for a period of time, the country fell into depression or recession, most recently the recession of 2001, following Clinton’s four years of running a surplus. It’s a bad idea to repay the national debt by running surpluses, because taxing more than a Government spends destroys net financial assets in the private sector, unless one also exports more than one imports.

So, provided we continue to run a trade deficit, our grandchildren won’t run surpluses. They may not issue debt subject to the limit while “deficit” spending. But that’s possible, only if the Congress repeals the mandate to issue debt when the Government deficit spends, or alternatively, the Government freely uses its PPCS power. In both cases the national debt can then be repaid without requiring that tax revenues match or exceed Government spending.

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

I can’t emphasize this last point enough. Austerity isn’t moral. It’s immoral! It kills, and it eventually impoverishes most people including our grandchildren, both those who are now living and growing up in difficult economic circumstances, and those yet unborn, who will be born and will grow up in a stagnant economy crippled by attempts to reduce the national debt, at the expense of full employment, and lost output for years on end.

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

MMT answer: All together now, there is no such problem. Since the US Government has no limits other than self-imposed ones on spending or borrowing, the level of the national debt, or the debt-to-GDP ratio don’t affect the Government’s capacity to spend Congressional Appropriations at all.

These numbers aren’t related to fiscal sustainability or responsibility in nations like the US with a non-convertible fiat currency, a floating exchange rate, and no debts denominated in a currency it doesn’t issue. Such nations can’t become involuntarily insolvent because they always create more currency to pay debts denominated in that currency.

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

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

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

MMT answer: No, the Federal Government is not like a household! Households can’t make their own currency and require that people use that currency to pay taxes.

Households can’t make their own currency and require that people use that currency to pay taxes. Households can run out of money; but the US can’t ever run out of money as long as Congress decides to appropriate spending and gives the Executive the authority to implement that spending. So, the Federal Government doesn’t have to sacrifice to live within its means, since its “means” to create new currency is limited only by its own decisions and not by any factors external to it. Put simply, Federal spending including deficit spending doesn’t cost anything in the doing. The only relevant question is its real effects on the economy.

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

MMT answer: Social Security has no fiscal problems. The SS crisis is a phoney one. So, no solution to this nonexistent 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

Again, this austerian claim assumes that Social Security funding is a fiscal problem and that the program needs to be strengthened by making the program “fiscally sustainable.” But that claim is at issue. Apart from the fact, that it isn’t obvious that a bi-partisan solution to a fiscal problem would produce a real solution, it’s also true that this is a fake fiscal problem.

Social Security should be strengthened alright. But the way to strengthen it is to guarantee its funding in perpetuity, and to greatly increase benefits for many seniors whose current benefits leave them scraping the poverty line. Try doubling SS benefits while providing full payroll tax cuts. That will strengthen SS and the economy as well.

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

MMT answer: This is total nonsense, because federal spending is costless to the Government

If the debt subject to the limit bothers the neoliberal austerians so much, they ought to be supporting full payoff of the debt using PPCS profits. Doing that won’t harm the economy, and it won’t cause inflation either, since the bonds retired are more inflationary then the money paid to redeem them.

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

MMT answer: 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 that’s why it can’t become Greece, Ireland, or any other Eurozone nation.

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

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

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

MMT answer: No! REAL Fiscal Responsibility is fiscal policy intended to achieve public purposes while also maintaining or increasing fiscal sustainability viewed as the extent to which patterns of Government spending do not undermine the capability of the Government to continue to spend to achieve its public purposes.

So, the REAL Government fiscal responsibility problem is not the problem of everyone “sucking it up” and responsibly accepting austerity. It is not targeting the debt-to-GDP ratio and managing Government spending to try to stabilize it. Instead, it is the problem of people facing up to the need to use fiscal policy to stop our out of control economy from ruining the lives of any more Americans.

This means that the REAL solution to the REAL fiscal responsibility problem is for our leaders in Congress and the Executive Branch, to remove fiscal constraints and use the fiscal powers of the Federal Government to fund solutions to the many national problems we face, starting with creating full employment, and a real universal health care system in which no one is shut out, or forced into foreclosure or bankruptcy by medical bills, and then all the other serious problems we face, but now will not handle because we claim a non-existent fiscal incapacity of the Federal Government. There is no incapacity! We have not run out of money! We have only run out of smarts, morals, will, and courage! We need to get those back, and do what must be done to reclaim the future for working Americans.

Federal Government austerity will create jobs

MMT answer: Right! Show us one case where austerity is working

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

Conclusion: Saying No to Neoliberal Austerity

So, the importance of continuing to counter austerian propaganda coming out of the Peterson Foundation and the organizations it allies with, and funds, remains. We must continue to try to break through the screen of the Petersonian closed system, the Washington/New York consensus. One of the popular slogans for the austerians this year is “Debate the Debt.” There’s a petition web site urging politicians to debate the debt. There was even a proposal demanding that the presidential candidates devote a whole presidential debate to the debt and deficit issues.

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

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

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

(Cross-posted from New Economic Perspectives.)

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

6:29 am in Uncategorized by letsgetitdone

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

I started this lengthy series by saying:

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

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

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

The Government is running out of money

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

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

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

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

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

The Government can only raise money by taxing or borrowing

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

No! REAL Fiscal Responsibility is fiscal policy intended to achieve public purposes while also maintaining or increasing fiscal sustainability viewed as the extent to which patterns of Government spending do not undermine the capability of the Government to continue to spend to achieve its public purposes. So, the REAL Government fiscal responsibility problem is not the problem of everyone “sucking it up” and responsibly accepting austerity. It is not targeting the debt-to-GDP ratio and managing Government spending to try to stabilize it.

Instead, it is the problem of people facing up to the need to use fiscal policy to stop our out of control economy from ruining the lives of any more Americans. This means that the REAL solution to the REAL fiscal responsibility problem is for our leaders in Congress and the Executive Branch, to remove fiscal constraints and use the fiscal powers of the Federal Government to fund solutions to the many national problems we face, starting with creating full employment, and a real universal health care system in which no one is shut out, or forced into foreclosure or bankruptcy by medical bills, and then all the other serious problems we face, but now will not handle because we claim a non-existent fiscal incapacity of the Federal Government. There is no incapacity! We have not run out of money! We have only run out of smarts, will, and courage! We need to get those back, and do what must be done to reclaim the future for working Americans.

Federal Government austerity will create jobs.

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

Conclusion: Saying No to Neoliberal Austerity

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Fiscal Summit Counter-Narrative: Part One

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

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

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

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

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

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

(Cross-posted from Correntewire.com)

The Eurozone Torture Chamber

5:28 am in Uncategorized by letsgetitdone

By

Warren Mosler

(With permission of the author)

(Cross-posted from Correntewire.com)

Looking like it was another ‘buy the rumor sell the news’ near term.

Euros on a monopoly board.

Photo: Images of Money / Flickr.

After you do the maths it still doesn’t add up.

It can’t add up.

Ever.

Given today’s institutional structures- pension funds, insurance reserves, etc.- that include massive, tax advantaged, demand leakages where private sector credit expansion is bound to periodically fall short full employment levels,and with the private sector necessarily pro cyclical, counter cyclical fiscal adjustments are, for all practical purposes, entirely in the realm of the issuer of the currency- the ECB, and not the users of the currency- the euro member nations.

In other words, as previously discussed, the maths can’t add up without the ECB, directly or indirectly, writing the check.

And that includes the banking system, which, to serve public purpose, requires credible deposit insurance, again meaning support from the issuer of the currency.

The last few weeks have demonstrated that the ECB does ‘write the check’ for bank liquidity even though it’s not legally required to do that, (and even though some think it’s not acting within legal limits) but it won’t just come out and say it.

And, apart perhaps from the Greek PSI (100 billion euro bond tax), which they still call ‘voluntary’, no government has missed a payment, also with indirect ECB support either through bond buying or via the banking system, but, again, it won’t just come out and say it’s an ongoing policy.

So while the ECB can and has ‘written the check’ as needed, there has been no formal proclamation of any sort that it will continue to do so. Nor does it look like there will be any such over policy announcement for a considerable period of time.

This means any manager of ‘other people’s money’ with any fiduciary responsibility will continue to remain on the sidelines.

And even as markets fluctuate, and then some, underneath it all all payments are met on a timely basis and the banking system continues to function to service deposits and loans.

And budget deficits will continue to be deemed too large, (at least until private sector credit expansion exceeds the ‘savings desires’/demand leakages) ensuring the maths don’t ever add up without the assumption of the ECB writing the check.

One last thing.

Publicly, at least, they all still think the problem in the euro zone is that the public debts/deficits are too high. And to reduce debt the member nations need to cut spending and/or hike taxes, either immediately or down the road.

A good economy with rising debt and ECB support to keep it all going isn’t even a consideration.

They’ve painted themselves into an ideological corner.

And deficit spending, exacerbated by austerity, may nonetheless be high enough for it all to muddle through at current (deplorable) levels of economic performance.

This economic ‘torture chamber’ of mass unemployment can, operationally, persist indefinitely, even as, politically, it’s showing signs of coming apart.

The founders of the euro believed a single currency would work to prevent a third great war.

So they did what it took politically to get the consensus needed to create the euro. Ironically not realizing what they created to promote unity has turned out to be the instrument of social disintegration.

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

5:26 pm in Uncategorized by letsgetitdone

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Warren Mosler replies saying:

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

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

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

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

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

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

L. Randall Wray:

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

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

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

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

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

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

Bill Mitchell replies:

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

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

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

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

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

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

Bill Mitchell adds:

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

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

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

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

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

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

Unidentified then said:

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

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

Warren Mosler: “Any bloggers in here?”

Unidentified: “One or two.”

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

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

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

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

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

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

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

Stephanie Kelton: “I was…”

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

Stephanie Kelton replies:

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

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

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

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

Warren Mosler: “Yes.”

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

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

Bill Mitchell then added a long comment on policy:

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

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

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

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

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

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

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

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

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

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

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

Bill Mitchell adds:

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

Joe Firestone: “There is one last question.”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(Cross-posted from Correntewire.com)

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

8:20 pm in Uncategorized by letsgetitdone

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

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

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

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

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

Presentation by Professor L. Randall Wray

Randy Wray begins his presentation with this overview:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Randy continues:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Randy goes on:

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

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

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

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

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

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

Presentation by Professor Pavlina Tcherneva

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

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

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

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

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

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

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

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

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

Pavlina continues:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And Pavlina ends:

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

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

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

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

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

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

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

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

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

“Among these are:

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

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

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

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

“The rightof every family to a decent home;

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

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

“The right to a good education.

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

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

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

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

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

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

(Cross-posted from Correntewire.com)

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

1:46 pm in Uncategorized by letsgetitdone

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

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

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

Marshall Auerback’s Presentation On Inflation and Hyper-Inflation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

So:

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

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

And he follows with:

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

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

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

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

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

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

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

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

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

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

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

Warren Mosler:

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

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

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

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

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

Bill Mitchell:

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

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

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

L. Randall Wray:

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

Pavlina Tcherneva:

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

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

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

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

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

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

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

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

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

And then Bill Mitchell adds:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Warren Mosler:

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

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

Warren Mosler:

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

Marshall Auerback:

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

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

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

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

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

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

L. Randall Wray:

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

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

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

Bill Mitchell:

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

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

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

Warren Mosler:

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

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

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

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

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

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

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

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

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

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

Conclusion

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

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

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

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

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

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

(Cross-posted from Correntewire.com)