Category Archives: MMT

1938 in 2010

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1938 in 2010

By Paul Krugman

September 5 (Bloomberg) — Here’s the situation: The U.S. economy has been crippled by a financial crisis. The president’s policies have limited the damage, but they were too cautious, and unemployment remains disastrously high. More action is clearly needed. Yet the public has soured on government activism, and seems poised to deal Democrats a severe defeat in the midterm elections.

The president in question is Franklin Delano Roosevelt; the year is 1938. Within a few years, of course, the Great Depression was over. But it’s both instructive and discouraging to look at the state of America circa 1938 — instructive because the nature of the recovery that followed refutes the arguments dominating today’s public debate, discouraging because it’s hard to see anything like the miracle of the 1940s happening again.

Now, we weren’t supposed to find ourselves replaying the late 1930s. President Obama’s economists promised not to repeat the mistakes of 1937, when F.D.R. pulled back fiscal stimulus too soon. But by making his program too small and too short-lived, Mr. Obama did just that: the stimulus raised growth while it lasted, but it made only a small dent in unemployment — and now it’s fading out.

And just as some of us feared, the inadequacy of the administration’s initial economic plan has landed it — and the nation — in a political trap. More stimulus is desperately needed, but in the public’s eyes the failure of the initial program to deliver a convincing recovery has discredited government action to create jobs.

In short, welcome to 1938.

The story of 1937, of F.D.R.’s disastrous decision to heed those who said that it was time to slash the deficit, is well known. What’s less well known is the extent to which the public drew the wrong conclusions from the recession that followed: far from calling for a resumption of New Deal programs, voters lost faith in fiscal expansion.

Consider Gallup polling from March 1938. Asked whether government spending should be increased to fight the slump, 63 percent of those polled said no. Asked whether it would be better to increase spending or to cut business taxes, only 15 percent favored spending; 63 percent favored tax cuts. And the 1938 election was a disaster for the Democrats, who lost 70 seats in the House and seven in the Senate.

Most interesting!

Then came the war.

From an economic point of view World War II was, above all, a burst of deficit-financed government spending, on a scale that would never have been approved otherwise. Over the course of the war the federal government borrowed an amount equal to roughly twice the value of G.D.P. in 1940 — the equivalent of roughly $30 trillion today.

Had anyone proposed spending even a fraction that much before the war, people would have said the same things they’re saying today. They would have warned about crushing debt and runaway inflation. They would also have said, rightly, that the Depression was in large part caused by excess debt — and then have declared that it was impossible to fix this problem by issuing even more debt.

Agreed! The deficit per se was of no consequence. The risks were and remain inflation from excess demand, which is not an easy channel to use to generate what we call inflation in today’s world. Our CPI problems have tended to come in through the cost channel and propagated by govt indexation of one form or another.

But guess what? Deficit spending created an economic boom — and the boom laid the foundation for long-run prosperity.

Agreed. Though the way I say it, for a given size govt. and given set of credit conditions there is a level of taxes that coincides with full employment, and that level is generally well below the level of govt spending.

Overall debt in the economy — public plus private — actually fell as a percentage of G.D.P., thanks to economic growth and, yes, some inflation, which reduced the real value of outstanding debts. And after the war, thanks to the improved financial position of the private sector, the economy was able to thrive without continuing deficits.

What??? Here, sadly, Paul’s implication that the actual level of the govt debt per se matters, and that his bent that lower deficits are somehow ‘better’ shines through, keeping him in the camp of being part of the problem rather than part of the answer.

(Good article for MMT’s to earn some hearts!)

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We need YOU!

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MISSION:
To deploy an army of MMT proponents to respond to deficit terrorism on the web.
Go to offending articles. Neutralize flaws. Report back to home base.

MERIT AWARDS:
An MMT heart (♥) will be awarded for each successful strike.

PRIZES:
In November, prizes will be awarded to those with the most MMT ♥, including an all inclusive trip to the Center of the Universe, St. Croix, USVI.

HOW TO PARTICIPATE:
1. Sign up
2. Track down the deficit terrorists
3. Counter attack with comments on their websites
4. At the end of your counter attack, leave your mark on their website
        Your Name or Alias
        www.moslereconomics.com
        Counter Insurgency, Deficit Terrorist Unit
5. Report back to headquarters for review

If you do not sign-up AND report back to headquarters for review, the MMT ♥ will not be awarded.

If you need assistance, let the group know.
We will put out a call for back-up.

All appropriate comments properly signed out will receive MMT ♥.

Leaders will be posted within the next few weeks.

Good luck to all that participate.

GO TEAM!

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Paul Krugman Blog – NYTimes.com

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The way I read it, he’s agreed that it’s about inflation, not solvency.

That is, in ratings agency speak, willingness to pay could be an issue, but not ability to pay.

That’s enough for me to declare victory on that key issue, and move on.

Not that I at all agree with his descriptions of monetary operations or his ‘inflation channels.’ I just see no reason to rehash all that and risk loss of focus on the larger point he’s conceded.

This reads like a true breakthrough. Hopefully this opens the flood gates and the remaining deficit doves pile on, and July 17, 2010 is remembered as the day MMT broke through and turned the tide.

And in the real world it’s all about celebrity status.

With Jamie’s credentials and definitive response to the sustainability commission, Paul finally had a sufficiently ‘worthy’ advocate which gave him the opening to respond and concede.


I Would Do Anything For Stimulus, But I Won’t Do That (Wonkish)

By Paul Krugman

It’s really not relevant to current policy debates, but there’s an issue that’s been nagging at me, so I thought I’d write it up.

Right now, the real policy debate is whether we need fiscal austerity even with the economy deeply depressed. Obviously, I’m very much opposed — my view is that running deficits now is entirely appropriate.

But here’s the thing: there’s a school of thought which says that deficits arenever a problem, as long as a country can issue its own currency. The most prominent advocate of this view is probably Jamie Galbraith, but he’s not alone.

Now, Jamie and I are, I think, in complete agreement about what we should be doing now. So we’re talking theory, not practice. But I can’t go along with his view that

So long as U.S. banks are required to accept U.S. government checks — which is to say so long as the Republic exists — then the government can and does spend without borrowing, if it chooses to do so … Insolvency, bankruptcy, or even higher real interest rates are not among the actual risks to this system.

OK, I don’t think that’s right. To spend, the government must persuade the private sector to release real resources. It can do this by collecting taxes, borrowing, or collecting seignorage by printing money. And there are limits to all three. Even a country with its own fiat currency can go bankrupt, if it tries hard enough.

How does that work? A bit of modeling under the fold.

Let’s think in terms of a two-period model, although I won’t need to say much about the first period. In period 1, the government borrows, issuing indexed bonds (I could make them nominal, but then I’d need to introduce expectations about inflation, and we’ll end up in the same place.) This means that in period 2 the government owes real debt service in the amount D.

The government may meet this debt service requirement, in whole or in part, by running a primary surplus, an excess of revenue over current spending. Let’s suppose, however, that there’s an upper limit S to the feasible primary surplus — a limit imposed by political constraints, administrative issues (if taxes are too high everyone will evade), or the sheer fact that tax collections can’t exceed GDP.

But the government also has a printing press. The real revenue it collects by using this press is [M(t) – M(t-1)]/P(t), where M is the money supply and P the price level.

What determines the price level? Let’s assume a simple quantity theory, with the price level proportional to the money supply:

P(t) = V*M(t)

By assuming this, I’m actually making the most favorable assumption about the power of seignorage, since in practice, running the printing presses leads to a fall in the real demand for money (people start using lumps of coal or whatever as substitutes.)

OK, now let’s ask what happens if the government has run up enough debt that the upper limit on the primary surplus is a binding constraint, and it’s necessary to run the printing presses to make up the difference. In that case,

[M(t) – M(t-1)]/P(t) = D – S

But P is proportional to M, so this becomes

[M(t) – M(t-1)]/VM(t) = D – S

Rearrange a bit, and we have

M(t)/M(t-1) = 1/[1 – V[D-S]]

And what does this imply? Since the price level is, by assumption, proportional to M, this tells us that the higher the debt burden, the higher the required rate of inflation — and, crucially, that as D-S heads toward a critical level, this implied inflation heads off to infinity. That is, it looks like this:

So there is a maximum level of debt you can handle. In practice, if it makes sense to say such a thing with regard to a stylized model, at some point lower than the critical level implied by this model the government would decide that default was a better option than hyperinflation.

And going back to period 1, lenders would take this possibility into account. So there are real limits to deficits, even in countries that can print their own currency.

Now, I’m sure I’m about to get comments and/or responses on other blogs along the lines of “Ha! So now Krugman admits that deficits cause hyperinflation! Peter Schiff roolz” Um, no — in extreme conditions they CAN cause hyperinflation; we’re nowhere near those conditions now. All I’m saying here is that I’m not prepared to go as far as Jamie Galbraith. Deficits can cause a crisis; but that’s no reason to skimp on spending right now.

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Ed Harrison’s post

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Out of control US deficit spending

By Edward Harrison

April 30 — Regular readers know that, while I have a little of what Marshall Auerback calls deficit terrorism in my DNA, I fully support fiscal stimulus as a means to arrest a deep downturn.

Yes, though I like to say ‘removing fiscal drag’ but same thing.

The horrendous Keynesian nightmare

My move into Keynesian mode came in December 2008 with Confessions of an Austrian economist. In fact, I have argued the ObamaAdministration needed to use more stimulus in early 2009, not less (see January 2009’s Obama’s stimulus bill is a tough sell so far as an example).

Yes, needed to remove more drag.

As early as February 2009, I argued that Obama took a middle road on stimulus and taxes that leads nowhere which would discredit stimulus as a policy tool. And that is indeed what has happened.

Agreed. Which would be ok if they recognized it and opted for further adjustment.

Now, of course many of you don’t feel that way because you share my visceral disaffection for deficit spending.

Given there is a ‘right size’ govt based on public purpose of the public sector, and not revenues, the fiscal adjustments fall on the tax side.

So I feel the visceral disaffection for the over taxation that comes from a too small deficit.

But I laid out where the US economy is headed without stimulus in “The recession is over but the depression has just begun” six months ago. And right now we are heading exactly where I said we would. Witness my last post on the economy “US GDP growth rate is unsustainable; recovery will fade”

Anyway, the point is that the US economy will not be able to sustain recovery for long without stimulus. The likely result of withdrawing stimulus is a recession that is deeper than the last one aka a major depression.

Yes, it sure looks like the shortfall in aggregate demand calls for an immediate fiscal adjustment.

Deficits as far as the eye can see

But right now, a lot of talking heads are trying to bamboozle people with tales of woe about hyperinflation and sovereign bankruptcy in the US to support specific claims about what deficit spending can and can’t do. Deficit hawks, in particular, are on the warpath – a completely predictable outcome since I anticipated it just as Obama was elected in November 2008 (see Beware of deficit hawks).

Agreed!

Of course the US deficits are too large. Come on: 10% deficits as far as the eye can see are unsustainable over the long-term.

I don’t see that. Especially if govt spending isn’t ‘forced’ into the economy which would be evidenced by a closing of the output gap.

Until the output gap closes, deficits are simply offsetting non govt ‘savings desires’ for dollar financial assets.

That is, deficits add directly to non gov savings and until those savings desires are saturated govt isn’t ‘forcing’ financial assets into the economy.

The key word, however, is long-term. However, no one seems to understand the difference between short-term and long-term and the debate has become an ideological free-for-all.

It would help if they realized there is not necessarily a long term problem either.

Earlier this month, I told you I am throwing in the towel on policy makers because it’s clear that Obama has been captured by the deficit hawks and we are headed for a painful recession within the next two years (maybe even as soon as next year).

Agreed!

Policy is exogenous and deficits are endogenous

So let’s stop talking about policy as if we are going to change anything. I started moving away from stimulus happy talk to focus on malinvestment in December of last year.

The policy debates aren’t working because the actual mechanics of a fiat monetary system are being obscured by ideological political debates. So, what I want to do is lay the foundations of modern money with you so we can strip away the politics and ideology from the economics.

The goal is to demonstrate that fiscal deficits and surpluses are endogenous to our economic system and depend on exogenous policy decisions which are inherently political and ideological.

Let me give you an example. What if we allowed the US economy to proceed without making one economic policy decision for the next two years? What would happen? The answer is that the government would have a fiscal deficit of X billions of dollars exactly matched by X billions of surpluses in the non-government sector (remember the sectors must balance). The deficit outcome is endogenous. It is a function of the inputs i.e. of the private sectors desire to save and the government’s spending decisions.

Agreed, as above.

On the other hand, government economic policy decisions are exogenous. They are input variables which alter outcomes. This is an important point because if we know how the monetary system works, then we can get a much better handle on how different policy decisions actually affect deficits and surpluses. And remember, policy decisions are almost entirely political. That is they are driven by ideological positions.

Agreed.

So, if I say to you that I am against government spending and it must be cut, this creates a specific outcome path. On the other hand, if I say I am pro-stimulus, this too creates a specific outcome.

Modern Money

Here’s how I am going to go about this one:

I went to a conference on Modern Monetary Theory (MMT) on Wednesday. Over the next few weeks, I will present some ideas from the Modern Money people (Randy Wray, Marshall Auerback, Bill Mitchell, etc). I’ll start the post titles with “MMT:….”

Yes, good to see you there!

I will take a somewhat antagonistic approach because I think that’s probably going to the best way to introduce this to people who have a more libertarian bent like myself.

Now, my bio says:

From an ideological perspective, Edward calls himself a libertarian realist: a firm believer in the primacy of markets over a statist approach. but not in an ideological way. Often government intervention and oversight is not just wanted but warranted.

What that essentially means is that when I think about government, I view it with suspicion and my inclination is to seek to limit its size and scope.

Yes, there is a right sized govt that serves public purpose that varies from person to person. It’s a political decision.

That means I have an innate disaffection for big government,

Ok, that’s a legitimate political position shared by tens of millions, and maybe a majority.

deficit spending,

That’s the size of additions to net non govt savings which can only come from fiscal balance. The political decision here is the outcome (growth, employment, etc.) Of the level of savings govt allows through its policy.

money printing,

That’s a gold standard term relating to the ratio of paper claims on the gold reserves to the actual gold reserves. It’s no longer applicable as originally defined, so needs to be redefined or otherwise specified.

For example, the fed buying securities is an exchange of financial assets, both of which generally fall under some monetary aggregate, at which level that aggregate remains unchanged.

etc. – but not in an ideological way. It all depends on the circumstances. (For instance, see “A brief philosophical argument about the role of government” and “A few thoughts about the limitations of government” which outline my ideological positioning).

So, my goal in this is to separate the policy and the politics from the mechanics of how our fiat money system operates. That way it will be clear what is actually happening in our monetary system right now and what is pure political posturing. You will also then probably see a lot of congruence between how I see the economic mechanics and how Marshall sees them. The difference, of course, is ideology.

The way I intend to position this is that Modern Money Theory economists are really the True Modern Money Operations economists because they present the true mechanics of modern fiat money operation, which I will show you.

Now, policy decisions are largely political, exogenous decisions about which informed decision-makers can disagree. However, if we aren’t at least informed about the mechanics of how modern money works, it is very difficult to have an intelligent debate about deficits, social security, fiscal stimulus or anything else for that matter.

I know that I have learned a lot from what the likes of Randy Wray and Bill Mitchell have said (remember, I studied economics in a time heavily influenced by the prevailing economic orthodoxy). I don’t ‘buy into’ a lot of what they propose on policy, but on modern money they have it right.

Agreed, though i probably support most of their policies as well. But not always.

The purpose is to present the underpinnings where we can all agree and separate it from the ideological piece. My ideological foil in this will be Marshall Auerback. Afterward, I hope we can have a framework from which to talk about the political piece.

I hope you enjoy the debate and a presentation of the ideas.

Looking forward to it, thanks!!!

Best,
Warren

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April 28 DC event

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Bloggers out in force:

Time to Sweep the Vampire Squid Off Our Faces and Make Room for the Real Change

April 22nd, 2010 by selise

Warning: At the end of this diary, I’m going to be asking for your support. Your financial support. Please consider making a donation today.

________________

I remember the fall of 2008 not as the time of an historic election but as a time of astonishment at the massive amounts of money our government, a Republican administration and a Democratic Congress, was willing to throw at the financial elites while demonstrating, for the most part, their utter cluelessness about why the money was needed or what would be done with it. At first is was $700 billion, then $850 billion and then trillions. All within the space of a few weeks.

Chris Floyd captured the moment perfectly (from Oct, 13, 2008 via x-post):

Perhaps the most striking fact revealed by the global financial crash — or rather, by the reaction to it — is the staggering, astonishing, gargantuan amount of money that the governments of the world have at their command. In just a matter of days, we have seen literally trillions of dollars offered to the financial services sector by national treasuries and central banks across the globe.

The effectiveness of this unprecedented transfer of wealth from ordinary citizens to the top tiers of the business world remains to be seen. It will certainly insulate the very rich from the consequences of their own greed and folly and fraud; but it is not at all clear how much these measures will shield the vast majority of people from the catastrophe that has been visited upon them by the elite.

But putting aside for a moment the actual intent, details and results of the global bailout offers, it is their very extent that shocks, and shows — in a stark, harsh, all-revealing light — the brutal disdain with which the national governments of the world’s “leading democracies” have treated their own citizens for decades.

Year after year, the ordinary citizens were told by their governments: we have no money to spend on your needs, on your communities, on your infrastructure, on your health, on your children, on your environment, on your quality of life. We can’t do those kinds of things any more.

Of course, when talking amongst themselves, or with the believers in the think tanks, boardrooms — and editorial offices — the cultists would speak more plainly: we don’t do those things anymore because we shouldn’t do them, we don’t want to do them, they are wrong, they are evil, they are outside the faith. But for the hoi polloi, the line was usually something like this: Budgets are tight, we must balance them (for a “balanced budget” is a core doctrine of the cult), we just can’t afford all these luxuries.

But now, as the emptiness and falsity of the Chicago cargo cult stands nakedly revealed, even to some of its most faithful and fanatical adherents, we can see that this 30-year mantra by our governments has been a deliberate and outright lie. The money was there — billions and billions and billions of dollars of it, trillions of dollars of it. We can see it before our very eyes today — being whisked away from our public treasuries and showered upon the banks and the brokerages.

Let’s say it again: The money was there all along.

A deliberate and outright lie. The money was there all along.

And now, just a year and a half later, the deficit hawks at the Peterson Foundation are at it again: attacking Social Security and Medicare, this time with a “National Fiscal Summit” including such notable “experts” as Robert Rubin and Alan Greenspan, among others “to Discuss Nation’s Rising Deficits and Debt.”

We have a massive need for a counter-narrative to their lies: that Federal deficit spending is bad, that it is a burden to the next generation, that deficit spending risks insolvency — basically that the Federal Government Budget is some how analogous to a household budget when, in fact, it is no such thing.

The Fiscal Sustainability Teach-In Counter-Conference on April 28th, 2010 in Washington, DC (At the George Washington University’s Marvin Center, Room 310, The Elliot Room, venue info here.) — the same day as the Peterson Foundation’s “Fiscal Summit” — aims to do just that. Here’s what Jamie Galbraith said about the Teach-In:

________________

“The Fiscal Sustainability Teach-In Counter Conference will be the important event in Washington on April 28. Unlike the other meeting, this one will feature important work by honest scholars. It deserves at least equal attention, and very much more respect.”

— James K. Galbraith, The University of Texas at Austin. [April 19, 2010 via email with permission]

________________

We can move beyond the false economic orthodoxy that got us into the current economic mess and that now is being promoted to attack Social Security and Medicare — and harming our Nation and its People in so many ways. But our help is needed (I warned you this was coming) to raise the money needed for speaker travel, venue, and other related expenses. No money is going to the organizers or to anything other than the conference. The Teach-In is being organized, at the last minute, with no charge for attendance and on a shoe-string budget, because the people involved believe in what they are doing.

Here is the program (see here and here in case of updates).

Time Period Topic Team Leaders
8:00–8:15 AM Welcoming Remarks
8:15–9:45 AM What Is Fiscal Sustainability? Bill Mitchell, Research Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW Australia, and blogger at billy blog
9:45–10:00 AM BREAK
10:00 AM–11:15 Are There Spending Constraints on Governments Sovereign in their Currency? Stephanie Kelton, Associate Professor of Macroeconomics, Finance, and Money and Banking, Senior Scholar at The Center for Full Employment and Price Stability (CFEPS), University of Missouri – Kansas City, Research Associate at The Levy Economics Institute of Bard College, and blogger at New Economics Perspectives
11:15–11:30 BREAK
11:30–12:45 The Deficit, the Debt, the Debt-To-GDP ratio, the Grandchildren and Government Economic Policy Warren Mosler, International Consulting Economist and blogger at moslereconomics.com
12:45–1:00 PM BREAK
1:00–2:15 PM Inflation and Hyper-inflation Marshall Auerback, International Consulting Economist, blogger at New Deal 2.0 and New Economic Perspectives;
Mat Forstater, Professor of Economics, Director of CFEPS, Department of Economics, University of Missouri — Kansas City, Research Associate at The Levy Economics Institute of Bard College, and blogger at New Economic Perspectives
2:15–2:30 PM BREAK
2:30–4:00 PM Policy Proposals for Fiscal Sustainability L. Randall Wray, Professor of Economics, Research Director of CFEPS at the University of Missouri – Kansas City, and Senior Scholar at The Levy Economics Institute of Bard College;
Pavlina Tcherneva, Assistant Professor of Economics at Franklin and Marshall College, Senior Research Associate at CFEPS and Research Associate at The Levy Economics Institute of Bard College and bloggers at New Economic Perspectives

Please help by contributing to the cost of the Teach-In today. Donate Here. Every little bit helps.

Some other things you can do:

  1. Ask your friends to donate too
  2. Attend the Teach-In
  3. Spread the word — write a blog post, tell your family, friends, neighbors and co-workers
  4. Educate yourself — some great introductory resources are:

Finally, here is a bit of inspiration from Rob Parenteau, who also gave me the title of this post (both via email and used with permission):

Of course, there is a need to reconstruct the way economics is taught in academia. But this is not the highest priority at the moment. We have many average people and citizens walking around looking for answers. We need to learn to speak to them and persuade the entrepreneurs, the unionists, the teachers, the housewives, the priests, the cab drivers, etc. They are hungry for answers and vulnerable to demagogues.

We have demonstrated some capacity to finally forge our way through the last mile problem on MMT, functional finance, and the financial balance approach in the blog world and elsewhere. Some like Marshall, Bill Black, and Jamie are even able to get the message across through more mainstream media channels. The tenured academics will surely be the last to follow, and of course, that is their perogative. We should let Rob Johnson and INET continue to work on that contigent while we take our case to the misinformed and extremely frustrated public. They are desperate to make sense of what has happened and to figure out how to find a plausible way forward to a more sensible and satisfying world. We can do that. We can completely engage them, and get the ball rolling.

Marshall and I have dialogued with pure blooded Austrian Schoolers on blog sites and actually gotten some traction with them. It is possible to help people find new perspectives or at least question and possibly move beyond limited old ones. I unfortunately cannot attend this one because I have other commitments I cannot break that day, but I have a funny feeling it will not be the last one either and I wish you all the greatest success and effectiveness with this inaugural teach-in. I am certain you will be making history. Feel the power of this moment and wield it wisely.

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Counter Conference

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Background

Fiscal sustainability is very much in the News these days because of the activities of the President’s National Commission on Fiscal Responsibility and Reform, The Peterson Foundation’s very vigorous efforts to present a point of view on fiscal sustainability that reinforces and expands the outlook of the National Commission’s statement of purpose, The Washington Post’s continuing expression of the deficit hawkism point of view, and CNN’s “news alliance” with The Peterson Foundation. All this and more is part of a steamroller being formed to ensure that only one point of view on fiscal sustainability, namely a neo-liberal point of view dominates the landscape of public discussion.

When that sort of thing happens, as it did in the health care debate, the people suffer, because any policy, based on an alternative framing of the fiscal sustainability problem, is immediately off the table of policy consideration because it is outside the frame of “legitimate debate.” Let’s not let that happen with fiscal sustainability. Let’s keep a number of frames under consideration, so that we can consider all fiscal sustainability policies that might work. The test we use to determine whether a policy will work needs to be an evaluation of its consequences; not an evaluation of whether it’s outside a dominant frame of ideology. Continue reading →

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