Most people, including Kelton and Blanchard, sow confusion on how deficit spending works. My purpose here is to provide clarity.
Let me know what you think. In talking about Kelton and Blanchard, I use the term “fool.” I may want to change that. It could be unnecessarily derogatory. Simply linking Blanchard with Kelton might be sufficient.
“Economic Fool” is well used at the end, both orthodox & heterodox. Your good simplification of barter, finance & real stuff is excellent. IOUs are a good example.
It’s an important subject, and I don’t doubt that there is “some point” where the US national debt will be considered “too big”.
Still, I’m also sure that the USA can have a national debt this is higher than Japan, in terms of % of GDP, since the USD remains the main trading currency of the world.
There has never been hyperinflation for a “main trading currency” — it loses out to more stable currencies, first. So, this contradicts your claim that As with any Ponzi scheme, the collapse, when it comes, will be sudden and unexpected.
(I’m a radical fool – we should have a balanced budget amendment, a huge “last” tax refund for those making less than 2* median income, and after the workers get their refunds, we should print enough money to pay off the national debt. The huge printing of money should be sudden and unexpected.)
Keep in mind that Japan’s headline debt-to-GDP ratio is not so easy to interpret, because it only counts certain liabilities without offsetting its assets for a net debt position. Those assets include vast reserves of foreign bonds, about a quarter of GDP in US Bonds (at least, that are held in ways that the Treasury tracks in the Major Foreign Holders index, which is hardly exhaustive of all the clever and more obscured ways some countries own USG financial assets) and about a similar amount in other hard currency bonds (but with same caveat, and not as easy to find), with total Bank of Japan holdings exceeding 100% of GDP.
That’s just not like the US situation, and so one should be very cautious about drawing analogies to make judgments about debt capacity.
Understood, but notice the irony of interpreting your caveat (which one could) as: “So Japan’s ability to pay is better than the US because it has US bonds as assets.” I suppose, at the margin, if the Headline Metric “marks” those bonds at zero (ignores them), the caveat is warranted.
My impression is the the new monetarists are only interested in conducting increased deficit spending for a short period and then using the risk of default that you cite as a justification for correspondingly large tax increases and sharp decreases or elimination of federal law enforcement agencies like ICE as well as the Department of Defense. Georgist land taxes, wealth taxes, carbon taxes, a reparations tax on non-blacks, even more progressive income taxes, a VAT, the nationalization of even more US industries, mandatory federal “community” service, eliminating the FICA cap, imposing FICA on investment income, a VAT, increased estate and gift taxes, higher corporate income tax rates, full taxation of capital gains, and a new progressive payroll tax, is perhaps the center left’s starting position in negotiating a final tax package with the hard left majority in 2020 that will want much, much more.
Serious question whos platform is this?
The list is just a grab bag of ideas I recall having seen or heard about.
Here is an article that shows just the “soak the rich” proposals out there: https://www.bloomberg.com/graphics/2019-candidate-tax-proposals/ Several of the tax increases are listed.
Everybody on the left as far as I can tell is in favor of eliminating ICE, slashing defense spending, a carbon tax, Medicare for All’s abolishment of private health insurance, and repealing the Trump tax cuts. And every leftist has complained about regressive FICA taxes since Christ was a corporal. Gillibrand is taking national service programs and several of the others embrace guaranteed jobs. I recall seeing Tyler Cowen’s land value tax advocacy being embraced by some candidate or another, I can’t remember, but who can believe given the opportunity to add such a tax, all of the candidates would say no? Sanders and Harris support expanded estate tax. Sen. Wyden has a new bill monkeying around with capital gains. And everybody talking about moving to a Scandinavian style socialism is implying support for a VAT and anything else that I have missed.
Thanks for the reply. Reducing defense spending is not the same as eliminating the DoD. Ask Rand Paul.
The GND is what people are generally talking about when specifics come up. I think its an amateurish effort, and pretty far out of the mainstream. But even GND doesn’t call for nationalizing industries and reparations. It has, what, 18 sponsors? You can relax! It’s not going anywhere.
VAT used to have Republican fans.
The hyperbole doesnt help your arguments or attract people to your cause.
Wherever leftists take control they push for the highest taxes possible and then distribute the money to their interest groups. That’s their stated platform. I think he presented a good summary of what they will try to get away with.
Right now I’m sitting in a home that is taxed at twice the property tax rate as a home less than a mile away with the same assessed value. That is because the left dominated city government did exactly as I outlined above. They used property taxes because it’s harder to move property then income (as all of the people who fled the city of the last few decades did).
A VAT would go after people who respond to higher income taxes by not working. Tax what they consume to live. No escape.
Good article. I suggest staying away from the word, “fool.” You want people to concentrate on the meat of the article and not be distracted by the waves of mock outrage that MMT proponents will broadcast in order to change the subject.
Another excellent essay, thank you. It seems pretty clear that excess government debt is a serious problem. Even if that were not true, not worrying about debt spending is a problem. If there are no financial constraints on spending, it reduces the need for congress to carefully consider what they are spending money on. If there is a hard limit on spending, that would force congress to prioritize budget items. I wonder how much of the money we spend on defense actually reduces the effectiveness of the military. On the other hand spending limits encourage the passage of unfunded mandates to both state and local governments and the private sector.
I’m afraid there is no substitute for better government.
I agree with the previous feedback about “fool” being unnecessary and making the article less likely to persuade those who don’t already agree.
I would have also liked more exploration of why the fools (or “fools”) get it into their heads to believe what they believe. One of the underexplored issues in the essay that might have illuminated this is the question of borrowing to invest vs borrowing to consume. In your useful framing, if the promises I make enable me to organize cooperative activity now which lays the groundwork to be able to produce more real stuff in the future, then when the promises come due I should be better able to make good on them. This is what businesses do, and often quite successfully; and it is qualitatively different from, say, a spendthrift consumer borrowing to buy a pleasure boat.
At least some advocates of government spending far beyond tax receipts (whether financed by bonds or MMT style money printing) would, I think, say that this is what it enables. That is, if I understand them right, they would say that enough of the things government does with that money increase the long-run productive capacity of the economy enough that we don’t need to worry about having the real stuff in the future to make the promises good. Some would go further and say that *failure* to take opportunities to e.g. borrow at low rates and spend on infrastructure, for example, shortchanges future generations by keeping long-term growth below its potential. How would we tell if they are right? How would we tell, that is, if government is more like a business investing in growth or a consumer buying a boat on credit?
Great points. Big spending proponents often cite infrastructure to bolster their arguments, but infrastructure is only a tiny part of the federal budget.
“One of the underexplored issues in the essay that might have illuminated this is the question of borrowing to invest vs borrowing to consume.”
Borrowing to invest properly causes inflation, borrowing to consume causes deflation. Economists of the regular kind have gotten backwards 250 years. They have a foul banking theory because they never had the math to make sound theory.
When an innovative productivity enhancement occurs, the currency banker loses currency, inflation. And visa versa, a bad investment causes the banker to make money, deflation.
It seems backwards to us because government offers unconditional currency insurance which raises consumer prices during a productive enhancement (special protection) , or government pays out insurance claims on a bad investment (bailout).
But I have it right, the banking economists are getting better theory.
Transfer payments aren’t investment, and that is a lot of what the government does.
It’s debatable but I mostly think defense spending has been waste.
Medical spending, at least the marginal medical dollar, seems to be in wasteful areas. Also, government medical spending is titled towards the old and the ROI on that is obviously questionable.
Education, via the Null Hypothesis, is mostly waste.
No doubt “investment” will be how the debilitating debt spending is sold, but there is little reason to believe the ROI will be good.
The problem is US debt is the fact that there isn’t a better game in town. Is there a single asset you can own which, in a scenario where the USG was in serious trouble, it could no tax/appropriate/outlaw?
Third world basket cases can buy assets in first world countries. What can people in first world countries do?
I may have put more emphasis on productivity, which somehow gets lost in most of these discussions despite being the crux of the issue. If you spend productively the goods/services will be there to satisfy the promises. If not, there won’t. (and yes, it can be hard to know).
To me the fatal flaw of MMT is the absence of focus on productivity. I consider something like a “job guarantee” to be highly unproductive as it would replace normal retraining & job search efforts with some make-work program.
I wouldn’t say “fool” either. The most chartible, but still critical terms for someone who holds either of those perspectives characterized by excess optimism and dismissiveness of potential downsides / failure modes / black swans are:
1. Pollyannas
2. Panglosses
3. Rosies (as in, “Rosy Scenario” the budget forecase joke about her being the highest ranking official in the Reagan Administration.)
If interest rates are sure to stay low and debt-based investment are sure to pay a net positive dividend, and if Blanchard believes all that to be true, then he is neither fool nor liar, but simply correct. If there is a risk of those things not being true, thus leading to a potential fiscal crisis or other economic disaster, but Blanchard is overconfident or insouciant about the situation, then he is only being foolish to the extent of this excess of optimism, which makes him a Pollyanna or a Pangloss or a Rosy.
Like Sumner and Selgin, I find it futile and frustrating to even engage with MMT ideas because of the tendency of its exponents to engage in unconventional and inconsistent use of terms and underlying models, but if Kelton is right about a nearly unlimited ability of the government in present conditions to print and spend new money on real goods and services without unleashing inflation or severely disrupting the markets and overall economy, then she is neither food nor liar but correct. But to the extent those are real risks she refuses to credit (heh) or acknowledg, she is being far too optimistic about the prospect and huge cost of these potential failure modes and the prudently cautious steps one should take – or activities from which a government should abstain – to avoid them.
Certainly it’s foolish to overlook risks of that level of severity, but it’s the kind of foolishness that doesn’t take a true “fool” and in which intelligent and credentialed people display all the time.
Use fool if you want that to be the thing that is focused on in the article. If you want to emphasize something else, or have people consider the entire article, dont use it.
Steve
Old,people die and we default, do it once a generation and do not make me go through each historical generation and identify the default and monetary regime change. I have done the loloking, it is true, we default on a generation basis.
The theoretical answer, the answer we use in mathematics, is that interest charges are set to keep loans and deposits mostly moving toward balance. The effect is to stabilize the transaction queues, the wait in line at Walmart for example. When the transaction queues are stable then ratios work. This is the mathematical answer for just about everything, actually. Applies to banking and quarks.
It’s better to show why someone’s ideas are foolish than to call the person foolish, but I often don’t show such restraint myself, so I can’t really judge.
As far as your thoughts on “Modern Ponzi Theory,” I think you are right on. I think of deficit spending as being like a game of Jenga. In the beginning, the structure is relatively stable, but then it becomes increasingly fragile as you continue playing. The inevitable collapse seems sudden, but the conditions that created the fragility happened over time.
Venezuela is a great recent example of Modern Monetary Theory in practice, but there have been many others over the centuries (the Weimar Republic, Hungary in 1946, Zimbabwe, and many others). Being able to print your own money isn’t going to save you, because as you discussed, money is a promise, and it is a promise that can go up in smoke.
Arnold, I think your write-up is fine. If anything, it may be a bit too complex. I can understand the urge to respond completely to Kelton and Blanchard, given that some folks take them seriously. But I think you are correct that the argument is pretty simple. There is “stuff” and there are securities that have various claims on the “stuff”. Changing the quantity of the securities does not alter the amount of “stuff”, which is ultimately where the wealth is stored. Although manipulating the amount of securities may provide some benefits at the margin, one can get carried away with an excess of securities, and in particular debt securities (i.e., deficit spending).
Money-financed fiscal deficits would work better than borrow and spend.
Ben Bernanke advocated money financed fiscal deficits for Japan, in 2003.
The MMT crowd is onto something, but they misfire when they advocate the government issuing bonds, rather than simply printing money.
There is also the question of Japan. The Bank of Japan has purchased back 45% of that nation’s heroic levels of national debt, which equal about 230% of GDP.
So, Japan has effectively deleveraged, without inflationary impact. Indeed, the Bank of Japan cannot seem to hit its 2% inflation target and that’s from the underside.
The Temple of Macroeconomics has many acolytes, genuflecting to different totems, who call each other fools.
You wrote “standing read to punish any politician”. Should be “ready”.
The essay is OK for anyone who doesn’t follow this stuff at all. For a more sophisticated audience, you are beating a dead horse.
Right now, we’re not capable of the kind of austerity it would take to bring the budget back into balance. When state and local government pension plans start to go bankrupt, perhaps the boomers will vote for austerity to keep Social Security intact. I doubt we’ll do anything before then.
Having acknowledged that there are real limits to budget deficits (it was never denied), MMT nevertheless makes clear that budget deficits are the norm, not the exception. This does not mean that budget deficits of any size are okay. They must be consistent with private-sector net-saving intentions. It simply means that ongoing budget deficits of some size will be the appropriate policy under normal circumstances. The reason for this is that the non-government sector typically desires to net save. This means, as a matter of accounting, that the government sector must be in deficit.
———————————-
Whenever the non-government sector net saves, it is spending less of the monetary unit than it earns. The result is unsold output and a signal to firms to cut back output unless the government fills the demand gap through deficit expenditure. By doing so, the government is in a position to ensure all output is sold at current prices and the non-government sector satisfies its net saving desires. If, instead, the government allows the demand shortfall to persist by not injecting sufficient expenditure of its own, firms will respond by cutting back production. There will be a contraction in output and income, thwarting non-government net saving intentions. If the non-government sector responds by redoubling its efforts to net save, the result is a further shortfall in demand, further contraction of income (as well as tax revenue), more frustration of non-government saving plans, etc. There is no end to the process until either the non-government sector accepts a smaller net-saving position or the government accepts a bigger deficit. —heteconomist (Dr. Peter Cooper)
Here is the accounting identity (absent the external sector):
(S – I) = (G – T)
If the private sector desires to net save, i.e., save net of investment, the government must run the corresponding deficit, or watch the economy contract. It is better to run the economy at full capacity then to worry whether a portion of private sector saving isn’t real because the private sector may actually try to spend it. In point of fact, it is that small portion of “fake saving” that allows you to have a greater “real saving” because the economy grows to a larger size over time, something that MMT makes mention of.
You know, when I look at how orthodox macroeconomists are taking after MMT, I get the sense that what is really being said is,
“Our shamanism tops their voodoo!”
Lindbladian equation, look it up. It is the general form of the theory of everything, but the issue of currency banking is a simplified form of this equation. It applies to how we think, how banks work, how quarks work, and how avalanches work. In currency banking is boils down to matching loans to deposits.
In currency banking is boils down to matching loans to deposits.
That’s not how banking works. Banks do not lend out deposits, loans create deposits.
As many of you know, I have spent much of the last seven years explaining to anyone who will listen that banks do not “lend out” deposits or reserves. Rather, they create both loan assets and matching deposit liabilities “from nothing” by means of double entry accounting entries. Creating money with a stroke of the pen (or a few taps on a computer keyboard) is what banks do. —Frances Coppola
I’ll just add that the fall of civilization probably means the extinction of humanity. My logic is as follows.
The fall of civilization implies a breakdown in exchange to the point that long or fragile supply chains fail. Key activities like natural resource extraction would fail because their supply chains are both long and fragile. Think oil exploration, extraction, refining, and delivery — most fields today are in the ocean or require fracking. Or think coal or iron mining — when the industrial revolution began, those deposits were near the surface, which is no longer true. So any resurgence of civilization would be highly constrained by natural resource limitations that we currently skirt through long and fragile supply chains. Once those collapse, they can;t be easily re-created because they involve highly specialized capabilities, for which there is no market outside that supply chain. We would forget how to frack and how to run mines that are a mile deep (which would fill with water in any case).
If civilization cannot recover within 100,000 years, then humanity probably does extinct because the clock on a super-volcano will come due by then, if an asteroid doesn’t get us first. And at some point, an asteroid probably does get us. Or take your pick on what you think the great filter is.