Debt ceiling dynamics revisited
Posted by WARREN MOSLER on July 19th, 2011
First, I’d guess the President will sign anything Congress passes, including short term measures.
But he might not.
And yes, there are options that allow the executive branch to continue to deficit spend if it wanted to, ranging from issuing a multi trillion dollar platinum coin to spending under cover of the 14th amendment.
However, there’s a real possibility Congress won’t pass anything for the President to sign, or that the President vetos what they do pass, and that the Treasury honora the current debt ceiling and limits spending to tax revenue.
Should that be the case, the US govt, as widely discussed, immediately goes to a ‘balanced budget’ mode, prioritizing interest payments, so there is no default by the US Treasury.
That means a lot of other bills won’t get paid.
Chairman Bernanke said that this could cut 6% off of GDP and send the US into a recession with GDP going from positive to negative.
However, falling GDP means falling revenues which means more spending cuts, and revenues falling further.
It also means the automatic fiscal stabilizers of rising transfer payments will not be funded by deficit spending and therefore not provide the support they have provided in all prior downturns.
In other words, for the first time the US would experience an unchecked downward spiral, which could make the downturn that much more severe than the Fed Chairman suggested.
And as difficult as it might be for the US, the euro member nations may be looking at something even more catastrophic.
The drop in US consumer, business, and govt spending will mean a drop in sales for euro zone exporters, possibly sending that region into negative GDP growth and falling govt revenues.
This means their current solvency and funding issues further deteriorate as the entire euro zone could experience a funding barrier and general default.
While the ECB can, operationally, write any size check required to fund the entire region, it doesn’t want to do that, and can be expected to wait until things deteriorate sufficiently to the point were there is no other choice.
Ironically, the US debt ceiling, a seemingly innocuous relic of the gold standard, where it once served to protect the nation’s gold supply and should have been eliminated when the US dollar ceased to be officially convertible into gold, could now bring down the entire world economy, and threaten the world social order as well.
July 19th, 2011 at 1:09 pm
And the problem is, the Repubs are just crazy enough to do it, and Obama doesn’t have the guts to do something like ignore them and spend anyway…
Maybe there is something to all this “Armageddon in 2012″ talk, after all…
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Crake Reply:
July 19th, 2011 at 2:00 pm
@Jim Baird,
Read The Fourth Turning. http://www.fourthturning.com/
It is probably technically pseudo-science but the researcher put forth decent evidence that all societies usually have a major social disruption every 80 to 100 years because generations cycle through 4 arch types that always play out in a series, with the fourth generation tending to tear down major aspects of the society that their parents (the 2 nd generation in the cycle) rebuilt from the last disruption. These four generations tend to cycle because children, in all cultures, tend to be opposite of their parents in core ways, so opposing cycles 1 versus 3 and 2 versus 4 tend to be opposite in their base of the other.
In that turning pattern, The American Revolution, the Civil War, and great depression were our previous fourth turnings and if the pattern holds out, the Baby Boomers would tend to be tearing down institutions the Great generation built around this time. Maybe what is happening now is the catalyst and base of that disrupted force.
Again, it is pseudo-science but it is very compelling (it was written in mid 1990s and predicted a major turning happening around now.)
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Adam2 Reply:
July 19th, 2011 at 2:08 pm
@Crake,
nonono.
We have great presidents every 80 years. Washington – Lincoln – FDR – GWBush.
h/t – Curb Your Enthusiasm.
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WARREN MOSLER Reply:
July 19th, 2011 at 3:36 pm
probably all comes down to fiscal balance cycles.
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Tom Hickey Reply:
July 19th, 2011 at 4:53 pm
@Crake,
I would not write it off as “pseudo-science” exactly. Strauss and Howe’s vitae are pretty impressive and they had been working in the field of generational studies separately before they teamed up. I don’t think that they represent their ideas as “science” as historical analysis.
Strauss and Howe are considered antecedent to the Tea Party and predictive of it.
Ravi Batra’ popular work is also historical analysis based on a theory developed by his mentor, P. R. Sarkar, who developed “the law of social cycles.” Batra holds a PhD in economics, and he teaches economics in the US.
Strauss and Howe are conservative and Batra is progressive. Interesting that they come to similar conclusions. It is difficult to predict the timing of cycles with any precision. For example, Batra has made some predictions that worked out very well, others not. He addresses this here at his site.
I
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Crake Reply:
July 20th, 2011 at 10:25 am
@Tom Hickey,
Fourth Turning seems to be grounded in research but to me it rests on a lot of generalizations and correlations without showing causation. Having said that, I feel it warrants merit.
Crake Reply:
July 20th, 2011 at 10:35 am
@Tom Hickey,
Also, it is ironic reading some of the forums on the Fourth Turning. It seems the debt hawks/tea party types, who are in the majority on those forums, see the “actual debt” as the Fourth Turning crisis, whereas we see the “debt crisis”/attitude toward the debt and prescribed action as a potential crisis of its own making. And this seems to indicate a poor reading by the former. From my understanding of the Fourth Turning, the crisis would tend to be caused by a symbolic stand taken by the fourth generation to show everyone who is boss during their leadership stage of life versus the crisis being born from something “real.” So, for those who think the crisis will be caused by the debt, something “real”, they are not working within the framework of the Fourth Turning. I suspect those types’ attraction to the Fourth Turning, at this point in time, is for confirmation purposes, of their beliefs/outlooks, versus using it as a predictive tool.
What are your thoughts?
Robert Kelly Reply:
July 20th, 2011 at 11:42 am
@Tom Hickey,
Tom and Crake,
John Xenakis at generationaldynamics.com has taken Strauss and Howe a bit further with his own research. He has predicted a financial crisis since 2002 with the same idea of lower and lower risk aversion as generations cycle through losing perspective and memory of the previous great crisis. He has considered himself a cassandra for quite some time.
jason m Reply:
July 20th, 2011 at 12:24 pm
interesting. it would seem to me that the ‘debt crisis’ is just one of many perceived crisis that could be used. i used to follow a lot of conspiracy theory stuff and its notable how much its picking up steam, from 9/11 “truthers” etc. all almost willfully wanting to believe the worst instead of being pragmatic and rational.
Crake Reply:
July 20th, 2011 at 2:16 pm
@Robert Kelly,
Robert Kelly thanks for the link to that site. I found the following, in a recent post on that site:
“Something that Boomers and Gen-Xers share, but which was rare among Silents, is what I’ve been calling “lenscap stupidity” or “lenscap blindness.” This refers to a February, 2007, photo showing Israeli defense minister Amir Peretz spending a half-hour military briefing looking through binoculars with the lenscap on. How stupid do you have to be to keep looking through binoculars with the lenscap on?
Looking at facts through binoculars with the lenscap on has several advantages. It lets you imagine any facts you want, and ignore any facts you don’t like.”
That might very well be the most apt description of what is occurring now – the nation is been run by an ideologue generation.
Tom Hickey Reply:
July 20th, 2011 at 3:30 pm
Crake, to claim causation you have to show some transmission mechanism in addition to correlation. In dealing with long-term social effects it is difficult to show a transmission mechanism that is testable, which scientific method requires. But one can provide a plausible explanation, and that is what I think that both Strauss & Howe and Batra have done fairly convincingly. I don’t think that either Strauss & Howe or Batra would claim that their explanations and predictions are “scientific” in the sense of testable by experiment. They have attempted to show historical patterns (correlation) and explain this in terms of similar conditions that repeat. I have lived long enough to see generational patterns, so I think that such a explanation has legs. Whether they got it right remains to be seen, but often explanations get refined over time by successors.
I think that there is something to both Strauss & Howe’s observations about generational patterns and also Batra’s observation about the four classes and how they rise to power and fall from it in a patterned fashion. Batra’s is not a new idea. It is found in ancient Indian and Greek philosophy (Plato’s Republic) and his mentor, P. R. Sarkar, adapted it to modern historical trends, shifting the order.
Tom Hickey Reply:
July 20th, 2011 at 3:37 pm
@Tom Hickey,
I think that Batra has put his finger of the proximate cause of both his own prediction of the fall of neoliberal capitalism and S & H’s fourth turning as endemic corruption and institutionalizing a double standard, resulting in political and economic chaos. I think we are seeing it unfold before our very eyes. In the final analysis, this is a moral crisis that portends vast political and economic consequences.
Ed Rombach Reply:
July 19th, 2011 at 6:13 pm
@Crake,
Sounds a bit like Martin Armstrong.
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WARREN MOSLER Reply:
July 19th, 2011 at 3:35 pm
What’s Mayan is Mayan?
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roger erickson Reply:
July 19th, 2011 at 4:45 pm
@WARREN MOSLER,
And, per Aztec Economics twist, what’s Youran is also Mayan (in the Aztecian sense).
The groups that always benefit from a deflationary crash are those pre-positioned with excessive hoards of scarce financial assets. In any crash, there will be people salivating to hoard even more, more, more … all at rock bottom prices.
It’s like a sale at Filene’s Basement. Look for at least one lobby to push for a “controllable” spiral.
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Art Reply:
July 19th, 2011 at 8:14 pm
@Jim,
“Maybe there is something to all this “Armageddon in 2012″ talk, after all…”
I’m applying for an internship with the crack investigative team that’s introduced at the 7:15 mark of this harrowing documentary:
http://www.youtube.com/watch?v=Nj7pHXlTdWc
Seems as likely to have an impact as speaking to my elected representatives does. :)
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July 19th, 2011 at 1:35 pm
it seems to me that, in a perverse way, the “deficit terrorists” may be vindicated if such a scenario occurred. In other words, when the economy tanks due to attempts to balance the federal budget, the deficit terrorists say, “See? we’ve gone past the point of no-return! we’ve become Greece!” Only after significant damage would congress be motivated to ramp up spending.
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Crake Reply:
July 19th, 2011 at 2:07 pm
@Joe,
This is politically scary. Deficit hawks are likely in a win-win situation. If the private sector starts to add debt (Mike Norman posted a link showing borrowing is rising) and offsets spending cuts and the economy grows, deficit hawks can say “told you so, spending cuts have helped.” And if the economy turns down, they can claim the spending cuts were too late. Win-win.
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WARREN MOSLER Reply:
July 19th, 2011 at 3:35 pm
except interest rates go down
;)
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Tom Hickey Reply:
July 19th, 2011 at 4:55 pm
@Joe,
Joe, whatever happens the anti-scientific crowd claims it proves their point. That is why they are anti-scientific.
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July 19th, 2011 at 2:05 pm
Couldn’t Obama be sued if checks bounce? Citing the 14th amendment, of course.
I had the same thought this morning about the similarities of gold standard and the debt ceiling. I even googled it. Here is a good article comparing the two.
http://seekingalpha.com/article/279702-it-s-time-to-get-off-the-debt-ceiling-standard
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Crake Reply:
July 19th, 2011 at 2:09 pm
@Adam2,
I wrote this on Miek Norman’s site:
From this “1. Congress has appropriated Federal spending for FY 2011 which the Executive is mandated to spend.” I wonder if the ultimate goal of all this ruckus is to trap the President into an impeachment scenario.
For example, if the debt ceiling is not raised and no alternative is entertained, then doesn’t the President have to break one of two laws? Either ignore the debt ceiling law or not spend all that he is mandated to spend (which would also be breaking the law?)
Is this the ultimate goal the Republicans are seeking? I know the Senate would likely not put forth sentence even if this happened and the House impeached President Obama. So the goal would be just to tarnish the President with the impeachment headline.
Thoughts?
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pebird Reply:
July 20th, 2011 at 9:54 am
@Crake, Biden is both assassination and impeachment insurance.
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Crake Reply:
July 20th, 2011 at 10:44 am
@pebird,
I actually like Biden. I think, assuming he would have put together a good cabinet, he would have been a very good president. I think he would have been hands-off and let specialists take care of their areas. I also think he would fight and be an “angry voice” which is something that would get public support (in these times, people seem to respond to anger to rally against things.)
I think Clinton would have made the best of the lot from 2008. I think she would have fought, put together good advisors and most importantly been doing stuff to build a historic legacy (not afraid to break molds.)
July 19th, 2011 at 2:45 pm
Warren, It seems inconceivable to me that something doesn’t get passed…the gang of six plan seems to be gaining momentum and obama effectively endorsed this afternoon…the question i have how much fiscal drag will it cause…i assume much of it will be back-loaded.
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WARREN MOSLER Reply:
July 19th, 2011 at 3:42 pm
doesn’t read like the House would pass it?
and yes, it’s back loaded, so no immediate harm
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July 19th, 2011 at 3:04 pm
Warren: I’m generally sympathetic to MMT ideas and I read this site regularly. I enjoyed Scott Fulwiler’s piece on going around the debt ceiling. In fact, I recently mentioned the $1 trillion platinum coin idea in a post on my blog. Having said that, I was surprised by the Armageddon-like tone of this post. You wrote:
1. “…In other words, for the first time the US would experience an unchecked downward spiral, which could make the downturn that much more severe than the Fed Chairman suggested…”
Are you really suggesting the debt ceiling debate failure could lead to a drop in total U.S. GDP of greater than 6%, that is from positive 2% to -4% or beyond?
And, is it accurate to say, for the first time the US would experience an unchecked downward spiral? I seem to remember in the history books a few downward spirals such as the Great Depression and earlier panics such as 1907.
You wrote in your last sentence:
2. “…could now bring down the entire world economy, and threaten the world social order as well.”
Bring down the entire world economy? Threaten the world social order? Good grief, isn’t this a bit over the top?
How do comments like these differ from standard liberal orthodoxy any time a government program is threatened? Is all government spending sacrosanct in your view?
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ESM Reply:
July 19th, 2011 at 3:45 pm
@Kurt Brouwer,
There’s a lot of hyberbole on this blog, but I think that if the federal government literally ran a balanced budget starting Aug. 2, which continued for a significant period of time (say, at least 6 months), then the world economy would head into a depression.
That being said, it ain’t going to happen.
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WARREN MOSLER Reply:
July 19th, 2011 at 3:45 pm
Yes, GDP could fall at those magnitudes of annual rates.
Yes, gold standard types of downward spirals.
Spending cut math works if you cut taxes at least that much to offset the drag of the cuts, and leave an appropriate deficit.
But no talk of that, even though such tax cutting is wildly pro agenda for the Tea Party crowd.
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luigi Reply:
July 19th, 2011 at 6:16 pm
@WARREN MOSLER,
do you know someone that is at Treasury? what they say?
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WARREN MOSLER Reply:
July 20th, 2011 at 6:31 am
No high level contacts at the moment. But I’ve been told several staffers have read my book and get it but keep it secret for career reasons.
luigi Reply:
July 20th, 2011 at 6:42 am
@WARREN MOSLER,
I remember that in your book, you quote Luigi Spaventa, and you talk about him like
one that understand monetary operations.
But he is a neoliberal, he writes in a famous economic newspaper in Italy, and he talks
about crisis in Europe but he doesn’t say something that could be right or possible, he is only a neoliberal with a neoliberal dogma.
it’s a career reason?
WARREN MOSLER Reply:
July 20th, 2011 at 9:03 am
yes, we all expected more from him
Crake Reply:
July 20th, 2011 at 11:14 am
@WARREN MOSLER, “Spending cut math works if you cut taxes at least that much to offset the drag of the cuts, and leave an appropriate deficit.”
Math would work but wouldn’t the outcome vary depending on where the tax cuts were made? For example, if the tax cut was a payroll tax cut, as you advocate, that would come closer to increasing aggregate demand by the amount of the tax cut than say cutting the upper brackets of income tax. I would think the latter would not lead to as much increase in aggregate demand and might likely place a “tax” on most of us because for really wealth income earners, it would probably translate to near 100% savings and while seeking out higher returns, a portion of that money might find its way to alternative investments like commodities, actions that would fuel that bubble more and therefore “tax” the economy on energy, resource inputs, and food prices.
So while the math would work, in both cases, I think the former would be good for the economy and the latter would be bad, no?
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WARREN MOSLER Reply:
July 20th, 2011 at 7:22 pm
with the purpose of taxes being reduction of demand, if a tax cut doesn’t add to demand it means that tax wasn’t needed for that purpose in the first place.
a separate purpose of taxation can be shifting of nominal wealth/social engineering, and should be judged on those merits.
July 19th, 2011 at 3:34 pm
The Gang of Six are back….
President Obama heaped praise on a deficit-reduction proposal produced by bipartisan group of senators known as the “Gang of Six,” calling it a “significant step” and arguing that members on both side of the aisle are beginning to coalesce around a balanced approach involving cuts to entitlements and tax increases.
http://tpmdc.talkingpointsmemo.com/2011/07/obama-embraces-gang-of-six-deficit-plan.php?ref=fpa
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July 19th, 2011 at 4:20 pm
I’m having a difficult time determining how serious some of these congressmen are. When they talk about a balanced budget ammendment please tell me they are just pandering. (except for maybe a few tea partiers) With 9% unemployment they really can’t be that dense can they?
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WARREN MOSLER Reply:
July 20th, 2011 at 6:29 am
Unfortunately, yes they can
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Crake Reply:
July 20th, 2011 at 10:48 am
@Jared,
I think they sincerely believe that government spending is crowding out “real” capital and its spending is not only wasteful but takes away from the private sector and that if you stop it, the free market would produce to unseen heights. I do not doubt for a moment they believe that to their core.
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ESM Reply:
July 20th, 2011 at 11:09 am
@Crake,
I don’t doubt it either because I believe it too. The level of government spending we have now IS wasteful. It distorts markets and misallocates resources. It would be much better to cut taxes, hand every resident a check, or even have a job guarantee at $8/hr.
It’s just very frustrating to have government set taxes too high, cause a recession, and then have people argue that we have to expand government in order to overcome the recession.
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jason m Reply:
July 20th, 2011 at 1:05 pm
@ESM, one man’s opinion
Peter D Reply:
July 20th, 2011 at 1:10 pm
@ESM,
“set taxes too high, cause a recession”
C’mon, ESM, you don’t really believe that the taxes caused the recession, do you?
Also, care to elaborate where exactly do you see wasteful govt spending (except, say, for military) backed with, you know, actual numbers, so that we’re not counting pennies.
ESM Reply:
July 20th, 2011 at 1:25 pm
@ESM,
@Peter D:
Of course high taxes caused the recession. Alternatively, you could say too little government spending caused it. Both are true from a certain point of view. Our level of GDP was sustained by bubbles and private sector leverage, and once those bubbles began to deflate, the government should have run bigger deficits one way or the other.
Since the government share of GDP was running just north of 20%, which it has been at for 60 years, I think it’s reasonable to think that taxes should have been lowered rather than government expanded, but it’s a matter of taste (and politics).
Where is there wasteful spending in government? There are whole sectors of the economy the government is involved in and shouldn’t be. Most involve providing services to the poor or to seniors: health care, housing, food stamps.
It’s not the providing of aid to the poor that’s the problem, it’s the form of the aid. You give them cash, that’s not wasteful. You give them products and services that they value less than the market does, that is wasteful. The food stamp program has turned into a horrible mess. There was a WSJ article about it a few weeks ago.
I would add to that list subsidies and investment in green technologies. Yes, I think the government should be funding basic research at some level (in the tens of billions of dollars range across all sciences feels about right), but what the government does now is market manipulation and picking winners and losers based on politics.
I could go on and on. And I just might if you continue to provoke me. :^)
WARREN MOSLER Reply:
July 20th, 2011 at 7:26 pm
don’t forget the 300 billion of interest paid on the debt. my 0 rate proposal saves all of that (no,not the first year)
allowing lower taxes for a given size govt, and altho eusanizes the rentiers, putting more people to work, increasing useful output, etc.
Peter D Reply:
July 20th, 2011 at 2:24 pm
@ESM,
What you’re saying is that the recession was caused by the bubbles and leveraging, and it was not fixed by quick increase of govt deficit. Which is not the same thing as saying it was caused by high taxes or low spending.
Now, we can argue about the govt programs – for example, basically, the rest of civilized world discovered that socialized healthcare works better than private – but I still think that you are overestimating the numbers. If we forget about Medicare/Medicaid + National Security for a second, do you really see all the rest (t he food stamps and green technologies and whatnot) as anything but a blimp on the radar relative to the rest of the economy?
Say, look at here:
http://www.usgovernmentspending.com/
50% goes to healthcare and defence – let’s leave those out. 20% on pensions – this is basically giving people money, which you don’t seem to have a problem with. That leaves 30% on welfare and all the rest. So, this is 20%*30%=6% of GDP on all the rest. Even assuming that all the 6% is bad, wasteful, distorting the markets etc (which is a ridiculous assumption) – this is what get’s you all worked up? 6% of GDP is the whole problem?
WARREN MOSLER Reply:
July 20th, 2011 at 7:27 pm
how about a sudden increase in savings desires reduced aggregate demand?
ESM Reply:
July 20th, 2011 at 4:01 pm
@ESM,
“What you’re saying is that the recession was caused by the bubbles and leveraging, and it was not fixed by quick increase of govt deficit.”
No, greater economic activity and a higher standard of living was caused by bubbles and leveraging. A recession happens when economic activity and the standard of living decreases. If we’re going to use taxes to regulate demand, then they need to be lowered when demand wanes (which happens when bubbles burst and the deleveraging cycle begins). The semantics aren’t particularly important, but I still stand by my original phrasing.
“for example, basically, the rest of civilized world discovered that socialized healthcare works better than private”
No, the rest of the world (aka WHO) came up with contrived metrics which makes socialized medicine look better. And better with respect to what? The US? The US’s system is a straw man. Government regulation of health insurance and tax subsidies for employer provided insurance means there really isn’t consumer choice. It’s a distorted system which has all the wrong incentives built into it.
A free market works better in all other areas of the economy. Why wouldn’t it work in health care? If you looked at it objectively, you might understand that a market in health care wouldn’t be anything special. It would be no more complex or morally fraught than the markets in food, shelter, education, transportation, or energy.
“this is what get’s you all worked up? 6% of GDP is the whole problem?”
Who’s worked up? I’m the one with rose-colored glasses compared to all the doom and gloomers on here. Even the post (#8) by Rodger below, someone who you probably agree with most of the time, shows a complete lack of perspective (historical or otherwise).
All I said was that it was frustrating to see the ratcheting effect of the government in action. It’s the direction that matters most to me, as well as how it is characterized.
If you have potable tap water, you don’t sweat the occasional times when a pipe bursts and you have to buy bottled water. But if the water utility expanded its incompetence, and then boasted about how it was giving you better service than ever, I think most people would find that frustrating.
Peter D Reply:
July 20th, 2011 at 5:54 pm
@ESM,
That’s like saying that you get sick from not taking medicine. You first get sick, then you may delay or prevent recuperation by not taking medicine. This is not simply semantics. You very cleverly manage to blame the govt for causing the recession. I agree that it should be blamed for prolonging it and not getting us out of it sooner.
And who might that be that was so intent on shooting down any measure that might have helped? Why did even the Obama economic team – not MMTers by any stretch – had to downsize their demands for stimulus numbers so as to get something they clearly knew was not enough? Could it be because of all the nice Republicans in Congress, whom you like so much?
(No desire now to engage in healthcare debate – maybe later)
WARREN MOSLER Reply:
July 20th, 2011 at 7:36 pm
because the president believes in fiscal responsibility?
WARREN MOSLER Reply:
July 20th, 2011 at 7:19 pm
the level can’t be wasteful. it’s the wasteful specifics that add up to a lot
ESM Reply:
July 20th, 2011 at 8:47 pm
@ESM,
@Peter D:
“That’s like saying that you get sick from not taking medicine. You first get sick, then you may delay or prevent recuperation by not taking medicine. This is not simply semantics.”
The capacity had been built. However, the economy got there (bubbles, imprudent leverage, prudent leverage), by the end of 2006, it had tremendous capacity to produce and satisfy the bubble level of aggregate demand. What’s wrong with that? Sure, building houses in the desert is a waste, but we had the wherewithal to do that AND meet everybody’s rational consumer needs too. By not keeping up demand when it faltered, the government allowed that capacity to shrink and go to waste forever (which is worse than one-off waste). We call it a recession when capacity shrinks to match falling demand. The bubble didn’t cause capacity to shrink. It caused it to grow. When demand faltered, we needed the government to take action to sustain demand and thus sustain capacity (and therefore maintain our standard of living at the high levels reached in 2006).
“And who might that be that was so intent on shooting down any measure that might have helped?”
I was against the stimulus too. It was the 2nd worst option (2nd only to doing absolutely nothing). It was pure political hackery, literally drafted in a few days and simply a decades old lefty wish-list of spending programs and transfer payments to favored constituencies. It was slow and wasteful, and even too small (reminds me of Woody Allen complaining about a restaurant — the food was awful, and the portions were too small). It even did lasting damage because it tricked people into believing that the government had done all it needed to do.
The Repubs would have gone for a FICA tax suspension, a la Warren, but the Dems were afraid it would undermine their precious social security and medicate programs. Repubs would probably have even gone for tax rebate checks (Bush 43 had already done this, but it was an order of magnitude too small). So I disagree with your implication that the Repubs would have opposed good stimulus programs. We of course will never know for sure. We only know that they opposed a bad stimulus program.
beowulf Reply:
July 20th, 2011 at 9:00 pm
@Warren Mosler,
A good start would be for Congress to repeal the debt ceiling and then keep on going to repeal Tsy’s authority to issue bonds or notes, allowing it to only issue T-bills going forward (existing T-bonds and T-notes would keep on keeping on till maturity).
§ 3101. Public debt limit
§ 3102. Bonds
§ 3103. Notes
§ 3104. Certificates of indebtedness and Treasury bills
http://www.law.cornell.edu/uscode/31/usc_sup_01_31_08_III_10_31_20_I.html
Peter D Reply:
July 20th, 2011 at 9:48 pm
@ESM,
“The Repubs would have gone for a FICA tax suspension, a la Warren, but the Dems were afraid it would undermine their precious social security and medicate programs”
Is there a shred of evidence of this? As far as I remember, the only one pushing for FICA suspension was in the end Obama, your buddies only cared about keeping the Bush’s tax cuts.
“It was pure political hackery, literally drafted in a few days and simply a decades old lefty wish-list of spending programs and transfer payments to favored constituencies.”
ESM, please, elaborate. Which “lefty wish-list of spending programs and transfer payments to favored constituencies”? Here is John Taylor – not a lefty by any stretch:
http://media.hoover.org/sites/default/files/documents/Where-Did-Stimulus-Go-Commentary-1-2011.pdf
Which is what MMT says should have been done, only on a much larger scale, to allow more deleveraging and more AD. Here is another illustration of the stimulus:
http://www.asranalytics.com/wp-content/uploads/2009/02/stimulus-bill-visualization-chart-graphic.gif
I can see a lot of direct payments to individuals, help to states etc. Where is all the implied corruption?
If anything, stimulus was the right direction, but wrong size, seems to me.
So I disagree with your implication that the Repubs would have opposed good stimulus programs.
Please, present a shred of evidence for that. Also, that Republicans are guided by anything but the desire to hurt Obama. Your pronouncements about the good intentions and all the woulda-coulda can hardly be taken seriously.
Peter D Reply:
July 20th, 2011 at 10:45 pm
@ESM,
“What’s wrong with that?”
Minskian instability?
I also find this quite hillarious:
Sure, building houses in the desert is a waste, but we had the wherewithal to do that AND meet everybody’s rational consumer needs too. By not keeping up demand when it faltered, the government allowed that capacity to shrink and go to waste forever (which is worse than one-off waste).”
Wouldn’t that be the definition of wasteful government spending? Something tells me that if those houses were built there by the govt and not by the private sector, you’d be the first to lament the distortion and the interference in the supposedly free markets (which, of course, are never really free.)
Gravity B is bad but propping up demand to building houses in the desert is good!?
And I thought we agreed that what matters is the real resources…
ESM Reply:
July 22nd, 2011 at 10:21 am
@ESM,
@Peter D:
“Wouldn’t that be the definition of wasteful government spending?”
Yes. The private sector often misallocates resources. That’s the consequence (and perhaps the definition) of a bubble for example. But the government inherently does a worse job because you have resources being allocated through a political process which gets all of the incentives wrong.
And, by the way, I did write that wasteful spending by the government during a recession was better than doing nothing. So I think I’ve been completely consistent.
You wanted some examples of wasteful stimulus spending. I had started a long list on another computer (which I don’t have access to right now) by going through the recovery.gov website. I was shocked by how ridiculous some of the spending was. Most of it was simply augmenting programs which were of highly dupious efficacy alraedy. Giving money to states to support bloated unionized teachers’ salaries is one example. Why not give the states the money and let them decide whether teachers’ salaries should be cut. Same thing with Medicaid. You’re forcing the states to use it for something the Dems like or lose it.
There are other programs which are rife with corruption which were augmented. Low-income housing and food stamps — to the tune of many billions of dollars — come to mind.
One example program with which I have personal experience is the $10B (in the form of partially refundable tax credits) spent on “weatherization” and energy efficiency. I took advantage of that, and I have to tell you the companies involved in that are pretty scammy and overcharging like crazy. $3,000 of “work”, and as far as I can tell, my energy bills have not gone down.
Gary Reply:
July 22nd, 2011 at 11:59 am
@ESM,
the point of stimulus is to put money in the hands of people with highest propensity to spend – that is the poor and the middle class.
So teachers salaries, Medicaid, low-income housing, food stamps etc. that you listed sounds about right.
While the bubble that you mentioned caused the money to flow to the banks, real estate sector, insurance sector – definitely not the poor – although some middle class. In any case – we do know that the bubble and its bursting caused the wealth to be distributed towards the richest.
Is that what you consider efficient allocation of resources?
If market was left to its own devices that is what would happen. So it seems to me that political process is the only way where some resource allocation reverses direction – and thus feeds the loop by allowing for the market to continue functioning. For how would it function if all resources will be concentrated in the hands of the rich?
Peter D Reply:
July 22nd, 2011 at 12:48 pm
@ESM,
I will reply to some of your points later, just wanted to share this good one from Ezra Klein (he annoys the hell out of me for failing to undertand MMT, but he still gets a lot of things right):
http://feeds.washingtonpost.com/click.phdo?i=72d7ac33a34d9003038932bfb4d452e0
I am still waiting for a shred of evidence that REpublicans are guided by any rational economic view as opposed to desire to hurt Obama and resentment of govt money going to the poorer rather than the richer parts of the society.
leja Reply:
July 21st, 2011 at 9:01 pm
Nothing compares for private sector waste.
Just think about millions of reporters publishing same news over and over, engineers developing same products their rivals do, over and over again.
There is lot of duplicate work.
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WARREN MOSLER Reply:
July 22nd, 2011 at 9:44 am
competition necessarily means failures. the scrap heap of capitalism is the cost of competitive market forces. much like the evolution of life.
ESM Reply:
July 22nd, 2011 at 10:08 am
@leja,
Leja,
Such private sector “waste” is the essence of capitalism. The duplicate work is wasteful, but creates competition, which creates an incentive to work hard and innovate.
If you think reinventing the wheel 3x over is wasteful, think about the difference in productivity between a motivated human being and an unmotivated human being. Perhaps a factor of 100? 1000? Perhaps even the factor is negative?
Neil Wilson Reply:
July 22nd, 2011 at 11:13 am
@ESM,
That’s a very primitive way of seeing things. Motivation via greater ideals gives much better results for everybody.
Collaboration with your peers on something special moves things along much faster than mere competition.
That’s why Linux exists.
ESM Reply:
July 22nd, 2011 at 11:39 am
@leja,
“Collaboration with your peers on something special moves things along much faster than mere competition.”
Collaboration works even better with competition. Each member of the team works hard to impress his collaborators and earn their respect and praise.
I didn’t say that people are only motivated by competition for monetary gain.
“That’s why Linux exists.”
This is an example which makes my point, not yours. Have you any idea how much duplicated programming is done in open source development? And how much competition there is to develop the tightest, most efficient code?
It is like capitalism only without the direct monetary incentive. The monetary incentive is not completely removed however. If you make a name for yourself as an open source developer, your market value goes way up.
Neil Wilson Reply:
July 22nd, 2011 at 12:01 pm
ESM,
You are clearly seeing what you want to see.
Open systems is what I do. Where you see duplication, I see variation.
The difference is that the competition is not destructive. You are not there to defeat a competitor but to move both of you forward faster than each could do on their own.
Gary Reply:
July 22nd, 2011 at 12:06 pm
@ESM,
the best example of capitalism’s waste is the wast marketing industry. Wast resources are devoted solely for creating and manipulating demand for things that nobody would need or want otherwise.
It is the same like building houses in the desert.
ESM Reply:
July 22nd, 2011 at 12:45 pm
@leja,
@Neil:
“The difference is that the competition is not destructive.”
I don’t understand what you mean by “destructive.” Are competitors literally sabotaging their competitors? I think that would be illegal.
“Where you see duplication, I see variation.”
Same here.
ESM Reply:
July 22nd, 2011 at 12:52 pm
@leja,
@Gary:
“Wast resources are devoted solely for creating and manipulating demand for things that nobody would need or want otherwise.”
Take a look at this link. It’s not as simple as you seem to think it is. Marketing is probably necessary for competition. It gives comsumers other useful information as well.
Just to give you one recent example for me. Last month I bought a Suzuki SX4 Crossover (it’s a car). It’s cheap as chips, all wheel drive, and an absolute delight to drive. Suzuki sells a pitiful number of cars in the US although it has a fantastic lineup. It’s all because they spend nothing on marketing in the US. I don’t know why. It was a miracle that I even found out about the car, but I’m glad I did.
Gary Reply:
July 22nd, 2011 at 2:57 pm
@ESM,
well – there certainly needs to be a way to inform consumer of the availability of the product. Preferably all manufacturers should have the same means of informing – so that the message would not substitute for the product.
However – it is different when the demand for the product is created solely by advertising. It would be quite a stretch to consider that “efficiency”.
Regarding the Lee Benham study – it is logical that when there is less information about product – people will buy from local sources (optometrists in that case), while when there is more information and advertising – the big specialized firms will succeed.
But like I said – it is different with providing information for needed products and creating demand for garbage (for the lack of better word) using advertising.
leja Reply:
July 23rd, 2011 at 8:02 pm
Yes of course we need some competition. But I was pondering the process where existing markets can get fragmented by new entrants and existing sales can get divided up by larger number of producers. Then same amount of revenue is divided up by more people and labor productivity measures actually go down. This can be the result of relying extensively on supply-side measures to combat unemployment – existing markets can get fragmented over larger number of producers hindering productivity. There is a productivity decline in the UK where GDP numbers have fallen more than employment. This might be the explanation.
And in fact, this process works even without economic recession. Just because new producers can slice somewhat of the sales of existing producers just by entering markets, they tend to do that. How productive is this work? Are we doing meaningful things? Why do we work so much and receive so little? The point is, structures in the private sector do not seem to corresponding to anything efficient, and are therefore wasteful.
We live in an imperfect world, and when it come to government, often times it is: if the government don’t do it, nobody will. There is no individual who will arrange national defense, build the infrastructure, or do the basic scientific research we can all benefit from, simply because no individual has the resources and even if they did, their personal benefit would be just an fraction of the total, so there would not be sufficient incentives on any individual.
So to sum things up, in my view, often times when the government doesn’t do it, nobody will, and freed up resources get employed in unproductive “make-a-living” jobs in the private sector instead. Crumbling infrastructure, missing scientific breakthroughs and educational achievements damage productivity growth permanently and make us all poorer. How is that for a waste?
zanon Reply:
July 22nd, 2011 at 10:47 am
@Jared,
ESM: You make good point. Reason the stimulus is unpopular is because it all went to vested dem interest.
If it had been FICA holiday, then everyone would be happy.
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July 19th, 2011 at 4:45 pm
Good post, Warren. Clear, concise. I’ve recommended it to my readers. For those who may think its extreme, and no worse than the Great Depression, remember: We didn’t have the Tea Party Crazies back then.
Rodger Malcolm Mitchell
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July 19th, 2011 at 4:58 pm
It’s amazing that the US and Europe may decide to cede power to the rest of the world of their own accord! No shots fired!
The ridiculousness of all of this is a little much to swallow. It certainly exposes the economics and finance professions as worthless participants in the function of our society.
So sad (though I don’t feel too bad for the economists – especially those at U of C and Harvard :)
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Save America Reply:
July 19th, 2011 at 8:37 pm
@Andrew, It’s amazing that the US and Europe may decide to cede power to the rest of the world of their own accord! No shots fired!
China is calling the shots in washington, when you hear Paul Ryan and others say silly stuff like “if we don’t balance the budget we will lose more jobs” what you should really hear is that, China says we better balance the budget and not deficit spend so we can send more jobs to them….
No shots fired, but it is financial warfare and not something we are doing willingly, People like Warren failed to get the masses educated of the warfare that is being waged on them and now the corrupt politicians don’t answer to thier voters but to the Asian Lobby in DC :(
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Save America Reply:
July 19th, 2011 at 8:39 pm
PS, chinese are using our boys and military to get them cheap oil in the middle east, we get all the deaths and bad publicity and military resource buildup, they are getting the benefits of the cheap oil contracts, we are thier stooge
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Crake Reply:
July 20th, 2011 at 10:58 am
@Save America,
I do not think this is right. We might very be in the Middle East to prevent Asians from securing supply contracts there. Chevron’s CEO, around 2002 or so, during a public speech, was warning of new contracts Asian government oil firms were securing in traditional western areas like the Middle East, and he then emphasized that it was vitally important that our government understand that point. Some, who cover oil markets, felt that was a public plea for the US government to use military force to exert pressure on Middle Eastern regimes to not enter contracts with those Asian governments and that that public pleas was likely preceded and proceeded by behind the door demands to do so. Iraq was likely not overproduced because of all its turmoil over the last decades, so it was a good starting place to throw our military muscle for that end.
July 20th, 2011 at 9:51 pm
WARREN MOSLER Reply:
July 20th, 2011 at 7:36 pm
because the president believes in fiscal responsibility?
I have no idea what this President believes in. He’s been played like some yo-yo and seems to be happy about it. I have very little respect for Obama nowadays. But to pretend that fiscal responsibility push to cut spending comes from the left – this is just wrong. If there weren’t all the centrist and rightists deficit hawks around, we’d have a big enough stimulus.
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