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by selise

James K. Galbraith: The Final Death (and Next Life) of Maynard Keynes

4:26 am in Uncategorized by selise

"John Maynard Keynes"

"John Maynard Keynes" by Steve Hunnisett on flickr

Posted below, with kind permission of the author, is the transcript (see note below) of James K. Galbraith’s keynote lecture to the 5th annual “Dijon” conference on Post Keynesian economics, meeting at Roskilde University near Copenhagen, Denmark on May 13, 2011. Please see the source link at UTIP for the audio, which I highly recommend. — selise

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It’s of course a great privilege for me to be here in this role and especially on the occasion of the 75th anniversary of the publication of the General Theory.

Two years ago, as you may recall, our profession enjoyed a moment of ferment. Economists who had built their careers on inflation targeting, rational expectations, representative agents, the efficient markets hypothesis, dynamic stochastic general equilibrium models, the virtues of deregulation and privatization and the Great Moderation were forced by events momentarily to shut up. The fact that they had been absurdly, conspicuously and even in some cases admittedly wrong imposed even a little humility on a few. One senior American legal policy intellectual, a fellow traveler of the Chicago School, announced his conversion to Keynesianism as though it were news. Read the rest of this entry →

by selise

Dear CPC Co-Chair Rep. Keith Ellison: Progressive Values need a Progressive Economic Policy

9:12 pm in Uncategorized by selise

If the road to hell is paved with good intentions, then the road political progressives are on may be very well paved, but it’s still heading in the wrong direction.

Prof. Stephanie Kelton explains why in her response to CPC Co-Chair Representative Keith Ellison:

Maddening! The Clinton surpluses were driven by the bubble and unsustainable private sector deficits. When the bubble burst, stocks crashed, the economy went into recession, and the surplus quickly reversed itself. It was only AFTER the government’s budget moved sharply into deficit that the private sector was able to get out of the red. All of this would happened even without 9/11, the wars in Iraq and Afghanistan, the subprime crisis, etc. We cannot keep relying on asset bubbles (stocks, housing, whatever) to drive economic growth.

The simple fact is this: A GOVERNMENT SURPLUS IMPLIES A DEFICIT IN THE PRIVATE SECTOR. And the private sector, unlike the public sector, cannot survive when it’s running a deficit. Anyone who does not recognize this simple fact (intuitively or empirically) should not offer commentary on matters of such significance.

Government Deficits allow the private sector to net save financial assets. Balance the budget, and the private sector loses financial assets. Run a government surplus, and you drive the private sector into deficit.

Someone in Washington better figure this out pretty damn quick, or our children and grandchildren are going to be burdened like never before.

The Ph.D. Economists who blog here understand:

Excerpts from This Is Our Moment by Representative Keith Ellison:

America has an historic opportunity. We have the chance to address our budget deficit in a manner not seen since President Bill Clinton created a budget surplus in 1999. And if we do it right, we could pave the way for a vibrant American economy based not on gimmicks like giveaways for special interests, but on job creation for working Americans. As co-chair of the Congressional Progressive Caucus, I urge us to avoid a default on the faith and credit of the United States while protecting Medicare, Medicaid and Social Security.

The Congressional Progressive Caucus stands with the American people. Long before Republicans took our economy hostage, we introduced the People’s Budget, the most fiscally responsible deficit plan introduced this year. The People’s Budget would eliminate the deficit in 10 years. Economists across the political spectrum have called it courageous and responsible. Introducing this budget was one of my proudest moments as a Member of Congress, because it shows the power of Progressive policies and values. Creating an economy that reduces deficits and creates jobs is a progressive value, not just a slogan as it is for the Tea Party.

As the People’s Budget has proposed, and the president has affirmed, our solution must reflect the same values that have motivated us historically. We believe in a fiscally healthy America because it leads to an economically healthy America. A balanced budget is critical precisely because it allows us to maintain the services that the middle class depends on. Any deficit deal that takes money away from seniors and American workers who rely on Social Security, Medicare, or Medicaid undermines the original goal of deficit reduction. Any deficit deal that cuts food stamps but pampers the wealthy is not only bad for the most vulnerable Americans, but damages our fiscal health.

See Warren Mosler for more: Kelton responds to the Progressive Caucus Co-chair

by selise

James K. Galbraith: Without the rule of law, the financial sector is no use to anyone except those who own it and the politicians they own

8:37 am in Uncategorized by selise

"Law Books"

"Law Books" by seychelles88 on flickr

Posted below, with kind permission of the author, is the transcript (see note below) of James K. Galbraith’s talk on financial fraud at the 20th annual Levy Institute Hyman Minsky conference at the Ford Foundation in New York City on April 15, 2011.

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In the past month I’ve attended two meetings as a non-speaker: one at the IMF and the other last weekend at Bretton Woods.

At both I asked the same question, from the floor. How is it possible to have these somber and well-informed discussions of financial supervision, replete with experts and high officials, and not one mention of the word “fraud?”

I received no real answer on either occasion. I trust, in fact that the issue already has been aired at this conference but I wasn’t able to be here before today so I don’t know for sure.

What is fraud? Read the rest of this entry →

by selise

Marshall Auerback: Worse than Hoover

10:25 pm in Uncategorized by selise

[x-posted with permission from New Economic Perspectives -- selise]

Worse than Hoover
By Marshall Auerback

It’s actually a bit over the top and unfair to compare Barack Obama with Herbert Hoover – unfair that is, to the memory of Herbert Hoover.  The received image of the latter is the dour, technocrat who looked on with indifference while the country went to pieces.  This is actually an exaggeration.  As Kevin Baker convincingly argued in his Harper’s Magazine piece, “Barack Hoover Obama”, President Hoover did try to organize national, voluntary efforts to hire the unemployed, provide charity, and sought to create a private banking pool. When these efforts collapsed or fell short, he started a dozen Home Loan Discount Banks to help individuals refinance their mortgages and save their homes.  Indeed, the Reconstruction Finance Corporation, which became famous for its exploits under FDR and Jesse Jones, was actually created by Hoover.  Often tarred with the liquidationist philosophy of his Treasury Secretary, the establishment of the RFC was, as Baker suggested, “a direct rebuttal to Andrew Mellon’s prescription of creative destruction. Rather than liquidating banks, railroads, and agricultural cooperatives, the RFC would lend them money to stay afloat.”

Hoover’s tragedy lay in the fact that whilst he recognized the deficiencies of the prevailing neo-classical laissez-faire nostrums of his day, he could not ultimately break with them and accept that the economic tenets which he had grown up with were deficient in terms of dealing with the huge unemployment challenges posed by the Great Depression.  By contrast, Roosevelt was himself instinctively a fiscal conservative throughout much of the early stages of his political career (and campaigned as a gold standard man during the election of 1932), but ultimately had the vision (or, at least, excellent political instincts) to recognize the need to cut himself off from the dogma of the past and try something new in a persistent spirit of experimentation. Not everything FDR did worked, but his lack of rigid ideology and his bold spirit of economic experimentation ultimately did much to reduce the scourge of unemployment, even though such policies brought him into significant conflict with the economic royalists of his day.

Barack Obama’s style of governing largely reflects an acceptance of the status quo. His “economic experts” also reflects this preference.  As Baker argued, “it’s as if, after winning election in 1932, FDR had brought Andrew Mellon back to the Treasury.”

To the extent that he displays any kind of radicalism, it is to roll back the frontiers of the New Deal and Great Society, in effect gutting the Democratic Party of its core social legacy.  This assertion will no doubt inflame the diminishing Obama supporters, who insist the president would never cut Social Security or Medicare, that he’s merely been exploring every possible route to a deal with the GOP.  But the evidence increasingly suggests otherwise.

Perhaps, as’s Joan Walsh suggests, the president sincerely believes that the intense polarization of American politics isn’t merely a symptom of our problems but a problem in itself – “and thus compromise is not just a means to an end but an end in itself, to try to create a safe harbor for people to reach some new common ground”.   One finds further support for this view within Barack Obama’s own writings. A major theme of his 2006 book The Audacity of Hope is impatience with “the smallness of our politics” and its “partisanship and acrimony.” He expresses frustration at how “the tumult of the sixties and the subsequent backlash continues to drive our political discourse.”

There appears little question, then, that the President values compromise, indeed appears to enshrine it as the apex of all great Presidencies (ironically citing Lincoln’s compromise on slavery as a perfect illustration of this ideal).  But the problem with Walsh’s supposition is that the President’s accommodation with his political enemies, his apparent infatuation with a “third way”, suggests that he is being forced to compromise on a particular set of ideals and principles which he has hitherto embraced dearly.

But what is this President’s ideal? The only time in our national discussions where Mr. Obama has evinced any kind of passion has been during the debt ceiling negotiations.  He has, since the inception of his presidency, elevated budget deficit reductions and the “reform” of entitlements as major transformational goals of his Presidency (rather than seeing deficit reduction as a by-product of economic growth).  As early as January 2009, before his inauguration (but after the election, of course), then President-elect Obama pledged to shape a new Social Security and Medicare “bargain” with the American people, saying that the nation’s long-term economic recovery could not be attained unless the government finally got control over its most costly entitlement programs (

In other words, Obama has been on about this since the inception of his Presidency.  Recall that it was Barack Obama, NOT the GOP, who first raised the issue of cutting entitlements via the Simpson-Bowles Commission.  The President has also parroted the line of most Wall Street economists as he has persistently characterized our budget deficits and government spending as “fiscally unsustainable” without ever seeking to define what that meant.  One of his earliest pledges was to cut the deficit in half by the end of his first term, in effect paying no heed to the economic context when he made that ridiculous assertion.

In essence, the debt ceiling dispute is not forcing a compromise on this President, but is instead is viewed by him as a golden opportunity to do what he’s always wanted to do. That also explains why he won’t ask for a clean vote on the debt ceiling, why he has ignored the coin seignorage option, and why he has persistently avoided the gambit of challenging its constitutionality via the 14th amendment, even though his Democrat predecessor has already suggested that this is precisely what he would do: Bill Clinton asserted last week that he would use the constitutional option to raise the debt ceiling and dare Congress to stop him (

It also explains why President Obama remains infatuated by bigger and bigger “grand bargains”, which seem to take us further away from averting the immediate economic catastrophe potentially at hand, which is to say national default.  The Administration, then, is not going for a bipartisan compromise, but going for broke on something which the President apparent holds sacrosanct.  In reality, true compromise would start with the notion of a clean vote on the debt ceiling or, at the very least, a minimal series of spending cuts that would avert the immediate risk of a default, whilst creating less deflationary pressures.

Have you actually seen the President ever get angrier than he was at his press conference announcing the collapse of the negotiations on the debt ceiling extension? Not even on health care “reform” can we ever recall seeing Obama this engaged, and manifesting something close to real emotion as he has here.  That does suggest something beyond mere political calculation; it hints at core beliefs.

And to what end? Neither he, nor the Congress appear to recognize the downward acceleration in GDP triggered when the spending limits are reached if the automatic stabilizers are disabled because they are no longer funded as a consequence of the debt ceiling limitations (again, a LEGAL, rather than operational constraint – the debt ceiling reflects an UNWILLINGNESS to pay, rather than an INABILITY to pay).

So spending will be further cut, debt deflation dynamics will intensify, sales will go down more, more jobs will be lost, and tax revenues will collapse even further. Which will set the whole process off again:  more spending is cut, sales go down more, more jobs are lost, and tax revenues fall more, etc. etc. etc. until no one is left working. All are radically underestimating the speed and extent of the subsequent damage.

Unlike President Hoover, who inherited the foundations of a huge credit bubble from the 1920s and found himself overwhelmed by it, this President is worse.  He is, through his actions, creating the conditions for a second Great Depression because of his misconceived belief that too much government spending “crowds out” private investment, and takes dollars out of the economy when it borrows. And therefore, goes the perverse logic, when the government stops borrowing to spend, the economy will have those dollars to replace the lost federal spending.

And so after the initial fall, Obama believes, it will all come back that much stronger.

Except, that as my friend Warren Mosler insists, he is dead wrong, and therefore we are all dead ducks.

As Warren notes, have you ever heard anybody say ‘I wish they’d pay off those Tsy bonds so I could get my money back and go buy something.’

Of course not! Notes Warren:

“Treasury borrowing gives dollars people have already decided to save a place to go. Dollars that came from deficit spending- dollars spent but not taxed. If they were spent and taxed, they’d be gone, not saved.

Treasury bonds provide a resting place for voluntary savings. They are bought voluntarily. They don’t ‘take’ anything away from anyone.

For example, imaging two people, each with $1 million. One pays a $1 million tax. The other doesn’t get taxed and decides to buy $1 million in Treasury bonds.  Pretty obvious who’s better off, and who’s still solvent and consuming.”

Someone please explain this basic economic tenet to the President so that he can effect a genuine compromise, not a destructive “grand bargain” which will suck trillions of demand out of a still fragile economy. The predictable result is of his current stance is that, even as he claims to recognize the interlocking nature of the problems facing us and vows to “solve the problem” once and for all via a “grand bargain”, Obama is in fact tearing apart most of the foundations which were tentatively initiated under Hoover, but which came to full fruition under FDR. If he continues down this ruinous path, $150 billion/month in spending will be cut. Such economic thinking isn’t worthy of Mellon, let alone Herbert Hoover.

by selise

Dear Representative McGovern [Update: Message & Book Delivered]

9:03 pm in Uncategorized by selise

Please see update below. — selise

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The Honorable James P. McGovern
438 Cannon House Office Building
United States House of Representatives
Washington, DC 20515

Dear Representative McGovern,

My name is xxxx xxxx. I am writing to ask you to take a leadership role in resolving the unnecessary federal budget debt limit crisis.

Thank you for your statement, “any cuts to Social Security, Medicare and Medicaid should be taken off the table” and also for recognizing the grave risk an unnecessary default poses for our Country.(1)

However, it is past time for you to do more. An unnecessary crisis has been allowed to develop that threatens not only Social Security, Medicare and Medicaid, but also the economic well being of our entire Nation.

The current debt limit crisis is unnecessary because the Administration has the power to prevent a default. There are at least two mechanisms by which the debt limit deadline can be circumvented: President Obama can invoke the 14th Amendment, a method former President Bill Clinton has endorsed(2), or President Obama can instruct the Treasury to mint a $1 Trillion dollar platinum coin to be deposited at the Federal Reserve.(3)

The current debt limit crisis is based upon false premises about the nature of Federal Government deficits. Many innocently false statements have been made and these statements must immediately be corrected in order to properly and accurately inform both your Colleagues in Congress and the American People of the basic economic facts. Read the rest of this entry →

by selise

Warren Mosler: MMT to President Obama and Members of Congress

1:30 pm in Uncategorized by selise

The following is x-posted from The Center of the Universe, with the kind permission of the author. Please see note below. — selise

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MMT to President Obama and Members of Congress:

Deficit Reduction Takes Away Our Savings


Yes, it’s called the national debt, but US Treasury securities are nothing more than savings accounts at the Federal Reserve Bank.

The Federal debt IS the world’s dollars savings- to the penny!

The US deficit clock is also the world dollar savings clock- to the penny!

And therefore, deficit reduction takes away our savings.



There is NO SUCH THING as a long term Federal deficit problem.

The US Government CAN’T run out of dollars.

US Government spending is NOT dependent on foreign lenders.

The US Government can’t EVER have a funding crisis like Greece — there is no such thing for ANY issuer of its own currency.

US Government interest rates are under the control of our Federal Reserve Bank, and not market forces.

The risk of too much spending when we get to full employment is higher prices, and NOT insolvency or a funding crisis.

Therefore, given our sky high unemployment, and depressed economy,

An informed Congress would be in heated debate over whether to increase federal spending, or decrease taxes.

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NOTE: Please read Warren Mosler’s book, The 7 Deadly Innocent Frauds of Economic Policy, with forward by James K. Galbraith. — selise

also x-posted at my blog — selise

by selise

Stephanie Kelton: What Happens When the Government Tightens its Belt?

12:28 pm in Uncategorized by selise

The following two-part series is x-posted from New Economic Perspectives, with the kind permission of the author. — selise

UPDATE: At the Peterson Foundation Fiscal Summit, no one challenged the underlying premise: that to be Fiscally Responsible, we have to be concerned about balancing the Federal Government Budget. But that premise is both false and incompatible with progressive policy! I hope these posts will help show why that is so. — selise

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What Happens When the Government Tightens its Belt? (Part I)
by Stephanie Kelton

Imagine two people sitting on opposite ends of a 15-foot teeter-totter. The laws of physics dictate that the seesaw will balance if the product of the first mass (w1) and its distance (d1) from the fulcrum (i.e. the balancing point) is equal to the product of the other mass (w2) and its distance (d2) from the fulcrum. Thus, the physicist can show that the teeter-totter will be in balance when the fulcrum is placed 6 feet from the end holding a 150lb person and 9 feet from the end holding a 100lb person. Moreover, the laws of physics ensure that an imbalance will arise if the mass or the relative position of one of the people is changed.


The laws of accounting allow us to demonstrate that similarly powerful concepts apply to the science of economics. Beginning with the simple identity for GDP in a closed economy, we have:

[1]   Y = C + I + G, where:

Y = GDP = National Income
C = Aggregate Consumption Expenditure
I = Aggregate Investment Expenditure
G = Aggregate Government Expenditure

For economists, this is as obvious as stating that a linear foot is the sum of 12 sequential inches. It simply recognizes that the total amount of money spent buying newly produced goods and services will yield an equivalent income to the sellers of these products. Thus, it demonstrates that expenditures are a source of income.

Once earned, income can be allocated in one of three ways. At the end of the day, all income (Y) will be spent (C), saved (S) or used in payment of taxes (T):

[2]   Y = C + S + T

Since they are equivalent expressions for Y, we can set equation [1] equal to equation [2], giving us:

C + I + G = C + S + T

Or, after canceling (C) from both sides and moving terms around:

[3]   (S – I) = (G – T)

Equation [3] shows that there is a direct relationship between what’s happening in the private sector (S – I) and what’s happening in the public sector (G – T). But it is not the one that Pete Peterson, Erskin Bowles, or President Obama would have you believe. And I want you to understand why they are wrong.

To understand the argument, imagine that you and Uncle Sam are sitting on opposite ends of a teeter-totter. You represent the private sector, and your financial status is given by (S – I). Your budget can be in balance (S = I), in deficit (S < I) or in surplus (S > I). When your financial status is positive (S > I), you are net saving. When your financial status is negative (S < I), you are net borrowing. Uncle Sam’s financial status is equal to (G – T), and, like yours, his budget may be balanced (G = T), in deficit (G > T) or in surplus (G < T). When you interact, only three outcomes are possible.

First, it is conceivable that (S = I) and (G = T) so that (S – I) = 0 and (G – T) = 0. When this condition holds, the teeter-totter will level off with each of you experiencing a balanced budget.


In the above scenario, the government is balancing its receipts (T) and expenditures (G), and you are balancing your savings and investment spending. There is no net gain/loss.

But suppose the government begins to spend more than it collects in taxes (i.e. G > T). How will Uncle Sam’s deficit affect your position on the teeter-totter? The answer is as straightforward as increasing the mass of the person on the right-hand side of the seesaw. As Uncle Sam’s financial position turns negative, your financial position turns positive.


This should make intuitive as well as mathematical sense, because when Uncle Sam runs a deficit, you receive more financial assets than you lose through taxation. Put simply, Uncle Sam’s deficit lifts you into a surplus position. Moreover, bigger deficits mean bigger surpluses for you.

Finally, let’s see what happens when Uncle Sam tightens his belt. Suppose, for example, that we were able to duplicate the much-coveted surpluses of 1999-2001. What would (and did!) happen to the private sector’s financial position?


Because the economy’s financial flows are a closed system – every payment must come from somewhere and end up somewhere – one sector’s surplus is always the other sector’s deficit. As the government “tightens” its belt, it “lightens” its load on the teeter-totter, shifting the relative burden onto you.

This is not rocket science, but it appears to befuddle scores of educated people, including President Obama, who said, “small businesses and families are tightening their belts. Their government should, too.” This kind of rhetoric may temporarily boost his approval ratings, but the policy itself will undermine the efforts of the very families and small businesses that are trying to improve their financial positions.

* I’ll be back with a second installment that shows what happens when we ‘open’ the economy to take into account the foreign sector (and the relevant financial flows). Many of us have been working with financial balance equations for years (see here for references), so the current effort is nothing new. I am merely trying to make the arguments more accessible by changing the way they are presented.

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What Happens When the Government Tightens its Belt? (Part II)
by Stephanie Kelton

In a recent post, I used a simple teeter-totter diagram to show how the government’s financial balance is related to the private sector’s financial balance in a closed economy. With only two sectors – government and non-government – I showed that a government deficit necessarily implies a surplus in the private sector.


As expected, this accounting truism ruffled the feathers of a flock of readers who have been programmed to launch into an anti-government tirade at the mere mention of the public sector and to regard the dangers of deficit spending as an unimpeachable fact. And while you’re certainly entitled to your own political views, you are not, as Senator Moynihan famously said, entitled to your own facts.

Other, less impenetrable minds, agreed that the private sector’s financial position must improve as the government’s deficit increases in a closed economy, but they argued that I had not demonstrated anything meaningful because I ignored the financial flows that occur in an open economy.

I still hope to convince both groups that they are acting against their own economic interests when they support policies to balance the budget or reduce the deficit, either by raising taxes or cutting government expenditures. So let’s continue the exercise and, as promised, extend the argument to the more realistic open-economy in which we actually live.

In an open economy, income flows into and out of the domestic economy as residents and foreigners buy goods and services (exports minus imports), make and receive payments such as interest and dividends (factor income) and make net transfer payments (such as foreign aid). Each country keeps track of these payments using a balance of payments (BOP) account, which summarizes the international monetary transactions that take place between the home country and the rest of the world. The BOP has two primary components – the current account and the capital account – and we can use either one to show whether, on balance, money is flowing into or out of a country.

When we incorporate these international flows, we transform the closed-economy accounting identity I used in my previous post:

[1] Domestic Private Surplus = Government Deficit

into the open-economy accounting identity shown below:

[2] Domestic Private   =  Government  +   Current Account
          Surplus                      Deficit                  Balance

or, equivalently,

[3] Domestic Private =   Government   +  Capital Account
         Surplus                       Surplus                Balance

When the current account balance is positive, it means that we in the private sector (households and domestic firms) are accumulating net financial claims on foreigners. When it is negative, they are accumulating net financial claims on us. Thus, a positive current account implies a negative capital account and vice versa.

To see this in the context of the teeter-totter model, let’s initially hold the public sector’s balance constant at zero (i.e. let’s assume the government is balancing its budget so that G = T). With the government budget in balance, Uncle Sam is a “weightless” entity on the teeter-totter, so that the private sector’s financial position will simply reflect the “weight” of the capital account. Suppose, first, that the current account is in surplus (i.e. the capital account shows an equivalent deficit):


The image above depicts the benefit (to the private sector) of a current account surplus (a.k.a a capital account deficit), and it is the outcome that many of you accused me of sidestepping in my previous post. Of course, the U.S. does not have a current account surplus, so let’s address that point before moving on. (And lest anyone begin to hyperventilate, I’ll also address the fact that G ≠ T). First, the current account.

Sticking with (G = T) for the moment, we can show how a current account deficit impacts the private sector’s financial position. As the capital account moves from deficit (diagram above) into surplus (diagram below), we see that the private sector’s financial position moves from surplus into deficit.


But does this all of this hold true in the real world, or is it some kind of economic chicanery? Let’s check the facts.

Equations [2] and [3] above are not based on economic theory. They are accounting identities that always “add up” in the real world. So let’s firm up the discussion about the implications of government “belt tightening” by running through some examples using the real world data found in the table below (Hat tip to Scott Fullwilir for sharing the file. All of the data comes from the National Income and Product Accounts (NIPA) and the Flow of Funds.)

[ Click here for Sectoral Balances Data (.xlsx format) ]

Let’s begin with the data from 1998 (Q3), when the public sector deficit was just 0.01% of GDP and the current account deficit was 2.56% of GDP. Plugging these numbers into equation [2] above, the identity tells us (and the data in the table confirm) that the private sector’s balance must have been:

[2] Domestic Private Sector’s Balance = 0.01% + (-2.56% )= -2.55%


Here, we can see that the private sector’s financial position was deteriorating because it was making large (net) payments to foreigners. Because this loss of financial resources was not offset by the public sector, the private sector’s financial position deteriorated.

To see how a bigger government deficit would have improved the private sector’s financial position, let’s look at the data from 1988 (Q1). As a percent of GDP, the current account balance was 2.59%, nearly the same as before, while the government’s deficit came in at a much higher 4.2% of GDP. We can use Equation [2] to see effect of the larger budget deficit:

[2] Domestic Private Sector’s Balance = 4.2% + (-2.59%) = 1.61%

In this period, the private sector ends up with a surplus because the government’s deficit was large enough to more than offset the negative effect of the current account deficit.


Again, this is simply a property of the sectoral balance sheet identities. Whenever the government’s deficit is too small to offset a deficit in the current account, the private sector will experience a net loss. The result my ruffle your feathers, but it is an unimpeachable fact.

So let’s go back to President Obama’s comment and the reason I wrote this blog in the first place. The President said:

“[S]mall businesses and families are tightening their belts. Their government should, too.”

Wrong! When we tighten our belts, it means that we are trying to build up our savings. We do this by spending less. But spending drives our economy. Sales create jobs. So unless Obama has a secret plan to reverse three decades of current account deficits, the Government needs to loosen its belt when we tighten ours. If it doesn’t, then millions of us will lose our shirts.

** An aside: I am aware that I have said nothing about the usefulness of the spending projects, the waste and inefficiency that exists with many government programs, cronyism, inequality, etc., etc. These are legitimate and important questions, but they are not the focus of this analysis. I wrote this series of blogs to try to get people to understand the interplay between the private, public and foreign sectors’ balance sheets. Criticizing me for not addressing a myriad of other issues is like reading Old Yeller and complaining, “What about the cat? You’ve completely ignored the genus Felis!”

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Note: also x-posted at my blog – selise

by selise

Peterson Foundation 2011 Fiscal Summit Today: Watch Live!

2:21 pm in Uncategorized by selise

A bipartisan gathering of deficit terrorists and deficit errorists is convening in D.C. today to discuss how best to continue trashing of American’s middle class, and the economy generally (h/t PrestoVivace). Livestream is available, although I strongly recommend a quick vaccination against the bat-shit-crazy before viewing.

From the Peter G. Peterson Foundation website: Nation’s Lawmakers, Policy Experts and Thought Leaders to Come Together in Washington on May 25 to Discuss Bipartisan Solutions to America’s Long-Term Debt and Deficits:

On Wednesday, May 25, 2011, senior Administration officials, policy experts and Democratic and Republican elected leaders will come together in Washington to discuss solutions to the nation’s fiscal challenges at the 2011 Fiscal Summit: Solutions for America’s Future, convened by the Peter G. Peterson Foundation. As the nation confronts critical choices about how to address our long-term debt and deficits, the Foundation’s second annual Summit will bring together hundreds of stakeholders from across the ideological spectrum to discuss proposals to be presented by leading policy organizations and explore concrete, bipartisan solutions.

Participants include keynote speaker President Bill Clinton; Members of the Congress working on fiscal issues including Senators Saxby Chambliss (R-GA), Kent Conrad (D-N.D.), Mike Crapo (R-ID), Dick Durbin (D-IL), and Mark Warner (D-VA) and Congressman Paul Ryan (R-WI); National Economic Council Director Gene Sperling; Governor Mitch Daniels, Co-Chair of the National Commission on Fiscal Responsibility and Reform Alan Simpson, and Foundation Chairman Pete Peterson and Vice Chairman Michael Peterson.

At last year’s Summit, participants agreed on the need to take action on the nation’s long-term debt and deficits. With increased consensus that our country’s fiscal situation is unsustainable, this year’s Summit will bring together stakeholders from across the political spectrum to discuss a range of concrete, comprehensive solutions.

The American Enterprise Institute, Bipartisan Policy Center, Center for American Progress, Economic Policy Institute, Heritage Foundation and Roosevelt Institute Campus Network will present and discuss their own proposed packages of solutions for achieving long-term fiscal sustainability at the Summit. These leading policy organizations, representing diverse perspectives, received grants from the Peter G. Peterson Foundation to develop comprehensive plans to address the nation’s projected long-term debt and deficits.

If any sane voices are to be heard, the only group I hold out any hope for is the Roosevelt Institute Campus Network. Will anyone do what is actually needed and challenge the underlying premise? All it would take is for some brave soul to ask the question, “Is The Federal Debt Unsustainable?” as James K. Galbraith did in his May 5, 2011 Policy Note at the Levy Economics Institute (pdf). Here are a few bits to assist in watching the Peterson freak show:

By general agreement, the federal budget is on an “unsustainable path.” Try typing the phrase into Google News. When I did it, 19 of the first 20 hits referred to the federal debt.

But what does this mean? The phrase is often stated, but rarely defined clearly. One is led to suspect that some who use the phrase are guided by vague fears, or even that they do not quite know what to be afraid of. After a brief discussion of the major worries, this note will attempt to clarify one, and only one, critical issue: the actual behavior of the public-debt-to-GDP ratio under differing economic assumptions through time.

Some people fear that there may come a moment when the government’s bond markets would close, forcing a default or “bankruptcy.” But this betrays nonunderstanding of both public finances and debt markets. The government controls the legal-tender currency in which its bonds are issued and can always pay its bills with cash. Apart (possibly) from the self-imposed politics of debt ceilings, a US government default on dollar bonds is impossible, and the word “bankruptcy”—which is a court proceeding to protect privatedebtors from their creditors—also does not apply.

Conclusion: It’s the Interest Rate, Stupid
Read the rest of this entry →

by selise

James K. Galbraith: The Implications of Rising Resource Costs for Economic Systems

6:15 am in Uncategorized by selise


Posted below, with kind permission of the author, is the transcript (see note below) of James K. Galbraith’s talk to the Association for Evolutionary Economics (AFEE) session of the Allied Social Sciences Association (ASSA) meeting on January 9, 2011. Please see the source link at UTIP for the audio, which I highly recommend. — selise


This is joint work with Jing Chen and it’s work in progress addressed to a question that we believe has not be adequately dealt with, in fact barely dealt with at all, in any major tradition — neither in the mainstream nor in the Keynesian or progressive responses to the crisis so far.

The question that we are addressing, that we would like to address, is to the implications of rising resource costs for economic systems in general and for the structure of economic society.

Our approach is to treat the economy as having the same form as a biophysical system — something that it obviously does — insofar as economic life is part of human life and involves interaction between organized society and the natural world.

The meaning of this idea, in essence, is that you have to be able to get more value out of your environment than it costs to extract it. Otherwise, you cannot live.

That is true for any form of living organism and it ought to be true, certainly is true, for society as a whole.

The key to extracting resources in an efficient way is to make an investment, that is to say, to build up that part of the economic system which works on the basis of essentially fixed physical resource costs.

And the appropriate analytical framework for thinking about this issue is therefore very much akin to the Marshallian theory of the firm and its treatment of diminishing and increasing returns — topics which seem to have dropped out of economic thinking in modern times but which were, of course, very much alive in the early days of the Keynesian revolution with Allyn Young and Nicholas Kaldor talking about, in particular, the importance of increasing returns.

A system which operates with a high level of fixed costs, that is to say, with a substantial prior investment can achieve a high level of efficiency at a high rate of utilization. To get there you have to have a perspective that involves thinking ahead for a long duration, that is to say, making plans and investments in systems that are expected to last a long time. And for that you have to have a reasonably low uncertainty about the implications of making those investment decisions.

These systems reach their maximum profitability when resource costs are relatively low and thus we think it is not accidental that the Keynesian era debuted in the 1930′s and was able to be pursued for 30 or 40 years without significant interruption because this period occurred in the moment in world economic history when the cost of resources fell by an unprecedented extent. That is to say, we had massive discoveries of cheap energy, of oil and other resources as well as the addition of other ways of extracting energy from the environment, provided you made sufficiently high front end investments.

On the other hand, systems of this kind are quite fragile and vulnerable to rising resource costs. Why? Because physically they require the same level of resources and therefore the cost of operating them rises proportionately to the cost of extracting the energy, the underlying resources, in real terms.

Systems which operate with very low fixed costs and a much higher proportion of variable costs are, on the other hand, more flexible, they’re more resilient. They can contract and expand with the changes in the cost of resources. And therefore they are more likely to survive in a form that is recognizably similar to what they are presently in the face of rising resource costs.

But, they are much less efficient and they operate at a much lower standard level of living.

It is not a smooth transition to move from a system that is built up on the basis of high fixed cost to one which does not have those high fixed costs. It is, on the contrary, abrupt, brutal, and may well involve the disappearance necessarily of a large part of the population supported by the system.

You can think about this in practically any context that you can imagine, and Jing Chen is very ingenious in coming up with examples so I will not tread on that territory by giving too many of them.

But, just as a very simple and intuitive matter, think about transportation systems. You have a network of trains or a network of aircraft that require certain functions to be performed on a continuous basis in order for the system to operate. Such a system will be vulnerable to disruption in the face of relatively small increases in the cost of resources, or for that matter, diminution in the expenses necessary to keep the system going, such as de-icers in airports, for example, in the face of a storm, something which I think everybody with recent experience in Europe probably has some acute and unpleasant memories of in the not very distance past.

On the other hand, if the transport system is built on low fixed cost, say based on animal transport, something you can still observe on the island of Cuba incidentally, you will find that it is not that vulnerable to disruption. On the other hand, it does not provide you with anything like the extent of the services that you can extract from one which has been built up on a heavy investment.

To take an example from an almost seemingly entirely different sphere, consider the dynamics of human reproduction. We have made it very expensive to raise children. The investment required to bring them up to a functioning standard in our society is very, very high. It involves a massive education, massive adaptation to the various systems that we have created, in order to function at a high level in that society. For many people, it is not worth it.

Is it therefore a surprise that many people choose to have fewer and fewer children, or none at all? You can have a much higher living standard if you are not raising a kid — still higher if you are not raising four kids, as some of us are.

On the other hand, in low fixed cost societies, the economics are entirely different and we argue that is a reasonable first approximation explanation for the demographic dynamics in which richer societies have much lower reproduction rates than poorer ones.

Think about the problem of system collapse. It becomes possible within this framework to conceptualize what has happened, and what is happening on an ongoing basis, in the last 30 years in a single unified way. The first major full scale system collapse of the modern era was the USSR in 1991.

Why did it happen? We have become accustomed to not thinking about it, to conceptualizing it, if we think about it at all, as an ideological matter.

But, we would argue, it makes much more sense to consider that the USSR was a single integrated high fixed cost industrial system which operated with very little flexibility in the face of rising resource costs. And given the inefficiency with which resources were extracted and the cost of doing so, it is not surprising that it was very, very fragile.

The question of the Japanese lost decade or two has been extensively explored, but not from this point of view. It was always an article of faith of my generation that Japan was the example of the society — of the proof — that you didn’t need to have access to resources in order to be a prosperous society.

But that was true in a period when resources, the real cost of extracting them, was much lower than it is now. And Japan, not having its own control of resources, has to pay the market price. And one plausible argument is that in a society which is built up and very advanced, the rising cost of resources put such pressure on profitability that even though living standards didn’t collapse in Japan, profitability did. And you get the indicators of a long term and uncorrectable, effectively, economic environment.

What are we going through in Europe and in the United States as we speak?

Is it possible that we are facing, to some degree, a very similar environment in which the conflicts associated with higher real costs of resources are beginning to be played out in the political system? Is there any evidence for this? Well, one of things to remember is that just in advance of the financial crisis, there was a period for a number of months when the oil price went up to $140 a barrel and that had to do with the fact that the swing producers were in a position to control the price, essentially in conjunction with speculative traders in the financial markets.

And so they were able to bring what appeared to be a resource that was running into its physical limits to a point where the price was essentially out of relationship to the current cost of production.

And at the time, in the spring and summer of 2008, those of us who were fully aware that there was an impending financial crisis, for reasons related largely to the fraudulent character of American housing finance markets, were also practically equally concerned about the economic consequences of the run up in oil prices. That tended to have gotten lost in the subsequent history because the oil price came back down again. But there it is.

What are the policy choices when you think about the problem in these terms?

Well, it seems to me basically there are three broad ways of approaching it and then I will stop and let Jing Chen give you a little more depth of the argument we have been trying to make.

The first way to approach it is to break the system, to try to move from a high to a low fixed cost environment. The way you do that, of course, is by destroying the institutions that support the system: government, the social welfare system, the infrastructure. The way you do that is by cutting its budget.

It seems to us that it is obvious that there is a very powerful movement, perhaps of overwhelming power going on right now, to do precisely that in every advanced country that you can think of, in the UK, in the United States, in Europe.


Is it going to be our argument that this is entirely based upon an ideological predilection or stupidity? It seems to me, that is not necessarily adequate. One has to understand, perhaps, that this is one approach which would preserve, at least, the predatory profitability of certain parts of the private system. Although the cost is forcing everybody to live at a much lower standard and the system effectively being able to support far fewer people.

The second way to approach it, which we might call the Chinese model, is to run the system at a loss. The Chinese industrial system largely runs at a loss. Vast numbers of enterprises continue to operate although they have never made a profit, that wouldn’t know how to make a profit, and their losses are absorbed by the banking system which is supported by the state.

The difficulty of that system, something the Chinese authorities understand very well, is that it gives you no control over the rents that are earned by the people who control the scarce resource, namely energy.

What is the approach of China in the face of that? It is to put as much energy as possible under long term contract. Something which they are doing as systematically as is possible in order to make the system continue for as long as it can.

And the third, which might be called the Nick Stern approach, or the approach of progressive, environmentally conscious economists, is to try to rebuild and reconfigure the system to make the long term investments that would be required to keep the rising costs of resources under control by moving from higher cost resources to lower cost resources and by conserving the resources you have available to the maximum extent possible and dealing, not incidentally along the way, with the deferred cost of resources associated with climate change.

That is a hugely demanding agenda. It is being presented to us by our friends at the Union of Concerned Scientists. I heard Nick Stern talking about this two nights ago — to an audience of economists. It is very clearly what they have in mind. But, you have to ask what institutional and policy frameworks can conceivably get us from here to there.

It is not something which can, in the ordinary course of events, yield high private profits unless institutions are created which make it profitable for private actors to do so. And it is not something which can easily be done in the face of private control over large parts of the energy supply sector because, once again, pressure on that sector generates rents which cannot, under those conditions, be turned to the problem of investing. It’s not something that’s going to happen in an environment of uncertainty and doubt about the potential effectiveness of the scheme.

If there is a fourth option, I’d be happy to hear it.


Further Reading:

Chen, Jing and Galbraith, James K., Institutional Structures and Policies in an Environment of Increasingly Scarce and Expensive Resources: A Fixed Cost Perspective, (2011), forthcoming in Journal of Economic Issues.

Chen, Jing and Galbraith, James K., A Biophysical Approach to Production Theory, Working paper, (2009).


NOTE: Remarks above were transcribed from the audio file at UTIP. All errors are mine. — selise

x-posted from my blog — selise

by selise

USG deficits: The Economics, the Politics, the Banksters and You.

9:22 am in Uncategorized by selise

The Economics:

James K. Galbraith: In Defense of Deficits

… a big deficit-reduction program would destroy the economy, or what remains of it, two years into the Great Crisis.

For this reason, the deficit phobia of Wall Street, the press, some economists and practically all politicians is one of the deepest dangers that we face. It’s not just the old and the sick who are threatened; we all are. To cut current deficits without first rebuilding the economic engine of the private credit system is a sure path to stagnation, to a double-dip recession–even to a second Great Depression. To focus obsessively on cutting future deficits is also a path that will obstruct, not assist, what we need to do to re-establish strong growth and high employment.

L. Randall Wray: “Teaching the Fallacy of Composition: The Federal Budget Deficit

We hear politicians and the media arguing that the current federal budget deficit is unsustainable. I have heard numerous politicians refer to their own household situation: if my household continually spent more than its income year after year, it would go bankrupt. Hence, the federal government is on a path to insolvency, and by implication, the budget deficit is bankrupting the nation.

That is another type of fallacy of composition. It ignores the impact that the budget deficit has on other sectors of the economy. Let me go through this in some detail, as it is more complicated than the other examples.

We can divide the economy into 3 sectors. Let’s keep this as simple as possible: there is a private sector that includes both households and firms. There is a government sector that includes both the federal government as well as all levels of state and local governments. And there is a foreign sector that includes imports and exports; (in the simplest model, we can summarize that as net exports—the difference between imports and exports—although to be entirely accurate, we use the current account balance as the measure of the impact of the foreign sector on the balance of income and spending).

At the aggregate level, the dollar spending of all three sectors combined must equal the income received by the three sectors combined. Aggregate spending equals aggregate income. But there is no reason why any one sector must spend an amount exactly equal to its income. One sector can run a surplus (spend less than its income) so long as another runs a deficit (spends more than its income).

Historically the US private sector spends less than its income—that is it runs a surplus. Another way of saying that is that the private sector saves. In the past, on average the private sector spent about 97 cents for every dollar of income.

Historically, the US on average ran a balanced current account—our imports were just about equal to our exports. (As discussed below, that has changed in recent years, so that today the US runs a huge current account deficit.)

Now, if the foreign sector is balanced and the private sector runs a surplus, this means by identity that the government sector runs a deficit. And, in fact, historically the government sector taken as a whole averaged a deficit: it spent about $1.03 for every dollar of national income.

Note that that budget deficit exactly offsets the private sector’s surplus—which was about 3 cents of every dollar of income. In fact, if we have a balanced foreign sector, there is no way for the private sector as a whole to save unless the government runs a deficit. Without a government deficit, there would be no private saving. Sure, one individual can spend less than her income, but another would have to spend more than his income.

While it is commonly believed that continual budget deficits will bankrupt the nation, in reality, those budget deficits are the only way that our private sector can save and accumulate net financial wealth.

Scott Fullwiler (via email):

2010q4 Sector Financial Balances by Scott Fullwiler

L. Randall Wray: The Perfect Fiscal Storm: Causes, Consequences, Solutions

During the Clinton years as the government budget moved to surplus, it was the private sector’s deficit that was the mirror image to the budget surplus plus the current account deficit. This mirror image is what the Wall Street Journal had failed to recognize—and what almost no one except MMT-ers and the Levy Economic Institute’s researchers understand. After the financial collapse, the domestic private sector moved sharply to a large surplus (which is what it normally does in recession), the current account deficit fell (as consumers bought fewer imports), and the budget deficit grew mostly because tax revenue collapsed as domestic sales and employment fell.

Unfortunately, just as policymakers learned the wrong lessons from the Clinton administration budget surpluses—thinking that the federal budget surpluses were great while they actually were just the flip side to the private sector’s deficit spending—they are now learning the wrong lessons from this crash. They’ve managed to convince themselves that it is all caused by government sector profligacy.

The Politics:

James K. Galbraith: Why Progressives Shouldn’t Fall For the Deficit Reduction Trap

The fetish of long-term deficit reduction is politically poisonous — and economically pointless. In reality, we need big budget deficits. We need them now — and down the road.

… once you concede that deficits are actually bad, you’re boxed in. If you exclude Social Security and Medicare, there is no way to cut deficits seriously (short- or long-term, on unchanged economic assumptions) except by slashing the Pentagon or by raising taxes. If you had to do something, I agree, those would be better moves. But good luck. It’s not a political battle one can win.

In reality, we need big budget deficits. We need them now. We need bigger deficits than we’ve got, to stabilize state and local governments and to provide jobs and payroll tax relief. And we may need them for a long time, on an increasing scale, and in the service of a sustained investment strategy aimed at solving our jobs, energy, environment and climate change problems. To pretend that expansionary policies are needed only for now, gives all this away.

The public deficit is just the obverse of net private savings. That is, when private credit is booming, investment exceeds saving and deficits tend to disappear. That’s what happened in the 1990s. When credit collapses, deficits return. That’s what’s happening now. Large long-term deficits will occur, or not, depending only on whether we succeed in generating a new growth cycle, financed by the expansion of private credit. Policies to cut spending or raise taxes — now or for that matter in the future — contribute nothing to this goal.

Financial reform and debt relief are therefore the only paths to public deficit reduction.; It would be nice to have them, for the economy works better and people are happier when they can borrow and invest privately. But if we don’t get them, the alternative isn’t a "return to fiscal responsibility." It’s a choice between large public budget deficits that fund important and useful activities and tax relief, or large deficits because the recession, housing slump and high unemployment drag on and on, all made worse by cuts in Social Security, Medicare and other public spending.

Yes, we must defend Social Security and Medicare from Wall Street and its political agents — which now, sadly, include the Obama White House. But we’ll lose on that — and everything else — if we start by giving up the fight for an aggressive, effective, sustained and long-range economic recovery program, deficits and all.

The Banksters and You:

James K. Galbraith: In Defense of Deficits

To put things crudely, there are two ways to get the increase in total spending that we call “economic growth.” One way is for government to spend. The other is for banks to lend. Leaving aside short-term adjustments like increased net exports or financial innovation, that’s basically all there is. Governments and banks are the two entities with the power to create something from nothing. If total spending power is to grow, one or the other of these two great financial motors–public deficits or private loans–has to be in action.

For ordinary people, public budget deficits, despite their bad reputation, are much better than private loans. Deficits put money in private pockets. Private households get more cash. They own that cash free and clear, and they can spend it as they like. If they wish, they can also convert it into interest-earning government bonds or they can repay their debts. This is called an increase in “net financial wealth.” Ordinary people benefit, but there is nothing in it for banks.

And this, in the simplest terms, explains the deficit phobia of Wall Street, the corporate media and the right-wing economists. Bankers don’t like budget deficits because they compete with bank loans as a source of growth. When a bank makes a loan, cash balances in private hands also go up. But now the cash is not owned free and clear. There is a contractual obligation to pay interest and to repay principal. If the enterprise defaults, there may be an asset left over–a house or factory or company–that will then become the property of the bank. It’s easy to see why bankers love private credit but hate public deficits.

All of this should be painfully obvious, but it is deeply obscure. It is obscure because legions of Wall Streeters–led notably in our time by Peter Peterson and his front man, former comptroller general David Walker, and including the Robert Rubin wing of the Democratic Party and numerous “bipartisan” enterprises like the Concord Coalition and the Committee for a Responsible Federal Budget–have labored mightily to confuse the issues.


“In all life one should comfort the afflicted, but verily, also, one should afflict the comfortable, and especially when they are comfortably, contentedly, even happily wrong.”

John Kenneth Galbraith


Further Reading:

Bill Mitchell, Stephanie Kelton, Warren Mosler, Marshall Auerback, L. Randall Wray, Pavlina Tcherneva: Fiscal Sustainability Teach-In and Counter-Conference

Lynn Parramore and new deal 2.0: The Deficit: Nine Myths We Can’t Afford

Warren Mosler:
Seven Deadly Frauds of Economic Policy

William Mitchell:
Barnaby, better to walk before we run
Stock-flow consistent macro models
Deficit spending 101 – Part 1
Deficit spending 101 – Part 2
Deficit spending 101 – Part 3

L. Randall Wray:
Understanding Modern Money: The Key to Full Employment and Price Stability

James K. Galbraith:
The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too


x-posted from my blog – selise