Richard Koo: a personal view of the macroeconomy
Posted by WARREN MOSLER on November 10th, 2009
I agree, and the deficit of consequence isn’t that high as I think that figure includes the TARP funds
which were a form of regulatory forbearance and not spending.
Unfortunately, elsewhere he falls short in explaining why deficit spending doesn’t have the downside risks the mainstream attributes to it.
Send him a copy of the 7 deadly innocent frauds draft for comment? (attached)
Richard Koo: a personal view of the macroeconomy
US a mirror image of Japan 15 years ago
In the last two weeks, I made my annual fact-finding mission to
Washington and also spent time in Boston and San Francisco. What I
witnessed was very reminiscent of the situation in Japan 15 years ago:
people were latching on to isolated fragments of good economic news as
evidence of recovery while ignoring the steady deterioration in the real
economy.
In addition to meetings with officials from the Federal Reserve and the
White House, I had the opportunity to talk with various groups at the
Hill including two Congresspersons over lunch.
Although there have been signs of improvement in the real economy,
particularly in production, the problems in the jobs picture are
underscored by the unemployment rate’s rise into double digits.
And on a personal level, the San Francisco bank that my parents
patronized for many years was shut down by the FDIC last Friday. To
prevent panic, the bank opened for business as usual on Saturday under
the name of another lender. This event added a personal dimension to the
crisis for me.
Budget deficit concerns make new fiscal stimulus all but impossible
One issue of particular concern on this trip was that people seem to be
paying little attention to the economic impact of the Obama
administration’s fiscal stimulus and instead are focusing entirely on
the size of the resulting budget deficit.
With the government running a deficit equal to 10% of nominal GDP, more
people are looking at the continued weakness in the economy:
particularly in employment: and drawing the conclusion that the
administration’s policies are ineffective and should be discontinued as
soon as possible. This view is so strong that additional fiscal stimulus
is seen as being almost impossible to implement today.
This pattern mirrors events in Japan 15 years ago. The more the
government draws on fiscal stimulus to avert a crisis, the more
criticism it receives.
People are giving no thought to the economic consequences if the
government had not responded to the $10trn loss in national wealth (in
the form of housing and stock portfolios) with fiscal stimulus. Instead,
they focus entirely on the fact that the economy has yet to improve
despite $787bn in expenditures.
In Japan, fiscal spending succeeded in keeping GDP above bubble-peak
levels despite the loss of Y1,500trn in national wealth, or three years
of GDP, from real estate and stocks alone. But because disaster was
averted, people forgot they were in the midst of a crisis and rushed to
criticize the size of the resulting fiscal deficits.
Their criticism prevented the Japanese government from providing a
steady stream of stimulus. Instead, it was forced to adopt a stop-and-go
policy of intermittent stimulus: each time a spending package expired,
the economy would weaken, forcing the government to quickly implement
the next round of stimulus. That is the main reason why the recession
lasted 15 years. And the mood in Washington today is very similar.
R. Koo
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November 11th, 2009 at 10:59 am
The events of the last year have made me much more sympathetic to the Japanese, whose flailing around in the 90’s seemed so incomprehensible at the time. The deficit myths run deep, and it turns out to be really, really, hard to convince either policymakers or the public to run deficits big enough to get out of the sort of trap we’re in. It’s looking more and more like we are going to follow their playbook of stop-start stimulus, with every inadequate round giving more and more ammunition to the forces of “sound finance”. Strap in for 20 years of stagnation, everybody!
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Scott Fullwiler Reply:
November 11th, 2009 at 2:57 pm
Unfortunately, true. And each additional round of stop-start, the perception that fiscal policy doesn’t “work” gets stronger, so we move farther away from politically being able to get the amount of stimulus needed to do more than tread water.
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November 11th, 2009 at 3:33 pm
The debt-hawks kill us with semantics. We need better words. “Borrowing” really is selling. Federal “deficit” really is federal money creation. Federal “debt” really is money.
This much I’ve learned in my long years: When smart people cannot understand a clear concept, an ulterior motive prevents their understanding. What is the ulterior motive for not understanding money?
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November 11th, 2009 at 4:03 pm
I ask this in all seriousness:
If deficit spending helps the economy by supporting aggregate demand, do counterfeiters help the economy?
If it is not found out that the banknotes are counterfeit, until after the economy recovers, it would seem that they do help, correct?
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zanon Reply:
November 11th, 2009 at 8:03 pm
Interesting question.
I would say that, if counterfeiters are never caught, then their dollars are as real as any others, and therefore have the same impact on aggregate demand, savings, and inflation as Govt deficit spending.
If they are caught, then their bills fall in value to zero, and all you’ve done is transfer money around, which has no (net) impact on the quantity of financial assets in the economy.
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Matt Franko Reply:
November 11th, 2009 at 8:44 pm
C, They usually submit the fake notes in exchange for something valuable and liquid in resale. Or pay with a fake $20 bill for a piece of gum and get $19+ legitimate change. The path for all “legitimate” cash sales leads immediately to a depository bank. When the merchant tries to deposit the fake notes its usually detected and the merchant loses. As no reserve balances can be generated (no deposit credited), I cant see any benefit for anyone but the fraudster.
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Warren Mosler Reply:
November 11th, 2009 at 10:16 pm
cash is functionally a reserve balance written on a piece of paper.
yes, counterfeiting adds to demand. just like winning a federal lottery if that spending wasn’t ‘paid for.’
it also transfers real goods and services to the criminal that could have gone to the rest of us (if our govt knew to support demand legally).
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Curious Reply:
November 11th, 2009 at 11:20 pm
If everybody did it, goods and services would move to all of us.
So why doesn’t the government let us help the economy? Why do they punish counterfeiting?
Warren Mosler Reply:
November 12th, 2009 at 10:23 am
because it’s an unauthorized govt expenditure.
if govt wants those funds spent they want to be the ones to direct that spending.
it’s an operational control on govt spending.
Curious Reply:
November 16th, 2009 at 2:55 pm
If govt wants to direct that spending, that means they don’t want those funds to go to all of us. Otherwise they wouldn’t have to direct it.
But you said, that the reason why counterfeiting is illegal, is because the govt wants the funds to go to all of us, not to the criminals.
So does the govt want those funds to go to all of us or not?
November 11th, 2009 at 6:16 pm
“When smart people cannot understand a clear concept, an ulterior motive prevents their understanding. What is the ulterior motive for not understanding money?”
I’ve been wondering this recently myself and meaning to bring it up on an MMT forum such as this… With so much at stake if the global economy cannot mount a sustained recovery, shouldn’t those convinced of MMT’s accuracy and applicability be pooling funds and even raising money to hire marketing experts, flash developers (to build educational visualization tools), youtube video producers, etc? I’m still learning MMT and have some unanswered questions regarding possible limitations, but from what I understand from those promoting it in the blogosphere, there would be no significant financial losers if core MMT policy prescriptions were to be enacted (unlike climate change mitigation, universal health care, and many other causes that have well funded opposition). Are established academic (neoclassical) and political ideology simply too powerful?
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Keith Newman Reply:
November 11th, 2009 at 8:47 pm
Hbl:
My understanding is that the main objective of MMT is to allow for full employment of resources without the needless constraints of “sound finance“. Given the remarkable effectiveness of sound finance propaganda this would be an excellent development and allow governments more freedom to act in the public interest.
Nonetheless the tough political choices will still remain, although at a higher level of aggregate demand. Issues in the US like paying too much for the most inefficient health system in the developed world and maintaining a bloated military with hundreds of bases around the world, etc, all at the expense of dealing with environmental degradation, increasing the income of most people,etc, still remain.
Sorry!
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November 11th, 2009 at 10:06 pm
Keith,
I understand that MMT doesn’t propose solving all the world’s economic and political problems :) But my take away from much of the discussion I’ve seen is that if governments are willing to deficit spend sufficiently to satisfy the non-government sector’s desire for savings (and consistently rather than stops and starts), then unemployment would be lower than otherwise, GDP would be higher, the risk of a debt deflation would probably be gone, and just about everyone would be better off. So doesn’t “higher level of aggregate demand” supposedly translate into less human suffering?
Clearly there would be ideological losers who would put up a fight, but who loses economically from this core policy change, if it would work as advertised? (I’m still making up my mind on some details). Also I said “core” because I understand many MMT proponents have other proposals, for example changes to the banking system that would likely reduce banking profits, so of course there are probably powerful financial interests against some types of policy change.
Thanks for the reply!
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Keith Newman Reply:
November 14th, 2009 at 11:29 pm
Hi Hbl,
Agreed that a major attraction of MMT is that it will make many people’s lives easier due to higher employment and income. This is very appealing in today’s high unemployment world.
But my understanding is that once you hit full employment of resources MMT tells you to back off because you’ll create excessive inflation. A couple of years ago, in 2006 and 2007 the US U3 unemployment rate was between 4 and 5 percent, within hailing distance of 2-3 % frictional unemployment, so not far from full employment of labour resources. I realize U6 is a better measure because it includes discouraged workers,etc. Nonetheless 4-5% was not a bad unemployment rate.
However things weren’t all that good for many people. Just having a job didn’t mean earning a decent income after 30 years of wage stagnation. Neither did it mean access to basic services, health care for example. Considering health care, the US devotes 6-8 points of GDP more to health than every developed country in the world, excludes 10’s of millions of people and gets worse health outcomes on average.
Say 7 percentage points of GDP: that’s 1 trillion dollars of wasted resources! One trillion dollars of people digging holes and filling them again, or in health system terms useless administration, finding ways not to pay claims, etc, etc. Those resources could be devoted to much more useful endeavours. I leave those to your imagination!
Conclusion: MMT helps reach the point of full employment of resources, an excellent result, but it doesn’t resolve many very large economic and political issues that affect people’s day to day lives.
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November 11th, 2009 at 10:18 pm
right, most everyone wins, which causes me to think ‘they’ truly don’t understand their own monetary system.
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Jim Baird Reply:
November 11th, 2009 at 11:47 pm
Exactly. I’m afraid there’s no great conspiracy. If there was, I’d at least have some hope that you could find Dr. Evil somewhere and cast him into the conveniently placed lake of molten hot magma in the center of his island fortress, ushering in an age of peace and prosperity. But it’s not to be…
The problem is, it’s exponentially harder to get someone to unlearn something they think they know about than to learn something they know they don’t know. When, for example, I link to the papers on this site in online arguements, people will mostly just read the first few paragraphs and respond back with some snide comment, and leave it at that. They just won’t engage with it, since it seems so crackpot.
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winterspeak Reply:
November 12th, 2009 at 12:40 pm
Agreed.
If the world understood MMT, look at all the emperors who will have been revealed to be naked.
1. The economics department of Harvard
2. The US Treasury
3. The US Fed
4. Barak Obama
5. All those bailouts to politically connected constituencies — not needed!
6. All that money to Goldman Sachs et al. — not needed!
7. All that unemployment and waste — not needed!
8. The economics profession as a whole — has no clue!
MMT is a big proof point that the Govt has no idea what it is doing, and that flat our fraud can exist, for decades, in the nation’s “best” universities. The establishment cannot withstand such massive loss of face, so they close ranks against it. It’s like the Catholic Church, the Earth, and the Sun.
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November 12th, 2009 at 12:59 pm
http://www.nakedcapitalism.com/2009/11/unemployment-insurance-for-the-21st-century.html
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