Obama plan

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A rising criticism is that the Obama proposal has no exit strategy.

The Obama proposal IS the exit strategy from falling output and rising employment.

The target is the economy.

Fiscal policy is the tool to hit the target.

The mainstream notion of an exit strategy from budget deficits demonstrates a profound misconception about fiscal policy.

The right size for the Federal budget deficit is any size that supports output and employment.

Only government deficit spending can provide the equity/savings of financial assets needed to sustain aggregate demand.

Government finance has no solvency issue, and no sustainability issue.

All government spending is nothing more than data entry on the government’s own spread sheet.

Government spending does not ‘have to come from’ somewhere-

  • Government borrowing does not take away savings.
  • Treasury securities ARE savings that are added to total savings by government deficits.

Government spending is not operationally constrained by revenues.

Government policy that restricts our available savings by keeping the deficit too small depresses output and employment.

Increasing the deficit when the output gap is too large removes the fiscal drag that is depressing output.

The Obama plan is best thought of as removing fiscal restriction, not ‘adding stimulus’.

It is a step in the right direction, but probably insufficient to restore output and employment to even moderate levels.

If the President or any of his immediate advisors understood monetary operations and reserve accounting we would have seen a very different proposal, and seen it much sooner.


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9 Responses to Obama plan

  1. warren mosler says:

    Hi Rob, let me point you towards the ‘mandatory readings’ on this website. start with soft currency economics.

    all govt spending is by data entry on its own spread sheet.
    operationally, federal spending is not revenue constrained

    and bond markets very often react ‘incorrectly’ in the short term,
    and often turn out to have been reacting to things other than what most people think.


  2. Rob K. says:

    Here’s a basic question regarding Mosler’s law: “there is no financial crisis so deep that a sufficiently large increase in public spending cannot deal with it”.

    What happens if we can’t get investors/central banks to buy tsy’s, where does the money to spend come from? What did the market do when Big Ben threatened to monetize the debt market? Didn’t the bond market sell off? Are they calling his bluff…can we really do that and have the world keep buying our debt?



  3. zanon says:

    I think the “exit strategy” is a real problem for the Obama plan.

    First, the “restrictions” are not removed until unemployment and natural stabilizers have already reduced the restriction. So we get unemployment now.

    Then, the restriction removal gets put in place to late, and is impossible to turn off. We get unacceptably high inflation.

    Finally, new restrictions are put in place but with permanently higher G. Capital is allocated less efficiently across the economy as a whole.

    Unemployment now. Inflation later. Lower growth last. What’s not to love?


    warren mosler Reply:

    can’t say it hasn’t happened before!


  4. Mike Norman says:

    One observation: The stock market bottomed in 1932 when the deficit hit 4.0% of GDP (up from 0.6% the prior year). This occurred even though there were no stabilizers in place. (No unemployment insurance, SS, medicare, large military budget, etc). The current deficit of $485 billion so far this year is right about there and we’re only four months into the fiscal year. So if past performance is any guide, the stock market should follow the same script. Be advised, however, that the nation’s economy did not see positive GDP gowth until 1934.


    warren mosler Reply:

    Very good point. Stocks are pricing in continued decline, so even a halt to the decline is worth a lot of upside.

    and again, the caveat is the eurozone’s potential collapse


  5. RSG says:

    “It is a step in the right direction, but probably insufficient to restore output and employment to even moderate levels.”

    So do you think the $819 billion plan passed by the House Wednesday will be insufficent to increase aggregate demand meaningfully? and will the Senate version vary enough to make a diiference? Don’t know if I should be bearish or bullish on the economy/markets.


    jcmccutcheon Reply:

    RSG, Great question. Warren, can we at least muddle through with this package + the auto-stabilizers?


    warren mosler Reply:

    it’s more than enough to be bullish on markets, but expect unemployment to fall only gradually.

    This is good for business and stocks- relatively cheap labor and moderately rising demand.

    Hardly what you’d expect Democrats to cheer about but it’s likely they will.

    The major risk remains the possibility of cascading defaults in the eurozone which can undermine most as policy makers have no clue as to how to respond to demand shocks.


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