Wall of Shame

Unsustainable budget threatens nation

March 24 (Politico) — Repeated battles over the 2011 budget are taking attention from a more dire problem—the long-run budget deficit.

Divided government is no excuse for inaction. The bipartisan National Commission on Fiscal Responsibility and Reform, under co-chairmen Erskine Bowles and Alan Simpson, issued a report on the problem in December supported by 11 Democrats and Republicans — a clear majority of the panel’s 18 members.

As former chairmen and chairwomen of the Council of Economic Advisers, who have served in Republican and Democratic administrations, we urge that the Bowles-Simpson report, “The Moment of Truth,” be the starting point of an active legislative process that involves intense negotiations between both parties.

There are many issues on which we don’t agree. Yet we find ourselves in remarkable unanimity about the long-run federal budget deficit: It is a severe threat that calls for serious and prompt attention.

This is just plain wrong, of course, but look at the list of supporters, below, disgracing themselves.

While the actual deficit is likely to shrink over the next few years as the economy continues to recover, the aging of the baby-boom generation and rapidly rising health care costs are likely to create a large and growing gap between spending and revenues. These deficits will take a toll on private investment and economic growth. At some point, bond markets are likely to turn on the United States — leading to a crisis that could dwarf 2008.

There is absolutely no applicable theory or evidence to support any of this. Any presumed supporting evidence or theory always applies to a gold standard or other fixed rate regime, but is always entirely inapplicable to our current non convertible currency/floating exchange rate regime.

“The Moment of Truth” documents that “the problem is real, and the solution will be painful.” It is tempting to act as if the long-run budget imbalance could be fixed by just cutting wasteful government spending or raising taxes on the wealthy. But the facts belie such easy answers.

The commission has proposed a mix of spending cuts and revenue increases. But even this requires cuts in useful programs and entitlements, as well as tax increases for all but the most vulnerable.

All this can do is lower aggregate demand, which means reduced real output and higher unemployment in general. How do any of these economics professionals think that producing less, including less real investment, addresses our very real needs?

The commission’s specific proposals cover a wide range. It recommends cutting discretionary spending substantially, relative to current projections. Everything is on the table, including security spending, which has grown rapidly in the past decade.

So do they think that current Social Security payments result in a too high standard of living for our seniors? I don’t see any of them flying on private jets to sporting events on their Social Security? In fact, current levels of Social Security payments are just barely enough to keep them from needing to eat out of garbage cans. And there certainly is no shortage of the real goods and services they consume, particularly with unemployment so high and the output gap in general so wide?

It also urges significant tax reform. The key principle is to limit tax expenditures—tax breaks designed to encourage certain activities—and so broaden the tax base. It advocates using some of the resulting revenues for deficit reduction and some for lowering marginal tax rates, which can help encourage greater investment and economic growth.

The commission’s recommendations for slowing the growth of government health care expenditures — the central cause of our long-run deficits — are incomplete. It proposes setting spending targets and calls for a process to suggest further reforms if the targets aren’t met. But it also lays out a number of concrete steps, like increasing the scope of the new Independent Payment Advisory Board and limiting the tax deductibility of health insurance.

How about taking a look at the real goods and services we devote to actual health care, and making decisions accordingly? Seems that used to be what economists did, before they got lost in finance to the point of absurdity?

To be sure, we don’t all support every proposal here. Each one of us could probably come up with a deficit reduction plan we like better. Some of us already have. Many of us might prefer one of the comprehensive alternative proposals offered in recent months.

Yet we all strongly support prompt consideration of the commission’s proposals. The unsustainable long-run budget outlook is a growing threat to our well-being. Further stalemate and inaction would be irresponsible.

Do any of them see the current budget leading to an irreversible excess of aggregate demand? If they do they never mention it. In fact, I’ve yet to see a long term inflation forecast from anyone that shows an excess of aggregate demand looming.

We know the measures to deal with the long-run deficit are politically difficult. The only way to accomplish them is for members of both parties to accept the political risks together. That is what the Republicans and Democrats on the commission who voted for the bipartisan proposal did.

Because they are afraid we could become the next Greece they are trying to turn us into the next Jonestown.

Feel free to repost and distribute, thanks.

We urge Congress and the president to do the same.

I urge them to recognize taxes function to regulate aggregate demand, and not to raise revenue per se.

Martin N. Baily

Martin S. Feldstein

R. Glenn Hubbard

Edward P. Lazear

N. Gregory Mankiw

Christina D. Romer

Harvey S. Rosen

Charles L. Schultze

Laura D. Tyson

Murray L. Weidenbaum

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157 Responses to Wall of Shame

  1. Tempest says:

    “”What people don’t get is that cutting SS, Medicare and other safety nets will force more saving, meaning less effective demand.””
    Classic bubble making and allocation of resources (redistribution of wealth) by a select few in government.

    “”With energy costs increasing over time and spreading through the economy, this coupled with increased saving is going to mean a lot less discretionary spending, a leaner economy and a lower standard of living.””
    So government spends your dollars better than you do?

    Reply

  2. Tempest says:

    “”So do they think that current Social Security payments result in a too high standard of living for our seniors? I don’t see any of them flying on private jets to sporting events on their Social Security? In fact, current levels of Social Security payments are just barely enough to keep them from needing to eat out of garbage cans.””

    SS is a way to ensure people are dependent on government and that the senior vote flows to the people that support it. Nothing more. Keeping them near poverty via the program assures this. Typical of all government social programs.

    If simply digitizing more money to give to seniors will increase “aggregate demand”, then why not simply digitize enough money to double everyone’s income?

    Reply

    WARREN MOSLER Reply:

    there’s no moral hazard issue with provisioning seniors in that people won’t work less when they are younger knowing there’s a floor under their standard of living when they are 66. That is, it’s not a disincentive to working.

    also, social security shifts the feeling of dependence away from the family, so seniors don’t feel like a burden on their family, which I consider a major positive.

    as for doubling everyone’s income, that can happen in a few years time, and in real terms, if we get ourselves back to full employment

    Reply

    ESM Reply:

    “That is, it’s not a disincentive to working.”

    Well, it’s a big disincentive to work when you’re 65. And these days, 65 year olds can be pretty darn productive. More productive than 22-year olds that just went through fours years of partying and learning “practically” nothing. Also, it’s an incentive to consume too much when you’re younger. You’re removing feedback loops from the system and insulating people from their poor decisions.

    “also, social security shifts the feeling of dependence away from the family, so seniors don’t feel like a burden on their family, which I consider a major positive.”

    And that removes a disincentive to raising good kids and building a support network.

    I’m all for having a social safety net in place, but it is bad policy to have a one size fits all program based on age. It is also inefficient to design a system to be more than a safety net. Social security should provide a minimum standard of living that is low enough that it provides some incentive to do better. I think we’re already above that level, mainly because the retirement age is way too low.

    Reply

    ESM Reply:

    should be: “And that removes an incentive to raising good kids and building a support network.”

    WARREN MOSLER Reply:

    It’s not one size fits all, it’s a floor.

    and it’s ok to work and collect, so you can afford meal service on your gulfstream.

    Tempest Reply:

    If people could invest the money they put into SS on the open market, would they have more or less money in the end, with a higher standard of living?

    The government steals money from the funding of these programs to fund other pet projects. They are simply a slush fund. This is not good allocation of resources.

    Yet, you support these programs and want more funding for them?

    Reply

    ESM Reply:

    Tempest:

    In the aggregate, the investment returns cannot be any better than what they are in the “trust fund.” Allowing people to save their own money would just shift ownership of Treasury bonds around, but not actually change the growth of the economy to first order (although I do believe there are second order benefits to making people more responsible for their own future).

    WARREN MOSLER Reply:

    there’s an entire section on that in ‘the 7 deadly innocent frauds’ on this website, include an exchange with steve moore for you to read, thanks

    save america Reply:

    Warren, all my ex girlfriends and most of my peers exes left because they were getting resources from the government. Why put up with a guy that sometimes “wants” something from them when they can get FREE resources for NOTHING like octomom? This all goes with an absolute power controlling 1984 government. The kids get resources from the top, (free food, free medical, free education, etc etc) the seniors get resources, everyone practically. We no longer have to rely on each other, or family, or our close local community, big brother is going to take care of us all from cradle to the grave. This alienates people, communities, families, they stop NEEDING each other and only NEED the state. Certainly you can see how evil that is? Why is it better to FEEL independent as a senior citizen because you are sucking off the faceless borg state with all that administrative transfer costs in between instead of just sucking off your local community or family?

    Absolute power corruptes absolutely, it is easier for a senior or any agent to rip off and have moral hazard with a faceless big brother system than to rip off thier own kids I would think. When you get really infeeble warren, you want Sada to put you into a state run nursing home with strangers than burden her with helping you around the house eh? I don’t believe that.

    Reply

    Tom Hickey Reply:

    What people don’t get is that cutting SS, Medicare and other safety nets will force more saving, meaning less effective demand. It would mean that most spending would be postponed until late in life and would go mostly toward medical expenses since it’s a no brainer that private insurance cannot cover old people be be profitable without exorbitant premiums, dumping people that have problems, or limiting coverage. With energy costs increasing over time and spreading through the economy, this coupled with increased saving is going to mean a lot less discretionary spending, a leaner economy and a lower standard of living. If that sounds good to you, go for it.

    Reply

  3. Slappy The Citizen says:

    Guess I’d better read the original post first instead of cruising the replies….

    Reply

  4. danw says:

    @ Tom & Warren

    Warren—agreed. RE: “…MMT *is* the operational truths. people are what takes it from there…” It’s the people who, in the end, ignore the law in lieu of personal gain. Tolkien’s Isildor is the archetype.

    Tom—YES, I have followed Bill Black. He is one man. And he is NOT in power. There may be moments in which law seems to prevail….but over time, over and wealth always conquer law.

    Reply

    danw Reply:

    power and wealth, I meant to say…

    I know I’m sounding cynical. It just seems that men are destined to exist in a perpetual dream state somewhere between enlightenment and greed/fear….and it just seems that greed and fear usually carry the day.

    Perhaps tomorrow i’ll feel differently.

    Reply

    Tom Hickey Reply:

    DanW: It just seems that men are destined to exist in a perpetual dream state somewhere between enlightenment and greed/fear….and it just seems that greed and fear usually carry the day.

    It’s still Kali Yuga. :(

    But Sat Yuga is on the way. :)

    Reply

    Tom Hickey Reply:

    Black is on the MMT team with Randy Wray. MMT’ers are definitely on the case.

    Reply

  5. Dan F says:

    To Warren’s point I would like someone to publish something that shows the cause and effect of the debt on the long term (or short term) viability of the economy.

    All I constantly hear about is how inflation, entitlement programs, the interest on the debt, or some other construct is going to bring the US down. But I have yet to read any analysis of how this is actually going to happen and when. At on point it was a percentage of GDP. Well we know what happened to that report.

    So please, I would really like to read something informative. Please.

    Reply

    Tom Hickey Reply:

    The controversy is over the primary deficit (deficit minus interest) v. interest payments. The idea is that as primary deficits rise due to social spending, especially health care, then the bond market gets skittish about inflation and the bond vigilantes demand higher rates, i.e., don’t buy at auctions unless rates rise. This is means that the government has to pay more interest on newly issues tsys. If the primary deficit continues to increase, e.g., due to non-discretionary spending that is increasing and the interest payments are also increasing, then the bond vigilantes demand even higher rates, compounding the problem. Then debt goes exponential as more and more of the deficit is committed to debt service, and the currency loses its value and hyperinflation ensues.

    Reply

    Dan F Reply:

    Tom,

    One of my favorite people to read (I have several on this forum so no one should feel slighted) I assume you are stating the claims that I hear as an example.

    But I want to read something that shows me how what you stated is reflected in the current 30 year notes. I want to know what the mechanics are that will cause this inflation, simply because I don’t understand it. Someone buys 10 trillion dollars in treasuries that you need to pay interest on doesn’t mean you owe an additional 10T and interest. The 10 trillion must have gone some where and done something? And I really don’t get inflation for the sake of inflation. long term inflation in my meager opinion is either scarcity or lack of confidence. Last time I looked we have the most consumers, largest economy, and the biggest manufacturing base in the world.

    Intuitively I get what you guys are talking about. It all makes sense even though I don’t really know all the details. But when I read Krugman (who I like to read) state the debt is a long term problem I can’t even begin to understand why. Maybe it is just beyond my ability to understand or he doesn’t care to elaborate.

    But it seems to me if no one can really prove inflation or the debt will be a problem then some one should be able to prove they won’t be a problem.

    Just a little frustrated and venting.

    Reply

    Tom Hickey Reply:

    Inflation is an ambiguous term because people use it loosely. Technically, it means a continuous general price rise, which means that wages have to rising too. This occurs in two ways. Demand side, where effective demand exceeds the capacity of the economy to meet it at full employment (no new resources can be brought on line), or supply side, like an oil price shock that goes viral since oil impacts so much of the economy.

    Bill Mitchell, Modern monetary theory and inflation – Part 1 considers demand side inflation from an MMT vantage and Modern monetary theory and inflation – Part 2 considers supply side.

    Most of what is written about inflation is confusing because it is off-track.

    Craig Reply:

    Great question Dan. I have troubling getting my head around the idea of inflation also – causes, controls, and characterizations of it.

    Tom thanks for the links and the responses. Your explanations are always a huge help for a laymen like myself!

    WARREN MOSLER Reply:

    the reason for the distinction was the assumption that there was a low propensity to consume out of interest income.
    but maybe there were other reasons

    Reply

  6. Charles R. Williams says:

    The cyclical deficit is not a problem. The long-term structural deficit is a problem for the following reason. The tax rates that will be necessary to stabilize “aggregate demand” at full employment will have a severe effect on productivity and investment. The entitlement promises are real and not nominal promises. They will involve massive government mediated transfers from workers to retirees. MMT offers no assurance that these entitlements can be settled with ever larger deficits. It is entirely possible that primary surpluses will be necessary to stabilize the price level. This level of taxation is unsustainable in a globalized, competitive economy short of building a wall around the US to keep people in. Talented people will leave, productive activities will leave or go underground, etc. MMT blithely assumes that the state can extract whatever it needs to from a market economy without crushing that economy. One is reminded of the Bolsheviks extracting the seed corn from starving Ukrainian peasants for export to fund their investment programs. At some point you do get Zimbabwe. It is a long way off but not as far off as you think. Well before we get there the political pressures, first to delay tax increases causing inflation and then to cut entitlements, will become overwhelming.

    How do the financial markets play into this? As MMT contends, there is no need to sell bonds. But the willingness to hold dollar-denominated US liabilities, on the part of both foreigners and US citizens, cannot be assumed when we are looking forward for one or two decades. Over-reliance on deficits (or if you will reluctance to increase taxes) to pay retiree entitlements means inflation and, if alternatives to the dollar emerge, this could mean a run on the dollar – a catastrophic outcome.

    I am sympathetic to MMT, but it is a purely macroeconomic theory that considers only the demand side. It takes a very modern view of central bank activities but seems to ignore or neglect other key aspects of the modern economy.

    Reply

    Ivan Reply:

    So you’re basically saying that deficits will be so large and so ingrained that demand will far exceed potential GDP and it will require extremely high tax rates to avoid massive inflation? It seems that Japan is already there now both in terms of deficits and the ratio of those working to those retired. Why aren’t we seeing the problems you project for the United States in Japan? Their currency is sound, inflation is not a problem, workers aren’t leaving etc. In fact, they still have an output gap. Thoughts?

    Reply

    WARREN MOSLER Reply:

    agreed that the condition of excess demand with a near 0 output gap- a prosperous, full employment, but overheating economy- would demand politically that demand be cooled with tax hikes and/or spending cuts.

    problem is no one ever does that kind of forecasting. Instead they just say we’re bankrupt, the numbers are unsustainable, and all the usual nonsense.

    This happened to me at the fed not long ago in a research meeting. It was said there was a long term deficit problem. So I asked of their forecasts indicated a long term inflation problem. The answer was no. So I asked what the problem was. They said deficits would drive up interest rates. I said the Fed sets rates, and asked if they meant that deficits would trigger something in the Fed’s reaction function that would cause them to hike rates. They said that was a good point and they needed to look into it.

    Reply

    beowulf Reply:

    “would demand politically that demand be cooled with tax hikes and/or spending cuts.”
    Or a Singapore-style mandatory savings system.

    “This happened to me at the fed not long ago in a research meeting…”
    The funny part was the Fed’s “reaction function” to your comments. I don’t think they get that a huge fraction of projected long term deficits is simply net interest. If they locked at current Fed Fund target and Tsy stopping issuing T-bills past 3 months, suddenly, there’s no long term deficit problem. Or keep setting FFR wherever they want, but run interest rate maintenance as a net credit to Tsy (Tsy spends with US Notes or jumbo coins, anchor FFR with Fed “user fee” on non-monetary base). At some point, Fed earnings refund would completely replace federal tax revenue. :o)
    http://www.americanthinker.com/entitlements_08-850.jpg

    Reply

    WARREN MOSLER Reply:

    also, if you are at full employment, you are getting all the possible output out of the economy.

    if you stabilize demand with any policy that does not reduce total employment, there is no reason to believe real output would suffer.

    real output suffers only with an output gap. so the trick would be to stabilize demand without reducing output.

    and, of course, the discussion would be in the context of an economy with maybe 3% of the workforce in the JG pool, and not with theso 16% unemployment of today sorry excuse for an economy.

    it would be what i call a good kind of problem, vs todays horribly ugly problem.

    Reply

    ESM Reply:

    I think it’s also important to recognize the inherent stability of government expenditures versus “revenues.”

    By design or by accident (I think mostly by accident because it has been instituted for the wrong reasons), we have a highly progressive income tax which sharply increases federal rax revenue as the economy heats up. It’s not just the progressive rate structure. It also has to do with taxing net profits in the business context, allowing deductions which phase out in the individual context, and taxing capital gains. Even the take from the SS tax goes up rapidly with wage growth and employment.

    The late ’90s give us a perfect example. The budget surpluses were a direct result of an overheating economy. The two years before the housing meltdown give us another example (the deficit was less then 1.5% of GDP).

    On the expenditure side, we have little to no debt service which is linked to the value of the dollar or to inflation. Many government programs reduce expenditures exponentially as unemployment drops, and Medicare and Medicaid are arguably only weakly linked to overall inflation or the value of the dollar (at least in hard-coded form). Social security is hard-coded to a CPI index of course, so that’s one counterexample, but the index understates inflation because it presumes basket substitution and includes product quality improvements (I forgot the precise economic term for the adjustment).

    Bottom line is that the US dollar is quite well protected from a bout of runaway inflation as long as the current structure is not radically changed.

    Reply

    beowulf Reply:

    ESM, hedonic quality adjustment — steak can be replaced with hamburger which can be replaced with cat food, etc. However, just using the CPI-U index (based on urban worker cost of living) for Social Security payouts shortchanges seniors, since 1990 BLS has tracked a CPI-E index based on elderly cost of living.
    http://www.bls.gov/cpi/cpihqaitem.htm

    Congress has never officially enacted the CPI-E. For almost 18 years, if the senior CPI had been used, your social security payments could have been higher. During this time, the senior CPI has grown about 15 percent more than the present CPI.
    http://www.atouchofgrey.com/cola.html

    So for someone receiving, say, $1200 a month in Social Security, that’s $138 a month in lost income. Using a lowball CPI index probably “saves” Tsy $60 billion or so a year. Which is, coincidentally, about how much seniors have deducted from SS checks for Medicare premiums for Part B (providers) and Part D (drug benefits).
    The Democrats lost the House in large measure because seniors were angry about the $500 billion (over 10 years) cut from Medicare. From 2006 midterms vs 2010’s, senior vote went from evenly divided to a +23 GOP advantage.
    http://www.politico.com/news/stories/1110/44802.html

    That’s the dilemma the GOP is in, the deficit hawks want to cut Medicare and (Good Lord) Social Security benefits even though the GOP swept into Congress on a wave of pro-entitlement voters. Lucky for them, the President (who should have used that $500 billion to cut Medicare premiums, hell, just zero them out) seems eager to walk through the minefield first to make sure its safe.

    ESM Reply:

    “ESM, hedonic quality adjustment”

    Right, that’s what I was thinking of. Hedonic quality adjustments make sense for some things. If the base model Toyota Camry used to be sold with fewer amenities than the current base model, of course there should be a price adjustment for that. Likewise for a 2500 square foot home versus a 2000 square foot home.

    But some hedonic adjustments don’t make sense, particularly in the area of consumer technology where things naturally progress to smaller, faster, and higher bandwidth with more powerful, user-friendly software.

    The bean counters should try to separate out the price adjustments needed because of marketing trends (e.g. making the base model equal to the luxury model of the past) from technological advances.

    WARREN MOSLER Reply:

    so my new computer that costs the same as my old one to do the same email has to have more processing power, memory, etc. to deal with the new fangled advertising.

    is that deflation? more value for the price?

    slappy the citizen Reply:

    It is indeed. Not only does it handle the new fangled advertising, it supports hdmi output to your big-screen tv, more hard drive storage, more and faster RAM storage, faster USB interface, faster search of your hard drive contents and email (folks, hit the “Windows” key on your keyboard and just start typing in what you’re looking for, yeah, just like that), faster video and lower power consumption as well.

  7. Ivan says:

    I was thinking about the debt service issue. As debt service is nothing other than another government expenditure, there are no operational impediments to meeting debt service at any level. Obviously, we’ve put in place voluntary restrictions such as a debt ceiling but that’s only politics. However, let’s assume potential GDP is $14 trillion and aggregate private sector demand ex debt service is $12 trillion. If debt service is $2.5 trillion, then the government must run a surplus in everything else or aggregate demand will far exceed potential GDP. The potential problem would be runaway inflation and the limited ability of the government to do much of anything.

    In this situation, the government would have to stop issuing Treasury securities and instead pay some small rate on reserves at the Fed. In all likelihood, this would trigger significant selling of dollars….which would also be inflationary. Currently, the output gap is so large that debt service isn’t an issue. However, 10 years down the road of $1 trillion deficits, this could become a problem.

    I’d love to hear your thoughts on this. Maybe (hopefully) I’m missing something.

    Reply

    beowulf Reply:

    he potential problem would be runaway inflation and the limited ability of the government to do much of anything

    Two problems you hit with one bullet, taxation. What isn’t scooped up by higher federal taxes on unearned income (like on, err, T-bond interest), higher consumption taxes would. Only political question is which income brackets are hit.

    “This would trigger significant selling of dollars….which would also be inflationary”.
    The US Government has no debts outside the dollar. So if taxes aren’t used to control inflation, then Plan B is allowing inflation to “pay down” the debt in real terms.

    Reply

    WARREN MOSLER Reply:

    govt spending can be said to be printing dollar liabilities, which makes dollars easier to get,
    and taxing unprinting dollar liabilities, which makes dollars harder to get
    (govt. borrowing is neither)

    Reply

  8. Tom says:

    Warren

    I have a problem for you:

    There are these accounting identities:

    Deficits = Private Savings + Current account deficit

    Deficits = change in government debt + change in high powered money

    Let’s assume that debt=100% of GDP deficits=10% of GDP (case of US).

    Now please answer the question: what would happen if investors didnt want to hold US debt? What are the possible implications of these equations (at full employment)?

    Thanks

    Reply

    WARREN MOSLER Reply:

    if the economy didn’t want to ‘hold US debt’ which includes ‘holding’ balances in fed reserve accounts, the govt wouldn’t have been able to deficit spend in the first place.

    trying to buy more than it taxed would have been hyper inflationary before it happened.

    Reply

    Scott Fullwiler Reply:

    Yet another answer is “how” do they stop holding it unless it is paid down or purchased by the Fed? Where does it “go”?

    Reply

    Tom Reply:

    Scott

    “Yet another answer is “how” do they stop holding it unless it is paid down or purchased by the Fed? Where does it “go”?”

    But I’m talking exactly about a situation where the only buyer is the Fed. You should know it Scott after our conversation at pragpap.

    But Scott please answer the question I’ve posted over there:

    What would you do if the increase in spending was bigger than say 100% GDP. How reducing deficit in this case would bring any effect?

    WARREN MOSLER Reply:

    Waiting to see if you’re willing to be the $20 first.

    Tom Reply:

    Warren

    “if the economy didn’t want to ‘hold US debt’ which includes ‘holding’ balances in fed reserve accounts, the govt wouldn’t have been able to deficit spend in the first place. ”

    No because they may not want to hold it in the future, but not now when deficit spending takes place. We are in liquidity trap so they want to hold government debt(bonds, notes, resereves). But it can change in the future to a degree that fiscal means cant offset.

    Now I will give you numerical example that MMT is wrong.

    Let’s consider situation where we have high unemplyment and the Fed and the Government decide to do something to reduce it. Government decides to hire every citizen for nothing. They will only receive compensation every month. In this case the Fed issues new money (bank notes) for every citizen and they receive it every month. Each citizen receives 5000$ a month. People decide to spend 10% of what they receive and keep the rst of it (i.e. 90%) in their pockets (we are in liquidity trap). This process lasts one year (5000$ every month for each citizen). After one year due to the additional spending we leave recession. At the beginning of the second year people have 16 trillons of unspent USD in their pockets (90%*5000USD*12months*300milions citizens). This is more than US GDP. Now people decide to spend it in the second year. How would you be able to offset it with fiscal means? You cant reduce decicits by 16 trillions (more than 100% of US GDP).

    Reply

    Neil Wilson Reply:

    “Now people decide to spend it in the second year”

    What en-masse. All at once. On real stuff?

    That’s just not credible. It’s “what if pens got hot” territory.

    Tom Reply:

    Neil.

    That’s just hypothetical case and it’s not the crucial point.

    The most important problem with MMT is this:

    YOU MAY NOT BE ABLE TO CONTROL INFLATION WITH FISCAL MEANS IF SPENDING RISES TOO MUCH

    Neil Wilson Reply:

    No need to shout.

    Of course you can. If I tax every transaction at a bank at 100% as it passes through the reserve system it will stop anything and everything happening.

    ESM Reply:

    Tom,

    This is a very important point, and you’re right that it is a theoretical weakness. Savings desire can drop in the future, and the process can be self-reinforcing, i.e. as inflation starts, savings desire will drop further.

    Some mitigating factors, however, are:

    1) Aggregate savings desire appears to increase over time due to population growth, price level rise, natural limits on individual consumption, and psychological effects (monetary wealth becomes a form of score-keeping for the wealthy to compete with other wealthy people), so a sudden drop is unlikely barring some supply-side shock;

    2) The system has automatic stabilizers, so that as the economy heats up, deficits decrease dramatically;

    3) Empirical examples — Japan, the US currently, the lack of inflation generally in developed countries — indicate that the private sector has been chronically undercapitalized.

    In theory, the enormous amount of saved “money” is a big inflation risk. In practice, I think we’re pretty far from that point. Total public “debt” of 100% of GDP does not worry me at all. Perhaps 500% would, but not 100%.

    WARREN MOSLER Reply:

    yes, and just because some day everyone might decide to spend all their savings at once and drive up prices, we should balance the budget today and keep unemployment at 25%?

    and what does any of that have to do with mmt being right or wrong?

    Tom Reply:

    Neil:

    “No need to shout.”

    I’m sorry I didnt notice.

    “Of course you can. If I tax every transaction at a bank at 100% as it passes through the reserve system it will stop anything and everything happening.”

    Look in my example there are no banks involved only cash in people’s pockets. And do you believe that Congress would rise taxes by more than 100% of GDP and fast enough (remember that even much more flexible Fed was often very slow with their decicions). And even if banks were involved it wouldnt matter. Essentially it would mean confiscation of much of people’s wealth. Do you believe in such scenario?

    WARREN MOSLER Reply:

    what does any of that have to do with mmt being ‘wrong’?

    Neil Wilson Reply:

    “Look in my example there are no banks involved only cash in people’s pockets”

    However in the real world there are banks involved, most nominal assets are in bank deposits, with little central bank assets.

    “Essentially it would mean confiscation of much of people’s wealth.”

    If your “pens got hot” scenario ever came about (which it wouldn’t) then that would be a crisis situation – a state of national emergency. In crisis situations extreme measures are warranted to stabilise the system.

    Now that could either be taxation to eliminate the excess nominal pressure, or a throttle on the amount of bank reserves the central bank will process in a day, or some other mechanism to reduce the spike in aggregate demand.

    You will notice that you proposed an extreme situation, and yet when the solution is similarly extreme you state it will never happen. That is not logically consistent.

    The key point is that the monopoly supplier of the currency has the power to stop the rot if it wants – because it can starve the system of the ability to clear payments.

    WARREN MOSLER Reply:

    agreed on that key point

    beowulf Reply:

    Neil,
    He keeps changing his hypo, no point chasing him. Leaving aside why every American would only spend $500 and save $4500 a month (a poverty level income for a single adult is closer to $1000 a month), you’re quite right. The govt could drain reserves (or currency if citizens were simply stuffing mattreses with FRNs) by taxing bank transactions, sales transaction, earned and unearned income– including those transfer payments kicked out every month– and even, in a roundabout way, real estate. Of course, it’d be even easier to simply cut off the money faucet ($5,000 a month?!?) instead of mopping it up afterward with taxes.

    Tom Hickey Reply:

    Tom: http://evostudies.org/2010/12/the-effects-of-inequality-pt-ii-impulsivity/

    You propose a ridiculous hypo and then respond ridiculous when someone responds in kind. Get real.

    Tom Hickey Reply:

    OOPs. forget that link. I meant to paste

    Do you believe in such scenario?

    Tom Hickey Reply:

    ESM: In theory, the enormous amount of saved “money” is a big inflation risk.

    Exactly, which is why I have been recommending taxing away economic rent, whence most of the saving arises.

    Neil Wilson Reply:

    As a means of light relief I do suggest that you all watch ‘What if pens got hot’.

    http://www.youtube.com/watch?v=xR3YvrNpssM

    Tom Hickey Reply:

    Perfect. :)

    Oliver Reply:

    Tom (Hickey, that is), wrt to your unintentional link above, may I suggest a book on the subject that I found very compelling. There are some good reviews of it in the interwebs too.

    Peter D Reply:

    Guys, when Tom got the same replies on pargcap, he accused us of being uneducated, unintelligent and idiots (the last referred to Scott Fullwiler, of all people). Disengage!

    WARREN MOSLER Reply:

    want to put $20 on that assertion that I’m wrong before I respond?

    :)

    Tom Reply:

    Warren

    I don’t think that he says “that today long term deficits are a problem”. I think that his main conclusion is that we shouldn’t abandon monetary policy at full employment (“lost access to the bond market”). I agree with that statement and do you?

    Thanks for your replies.

    WARREN MOSLER Reply:

    he says that the projected deficits are a problem that should be dealt with, but not by adjusting this year’s deficit.

    that means things like raising the retirement age for social security.

    the problem is he has no analysis about exactly what problem the projected deficits might pose.
    he thinks they are just ‘obviously’ a problem because they are x trillions of dollars and x % of projected tax revenues and all that, with the implication that there can be funding issues, higher rates forced on us, etc.

    And the largest problem is what he doesn’t say- there is no solvency issue, the fed sets rates independently of deficits, etc. etc.

    Tom Reply:

    MamMoTh

    Welcome on the board (with me and Krugman):) (I dont agree with his political views but his economic reasonings is always flawless).

    I don’t understand why some people can be so dogmatic. Especially when our economic history tells us that we have to be flexible and analize all possibilities. There is no holy grail to regulate economy.

    WARREN MOSLER Reply:

    but there is a lot of nonsense, like we have a long term deficit problem.
    and saying mmt says deficits never matter

    Neil Wilson Reply:

    Automatic stabilisers like the Job Guarantee don’t need any meetings in rooms, no Wisdom of Solomon and no crystal balls.

    They act, as the name suggests, automatically to rebalance the system.

    Fiscal policy can be built into the system design – automatically. And it is best if it done like that. I’d rather have a system where nobody had to make decisions based on forecasts.

    Additionally monetary policy is just a delegated power. There is no reason on earth why you couldn’t delegate fiscal power in the same fashion – moving a tax or spending limits through a range for example.

    WARREN MOSLER Reply:

    and monetary policy doesn’t work. at least not in the direction most assume.

    MamMoTh Reply:

    The JG does only sets a floor level to aggregate demand, the same as unemployment benefits do.

    I don’t think the idea of delegating the power to tax to an unaccountable entity will ever be accepted (nor that it should).

    Neil Wilson Reply:

    Monetary policy redistributes. It takes from borrowers and gives to savers, and vice versa. Why are unelected bureaucrats allowed to do that.

    It increases or decreases government spending on bonds, which is largely an import subsidy. Why are unelected bureaucrats allowed to change government spending at the expense of domestic businesses?

    So there is no difference in form. Unelected bureaucrats should not be making those decisions whichever tool you use.

    You’ll notice that I didn’t say delegate to unaccountable entity. You assumed that.

    MamMoTh Reply:

    I assumed it because there is already an accountable entity responsible of fiscal policy.

    Somehow people don’t care as much about interest rates being increased as they do about taxes being increased. That makes a difference.

    Tom Reply:

    Neil

    “Monetary policy redistributes. It takes from borrowers and gives to savers, and vice versa.”

    “So there is no difference in form”

    Yes there is because paying interest rates government may convince bondholders not to swap financial assets (accumulated in previous years and much higher than current year’s budget deficit/surplus) for real assets. And that can prevent inflation.

    Tom Reply:

    “Concerning Pavlina qyote, any assertion that starts off with “It is a huge leap of faith”, is going to be neither an admission nor, for that matter, really an assertion.”

    But she is admitting that more reserves or bond holdings would create a wealth effect and inflation, but because of sluggish lending that is not a problem now.

    And that is precisely point that Krugman is making.
    And the funny thing is that she is fighting with him like he was some deficit terrorist or something like that:)
    MMT people just don’t realise that Krugman is not against deficits but against irresponsibility. And when we achieve full employment government should have market confidence because good monetary policy can be the only one preventing inflation.
    So he just reminds us that we should be able to differentiate between distinct economic conditions in liquidity trap and at full employment.

    the level of Reserve requirements doesn’t if MB is external to loans (try to read with understanding) and you are the one proposing interventionism (reserve requirements, transaction fees) so don’t accuse me about controlling anything

    Kristjan Reply:

    Tom
    “This whole MMT thing comes to this: print and if people spend too much tax. You guys are insane if you think that it would bring anything less than a complete disaster.”

    I don’t see any flaw in that. I just don’t see how you can implement those taxes fast enough. You need to run deficits and when private credit creation picks up you might need to run surpluses if you want to control inflation.

    Another thing that I don’t have an answer for myself is why they are against treasury debt issuance. It enables private sector to save inflation free and risk free. Is that bad?
    Thank you.

    WARREN MOSLER Reply:

    right, if Congress determines there is public purpose in promoting that kind of savings it can do that for that reason. That’s a completely different matter from believing the myth that tsy secs function to operationally fund spending, and then going completely bonkers (Paul Davidson’s word) over it with tragic consequences that are only beginning to surface.

    But if they read the 7 deadly innocent frauds they will understand the myth about savings and investment and so probably wouldn’t want to do that.

    Tom Reply:

    ESM

    Thanks great post I agree with you (first intelligent reply I received here and at pragcap.)

    But we cant say like for example Warren (his “law” at the top of site) that there is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it. Because if our only goal is to achieve full emlpoyment (or even less than that) it may require so much spending that in the future we can have problems.
    I’m only pointing out that we cant ignore debt level(bonds, notes, reserves) because of crisis (high unemployment, slack etc.).

    Reply

    ESM Reply:

    I agree. The problem is nobody really knows how to interpret numbers like debt and budget deficits and trade deficits as a percentage of GDP. Who knows what the optimal numbers are and any given point in time?

    To a much greater extent, though, we can interpret numbers like the unemployment rate, inventory levels, excess capacity, the CPI index, and the value of the dollar on fx markets.

    We know that the employment situation is terrible. Too many people are unemployed or underemployed or have even dropped out of the workforce and aren’t even counted. And we also know that inflation has been subdued, inflation expectations remain subdued, and that the dollar has been reasonably stable on fx markets (with option prices implying normal levels of future volatility).

    For me, that’s the cue to run up larger deficits. Of course, I would much rather see tax cuts than increased spending. I am even torn over increased spending which doesn’t take the form of one-time transfer payments. I don’t want to see the federal government grow, since I think it is too big already. But of course I also don’t want 16% underemployment.

    Still, that’s a political fight to have between conservatives and progressives with everybody having a correct understanding of basic MMT. Then progressives can argue for tax hikes (or at least no tax cuts) for the reasons they really believe in (e.g. fairness, remedying inequality, providing social safety nets), and conservatives can argue for decreased spending (or at least no increased spending) for the reasons they really believe in (e.g. creating proper incentives, efficiency, expanding liberty).

    WARREN MOSLER Reply:

    agreed, except progressives should also be in favor of ‘creating proper incentives, efficiency, expanding liberty’

    i suspect most of us come together under populism on most issues.

    and the problem is both parties have become elitist

    Tom Reply:

    ESM

    I agree with everything you wrote.

    But the problem is that people criticizing Krugman dont understand that he is 100% right.

    He advocates deficits now but understand that we cant lose from our sight debt levels (which from historical perspective are still not very high). But outside of liquidity trap MMT prescriptions (controlling inflation by adjusting budget deficits/surpluses) may not be sufficient if debt levels will be very high. And the last thing: outside of liquidity trap monetary policy may be better (MMT is against it) than fiscal policy because higher rates may convince investors to buy (or agree to roll) financial assets instead of changing them for real assets. Instead fiscal policy would only propose increasing budget surpluses and that may be impossible to do in adequate amount.

    Scott Fullwiler Reply:

    Krugman’s wrong. Liquidity trap doesn’t matter for the effect of the MB. Functional finance is Ricardian. MMT has a whole range of suggestions for dealing with the financial issues you raise as complements to fiscal policy (in fact, we’ve always said functional finance alone won’t work to stabilize financial system over the long run–we’re Minskyans, after all). Mosler’s Law was coined by Jamie Galbraith to refer to deflationary periods–liquidity traps, as you call them (you’re taking it out of context). Finally, extremely stupid outliers aren’t useful examples.

    Tom Reply:

    Scott

    But please answer why do you think that fiscal policy is better than monetary policy at full employment and what would be your suggestions to control inflation in my example (which you describe as “extremely stupid outlier”).

    Thank you

    Tom Reply:

    Warren

    Do you agree that your motto: “there is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it” is only true with additional assumption?

    And this assumption is this: high net spendings today are only good if they generate higher taxes tomorrow.

    I’m waiting for replay

    Thank you

    WARREN MOSLER Reply:

    under current institutional arrangements, higher net spending today will generate higher taxes tomorrow than otherwise.

    however, tomorrow’s higher taxes could very well reduce aggregate demand to something less than full employment. if so, they are too high and should be adjusted for the size govt and credit conditions when the time comes to sustain full employment

    WARREN MOSLER Reply:

    inflation is a continuous increase.

    that future possible spending surge would be a one time adjustment

    and mmt doesn’t say ‘no matter what people might ever do prices will never go up’

    Tom Reply:

    Warren

    Thanks for your replies.
    I think that you are very smart guy.
    I liked your book very much and thought that it was very original. I even used your “law” in my investment decisions (up to now with succes).

    I agree that we should keep deficits high now because high unemployment is the biggest danger.

    But:

    You guys shouldn’t criticize Krugman because I think he’s right when he says that at full employment monetary policy may be preferred and debt level shouldn’t be ignored because later it can bring troubles (from historical perspective it’s not too high yet).
    And again I don’t believe that you can fully control inflation only with fiscal means at full employment.
    But we can agree to disagree.

    Best,

    WARREN MOSLER Reply:

    I don’t criticize him for that. The problem there is he misrepresents mmt
    And when he says that today long term deficits are a problem he’s shooting from the hip and out of paradigm as well

    Tom Reply:

    Warren

    I don’t think that he says “that today long term deficits are a problem”. I think that his main conclusion is that we shouldn’t abandon monetary policy at full employment (“lost access to the bond market”). I agree with that statement and do you?

    Thanks for your replies.

    WARREN MOSLER Reply:

    inflation isn’t a function of what passes for ‘monetary policy’

    the problem he’s saying mmt says deficits never matter completely out of context which he knows or should know is not true

    Tom Reply:

    Scott

    You don’t want to answer so I will modify my example. Let’s divide all numbers by 10 (500 USD a month and 1.6 trillions of unspent USD after a year). Now introduce banks and let people put their money in the banks. Because we have full employment demand for loans is high. But the Fed doesnt want inflation so decides to offer good interests rates for money that banks now received: either by selling them bonds or paying them interests rates on their reserves. Banks do the same for their clients and money that people received remains unspent. So there is no increase in inflation.
    Now how would you prevent inflation in this case using only fiscal policy. If people wanted to spend more money during the year you cant rise taxes with the effect within this year.
    It’s clear that monetary policy is superior to fiscal policy in this case (at full employment). BTW even in my original example you could use monetary policy to prevent inflation but certainly not fiscal policy.
    Why you don’t want to accept this fact I don’t understand Scott.

    I’m waiting for you replay.

    Thank you

    WARREN MOSLER Reply:

    raising rates means the economy earns more interest (it’s a net saver to the tune of the outstanding debt) and spends at least some of it.

    and raising rates raises costs of production that get passed through into prices.

    that’s probably why raising rates has never worked to lower inflation

    Sergei Reply:

    “Thanks great post I agree with you (first intelligent reply I received here and at pragcap”

    Such issues have been already long discussed and I believe agreed upon. It is most likely that nobody wants another Marshall’s longest here.

    Distribution of financial wealth matters. Deficits can solve short-term economic issues. Long-term and high deficits indicate inefficiencies which have to be addressed. Most likely through changes in the tax system. These changes can be implemented only over the long-term. The loop is closed. Everybody has to ask right questions in order to get right answers.

    So any claims that apparently there is a theoretical weakness in the MMT are way overblown.

    WARREN MOSLER Reply:

    which inefficiencies do long term deficits indicate?

    although i do consider the incentives for demand leakage (tax advantaged savings) highly problematic and i have proposed eliminating them

    Tom Reply:

    Sergei

    Thanks for your reply

    “So any claims that apparently there is a theoretical weakness in the MMT are way overblown.”

    I’m not sure that I can fully agree with you because I think that MMT assumes that loans create money (deposits) and that creates reserves (monetary base). But I have just shown you that it doesnt always have to be in this order. And why do you insist only on fiscal regulations I can’t understand. Don’t you think that sometimies monetary policy may be better?

    WARREN MOSLER Reply:

    bank loans create bank deposits and any required reserves as a matter of accounting.

    it’s an identity.

    Tom Reply:

    Segei

    “Long-term and high deficits indicate inefficiencies which have to be addressed.Most likely through changes in the tax system. ”

    I can agree but even without deficits we can have troubles if we accumulate too much debt. And how that can be controlled only through tax regulations? Don’t you think that it can be rather difficult in practice?

    Waiting for you replies

    WARREN MOSLER Reply:

    the only ‘problem’ is what can happen any time- everyone deciding to spend their savings at once and driving up prices.

    but that’s a one time surge, and not inflation, as when taxation eventually brings actual savings down to desired savings its all stabilizes

    MamMoTh Reply:

    Tom, I’m with you on this one. Somehow MMT people prefer fiscal over monetary policy to control inflation even if it doesn’t make much sense in practice.

    Although I agree monetary policy is a blunt instrument, it is efficient: a few people lock themselves in a room a couple of hours, drink coffee, have a chat, and at the end of the meeting they announce a magic number.

    WARREN MOSLER Reply:

    except no central bank research i’ve ever seen shows interest rates actually function to control inflation

    Tom Reply:

    I think there are at least to major flaws of MMT (they are connected):

    1. Assuming that fiscal policy is always better than monetary policy (which is certainly not true at full employment)

    2. Assuming that only lending create reserves (that is also not always true as shown in my example).

    Guys I want your opinions!!

    Thanks:)

    WARREN MOSLER Reply:

    monetary policy has shown itself to be ineffective, at least in the direction assumed. that’s a fact of very expensive and high quality CB research

    only the fed creates net reserve balances. that can be done by govt spending and/or lending only.

    when govt sets reserve requirements, it is agreeing to create reserves.

    that’s what ‘requirement’ means as a requirement is functionally a debt.
    and accounted for accordingly

    and mmt doesn’t say which is ‘better’- it just tells you what each does.

    Tom Reply:

    I want to add:

    Assuming that only lending create reserves so monetary base is not inflationary (that is also not always true as shown in my example).

    Tom Reply:

    Neil

    “Automatic stabilisers like the Job Guarantee don’t need any meetings in rooms, no Wisdom of Solomon and no crystal balls.”

    But in my example there was something like Job Guarantee (everybody received job) and it may not work in terms of preventing inflation

    “I’d rather have a system where nobody had to make decisions based on forecasts.”

    I’d rather also but it is too idealistic in my opinion.

    “Additionally monetary policy is just a delegated power. There is no reason on earth why you couldn’t delegate fiscal power in the same fashion – moving a tax or spending limits through a range for example.”

    Because it is easier to design flexible monetary policy (in my opinion).

    Thanks for your replay

    Tom Reply:

    Besides guys,
    Do you really think that there are only three economics professors (Jamie Galbraith and Randy Wray in US and Bill Mitchell in Australia) that are able to understand and appreciate benefits of MMT?

    Tom Reply:

    Ok guys I will now show you final argument that Krugman is right (i.e. that MMT prescriptions are only good because we are in liquidity trap)

    It is excerpt from Pavlina Tcherneva in response to Krugman (she is MMT expert):
    http://neweconomicperspectives.blogspot.com/2011/03/modern-monetary-theory-and-mr-paul.html

    “It is a huge leap of faith to argue that more reserves or bond holdings would create a wealth effect. It might, but the transmission mechanism is highly problematic—the banking sector is bursting with reserves as we speak, yet bank lending to consumers and investors continues to be sluggish.”

    So she is admitting that because of liquidity trap (sluggish lending) there is no danger of wealth effect and inflation.
    But nowhere in this text she is saying that at full employment that would be also true.

    So again MMT prescriptions may be only good in liquidity trap but certainly not at full employment.

    WARREN MOSLER Reply:

    we aren’t in a liquidity trap. that’s a fixed fx construct that has no application with today’s fiat currency.
    sluggish lending is not a liquidity trap.

    there is no danger of ‘wealth effect’ from QE because QE doesn’t alter wealth (net financial assets) of the economy

    at full employment there are full employment conditions that apply to the economy at that time.

    lending could be brisk or sluggish. inflation could be high or low.

    a little over 10 years ago we had 3.7% unemployment, core inflation low and falling, and a whopping 380 billion trade gap back when that was a lot of money. lending/domestic credit growth was at a record and unsustainable 7% of gdp chasing impossible .com business plans and y2k fixes, the budget was in surplus maybe 2% of gdp, and the foreign sector saving maybe 5% of gdp. (this is from memory. could be off a bit, but won’t change the point).

    this stopped working just after y2k, when private sector credit creation collapsed. all we needed to do was cut taxes that much to sustain demand (or increase govt spending) which bush eventually did in early 2003 after i visited the west wing and explained it all to andy card.

    beowulf Reply:

    Tom, Are you sending in your replies by twitter? One long post addressing several people in turn is easier to read than a series of short ones.

    Concerning Pavlina qyote, any assertion that starts off with “It is a huge leap of faith”, is going to be neither an admission nor, for that matter, really an assertion.

    And your hypothetical reminds me of mhen dad was practicing medicine, he’d have patients come in and say (for example), “Doc, when I stand on one foot and close my eyes, I get very dizzy”. And my dad’s sage medical advice, “Don’t stand on one foot and close your eyes”. Problem solved. Likewise, since you’re stipulating that the cause of inflationary spending is a monthly universal rebate, then stop sending out universal rebates. You don’t even have to get the IRS involved. If Congress ever authorized such a program, it could give the Secretary discretion to adjust the rebate amount on pro rata basis as economic conditions warranted. Problem solved.

    Even under current statutes, Congress has already effectively delegated tax power to the Federal Reserve. The Fed governors are authorized to set and adjust fees for services to banks that reflect their direct and indirect costs. Since inflation is too much money moving at too high a velocity (P = MV), then clearly the Fed can set fees that account for the “indirect cost” of inflation. Target velocity with a transaction fee (which will also drain money) or target money supply with a non-monetary base fee (which will also reduce velocity), the latter could also be used to anchor a Fed Fund rate without bonds. Since the Fed refunds its net earnings to Tsy, Fed user fees can have the same reserve drain / deficit reduction function as taxes (but can be adjusted far more expeditiously).

    WARREN MOSLER Reply:

    good point on fed taxing authority!

    but while p does equal mv by definition of the terms, it doesn’t have anything to do with the causation of inflation, particularly when the currency is a public monopoly.

    Tom Reply:

    beowulf

    Thanks for your reply

    “stop sending out universal rebates.”

    But it doesn’t have to be bad if we are in liquidity trap and want to fight high unemployment. Look the problem is that in this way we can accumulate a lot of debt debt (bonds, notes, reserves). And later when we achieve full employment it may be controlled (to prevent inflation) only through monetary policy – in case debt is high in relation to deficit (by positive interest rates so investors wont change it for real assets).

    “the latter could also be used to anchor a Fed Fund rate without bonds.”

    Ok so you admit that interest rates may be required to maintain above zero at full employment (it doesn’t matter if we call this assets bonds reserves or whatever).

    So you are with me and Krugman.:)

    Maybe I post too much but this is because I can’t wait for your replies.:)

    WARREN MOSLER Reply:

    when we did have inflation at full employment or otherwise fed rate hikes have been shown to make it worse.

    Tom Reply:

    Ok guys now I want prove to be true statement that MMT claims is false (this is from Warren’s book):

    “With government deficits, we are leaving our debt burden to our children.”

    Again this statement is only false as long as we are in liquidity trap (high unemployment, slack etc.). Arguments you can find in Warren’s book (which of course is very good and worth reading) so I won’t repeat them.

    But at full employement this statement is true because:
    you are obliged in the future to pay positive interest rates and this reduces government spending for other things. If we don’t want to pay interest rates it may increase inflation (financial assets may be swapped for real assets) and this reduces purchasing power of future generation. Even if we are able to control it with reduced deficit (to a degree because I don’t believe it can be done fully and it can be even totally impossible with high debt) we are still taking purchasing power from this future generation (by increased taxes).

    WARREN MOSLER Reply:

    But at full employement this statement is true because:
    you are obliged in the future to pay positive interest rates
    NO YOU AREN’T

    and this reduces government spending for other things.

    NOT NECESSARILY

    If we don’t want to pay interest rates it may increase inflation (financial assets may be swapped for real assets)
    NEVER HAS, BUT THERE MAY BE CIRCUMSTANCES WHERE IT WOULD. I JUST CAN’T THINK OF THEM

    and this reduces purchasing power of future generation.

    NO IT DOESN’T. ONLY REDUCED REAL TERMS OF TRADE CAN HURT AGGREGATE PURCHASING POWER OF A NATION AT ANY TIME.

    Even if we are able to control it with reduced deficit (to a degree because I don’t believe it can be done fully and it can be even totally impossible with high debt)

    WHY WOULD CUTTING SPENDING OR RAISING TAXES BE LESS POSSIBLE WITH MORE OUTSTANDING TSY SECS?

    we are still taking purchasing power from this future generation (by increased taxes).

    IF TAXES ARE AT THE RIGHT LEVEL TO SUPPORT FULL EMPLOYMENT, DOMESTIC OUTPUT AND CONSUMPTION ARE MAXIMIZED, AND GAINING FROM THERE AT ANY POINT IN TIME IS A FUNCTION OF REAL TERMS OF TRADE.

    ESM Reply:

    Tom,

    Living standards at any point in time in the future will be wholly determined by the economy’s ability to create goods and services, plus all tangible wealth created up to that point (e.g. houses, software, medical technology). Why this has anything directly to do with numbers on a spreadsheet at the Federal Reserve is beyond me.

    WARREN MOSLER Reply:

    beyond me too.

    and that isn’t even mmt

    beowulf Reply:

    Ok so you admit that interest rates may be required to maintain above zero at full employment (it doesn’t matter if we call this assets bonds reserves or whatever).

    Objection, assumes facts not in evidence. I said it could be used to anchor fed fund rate, but there’s certainly no necessity to ever maintain positive interest rates (if nothing else, the Fed could increase required reserves). Since what matters is fiscal and not monetary policy, just let FFR drop to zero and Fed can make fiscal adjustments with transaction fees.

    The advantage of using a tax on non-monetary base is that it converts monetary policy into fiscal policy. Assuming constant Tsy spending: raise rates, reserve drain; cut rates, reserve add.

    Kristjan Reply:

    “But at full employement this statement is true because:
    you are obliged in the future to pay positive interest rates and this reduces government spending for other things.”

    First that’s the kind of economy I want to live in. All the resources are being utilized and government is raising taxes to avoid inflation versus “we have to raise taxes no matter what is the condition of real economy”.

    You are the one that is advocating treasury securities in the first place and now you are arguing that we have to pay interest on them. That interest payment is part of government spending. Are you breaking down the government spending now and arguing that It is not wise to spend on something? If so then we are talking. So far the whole talk has been It is not sustainable, we cannot go on like this etc.

    Tom Reply:

    Thanks guys for your opinions (the more the better)

    ESW

    “Living standards at any point in time in the future will be wholly determined by the economy’s ability to create goods and services, plus all tangible wealth created up to that point (e.g. houses, software, medical technology). Why this has anything directly to do with numbers on a spreadsheet at the Federal Reserve is beyond me”

    Here lies the trick:

    At full employment economy’s ability to create goods and services is already at maximum so average living standards dont change but there are different transfers due to debt (bonds, notes, reserves) issuance:

    1. Government issues debt wihout offsetting it with monetary policy (interests rates) or fiscal policy (decreased deficits or increased surpluses). Then we have inflation and there is a transfer to those who benefit from government spendings from the rest of people. So there is only a transfer within current generation.

    2. Government issues debt wih offsetting it with fiscal policy (decreased deficits or increased surpluses). Then we have no inflation and there is a transfer to those who benefit from government spendings now from the rest of taxpayers. So there is only a transfer within current generation.

    3. Government issues debt wih offsetting it with monetary policy (positive interests rates). Then we have no inflation and there is a transfer to those who benefit from government spendings now from future generation. Because government will have to pay interests to bonholders instead of leaving this purchasing power to people.
    Bondholders resign from spending today (it goes to people who benefit from government) but in the future they will receive additional interests at the cost of other people.

    If government issues a lot of debt then positive interests are necessery because fiscal means are insufficient to prevent inflation (because deficit decrease could be too high). Especially if there is also accumulated debt from the future. And then we have transfer from future generation.
    So this statement remains true: “With government deficits, we are leaving our debt burden to our children”.

    WARREN MOSLER Reply:

    except in 3 the rate hikes add to inflation

    Tom Reply:

    Especially if there is also accumulated debt from the past of course. sorry English is not my native language:)

    Tom Reply:

    beowulf

    “but there’s certainly no necessity to ever maintain positive interest rates (if nothing else, the Fed could increase required reserves).”

    Even if there was 100% reserve requirement it would be only helpful
    if reserves could emerge only after loans (loans->deposits->reserves)
    because banks in this case would not be interested in giving loans.
    But it doesn’t have to be true as was shown in my example. So in this case (MB external to loans)it would mean that banks would not be able to convince clients to keep their money in banks because they would not be able to pay them interests (100% reserves=no loans=no money for interests for deposits). And then clients would decide to change their money for real assets (why hold deposits without interests). So inflation would emerge.

    “Since what matters is fiscal and not monetary policy, just let FFR drop to zero”

    No because there can be debt from the past that if not rolled with positive interests rates could cause inflation (swapped for real assets).

    “and Fed can make fiscal adjustments with transaction fees.”

    Fed can only charge banks for different transactions but not non-bank entities which make different transactions between themselves without banks. So that would not be sufficient to prevent inflation.

    “The advantage of using a tax on non-monetary base is that it converts monetary policy into fiscal policy. Assuming constant Tsy spending: raise rates, reserve drain; cut rates, reserve add.”

    I’m not sure I understand but if you explain I will give my opinion.

    Thanks for replay

    Tom Reply:

    Kristjan

    “You are the one that is advocating treasury securities in the first place and now you are arguing that we have to pay interest on them.”

    Because we are in liquidity trap interests or no interests it doesn’t matter. You can issue bonds, notes or resererves it doesn’t matter now. (I think I explained it may times).
    But when we achieve full employment paying interests (on bonds, or reserves) may be the only tool to prevent inflation because adjusting budget deficits/surpluses may not be sufficient because of high debt (in whatever form).

    “That interest payment is part of government spending. Are you breaking down the government spending now and arguing that It is not wise to spend on something?”

    Now it doesn’t matter on what we spend (liquidity trap).

    beowulf Reply:

    “Even if there was 100% reserve requirement it would be only helpful…”
    I’ll stop you right there, somewhere between then 0% Canadian reserve requirement and, presumably, the 100% North Korean reserve requirement (if anyone would…). There is a practical limit to how hig reserve requirements go before the govt has taken over the issuance of credit. And the govt doesn’t care about making a profit in the best of times, if its making credit it decisions, oh boy. Therefore I must object to your recommendation we nationalize the banking system.

    “Fed can only charge banks for different transactions but not non-bank entities which make different transactions between themselves without banks.”

    The steps necessary for non-banks to transfer US Dollars while avoiding contact with the FRS (before, during or after the transaction) will reduce velocity more efficiently (or rather, inefficiently) than any transaction tax would. Tom, you are a born price controller.

    WARREN MOSLER Reply:

    reserve requirements, even 100%, don’t restrict lending per se. they are just part of the pricing

    i think you were thinking of maybe 100% capital requirements which means banks can only lend their equity?

    Tom Reply:

    the level of Reserve requirements doesn’t if MB is external to loans (try to read with understanding) and you are the one proposing interventionism (reserve requirements, transaction fees) so don’t accuse me about controlling anything

    Tom Reply:

    beowu

    “Concerning Pavlina quote, any assertion that starts off with “It is a huge leap of faith”, is going to be neither an admission nor, for that matter, really an assertion.”

    But she is admitting that more reserves or bond holdings would create a wealth effect and inflation, but because of sluggish lending that is not a problem now.
    And that is precisely point that Krugman is making.

    And the funny thing is that she is fighting with him like he was some deficit terrorist or something like that:)
    MMT people just don’t realise that Krugman is not against deficits but against irresponsibility. And when we achieve full employment government should have market confidence because good monetary policy can be the only one preventing inflation.
    So he just reminds us that we should be able to differentiate between distinct economic conditions in liquidity trap and at full employment.

    Best

    Tom Reply:

    Warren

    Dou you still believe that 7DIF are always false? Because the more I think about them the more I’m convinced that they are only true in liquidity trap.

    “Concerning Pavlina qyote, any assertion that starts off with “It is a huge leap of faith”, is going to be neither an admission nor, for that matter, really an assertion.”

    But she is admitting that more reserves or bond holdings would create a wealth effect and inflation, but because of sluggish lending that is not a problem now.

    And that is precisely point that Krugman is making.
    And the funny thing is that she is fighting with him like he was some deficit terrorist or something like that:)
    MMT people just don’t realise that Krugman is not against deficits but against irresponsibility. And when we achieve full employment government should have market confidence because good monetary policy can be the only one preventing inflation.
    So he just reminds us that we should be able to differentiate between distinct economic conditions in liquidity trap and at full employment.

    Tom Reply:

    Because the more I think about them the more I’m convinced that they are only false in liquidity trap. of course (it’s 4 a.m in my country:))

    Tom Reply:

    Warren

    I don’t have time to be involved in this discussion any more so I will only say that you either don’t read my answers carefully or don’t understand them (for example this excerpt has nothing to do with QE). Nevertheless I think that you are as clueless as Milton Friedman except he wanted to stablize economy with adjusting money supply and you with adjusting deficits.
    And when you say “that’s a one time surge, and not inflation, as when taxation eventually brings actual savings down to desired savings its all stabilizes” I really hope MMT will never be implemented in reality.

    Best regards

    WARREN MOSLER Reply:

    there is another possibility, but understood…

    Tom Reply:

    Last addition.
    This whole MMT thing comes to this: print and if people spend too much tax. You guys are insane if you think that it would bring anything less than a complete disaster.

    WARREN MOSLER Reply:

    it’s always worked that way, whether you recognize it or not.

    and it is looking like that disaster is on the way from grossly overtaxing us for the size govt and credit conditions we currently have

    Tom Reply:

    Warren

    “and it is looking like that disaster is on the way from grossly overtaxing us for the size govt and credit conditions we currently have”

    I can agree (altough I’m not so pessimistic).

    “it’s always worked that way, whether you recognize it or not”

    Think about it Warren. How could you adjust deficits and taxes? Based on people’s spending from last year or based on forecasts?
    If you want to rely on forecasts you can make substantial errors and overtax or undertax (and this could result with high deflation inflation). The same is true in the other case except you would always have inflation or deflation because you would only react to past data and overshoot and undershoot. This whole “adjusting deficits” holy grail is actually the same as Friedman’s “controlling money supply” recipe for happines (for MMT new source of money= deficit). Advantages of monetary policy are these that you can be more flexible and adjust interest rates in a more flexible way (but of course different problems still remain).

    WARREN MOSLER Reply:

    i didn’t say it was ‘easy’ but if you are going to have a govt and provision it via a monetary system mmt is how it works and it’s all in your hands

    Kristjan Reply:

    Tom
    ” How could you adjust deficits and taxes? Based on people’s spending from last year or based on forecasts?
    If you want to rely on forecasts you can make substantial errors and overtax or undertax (and this could result with high deflation inflation).”

    And you think they haven’t thought of that. Let’s enjoy the ride! :)

    The main idea of MMT to me is that “we can consume whatever we are capable of producing” versus mainstream: we cannot afford It, so we shouldn’t be producing in the first place

    Does this idea sound to you like It might be true(we can consume whatever we are capable of producing)? To me It does. And if you think the monetary system is on the way then we should trash It. Because we can consume whatever we are capable of producing. Warren is saying the monetary system is not on the way let’s give It(MMT) a chance, before we start beating It up.

    WARREN MOSLER Reply:

    agreed (with typos corrected)

  9. danw says:

    It seems to me that the debate we are having should be about regulation and the rule of law, not money per se. Under a fiat regime, if the government and its regulatory structure are competent, honest and apply the law equally and fairly across the financial and political and social spectrum, than monetary policy becomes a non-issue. But we live in a plutocratic system, run by the super-rich and lorded over by the same. There is no rule of law, only the rule of men. If THIS condition is not rectified, the USA will continue to head down the path of banana republicanism….or worse.

    Reply

    Tom Hickey Reply:

    DanW, this started at the beginning of the republic. The choice of a republic instead of the direct democracy favored by Tom Paine is an indication of that. The primary financier of the revolution was Robert Morris. The quid pro quo was Hamilton joining with him to put US finances in the hands of bankers instead of direct currency issuance, per US Constitution, art 1., sec. 8. Since then the foxes have been in charge of the henhouse.

    See http://williamhogeland.wordpress.com/ for many posts on this.

    Reply

    ESM Reply:

    Not sure what’s so bad about having a system run by the super-rich. At least they have some business sense and can make decisions once in a while.

    Is it better to have a system run by people who are the most charismatic, or who are best at lying, or who are the most ruthless?

    Based on his ability to read a speech, we elected a feckless goof-off to be the chief executive officer of the most powerful country on earth. How well is that turning out?

    Reply

    Tom Hickey Reply:

    Noting wrong with it as long as they don’t skim the cream off the top through rent schemes that give them subsidies.

    Neil Wilson Reply:

    Do we elect anything other than feckless goofs these days?

    Who else would want to stand for election?

    danw Reply:

    Maybe I was unclear. Without LAW, men of wealth (or just men of power, etc.), with greed as their sole compass, trash everyone else. MMT is a pipe dream NOT because of the operational truths that it understands viz a fiat system, but because it relies on the idea that real LAW and regulation will in fact be followed and adhered to. But anyone who has read DISASTER CAPITALISM—or who has even lightly perused the history of man—knows that there is no, and never has been, a RULE OF LAW.

    WARREN MOSLER Reply:

    MMT *is* the operational truths.

    people are what takes it from there

    Tom Hickey Reply:

    DanW if you think this, you have not been following Bill Black and Randy Wray. In fact, Bill Black is one of the foremost figures documenting control fraud and calling for prosecutions. He is way out front on this.

  10. Neil, I agree that if the private sector is in saving or deleveraging mode, then a deficit at full employment is OK. I should have mentioned that. I also agree that if the private sector is in a kind of “middle of the road” mode – neither trying to save or dissave money, then a deficit is in order. But if the private sector is in “irrational exuberance” mode, and inflation looms, then a surplus might well be appropriate.

    Re why might there be a 6% deficit at full employment, there is a reason in addition to the reasons given by Beowulf, and as follows.

    Given the target 2% inflation rate, the monetary base and national debt will decline in real terms at about 2%. It will require a deficit to keep the two latter “topped up”. Plus if an economy grows in real terms, and if the national debt and monetary base are to expand similarly, that requires even more deficit.

    Reply

    Neil Wilson Reply:

    I think everybody is missing the point here.

    To get to 6% deficit at full employment is a journey from where we are now, and along that way you will constantly reference inflation and unemployment adjusting spending/taxation as you go if you’re following MMT/functional finance prescriptions.

    The discussion is missing the MMT context which is ‘and what are the values of the policy variables at that time?’

    The ‘deficit’ is not a policy variable under MMT, it is merely an outcome of the sectoral balances persisting at that point in time. It’s a mildly interesting statistical artefact that really doesn’t deserve the amount of discussion it gets.

    So what we need to be saying is that a deficit is not a policy variable. What are the values of inflation and unemployment.

    Reply

  11. Bowles-Simpson are wrong in that they advocate tax increases or public spending cuts during a recession, as Warren points out. However I think Warren is wrong in that he seems to say that deficits are never a problem, even after we return to full employment, for countries in a “non convertible currency/floating exchange rate regime.”

    In the later scenario, deficits are not a problem in that they won’t cause “Greek style” bankruptcy. But as Krugman pointed out in his recent New York Times article, too large a deficit, given full employment, certainly is a problem in that it leads to excess inflation.

    In view of the political power of deficit terrorists, MMTers need to be careful not to say anything that suggests they think deficits are NEVER a problem. Krugman has certainly got the impression that the latter is what some MMTers think, and I don’t blame him.

    Krugman’s article:

    http://krugman.blogs.nytimes.com/2011/03/25/deficits-and-the-printing-press-somewhat-wonkish/

    Reply

    Neil Wilson Reply:

    Ralph,

    I’m afraid you are plain wrong here. If there is a deficit at full employment under MMT ideas, ie there are no unemployed and interest rates are stable then by definition that is because the non-government sector, for whatever reason, has decided to hold 6% and not spend it.

    The deficit is the non-government sector surplus. The non-government sector decides ‘en-masse’ what their surplus will be given the prevailing conditions. So the deficit is just an outcome.

    I would say that a 6% deficit at full employment would be unexpected under MMT rules, but entirely possible if you’re the United States and everybody else in the world thinks US dollars are worth accumulating as some sort of reserve.

    And if they don’t, then you won’t get 6%.

    What irritated the hell out of me with this article and your response is that you all move straight to the assumption – that there is a 6% deficit at full employment.

    And nobody has asked the question “Why the hell do you think there will be a 6% deficit at full employment?”.

    Reply

    Kristjan Reply:

    I follow you Neil, my understanding is that this work program is not suppose to get very large, not 6% GDP.
    Most likely there is not going to be 6% deficit at full employment but let’s say there is, the rest of the world wants to save in dollar denominated financial assets 6% of US gdp.

    does the work program take care of It?

    Reply

    Kristjan Reply:

    the rest of the world wants to save in dollar denominated financial assets+domestic net savings desire= 6% of US gdp

    beowulf Reply:

    And nobody has asked the question “Why the hell do you think there will be a 6% deficit at full employment?”.

    1. Full employment U3 rate is set too high. Somewhere between NAIRU “full employment” rate of 5.5% (which CBO uses for budget projections) and wartime (1944) peak U3 of 1.2% (which entailed price controls and shipping millions of Americans overseas) there is a peacetime full employment rate which the Fed fears like Austin Powers fears nuclear war and carnival workers.
    2. Private savings leakage (retirement savings accounts for the most part) which, like taxes, are reserve drains but are not booked on federal budget, something Tsy once knew, but has forgotten, during its seven war bond drives.
    3. The trade deficit leakage is enormous, running about $500 billion a year (3% of GDP). If its not going to eliminated via tariffs, then govt needs to fill this demand leakage either with on-budget deficit spending or with, say, off-budget public investment spending (infrastructure spending financed by Tsy’s in-house Federal Financing Bank is off-budget for the most part).

    Reply

    Peter D Reply:

    At full employment, the only reasons for deficit to be high would be (a) to offset CAD (b) to offset non-govt domestic sector’s desire to save $US ((a) and (b) should be abbreviated as “non-govt sector’s desire to save in $US”) and (c) to pay for non-discretionary govt spending (SS, Medicare, Military, the cost of govt etc) + programs that the public decided should be run by the govt (eg, space program) If you have deficit that is too high under this circumstances – and “too high” means you’re getting demand-pull inflation – then you’re undertaxing.

    Reply

    WARREN MOSLER Reply:

    agreed

    WARREN MOSLER Reply:

    i’d say it this way- for a given time period, the govt determines the nominal deficit, and the non govt sector the real govt deficit

    so if the govt tries to deficit spend ‘too much’ the result will be a larger nominal deficit but a higher price level.

    and yes, i could see a deficit higher than 6% at full employment. just like japan today. depends on the demand leakages

    Reply

  12. Chris says:

    Warren –
    “… there’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody. The question is, how do you set up a system which assures that the real assets are created which those benefits are employed to purchase?” — Alan Greenspan.

    What is the answer to this question?

    Thanks.

    Reply

    art Reply:

    Chris, it would be nice if that were the question being asked (or the prevailing assertion being made) as it would take us beyond the ‘fearing becoming the next Greece, we become the next Japan’ thing.

    No right answer to it imo. It’s a many, many dimensioned optimization problem of incredible complexity. Our political system seems to be pretty OK at dealing with those kinds of challenges, at least relative to most others. Doesn’t mean we can’t do better.

    Reply

    WARREN MOSLER Reply:

    and because we use computers from japan we are becoming geeks…

    Reply

    kkken530 Reply:

    4-6-11
    Congress needs to have the Treasury create six new coins,a 1,5,10,20,50,and 100 dollar coin.. Use the same metal we stamp our quarters from. Say a million of each,then have a paper certificate promising redemption for the coin so people who choose wouldn’t have to carry around a pocket full of money. Each coin would be able to extinguish it’s face value of taxes. They will also be legal tender money. They would be lawful money by the terms of the Constitution..They DO NOT have to be gold or silver,and wouldn’t be as good if they were. Gold,or any commodity metal make lousy currency. As long as their commodity value is below face value they work no different than base metal or paper. As soon as their value is above face value they start to disappear,and if their metal value goes up soon they are gone,and you have no money..

    Take these new coins and bills,
    Spend them into circulation. Pay the troops,pay government workers. Have the Surgeon General lead a new corps of Doctors and Nurses to fight our common enemy;Sickness and Disease..Create a new teaching hospital to train a thousand new doctors a year,and twice as many nurses.Hire the best Doctors we have to teach them. Lets REALLY have the best medical care in the world,for All Americans

    Reply

    Matt Franko Reply:

    Ken,
    Looks like the leadership in the west had this knowledge at one time (albeit for depraved purposes, we could re-direct such public purposes today) but we’ve lost it along the way somehow.
    http://en.wikipedia.org/wiki/Frome_Hoard

    Of course we also could skip the metallurgy and run the system on our computers today…
    Resp,

    Reply

    kkken530 Reply:

    Of course most transactions will continue to be computer blips as they are now. But the coins{and paper substitutes} give a constitutional legitimacy to the currency.The important point is the coins are a direct issue,not a bond and fed note program that adds interest to the money so the coins[and their paper and electronic substitutes] remain circulating interest free. The important thing was my second point,to spend them into circulation creating a US Medical Corp to supply more doctors and nurses that will be needed to supply the retiring boomers and the uninsured{and get rid of health insurance} and other job creating projects.

  13. Tom Hickey says:

    I fault the president for appointing this commission in the first place. It was crassly political, to make him look like a Very Serious Person. Unfortunately, the person running against him in ’12 will likely be a deficit hawk whose policies would tanks the economy by cratering effective demand.

    Reply

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