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The old line back to free market ideology still intact

The US economy is showing signs of slowing as the fiscal stimulus is withdrawn and the spending contractions of the state and local government increasingly undermine the injections from the federal sphere. The recent US National Accounts demonstrate that things are looking very gloomy there at present. In the last week some notable former and current policy makers have come out in favour of austerity though. Some of these notables contributed to the problem in the first place through their criminal neglect of the economy. Others remain in positions of power and help design the policy response. A common thread can be found in their positions though. A blind faith in the market which links them intellectually to the erroneous views espoused by Milton Friedman. His influence remains a dominant presence in the policy debate. That is nothing short of a tragedy.

Facts

The US Bureau of Economic Analysis released the June quarter National Accounts data for the US on Friday, July 30, 2010, which showed that:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 2.4 percent in the second quarter of 2010, (that is, from the first quarter to the second quarter), according to the “advance” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 3.7 percent.

While, the June release is subject to revision in late August, the results are signalling that the US economy is now slowing down as the fiscal stimulus is withdrawn.

The press clearly saw it that way.

The UK Guardian said on July 30, 2010 that US economy shows signs of slowdown as consumer spending falters. They amplified this headline with the following:

The US recovery appears to be faltering after a slowdown in consumer spending dampened growth and fuelled fears of a double dip recession … Slower growth across the US, where almost one in 10 are out of work, was expected by economists. But many expressed surprise at the extent of the slowdown and the continued anxiety among consumers. While business investment grew strongly, consumers sat on their hands. Spending on services was especially weak with figures showing a meagre 0.8% annual rise.

The following graph focuses on what is happening with the components of real GDP growth. It shows the percentage contributions of the main aggregate demand components from the first quarter 2008 to the June 2010 quarter.

A major problem for the US government now is that the stimulus at the federal level is being increasingly undermined by the the cuts occuring in public spending at the state and local government levels. The US federal system is working against itself. Further while private investment has been growing modestly, private consumption has tapered off again.

The BEA say that:

The deceleration in real GDP in the second quarter primarily reflected an acceleration in imports and a deceleration in private inventory investment …

The next graph shows the percentage contributions to the percent change in Real GDP from the first quarter 2007 to the June 2010 quarter arising from the trade sector. While exports have grown modestly (slowing in the June quarter though), imports have accelerated and drained 4 per cent from the real GDP growth in the June quarter.

Fiction

Former US Federal Reserve boss, Alan Greenspan was interviewed on Meet the Press yesterday (August 1, 2010). David Gregory was the MSNBC chair.

Greenspan appeared along with the mayor of New York City, Michael Bloomberg; and governor of Pennsylvania, Ed Rendell.

Gregory asked Greenspan whether the US economy would get worse before it gets better. If you can work out the double-talk answer then you get a bonus point. This is what Greenspan said:

Maybe, but not necessarily. I think we’re in a pause in a recovery, a modest recovery. But a pause in the modest recovery feels like quasi recession.

He went onto explain how the top-end-of-town had received the benefits of the stimulus and that if there is a further fall in house prices then the economy might double dip back into recession.

He was asked where unemployment would be through 2010 and beyond. He replied:

I feel we just stay where we are. The–there is a gradual increase in unemployment, but not enough to reduce the level of unemployment … I would say that there’s nothing out there that I can see which will alter the, the, the trend or the level of unemployment in this context.

So nothing at all to say about this other than it won’t get better.

He was then asked about the need for interest rates to rise again. He said:

Well, the problem there implies that the government has control over those rates, meaning the Federal Reserve and the Treasury Department, in a sense. There is no doubt that the federal funds rate, that is the rate produced by the Federal Reserve, can be fixed at whatever the Fed wants it to be, but which the government has no control over is long-term interest rates, and long-term interest rates are what make the economy move. And if this budget problem eventually merges to the point where it begins to become very toxic, it will be reflected in rising long-term interest rates, rising mortgage rates, lower housing. At the moment, there is no sign of that, basically because the financial system is broke and you cannot have inflation if financial system is not working.

Greenspan knows full well, as does his successor Bernanke, that the central bank in tandem with the US Treasury could control investment rates if they wanted to. Please read my blog – Who is in charge? – for more discussion on this point.

But his reply also is an examples of one of those “well crowding out is a bad problem, but empirically there is no sign of it, but it is only a matter of time.” This sort of response is commonplace as the ideologues who just quote from mainstream macroeconomics textbooks cannot face the fact that their understanding of how the economy operates is false and the data is showing that.

The empirical world is being very harsh to the goldies, the Austrians and the neo-liberals at the moment. But rather than take a robust intellectual position and admit they got it wrong entirely, their ideological minds have to say – well it will get bad eventually. It might and it might not. But whatever happens – it won’t validate their erroneous theoretical conceptions.

Greenspan was then asked whether extending the tax cuts that are due to expire at the end of 2010 would be the solution. Greenspan had previously told a finance journalist in an interview that the Government “should follow the law and then let them lapse.”

The previous interview has then posed the problem that allowing the tax cuts to vanish would depress growth. Greenspan had answered: “Yes, it probably will, but I think we have no choice in doing that, because we have to recognize there are no solutions which are optimum. These are choices between bad and worse.”

So “Meet the Press” asked him to clarify the statements made in the earlier interview:

MR. GREGORY: You’re saying let them all go, let them all lapse?

MR. GREENSPAN: Look, I’m very much in favor of tax cuts, but not with borrowed money. And the problem that we’ve gotten into in recent years is spending programs with borrowed money, tax cuts with borrowed money, and at the end of the day, that proves disastrous. And my view is I don’t think we can play subtle policy here on it.

The problem that the US economy has gotten into in recent years are the legacy of the blind faith in the market that Greenspan promoted vigorously during his term in office. This led to a massive grab of real GDP by the financial sector which then gambled it to advance their own greed.

The gamble failed and the real economy collapsed as private spending faltered. The only thing that saved us from another depression was the fiscal interventions with some monetary policy support.

The fact that governments are borrowing when they are sovereign in their own currencies reflects the dominance of the neo-liberal paradigm. It is voluntary and basically financially harmless but totally unnecessary. The political damage it is causing though is the problem.

Recall the Time article (which covered the Russian and Latin American debt crisis) as I watched the US PBS Frontline program The Warning which went to air in the US on October 20, 2009. It is available via the Internet now and is worth viewing if you have the time. It documents that struggles that Brooksley Born, who became the head of the US federal Commodity Futures Trading Commission had with the Committee that Saved the World.

I especially liked the segment which described Born’s first lunch with Greenspan after she was appointed as Head of the Commodity Futures Trading Commission. Apparently, Greenspan expressed a “disdain for regulation” and when she raised the issue of the problem of financial fraud Greenspan said that “the market would take care of the fraudsters by self-regulating itself”.

So never mind the real damage caused to people’s life savings or life-time employment entitlements (pensions etc) or jobs – the market will see to it that a monumental failure driven by fraud (for example, Enron) is sorted out. And … meanwhile … very few of the fraudsters ever really get rounded up and punished.

Born had wanted to regulate the growing and secretive Over the Counter (OTC) derivatives market and met with great resistance from Rubin, Greenspan and Summers. She told the program that “Alan Greenspan at one point in the late ’90s said that the most important development in the financial markets in the ’90s was the development of over-the-counter derivatives”.

When asked if Greenspan knew what he was talking about, Born replied “Well, he has said recently that there was a flaw in his understanding”. The last comment is in relation to testimony that Greenspan gave to the US Congress in October 2008 which I discuss below.

Born got involved in the law suit filed by filed by Procter & Gamble against Bankers Trust. It is clear that BT were screwing Procter by selling them derivatives that were too complicated for them to understand the risk. The program reveals audio-tapes of Bankers Trust brokers talking about their deliberate “intention to fleece the company” (Procter). One said “This is a wet dream” while there was a lot of laughing about how smart BT was in “setting up” Procter as a pigeon (victim).

At that stage Born saw the need for government regulation of the financial sector (particularly the banks) but she met incredible resistance from the Adminstration and Greenspan.

But Born’s efforts to seek ways of regulating the OTC market didn’t stop the awesome trio – The Committee to Save the World. She sought to develop a “concept release” – a plan for regulation within the legal jurisdiction of the CFTC.

The Committee to Save the World with another came out publicly on May 7, 1998 which this Press Release from Rubin, Greenspan and Levitt (SEC Chair) issued by the US Treasury:

JOINT STATEMENT BY TREASURY SECRETARY ROBERT E. RUBIN, FEDERAL RESERVE BOARD CHAIRMAN ALAN GREENSPAN AND SECURITIES AND EXCHANGE COMMISSION CHAIRMAN ARTHUR LEVITT
On May 7, the Commodity Futures Trading Commission (“CFTC”) issued a concept release on over-the-counter derivatives. We have grave concerns about this action and its possible consequences. The OTC derivatives market is a large and important global market. We seriously question the scope of the CFTC’s jurisdiction in this area, and we are very concerned about reports that the CFTC’s action may increase the legal uncertainty concerning certain types of OTC derivatives.
The concept release raises important public policy issues that should be dealt with by the entire regulatory community working with Congress, and we are prepared to pursue, as appropriate, legislation that would provide greater certainty concerning the legal status of OTC derivatives.

This New York Times article from last year – Taking Hard New Look at a Greenspan Legacy provides a good summary of the events. It documents the fierce opposition that Greenspan, Rubin and Summers put up against any notion of regulation of the financial markets.

So now Greenspan is advocating fiscal austerity when he knows it worsen the economy and knows that unemployment will also rise.

He knows full well that public debt is unproblematic and is not akin to private debt. He knows that when there is such a huge reservoir of excess capacity in the US economy that extra spending is required and that the debt-repayments provides income to the private sector.

But his public comments would suggest he is stupid in relation to presenting an accurate portrayal of how the modern monetary system operates. But we know he is not stupid – he understands the opportunities the government has. So he is just choosing to deliberately mislead the public and advance his extremist ideological agenda.

He is nothing more than ideological warrior who is prepared to distort public perception. That should come as no surprise given that the extremist Ayn Rand was Greenspan’s intellectual light.

Please read my blog – Being shamed and disgraced is not enough – for more discussion on this point.

More fiction

On Thursday July 29, 2010 the CEO of the Dallas Federal Reserve Bank, Richard W. Fisher gave a speech entitled – Random Refereeing: How Uncertainty Hinders Economic Growth – to the Greater San Antonio Chamber of Commerce. So a forum stacked with business types.

His speech continued to air the view that is now commonplace in the public debate that government policy is now making the recession worse and things would be better if the government just set some rules and let the market rip.

He said:

I have ascribed the economy’s slow growth pathology to what I call “random refereeing” – the current predilection of government to rewrite the rules in the middle of the game of recovery. Businesses and consumers are being confronted with so many potential changes in the taxes and regulations that govern their behavior that they are uncertain about how to proceed downfield. Awaiting clearer signals from the referees that are the nation’s fiscal authorities and regulators, they have gone into a defensive crouch.

Of-course, much of the “uncertainty” is being driven by the fact that the government stimulus is now being withdrawn and austerity programs which are cutting peoples’ incomes and pensions are now being pursued with vigour.

Fisher doesn’t mention that.

He claims that the government should set rules and stick to them.

I would not defend the performance of the US Government or the US members of congress. From a distance they seem to have little regard for the crisis they are overseeing.

Fisher claims that the current fiscal situation is crowding out private spending, making it impossible for the US government to deal with the recession (because they have run out of money) and hindering the capacity of “individuals to smooth their consumption over the business cycle” and raising the “probability of a debt crisis”.

So you realise that he is another free market ideologue who chooses to mimic the erroneous mainstream macroeconomics textbook mantras.

Underpinning of the crowding out hypothesis is the old Classical theory of loanable funds, which is an aggregate construction of the way financial markets are meant to work in mainstream macroeconomic thinking. The original conception was designed to explain how aggregate demand could never fall short of aggregate supply because interest rate adjustments would always bring investment and saving into equality.

Mainstream textbook writers (for example, Mankiw) assume that it is reasonable to represent the financial system to his students as the “market for loanable funds” where “all savers go to this market to deposit their savings, and all borrowers go to this market to get their loans. In this market, there is one interest rate, which is both the return to saving and the cost of borrowing.”

This doctrine was a central part of the so-called classical model where perfectly flexible prices delivered self-adjusting, market-clearing aggregate markets at all times. If consumption fell, then saving would rise and this would not lead to an oversupply of goods because investment (capital goods production) would rise in proportion with saving.

So while the composition of output might change (workers would be shifted between the consumption goods sector to the capital goods sector), a full employment equilibrium was always maintained as long as price flexibility was not impeded. The interest rate became the vehicle to mediate saving and investment to ensure that there was never any gluts.

The supply of funds comes from those people who have some extra income they want to save and lend out. The demand for funds comes from households and firms who wish to borrow to invest (houses, factories, equipment etc). The interest rate is the price of the loan and the return on savings and thus the supply and demand curves (lines) take the shape they do.

This framework is then used to analyse fiscal policy impacts and the alleged negative consequences of budget deficits – the so-called financial crowding out – is derived.

The erroneous mainstream logic claims that investment falls when the government borrows to match its budget deficit – the borrowing allegedly increases competition for scarce private savings pushes up interest rates. The higher cost of funds crowds thus crowds out private borrowers who are trying to finance investment. This leads to the conclusion that given investment is important for long-run economic growth, government budget deficits reduce the economy’s growth rate.

The analysis relies on layers of myths which have permeated the public space to become almost “self-evident truths”. Obviously, national governments are not revenue-constrained so their borrowing is for other reasons – we have discussed this at length. This trilogy of blogs will help you understand this if you are new to my blog – Deficit spending 101 – Part 1Deficit spending 101 – Part 2Deficit spending 101 – Part 3.

But governments do borrow – for stupid ideological reasons and to facilitate central bank operations – so doesn’t this increase the claim on saving and reduce the “loanable funds” available for investors? Does the competition for saving push up the interest rates?

The answer to both questions is no! Modern Monetary Theory (MMT) does not claim that central bank interest rate hikes are not possible. There is also the possibility that rising interest rates reduce aggregate demand via the balance between expectations of future returns on investments and the cost of implementing the projects being changed by the rising interest rates.

But the Classical claims about crowding out are not based on these mechanisms. In fact, they assume that savings are finite and the government spending is financially constrained which means it has to seek “funding” in order to progress their fiscal plans. The result competition for the “finite” saving pool drives interest rates up and damages private spending.

A related theory which is taught under the banner of IS-LM theory (in macroeconomic textbooks) assumes that the central bank can exogenously set the money supply. Then the rising income from the deficit spending pushes up money demand and this squeezes (real) interest rates up to clear the money market. This is the Bastard Keynesian approach to financial crowding out.

Neither theory is remotely correct and is not related to the fact that central banks push up interest rates up because they believe they should be fighting inflation and interest rate rises stifle aggregate demand.

Further, from a macroeconomic flow of funds perspective, the funds (net financial assets in the form of reserves) that are the source of the capacity to purchase the public debt in the first place come from net government spending. Its what astute financial market players call “a wash”. The funds used to buy the government bonds come from the government!

There is also no finite pool of saving that is competed for. Loans create deposits so any credit-worthy customer can typically get funds. Reserves to support these loans are added later – that is, loans are never constrained in an aggregate sense by a “lack of reserves”. The funds to buy government bonds come from government spending! There is just an exchange of bank reserves for bonds – no net change in financial assets involved. Saving grows with income.

But importantly, deficit spending generates income growth which generates higher saving. It is this way that MMT shows that deficit spending supports or “finances” private saving not the other way around.

Acknowledging the point that increased aggregate demand, in general, generates income and saving, Luigi Passinetti the famous Italian economist had a wonderful sentence I remember from my graduate school days – “investment brings forth its own savings” – which was the basic insight of Keynes and Kalecki – and the insight that knocked out classical loanable funds theory upon which the neo-liberal crowding out theory was originally conceived.

Further, there is a zero probability that the US government will face a solvency crisis with respect to its debt issuance. There is not increasing probability of a debt crisis.

Finally, the consumer smoothing argument is based on the Ricardian Equivalence nonsense that I have blogged about regularly. Please read my recent blog – Defunct but still dominant and dangerous – for more discussion on this point.

Fisher then invoked the inflation myth:

Let me close this discussion of fiscal uncertainty with one more thought. Some of you may wonder whether our elected officials, faced with the truly monumental task of balancing the nation’s books, might simply throw in the towel and turn to the Fed to print us out of this enormous fiscal hole. If such a request were ever made, there should be no uncertainty: We at the Fed cannot and will not monetize the debt. We know what happens when central banks give in to those requests – it leads us down the slippery slope of debasing our currency and puts us on the path of hyperinflation and economic destruction. Neither I nor my colleagues are willing to risk that legacy.

Please read the following blogs – Operational design arising from modern monetary theory and Asset bubbles and the conduct of banks for further discussion as to why this is sheer nonsense.

The root source of the fiction

It all reminded me of a 1973 Playboy interview with Milton Friedman, which was one of the only times that I can recall (and I was young at the time) that the sycophantic press really homed in on the ideologue from Chicago.

At one point in the interchange Friedman was asked to explain how the Federal Reserve System causes inflation. He replied:

… The Fed, because it’s the government’s bank, has the power to create – to print – money, and it’s too much money that causes inflation. For a rudimentary understanding of how the Federal Reserve System causes inflation, it’s necessary to know what it has the power to do. It can print paper money; almost all the bills you have in your pocket are Federal reserve notes. It can create deposits that can be held by commercial banks, which is equivalent to printing notes. It can extend credit to banks. It can set the reserve requirements of its member banks – that is, how much a bank must hold in cash or on deposit with the Federal Reserve Bank for every dollar of deposits. The higher the reserve requirement, the less the bank can lend, and conversely.

These powers enable the Fed to determine how much money-currency plus deposits – there is in the country and to increase or decrease that amount.

So I would fail the now deceased Chicago professor if he submitted this to me as an answer. I would fail it because it doesn’t reflect the way the monetary system functions nor the way the central bank interacts with the commercial banks.

This is the mainstream macroeconomics text book view that you will still see in books like Mankiw. In his Principles of Economics (I have the first edition), Mankiw’s Chapter 27 is about “the monetary system”. In the latest edition it is Chapter 29.

In the section of the Federal Reserve (the US central bank), Mankiw claims it has “two related jobs”. The second “and more important job”:

… is to control the quantity of money that is made available to the economy, called the money supply. Decisions by policymakers concerning the money supply constitute monetary policy (emphasis in original).

In the blog – Money multiplier – missing feared dead – I explain how the money supply is endogenous (that is, the central bank cannot control it) and depends on the credit-seeking behaviour of the private sector and the commercial banks’ responses to this behaviour.

The idea that some money multiplier exists that scales up the central bank creation of the monetary base is totally false. There is in fact no unique relationship of the sort characterised by the erroneous money multiplier model in mainstream economics textbooks between bank reserves and the “stock of money”.

See also the September 2008 edition of the Federal Reserve Bank of New York Economic Policy Review – Divorcing Money from Monetary Policy – where they explain that the central bank targets the short-term interest rate as an expression of monetary policy and cannot control the money supply.

Please read the following blogs – Building bank reserves will not expand credit and Building bank reserves is not inflationary – for further discussion.

It is a myth that the reserve requirements constrain the bank’s capacity to lend. They just mean that the central bank has to ensure there are at least that volume of the reserves in the system. They might try to supply those reserves at a prohibitive rate but then they will compromise their target policy rate.

Please read my blog – Money multiplier – missing feared dead – for more discussion on this point.

I will write more about Friedman’s errors in another blog later this week sometime.

Playboy continued to probe this issue and Friedman said that the Federal Reserve system was vulnerable because:

it’s a system of men and not of rules, and men are fallible … we can take some of the discretionary power away from the Fed and make it into a system that operates according to rules. If we’re going to have economic growth without inflation, the stock of money should increase at a steady rate of about four percent per year – roughly matching the growth in goods and services. The Fed should be required to take the kind of limited action that would ensure this sort of monetary expansion.

So once again there is an erroneous claim that central banks could control the money supply. This belief led to the embarrassing period of monetary targetting which was the flavour of the decade from the mid-1970s. Friedman’s ideas were very influential in this period.

Central bankers were conned into believing that by controlling the money supply they would control inflation. Milton Friedman told the profession that if the central bank reduced the growth rate of the money supply to the potential rate of real output growth then the inflation rate would stabilise at zero.

So if you desired a 1 per cent inflation rate and your “fully employed” economy could generate real GDP growth at 4 per cent, then the nominal growth in the money supply should be set at 5 per cent. This was the basis of monetary targetting.

My own stupid nation was one of the first to implement this stupidity in March 1976 just after the conservatives “stole” the federal government with the help of the CIA (see Australian constitutional crisis for more on that).

In Australia, as elsewhere, the policy was a total failure. There was no clear relationship anyway between the measured growth in the broad monetary aggregates (the money supply) and the rate of inflation.

Further, the between August 1978 and the time the conservatives were thrown out of office in March 1983, actual monetary growth exceeded the targets. And … both inflation and high unemployment remained at high levels.

Interestingly, the Labor party (the so-called political arm of the trade union movement) which swept to office in 1983 continued with the policy. This was the early warning sign that the progressive party in Australian politics had sold out to the neo-liberal agenda. It got worse from then on. Unfortunately, we are still caught in that mindset.

At the time though, the “markets” – which are still seen as the oracles of good policy – were strongly behind targetting despite its total failure. The Labor party scared they would put the “bond traders” off-side, retained the policy.

By the mid-1980s it was clear the policy approach was a total crock. The central bank could not control the money supply. The stupidity was abandoned in Australia in January 1985.

It demonstrated that the mainstream macroeconomics text book models were (and remain) useless for understanding how the monetary system operates.

Yet these modern day monetary commentators still appeal to the same starting points and hold out Friedman as if he has anything to offer us. He had nothing to offer when he was alive and in his “prime”. He has nothing to offer us now as a legacy of his work.

All I remember him for is the damage he did in Chile after the democratically-elected Allende government was overthrown by a brutal military dictatorship with the support of the US government. Please see the film – The Battle of Chile – for more information on this.

Now, back to the Playboy interview. Friedman was then asked if the central bank was forced to set monetary policy by rules “wouldn’t the Fed lose its emergency powers – powers that would be useful in a crisis?”. Friedman said:

Most so-called crises will correct themselves if left alone. History suggests that the real problem is to keep the Fed, operating on the wrong premises, from doing precisely the wrong thing, from pouring gas on a fire. One reason we’ve so many government programs is that people are afraid to leave things alone when that is the best course of action. There is a notion – what I’ve called the Devil Theory – that’s often behind a lot of this …

PLAYBOY: But you prefer the laissez-faire – free-enterprise – approach.

FRIEDMAN: Generally. Because I think the government solution to a problem is usually as bad as the problem and very often makes the problem worse …

So we are just getting a reprise of this basic view.

Friedman was asked at one point (not in this interview) how long it would take for unemployment to fall back to its so-called (mythical) natural rate after rising to kill off inflation. He said about 15 years. So 10 or more percent unemployment for 15 years … and that is if his model of self-correction works.

The modern proponents of the “government makes things worse” lobby won’t even put a figure on what would have happened if the stimulus packages were not introduced nor will they tell us how long it would take before trend growth is resumed and whether the trend remained undamaged (via the hysteresis).

My advice: any comments this lot make in the public debate should be instantly disregarded.

An aside – self-promotion and more fiction

It is not only the mainstream economists who have a crying need to pursue celebrity at the expense of compromising themselves with lies and misrepresentations. Even so-called progressives do it.

In a recent Interview in the Australian media, Steve Keen was quoted as saying:

I’m not a fan of what’s called Chartalist economics that argues the government can run any size deficit it likes … I believe there are limits there, but nonetheless if you have private sector deleveraging, then the last thing you want to have there is the government doing exactly the same thing – it will just take cash flow out of the economy and push it down.

When have any MMT economists said that there are no limits on the size of the public deficit? Answer: Never.

When have MMT economists said that the government can run any size deficit it likes? Answer: Never.

The statement that a sovereign government is not financially constrained is not equivalent to either of the previous statements.

Associate Professor Steve Keen (an academic ranking which is below full professor in the Australian system) – clearly doesn’t understand what Modern Monetary Theory is about despite continually making public statements criticising it.

Or, perhaps, he chooses to deliberately misrepresent it because he realises his own forecasts of what was going to happen as the crisis unfolded have been found to be badly wanting and he knows that MMT is the only theoretical position left standing at present that has any credibility.

But then if you cannot get simple accounting correct I suppose there is not much to expect beyond that.

Conclusion

It is clear that reinvention and historical revisionism is the order of the day. More and more of these neo-liberal zealots are speaking out again – after being initially shamed and silent.

The irony is that fiscal policy has reduced the damages their actions (or inaction) caused yet they are doing their best to undermine it. Given their links to the top-end-of-town which has clearly profited massively from the public handouts, it is no surprise that they want to stop the fiscal expansion in its tracks for fear that some of the largesse might be spread a little further to the unemployed.

It is a pity the ordinary Americans couldn’t see it within their powers to redux their revolution when they threw the British (and French and Spanish) out. This time their targets should be Wall Street and all its connections in the political sphere.

Some people have just stopped earning the chance to be listened to any longer.

That is enough for today!

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    This Post Has 109 Comments
    1. I happened to watch a segment on CNBC with the St. Louis Fed President James Bullard. As a traditional inflation hawk, he caused a lot of commotion by coming out and warning about the risks of deflation in the near future. In the TV segment, he made the argument that the Fed’s “extended period” language might actually prove counterproductive. Although he said the most likely scenario is a modest recovery, he mentioned that an external shock — like the Euro debt crisis for example — might serve to push inflation expectations lower and cause inflation. The conservative, pro-business host of the program asked Bullard if he thought that the confusion and uncertainty over recent government legislation such as health care reform is serving to depress business confidence. Without expressing outright approval, Bullard offered his support for the host’s contention.

      All throughout the conversation with the regional Fed president, there was plenty use of the words “inflation expectations”, “shocks”, “business uncertainty”, etc., but not once was the word “demand” uttered. There was talk about unemployment, but only in the context of price stability — to the Fed president, the problem with high unemployment is not in the human suffering or lost real output, but rather in the fact that it keeps “inflation expectations” too low for his liking!

      A common retort I hear from fiscal conservatives is that government stimulus is an illusory “free lunch” proposal — i.e. there is no such thing as a magic cure. Economists subtly argue this when they use terms such as “inflation expectations” and “shocks”, terms which emphasize their belief that recessions and unemployment are “real” phenomena and not demand-driven. But here on the business channel we have a regional Fed president and a panel of hosts and reporters seriously considering whether or not the Fed should change the language in their FOMC minutes! Who cares?!?! These same conservatives who chide fiscal stimulus as “too easy” are suggesting that a change in the wording of a Fed press release might avert deflation! How fantastical is that?!?

    2. Thank you for the graduate level education in what has been going on in the halls of high finance over the course of the past 10 years, bringing about the collapse of western civilization as we know it, but having it’s roots, no doubt, in the likes of Alexander Hamilton, The Federalist. It’s astounding that less than 60 years after the end of the civil war, and the consolidation of power in the US Government, that the world slid into a global depression, and here we are 70 years after the war to end all wars having slid into a second global depression.

      If I understand the article’s conclusion correctly, then the sovereign debt of the US is insignificant compared to the consequences without increased federal spending. Even so, there’s a tipping point at which public sector spending crowds out private spending. And, to whom does the benefit of all of this spending accrue? I would prefer to teach a man to fish so that he might have to provide for himself and his family, than to dole out unemployment benefits. Has the pendulum swung so far in preserving the financial institutions which caused the collapse, along with the complicity of the federal government, that equilibrium with the private sector cannot be re-attained?

      The important thing, I think, is to reduce federal spending and reduce taxes to return the American economy back to the private sector. Aside from the Fed and Treasury’s unfailing errancy and inability to acknowledge the failure of their collective world view, our federal government is still operating in a vacuum of denial. They figure as long as they can print and spend, the barbarian hordes will be kept at bay. The defense of the dollars they count on to fund their own retirement is their only motivation, which makes peculiar bedfellows of politicians and financiers. In the meantime, state governments are struggling to balance their budgets. with 11 states meeting the definition of bankrupt, and federal deficit spending continues it’s upward trajectory. This imbalance and lack of parity between Washington and the rest of the country could very well lead to a second American Revolution. The economy can not be centrally managed, this has been proven time and again. The longer the delay in returning the economy to the people, by cutting spending and taxes, i.e. shrink the federal government by any means necessary, the longer it will be before a recovery begins, and the more severe will be the consequences.

    3. Dear Bill,

      please take good care of your health so you would live longer, we, the sane citizens of this world, still need your guidance and hope you would see the transformation of ECONOMIC Studies in your life time . . .

      Cheers
      Anas

    4. Bill,
      when are we going to see some commentary from you in regard to economic policy in the current election debate. Major parties are both keen to talk about paying the debt down as soon as possible. No doubt Libs are much worse than Labour when it comes to stimulus and propping up the aggregate demand. When it comes to the only progressive party “Greens” I’m not convinced that even they really comprehend the MMT fully and the folly and myths of government debt, and least not publicly.

    5. “Associate Professor Steve Keen (an academic ranking which is below full professor in the Australian system) – clearly doesn’t understand what Modern Monetary Theory is about”

      Bill, what is it about? Where is the theory actually written down? I’ve read Mosler’s “Soft Currency Economics” which contains some fundamental flaws, which I have pointed out here: http://moslereconomics.com/2010/07/26/the-political-genius-of-supply-side-economics/ (comment 16 onwards) .

      I asked you whether there is a definitive text or set of texts, in a comment on a recent post, but received no reply.

    6. Bill,
      Do you have the link to the Playboy article (or do you keep the magazines; for reference to the articles of course)? :-)

    7. Paul Andrews,

      Understanding Modern Money – by Randall Wray is a good place to start. It’s a very simple book that anyone can understand. Well maybe not a neo-liberal, but most people shouldn’t have any trouble.

      Most of what Wray’s book outlines is just common sense wehich unfortunately has never been the strong suite of neo-liberals.

      Cheers.

    8. Paul Andrews,

      I believe some of the confusion arises because of different to MMT scholars theory of value you are using. So in your metrics government spending leading to additional employment may not create additional value if everything is “marked to market”. But this is not the point. We can always define such a metrics and exclude for example the implicit value of work provided by the Police officers who are employed by the State.

      Yes we can always hire thugs on the free market to provide enforcement of our ideas. But this is rather the Zimbabwian model.

      Haven’t said that I agree that under certain circumstances (in a degenerated command economy for example – I am sort-of familiar with that system) little of additional common-sense value is added when people are hired just for the sake of hiring.

    9. Adam,

      I am not referring to “mark to market”. Warren Mosler says in “Soft Currency Economics”:

      “When people and physical capital are employed productively, government spending that shifts those resources to alternative use forces a trade-off. For example, if thousands of young men and women were conscripted into the armed forces the country would receive the benefit of a stronger military force. However, if the new soldiers had been home builders, the nation may suffer a shortage of new homes. This trade-off may reduce the general welfare of the nation if Americans place a greater value on new homes than additional military protection. If, however, the new military manpower comes not from home builders but from individuals who were unemployed, there is no trade-off. The real cost of conscripting home builders for military service is high; the real cost of employing the unemployed is negligible.”

      My comment explains that there is a trade-off. It doesn’t matter how you value the resources consumed versus the resources produced, there is a trade-off. I’m not talking about dollar values as such. Subjectively we may disagree about the relative “value” of the costs and benefits, (e.g. in this case the benefit of having a stronger miltary versus the cost of supplying soldiers with resources both to do their job and to reward them for doing their job), but to deny there is a trade-off is a big mistake. And this is in the introduction of a supposedly seminal MMT work.

      I will take a look at Wray’s book.

    10. Bill,
      Even if Neill above was correct (which I know he’s not), so long as everyone has a job (public or private) then we would live in a more civilised world.

      As I understand it Neil’s reference to ‘needing to balance the budget’ is illogical. The government sector deficit balances the private sector surplus!

      I echo Anas Alil’s words above. Make sure you get plenty of rest, as some us really care about you.

      Kind Regards
      Charlie

    11. Paul Andrews,

      I 100% agree that there is always a trade-off and only the simplified, introductory version of MMT presented on some blogs may contain statements creating an illusion that these trade-offs do not exist. Whenever I see “all things equal” an alarm bell rings in my head.

      To me the key issue not discussed widely enough is the trade-off between increasing our current consumption of non-reneweable resources and leaving them for the future use or leaving them to allow the global ecosystem to function properly. Another aspect which is virtually missing tn the current discussion is the trade-off between increasing the quality of life in the Western countries by accepting cheap cargo from the developing countries and allowing for dismantling of the productive capacities combined with losing our skills. This is again a kind of intertemporal trade-off as in my opinion the West will pay a price for that.

      On the other hand the Chinese and the others have every right to enjoy the same level of consumption we have.

      The issue of price stability in the context of exchange rate gyrations may need to be addressed as well. But having to chose between 20% unemployment for 10 years and 20% CPI inflation for one year I would chose the cost-push inflation. Another trade-off.

      Having said that I don’t see where these issues may invalidate MMT. This is just a monetary theory and I am asking questions which clearly transcende the limits of the monetary economics. However I would argue that clear understanding of the functioning of the financial system and the knowledge of the policy tools avaliable to the societies and governments is a precondition of addressing the problems I mentioned and these (private debt deflation) highlighted by Steve Keen as well.

      This is what MMT should be about.

    12. Paul:

      Trade-offs exist in a zero-sum game. I would (in fact do) argue that both neo-liberals and conservatives describe the economy as a zero-sum game when it suits their interests. I don’t disagree that there are elements of our economic activity (environmental damage, resource scarcity, etc.), where a zero-sum context makes sense. But it is a mistake to characterize the entire economy as such.

      The point Mosler was trying to make is that when employing the unemployed, the economic trade-offs don’t exist – the economy is as a whole better, you get more than what is input.

      Yes, the work has to be meaningful, although just generating demand for someone else to fulfill is meaningful to the economy (so bankers CAN sleep at night knowing they are helping their fellow human beings) – but overall, work should generate something of material value.

      The fact that someone has a cost of employment is not a trade-off if the value of the work exceeds that cost. Just because that value cannot be privately monetized doesn’t mean that value doesn’t exist.

    13. Terrific post as always Bill.

      I’m sure you are well aware that Steve Keen is not the only economist to have misrepresented MMT as saying there is no limit to deficit spending. Paul Krugman did the same thing in his recent online debate with Jamie Galbraith here and here.

      I think MMT makes very clear that deficit spending for a fiat-currency issuing government is limited by real resource and political constraints. Whenever deficit spending falls inside resource limits, the constraint is political. For academic economists to “misinterpret” this aspect of the theory – especially “Nobel Prize” winners – stretches credulity.

      I recently discussed the exchange between Krugman and Galbraith here. I hope the shameless self-promotion can be forgiven. The post may clarify the limits to deficit spending for some who are relatively new to MMT.

    14. “The government sector deficit balances the private sector surplus!”

      I don’t think this is correct.

      What about the following case?

      I go and dig a tonne of gold out of my back yard, and sell it to Westpac, and “deposit the funds” in an account there (in other words, let them keep the gold on the promise that they will give me up to $46 million when needed):

      Westpac: Assets: Tonne of gold; Liabilities: $46 million to Paul

      Paul: Assets: $46 million; Liabilities: $0

      Net private sector surplus: $46 million
      Net public sector deficit: Zero

    15. “Just because that value cannot be privately monetized doesn’t mean that value doesn’t exist.”

      Of course – as mentioned above I am talking in terms of underlying costs and benefits, not in dollars. The government provides many services that have value, but which could never be “marked to market”.

      There is no zero-sum game, as the productive elements of society are continually creating products, services and assets of value, from their brainpower and their labour. The assets are used as collateral, generating new loans and hence new funds.

    16. Paul

      Gold is no longer a financial asset – it is not a claim on anybody, it is a real asset. The private sector’s financial surplus in your example is still zero. Any bank can purchase a real asset by issuing deposit liabilities to the seller, but no net financial assets can be created this way.

      Hence your example does not disprove the rule that “govt sector deficit balances private sector surplus”.

    17. “Gold is no longer a financial asset – it is not a claim on anybody, it is a real asset. The private sector’s financial surplus in your example is still zero.”

      So what the original premise more closely means for you is: “The government sector deficit balances the private sector financial surplus”

      And you are defining financial to mean a claim on somebody.

      So more closely again to the true meaning from your perspective: “The government sector deficit balances the increase in private sector assets that are claims on others, less the increase in private sector liabilities”.

      I don’t think anyone can argue with that statement.

      Where I think MMT goes astray is it takes the original unclarified statement and draws some conclusions about “money”, which is definitely not merely the difference between private sector assets that are claims and others, less private sector liabilities.

      It uses a term “net money”, to mean the above, then claims to draw conclusions about “money” as if it was “net money”.

    18. peterc,

      In fact initially Krugman created a model with inflation-linked bonds which can breed like rabbits no matter what and there is no escape. But governments do not use TIPS to offset the deficit spending. They use ordinary bonds.
      “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.)…”
      And here is the problem. Bonds yields do not have to be equal to inflation expectations and inflation expectations do not have to be accurate.
      The second problem is obviously the P(t) = V*M(t) equation which may or rather may not be true.

      Somebody who is more “knowledgeable in scripture” than me should clarify this issue with prof Krugman and he may accept certain provisions of MMT once he starts applying the rational expectations model only to some groups of people. (Bourgeois may have rational expectations. Workers and peasants have usually few)

      However the issue mentioned in the second post is more interesting.
      “Someday the private sector will see enough opportunities to want to invest its savings in plant and equipment, not leave them sitting idle, and the economy will return to more or less full employment without needing deficit spending to keep it there. At that point, money that the government prints won’t just sit there, it will feed inflation, and the government will indeed need to persuade the private sector to make resources available for government use.”

      Again it looks that the quantity of money or quasi-money may matter. I believe that Paul Krugman may have heard a family story about the hyperinflation in Poland as his grandparents left the city called Brest-Litovsk (Brzesc Litewski) in 1922
      SOURCE_http://www.genealogywise.com/profiles/blogs/in-search-of-a-man-selling
      So he must have heard the same stories I heard when I was a kid (about bringing wages in a briefcase). My family lived not far away…

      Based on that I don’t quite understand where he got his rational expectations from but let’s leave this topic for now.

      So the problem which I can see is when the investors / savers discover that real interest rates are below zero they may try to dump the assets denominated in that currency thus pushing down the exchange rate even more. Does it depend on the quantity of financial assets denominated in that currency? I think so. Then the process of running away from the currency accelerates on its own. The interesting question is why the fiscal policy of imposing a land tax helped to halt inflation in Poland in 1923. Aristocrats and rich people didn’t contribute much to the aggregate demand. I believe the transmission channel was actually the exchange rate of the foreign currencies. Rich people were immediately changing Polish Marks into whatever hard currency they get. This was depressing the exchange rate and feeding back into the prices of imported goods.

      What I remember from the hyperinflation period in 1989 was that people receiving wages who wanted to save were going straight to money exchanges with PLZ (old Zlote) to get either DEM or USD. Any “serious” transactions like buying an apartment were performed in USD. So the local currency was not performing and the rate of saving in PLZ was pretty much zero. Almost like in Zimbabwe…

      Did the aggregate demand exceed the productive capacities? Of course. But this is also the point Paul Krugman is trying to make. If we have a stock of financial assets equal to 10000% of the GDP the system may easily lose its dynamic stability.

      I have no time to research this. One day I may dig out the old Polish statistics from 1921-23 or 1988-91 and analyse them. For now let’s not discard what our old neighbour Krugman said, he may have a point…

      One more thing. I disagree with branding people who do not understand or don’t 100% agree with the MMT. They may not have bad intentions and this may be unfair. I have no bad intentions and I accept that I may be an ignorant as I had only one semester of Marxist / neoclassical Economics 101 at the Uni. But arguments ad hominem won’t convince anyone…

    19. Further to the above regarding “The government sector deficit balances the private sector surplus”.

      Here is an example of it being used to draw a misleading conclusion: (from http://www.creditwritedowns.com/2010/05/mmt-economics-101-on-federal-budget-deficits.html )

      “When the government sector runs a deficit, the non-government sector runs a surplus of equivalent size. Draw your own conclusions about what this means in an era of government fiscal austerity.”

      No conclusion can be drawn, because of the limited underlying definition of surplus. If the government ran a surplus, the private sector could well have a very healthy surplus in terms of real assets.

    20. Adam (ak): Krugman (like Keen) claimed that MMT says deficit spending can never be a problem. MMT does not say this. Krugman’s (and Keen’s) characterisation of the theory is a misrepresentation. I do think it strains credulity that they could fail to realise this. If they did fail to realise it, it could only be because they didn’t actually take time to check the viewpoint that they were misrepresenting. Krugman, in particular, is at the top of his profession, so to me innocent misinterpretation seems unlikely. In either case, both Krugman and Keen have created a strawman, which is usually done in a dishonest attempt to discredit a point of view. Whether they would agree with MMT, correctly interpreted, is a separate issue, and not the point of my comment.

    21. peterc,

      In my opinion even very smart people simply don’t like getting to the bottom of these issues because this would invalidate the theory they invested so much into. But this is not dishonesty. This may be a kind of intellectual failure. We are all humans. I am probably the last person who should lecture about that because my personal style is to pour acid first and then to watch what happens. I do it often and then I regret it later. So please believe me personal attacks will not help anybody. Engaging in discussions whenever possible and pinning down opponents with strong arguments will do the trick I believe.

    22. Paul Andrews, August 2, 23:02.

      Your comment # 17 on Warren Mosler’s blog assumes full employment. If there is full employment then diverting a worker from one task to another involves a trade-off. If the worker is unemployed there is no trade-off in terms of that worker’s labour. Warren Mosler assumes there is not full employment hence there is no trade-off.

    23. Sorry Paul Andrews,
      I can’t give you a textbook understanding of MMT but FWIW this is my intuitive understanding and so what follows could well be a misrepresentation. I would appreciate any feedback about where I have misunderstood MMT from the more knowledgeable posters.
      Basically whatever you dig out of your backyard, be it gold or potatoes, can only obtain monetary value if someone is willing to exchange that produce for a financial asset. Unless you are in a ‘beads for Manhattan’ situation that financial asset only has value through taxes or interest and ultimately private interest arrangements need taxing to avoid currency annihilation. Runaway inflation or deflation under such an arrangement can mean all bets are off with the exchange value of your financial or real assets.
      You need someone who can pay you in the currency that you get taxed on to buy the goods and services that are others need to sell to you to pay their taxes. So why sell to foreigners if the only financial assets you want are to save the value of your productivity through paying taxes? It is only possible if they are happy to pay you in the financial asset that you are taxed on.
      Admittedly currency pegs, currency trading and monetary union arrangements obscure and complicate this basic international transaction. However it is worth bearing in mind that the only ways your government and the private sector can both be in surplus in any monetary form is if foreign governments and/ or foreign private sectors want your money, goods or services.
      In other words your gold, potatoes, whatever has to be exchanged to have monetary value in the currency that is most efficient and realisable to either where, who and what you are. Most of us have ties in that regard, which, to some extent, make monetary considerations irrelevant.
      Yes it is possible to export and earn an income if your county’s private and government sector are not spending enough of your financial asset at home for you to market your product at home. To do so your country has to produce either financial assets that foreign nationals want to save or invest in or be producing real services and goods that they want to the point that they are willing to fund both the private and public sectors of your economy through buying your government’s currency.
      Of course this breaks down when the productivity of a national economy becomes wildly out sync with the monetary value of currency. Inflation occurs when the productive value of an economy cannot be realised because the flow of monetary value (not its quantity) out strips the economy’s capacity for the production of real goods and services. But the converse is also true. The productive capacity of an economy cannot be realised when flow of monetary value in an economy is not sufficient to pay for the full value of real goods and services in the economy and deflation is triggered.
      Adam (Ak)
      My brief taste of neoliberal influence on academia in Australia during the 80’s in my non- economic social science degree put me off doing any postgraduate study, until recently. I can only admire both Stephen Keen and Bill Mitchell to have come through the discipline of economics and still have the capacity to refute the nonsense. That said I understand Prof Mitchell’s frustration with Prof Keen’s public account of MMT which ignores the fundamental point that deficits are limited by the productive capacity of an economy.

    24. “No conclusion can be drawn, because of the limited underlying definition of surplus. If the government ran a surplus, the private sector could well have a very healthy surplus in terms of real assets.”

      Ah ha, a conclusion can be drawn – in such a situation you would have a deflationary scenario – a “very healthy surplus of real assets” with a reduction in net private financial assets. Less net financial assets representing a “healthy” (let’s assume that to mean larger in size relative to some earlier period) net real production.

      Straight-forward is not equivalent to limited.

    25. Let me qualify that last conclusion with the possibility of a private credit expansion, which would delay any deflationary episode.

      And this assumes net zero effects from the external sector.

    26. Keith Newman,

      “Your comment # 17 on Warren Mosler’s blog assumes full employment.”

      This is not correct. Here is the comment, which assumes a level of unemployment:

      —————-

      Warren,

      In “Soft Currency Economics”, you state:

      “When people and physical capital are employed productively, government spending that shifts those resources to alternative use forces a trade-off. For example, if thousands of young men and women were conscripted into the armed forces the country would receive the benefit of a stronger military force. However, if the new soldiers had been home builders, the nation may suffer a shortage of new homes. This trade-off may reduce the general welfare of the nation if Americans place a greater value on new homes than additional military protection. If, however, the new military manpower comes not from home builders but from individuals who were unemployed, there is no trade-off. The real cost of conscripting home builders for military service is high; the real cost of employing the unemployed is negligible.”

      There is a trade-off. Assume the unemployed person is receiving unemployment benefits B. Assume the wage for a military position is W. Let the difference the two be D. D = W – B. This represents the extra purchasing power of the person after he joins the military. The person now has access to more resources than before, through the additional purchasing power D, which leaves less resources for everyone else.

      There is a second trade-off, which is the cost of employment of the person – insurance, equipment, uniforms etc. These need to be supplied from the resources of the nation, leaving less for the people.

      There is third trade-off. While the person is serving in the military, he has no incentive, or even opportunity, to do his own work. He has no opportunity to exhibit entrepeneurship. He has no opportunity to start a small business that will create resources. Therefore the resources of the nation are diminished further.

      These are the trade-offs that should be considered when employing someone in a government position. Sometimes it will be worth it and other times not. But let’s not pretend there is no trade-off.

    27. Adam,

      Are you the AK that comments on Steve’s blog?

      Thanks very much for putting together a summary of your understanding of what MMT is. I will have a closer look later and comment further.

    28. pebird,

      “Ah ha, a conclusion can be drawn – in such a situation you would have a deflationary scenario – a “very healthy surplus of real assets” with a reduction in net private financial assets. Less net financial assets representing a “healthy” (let’s assume that to mean larger in size relative to some earlier period) net real production.”

      “Let me qualify that last conclusion with the possibility of a private credit expansion, which would delay any deflationary episode.”

      In other words no conclusion can be drawn purely on the basis of there being a government sector surplus.

    29. Further to this: “In other words no conclusion can be drawn purely on the basis of there being a government sector surplus.”

      Not only is one not able to draw a conclusion as to whether there will be inflation or deflation, one is also not able to draw a conclusion as to whether there will be a surplus of real assets.

      A government deficit can coexist with a surplus in real private sector assets.

      A government deficit can coexist with a deficit in real private sector assets.

      A government surplus can coexist with a surplus in real private sector assets.

      A government surplus can coexist with a deficit in real private sector assets.

    30. The fact is we have too many people either without work ,with not enough hours of work, or receiving a rate of pay that is insufficient to maintain any reasonable standard of living.

      Rises in productivity have often seen profits increase and yet real wages have not followed suite.

      The other common thread through all this is that government surpluses appear to have forced many people into using up all their savings to maintain a standard of living and then once the savings run out they seek credit to simply exist.

      That’s not greed it’s a necessity in this day and age because those who are a little different or don’t keep up with trends are pretty much cast aside like lepers.

      Hence, many people could care less about real private sector assets because they appear to be in the hands of a few and the majority are probably paying for them.

    31. For Paul Andrews, August 4 at 8:30:

      I didn’t express myself clearly. The full employment you are assuming is not full employment of labour but rather full employment of productive capacity. You write:

      “There is a trade-off. Assume the unemployed person is receiving unemployment benefits B. Assume the wage for a military position is W. Let the difference the two be D. D = W – B. This represents the extra purchasing power of the person after he joins the military. The person now has access to more resources than before, through the additional purchasing power D, which leaves less resources for everyone else.”

      My response: The person does indeed have access to more resources than before. But there can only be fewer resources for everyone else if all resources were previously fully employed. If there were idle resources available then the allocation of these resources to the now newly employed worker does not come at the expense of anyone else. No trade-off occurs in this case.

      “There is a second trade-off, which is the cost of employment of the person – insurance, equipment, uniforms etc. These need to be supplied from the resources of the nation, leaving less for the people.”

      My response: Same as above.

      “There is third trade-off. While the person is serving in the military, he has no incentive, or even opportunity, to do his own work. He has no opportunity to exhibit entrepeneurship. He has no opportunity to start a small business that will create resources. Therefore the resources of the nation are diminished further.”

      My response: I agree that excessive military expenditures are a lost opportunity for a country even if it is idle resources that are being deployed. If the person was hired to improve infrastructure or educate other people, etc, his/her work would increase the resources of the country.

    32. Alan,

      “The fact is we have too many people either without work ,with not enough hours of work, or receiving a rate of pay that is insufficient to maintain any reasonable standard of living.”

      Agreed. The question is: Why? The answer is not necessarily to be found in the private sector surplus of claims on others.

      “Rises in productivity have often seen profits increase and yet real wages have not followed suite.”

      Agreed again. So why the MMT fixation on aggregate private surplus?

      “The other common thread through all this is that government surpluses appear to have forced many people into using up all their savings to maintain a standard of living and then once the savings run out they seek credit to simply exist.”

      Where is the evidence that government surpluses have forced people into using up all their savings? Who decreed that the standard of living to be maintained includes a large house, two new cars every three years, restaurant meals once or twice a week, huge flat screen TV, designer clothing etc. etc? People want to keep up with the Jones’s, and the availability of private credit has enabled a lifestyle arms race. This is nothing to do with whether the government has a surplus or a deficit, especially in times when private sector credit far exceeds public sector credit.

      “That’s not greed it’s a necessity in this day and age because those who are a little different or don’t keep up with trends are pretty much cast aside like lepers.”

      Bingo! It’s only a necessity for those who feel they must keep up with the Jones’s. Anyone else is “different”. This is a huge driving force in a consumerist society. It can’t go on forever though, because at some stage GDP will not support the debt-service on the total stock of credit. Hopefully our society will be a little more accepting of differences when the credit cycle passes its peak.

      “Hence, many people could care less about real private sector assets because they appear to be in the hands of a few and the majority are probably paying for them.”

      Nearly all the people I know seem to care a great deal about real private sector assets – especially houses and their contents! Unfortunately these people’s love of real private sector assets has blinded them to the real cost – i.e. the cost denominated in future labour hours. To the other people, the debt-free non-materialists, I say congratulations!

    33. Keith,

      Thanks for your thoughtful response.

      “The person does indeed have access to more resources than before. But there can only be fewer resources for everyone else if all resources were previously fully employed. If there were idle resources available then the allocation of these resources to the now newly employed worker does not come at the expense of anyone else. No trade-off occurs in this case.”

      There is some truth in this. However resources are not homogeneous, so there is still a trade-off. Assume the total resources available are R. Of these, some are idle and would be wasted if not needed by anyone. Call these Ri. Others are not idle, call these Ra. So R = Ri + Ra. The newly employed person will consume some of Ri and some of Ra – call this consumption Ca and Ci. I agree that the consumption of Ri is not a direct negative for the economy (although there may be indirect negative effects). However, the rest of the economy now has access to Ra – Ca, whereas previously it had access to Ra.

      “I agree that excessive military expenditures are a lost opportunity for a country even if it is idle resources that are being deployed. If the person was hired to improve infrastructure or educate other people, etc, his/her work would increase the resources of the country.”

      Yes, if the person is doing something that benefits the country, and those benefits exceed Ca + the debt service costs on the government borrowing, I agree. However I believe this becomes hard to achieve when the objective is purely to stimulate. It also becomes harder to achieve as the debt service costs increase. The objective should be to benefit the country through productive endeavours rather than to stimulate for stimulation’s sake.

    34. @paul andrews

      “Where is the evidence that government surpluses have forced people into using up all their savings?”

      Now it is you who is confusing the difference between real and financial assets :)

      “People’s Savings” are financial assets, namely a claim on someone else rather than a real asset like a tonne of gold. And, as you agreed in an earlier post on this very thread, it is obvious and uncontestable that if the government runs a surplus, that must be at the expense of private sector financial assets. They are two names for the same thing!

      A financial asset is always a claim on someone else, and is consequently an exactly equal liability for someone else. That is what a ‘financial asset’ is, as opposed to a real asset.

      Therefore, the sum total value of all the financial assets in the world is, always has been, and always will be, zero.

      Anyone can create a financial asset, as long as they create the corresponding liability at the same time – it’s called writing an IOU. Banks do it when they issue loans, companies do it when they issue bonds. You can do it when you didn’t bring enough cash to a poker table.

      Governments do it when they print money (or create bank reserves, same thing). Or, for that matter, when they issue debt, which is why the whole ‘printing money will be inflationary so we must borrow it instead’ line is so silly. A dollar bill is just one dollar loaned to the government at no interest.

      The MMT insight is that, since the total value of financial assets is always zero, if the private sector wants to accumulate them (have a net non-zero amount), the government must, as a simple question of logic, be the ones with the corresponding liability. There aren’t any other players at the table! (If you consider more than one country then flows between countries make things a bit more complicated, but overall change nothing.)

      Consider a game of monopoly, because it really is just that simple. All the money tucked under the player’s sides of the table – “private net financial assets” – had to come out of the currency issuer – “government deficits”. For money to go back into the bank – “government surpluses” – it has to come from what the players have – “run down in private net savings”.

      So yes, it is precisely the case that government surpluses forced the private sector to run down their savings – where by savings we mean (and always did mean) ‘net financial assets’, which seems pretty uncontroversial. Why, what did you think “running down people’s savings” meant?

    35. Paul Andrews,

      Yes I’m the same “ak”

      I believe the real advantage of MMT is that it has been shown that the current system can be hacked and the real “debt service costs on the government borrowing” can be set to a very low value if not zero. So the society only needs to worry about the real trade-offs not imaginary ones and is effectively inoculated against debt-deflation. This is one of the points Steve Keen disagrees with the MMT I believe.

      The trade-off is obviously the denial of delivery of further free lunches to some rentiers and possibly some moderate erosion in the real value of their assets. This would hurt!

      Personally I would put more emphasis not on just stimulating the demand and increasing overconsumption but on stimulating scientific and technological progress to actually reduce the consumption of non-reneweable resources.

      But without the MMT and only confined to the reactive quasi-free-market system and we will never address any future problems in time – we will keep doing what we’ve been doing for the last several hundred years, behaving as if there was no environment around us.

      There is still a risk that the government will abuse the tools made available by MMT. But this is a political risk – human societies are no longer constrained by dubious database record processing rules claimed as “objective constraints” by the neoconservatives.

    36. begruntled,

      Using your definition of people’s savings, people’s savings are people’s claims on others.

      By contrast, “Total claims on others” includes firms’ claims on people, as well as people’s savings.

      Therefore people’s savings (using your definition) can diminish or increase even though total claims on others nets to zero, and independently of the government’s deficit or surplus.

      “The MMT insight is that, since the total value of financial assets is always zero, if the private sector wants to accumulate them (have a net non-zero amount), the government must, as a simple question of logic, be the ones with the corresponding liability. There aren’t any other players at the table! (If you consider more than one country then flows between countries make things a bit more complicated, but overall change nothing.)”

      The private sector wants to accumulate real assets. There is therefore no additional insight provided by MMT in this regard.

    37. Hi AK,

      If MMT’s core premises can not be shown to be solid then it tells us nothing. Worse, it may be leading people into dangerous misconceptions.

      Regarding the environment, measures to negate impacts on the environment need to be judged according to real costs and real benefits. Whether this is done by the government sector or not is probably less important than that it be done. If the objective is to obtain a net real benefit, and the means can be demonstrated to enough people to be likely to be effective, then I agree, it should be done. The big problem is that the costs are borne by individual governments, whereas the benefit is to the whole world, so the cost/benefit analysis doesn’t work for any one country. Therefore some way must be found to persuade many countries to agree on measures and implement them simultaneously. I don’t think the cause is helped by associating it in any way with MMT.

    38. Paul, private sector does not accumulate real assets. It produces real assets and consumes them, then produces more and consumes more. This process of getting more is driven primarily by productivity gains. There is no economic reason whatsoever to accumulate real assets.

      Private sector also tends to save. It can only save in something which is external to private sector because any other transaction within private sector is just an asset swap. So this external thing is government liabilities which private sector can not generate. This is the definition of saving.

      You can save in real estate, private sector can not. You can save in gold, private sector can not. You can build a house or dig up some gold and consider it your personal savings but it is just a production (GDP) of real estate or gold which is supposed to be consumed. But GDP is a flow. It can not be saved. It is not saving.

    39. “o R = Ri + Ra. The newly employed person will consume some of Ri and some of Ra – call this consumption Ca and Ci. I agree that the consumption of Ri is not a direct negative for the economy (although there may be indirect negative effects). However, the rest of the economy now has access to Ra – Ca, whereas previously it had access to Ra.”

      You seem to have forgotten That Ra will consume some of Ri as well, and that an amount of Ca was happening anyway. Plus of course that an increase in Ca or Ci will cause a multiplier effect in Ra.

    40. “You seem to have forgotten That Ra will consume some of Ri as well, and that an amount of Ca was happening anyway. Plus of course that an increase in Ca or Ci will cause a multiplier effect in Ra.”

      Ra and Ri are mutually exclusive by definition. If the resource was idle before the event, it is Ri. If it was not idle before the event it is Ra.

      You are correct that an amount of Ca was happening anyway, because of unemployment benefits. Call the initial Ca: Ca1, and the additional Ca due to the wages being greater than the unemployment benefits: Ca2. So Ca = Ca1 + Ca2. The rest of the economy now has access to Ra – Ca2, whereas previously it had access to Ra.

      An increase in Ci will not cause a multipler effect in Ra, as by definition the resources used to satisfy Ci come out of Ri.

      Ca will cause Ra after the event to be less than Ra before the event. At the time of the event, there is no multiplier. After the event, the private sector may take steps to increase Ra due to the additional demand, but this will not tend to be greater than the reduction caused by the event, and will entail further real costs. Therefore any multiplier effect may in fact be a further drain on real resources.

    41. Paul Andrews: A few quick and dirty observations. Where is the evidence that government surpluses have forced people into using up all their savings? Pebird’s conclusion is not “no conclusion” unless you think credit bubbles are infinitely sustainable. Maybe next time will be different. :-) Just as lines and shortages hide inflation in a command economy, easy credit can hide or postpone deflation in a market economy, but if the cause, the surplus is not removed, the effect is inevitable. Check out http://bilbo.economicoutlook.net/blog/?p=4157 and http://bilbo.economicoutlook.net/blog/?p=5345 mentioning the negative effects of the Clinton surpluses, and lots of others on Australian surpluses.

      Most of the problems you bring up seem to me to concern more any type of Keynesian or nonclassical macro – economics, rather than MMT in particular. I think you should realize that anti-full employment views have the burden of proof. They are frankly, crazy, and assume that there is a nonlinear quantum chaotic fractal buzzword effect that makes doing nothing more profitable than doing something. As Keynes said:

      “The Conservative belief that there is some law of nature which prevents men from being employed, that it is ‘rash’ to employ men, and that it is financially ‘sound’ to maintain a tenth of the population in idleness for an indefinite period, is crazily improbable – the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years. The objections which are raised are mostly not the objections of experience or of practical men. They are based on highly abstract theories – venerable, academic inventions, half misunderstood by those who are applying them today, and based on assumptions which are contrary to the facts…Our main task, therefore, will be to confirm the reader’s instinct that what seems sensible is sensible, and what seems nonsense is nonsense.”

      Bingo! It’s only a necessity for those who feel they must keep up with the Jones’s. Anyone else is “different”.
      You misunderstand Alan, and I daresay, reality. The difference between the old US or global full employment economy and the new unequal and irrational one, means that you either keep up with the Joneses, or you are out of a job, and soon out on the street. That’s what “different” means now, as Alan said: “cast aside like lepers”.

      this [increasing the resources of the country] becomes hard to achieve when the objective is purely to stimulate.
      Empirically, this is not true. The New Deal worked, got employment into single digits. WWII, spending directed toward the military, probably the least effective stimulus, as the product is simply destroyed, got the USA completely out of the Depression. Worry about full employment, let the budget take care of itself, and see the economy grow was the universal postwar experience, with no worse inflation than the subsequent, low growth, monetarist, inflation fighting era.

      debt service costs on the government borrowing, Answer to government debt worries: then don’t “borrow” (governments issuing bonds for bucks is not real borrowing, just exchanging one type of debt for another.)

      The third trade-off: I hope you pardon me for saying so, but get real. Yes, necessity is the mother of invention, but god bless the child that’s got his own.

    42. “Paul, private sector does not accumulate real assets. It produces real assets and consumes them, then produces more and consumes more. This process of getting more is driven primarily by productivity gains. There is no economic reason whatsoever to accumulate real assets.”

      How then would you explain private sector accumulation of houses, offices, factories, intellectual property, machinery, stock, etc.?
      The sum of these has been increasing for hundreds of years. This year’s creation allows for more creation next year. Net real production of these assets far exceeds net real consumption/depreciation.

      “Private sector also tends to save. It can only save in something which is external to private sector because any other transaction within private sector is just an asset swap. So this external thing is government liabilities which private sector can not generate. This is the definition of saving.”

      Your definition of savings includes all claims on others, including firms’ claims on individuals. It does not include individuals’ ownership of firms through shareholdings. It does not include real assets. Using that definition, your statement may be correct. MMT proponents need to make that definition absolutely clear when making statements like the one you have made.

      What is important in increasing the prosperity of an economy is the increase in real assets, not the increase in savings as you have defined them. This can and does increase independently of the government surplus or deficit.

      “You can save in real estate, private sector can not. You can save in gold, private sector can not. You can build a house or dig up some gold and consider it your personal savings but it is just a production (GDP) of real estate or gold which is supposed to be consumed. But GDP is a flow. It can not be saved. It is not saving.”

      You are implying here that the private sector does not include individuals like myself. But using that definition the sum of claims on others in the private sector does not net to zero. You need to choose one definition or the other.

      GDP includes capital investment, which creates real assets in year X that can then be used in production in year X + 1. Over time, in a propserous economy, the sum of real assets increases, even though some assets depreciate over time.

    43. Paul:

      Re: “The government sector deficit balances the private sector financial surplus”

      Private sector financial surplus, as taken from the GDP identity, means holding cash or Government bonds *only*. Any other kinds of mutual claims inside the private sector, due to aggregation, cancel out. E.g., commercial bonds as opposed to T-bonds are not part of such surplus obviously.

      I thought you realized that, but after reading your exchange I am not so sure.

    44. Paul, yes, production of assets is increasing as well as consumption of these same assets. Or what is your actual point here?

      Your problem feels like one those problems where people try to challenge MMT but choose instead to go in circles and to make self-obvious statements implying very deep meaning in them. Yes, GDP includes investments. Yes, investments create real assets. Yes, real assets can be used in production. Yes, in prosperous economy real assets increase (though we can discuss it). Yes, real assets depreciate over time. But what precisely is your point?

    45. Paul Andrews,

      “The big problem is that the costs are borne by individual governments, whereas the benefit is to the whole world, so the cost/benefit analysis doesn’t work for any one country. Therefore some way must be found to persuade many countries to agree on measures and implement them simultaneously. I don’t think the cause is helped by associating it in any way with MMT.”

      These are 2 separate issues:
      1. global coordination of limiting using resources / limiting CO2 emissions (where I may share your views) and
      2. development of new technologies.

      I was clearly referring to the second issue – financing of the R&D work. In this case real resources are spent and crowding-out effect may occur however I would argue that only states can take responsibility for a long-term investment in new technologies. Securing public financing is an issue if MMT is rejected.

      I disagree with the usual cost/benefit analysis because it implies a static market picture. I can show that early investment in for example electric cars will give the country which is capable of diverting resources early to win the competition later and at the same time may slow down the ratio of using the non-renewable resources even if the other countries initially do not adopt new technologies. The key thing is the change in relative prices in time.

      The Chinese (not spending constrained for obvious reasons) are investing now. The Americans seem to be fiscally constrained because they do not listen to Warren Mosler and they do not spend enough on the research in 2010. The private sector will only react to the pricing signal when it hits the future markets because this is the free market economy and it can only process prices driven by rational expectations. But now oil futures are cheap so making electric car is rather pointless…

      “The next five years will see rapid advances in advanced battery technology, as dozens of manufacturers position themselves to meet the anticipated demands of newly electrified vehicles being launched by nearly every major global automotive company. Despite the support of the federal government, U.S. battery companies have struggled to gain market share while the Asian market for vehicle batteries has taken off. Asian manufacturers, which have traditionally dominated the global market for lithium ion (Li-ion) batteries in various electronics categories, will continue to lead in both Li-ion production and consumption as the global market for electrified vehicles grows rapidly over the next several years, according to a recent report from Pike Research.
      “The Obama administration is making a concerted effort to prevent the failure of the U.S. auto industry, and that will bolster development of the U.S. battery industry through 2012,” says senior analyst John Gartner. “But political shifts and market realities could remove that safety net.”

      SOURCE_http://www.pikeresearch.com/newsroom/asian-manufacturers-will-lead-the-8-billion-market-for-electric-vehicle-batteries

      It is exactly the development of new technologies what may stop the race to the edge of the cliff and prevent wars to get better access to the oil. If this is coordinated globally – everyone will win. So this may have an impact of the first issue as well.

    46. Some Guy:

      “A few quick and dirty observations. Where is the evidence that government surpluses have forced people into using up all their savings? Pebird’s conclusion is not “no conclusion” unless you think credit bubbles are infinitely sustainable. Maybe next time will be different. :-) Just as lines and shortages hide inflation in a command economy, easy credit can hide or postpone deflation in a market economy, but if the cause, the surplus is not removed, the effect is inevitable. Check out http://bilbo.economicoutlook.net/blog/?p=4157 and http://bilbo.economicoutlook.net/blog/?p=5345 mentioning the negative effects of the Clinton surpluses, and lots of others on Australian surpluses.”

      Credit bubbles are not sustainable. Easy credit can hide or postpone deflation. I agree with you there. The cause is not the surplus – credit can and does expand without a government surplus. The cause is a positive feedback loop – more credit inflates asset prices. Rising prices encourages people to “invest” with more credit. The profit motive causes relaxation in lending standards by financial institutions. There is a great book that describes this if you are interested: “The Origin of Financial Crises” (Cooper 2008).

      “Most of the problems you bring up seem to me to concern more any type of Keynesian or nonclassical macro – economics, rather than MMT in particular.”

      Fair enough. They remain problems with MMT also.

      “I think you should realize that anti-full employment views have the burden of proof. They are frankly, crazy, and assume that there is a nonlinear quantum chaotic fractal buzzword effect that makes doing nothing more profitable than doing something”

      I have not argued against full employment. I have argued against unproductive employment. I think that close to full productive employment can be achieved by the private sector, with an efficient and productive public sector to support it. If you think that is crazy please let me know why.

      “You misunderstand Alan, and I daresay, reality. The difference between the old US or global full employment economy and the new unequal and irrational one, means that you either keep up with the Joneses, or you are out of a job, and soon out on the street. That’s what “different” means now, as Alan said: “cast aside like lepers”.”

      Apologies to Alan if I have misunderstood him. What I meant is that standards of living are very high and people buy things on credit that they can’t afford. People that don’t buy things on credit that they can’t afford (e.g. large houses and goods to fill them with) are better off in my opinion but are the minority and are treated as “different”. Alan was referring to people maintaining a standard of living using credit. To me the average standard of living of today is far higher than that of years ago, and is unsustainable, and people should not try to maintain that standard.

      “The New Deal worked, got employment into single digits. WWII, spending directed toward the military, probably the least effective stimulus, as the product is simply destroyed, got the USA completely out of the Depression. Worry about full employment, let the budget take care of itself, and see the economy grow was the universal postwar experience, with no worse inflation than the subsequent, low growth, monetarist, inflation fighting era.”

      Whether the New Deal worked is a subject of much debate. The New Deal created Fannie and Freddie, so the consequences are still playing out. In my opinion the massive credit bubble created in the twenties was finally destroyed by WWII, allowing the start of a new credit expansion.

      “debt service costs on the government borrowing, Answer to government debt worries: then don’t “borrow” (governments issuing bonds for bucks is not real borrowing, just exchanging one type of debt for another.)”

      Without the real assets created by the private sector, the government would not be able to achieve anything. How else to gain access to those assets, other than through borrowing or taxation?

      “The third trade-off: I hope you pardon me for saying so, but get real. Yes, necessity is the mother of invention, but god bless the child that’s got his own.”

      Think about all the things we have today that we did not have 100 years ago, and consider how many of these things were created by the inventive capacities of the private sector.

    47. Adam,

      When I refer to a cost/benefit analysis I am talking about real underlying costs and benefits, not prices of those costs and benefits.

      I think that governments should enforce constraints to protect the environment. Development of technology will be performed by private sector once the constraints are in place because there will be profits to be made.

      I dare say we will not agree on that.

    48. Paul Andrews,

      I actually fully agree with the need to impose the constraints but I may not be convinced that the private sector alone has the capacity to develop the technology and that the current intellectual property model encourages commercialisation not patent hoarding.
      REFERENCE_http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aw5EZ9BzrgtU
      All really big R&D projects (for example nuclear research and space programs) were run by the state institutions only outsourcing individual tasks to the private sector. When the actual technology was already available the private sector could efficiently commercialise it.

      The scale of the tasks facing us is enormous if we want to live in a sustainable world in 50 years time. Startups may help but this is not enough.

    49. Sergei,

      “Paul, yes, production of assets is increasing as well as consumption of these same assets. Or what is your actual point here? ”

      My point is that production of these assets exceeds consumption, meaning that real assets grow over time. This was in response to your claim that the “private sector does not accumulate real assets”.

      I note that you have not responded regarding the inconsistency in your definition of private sector.

    50. VJK,

      “Private sector financial surplus, as taken from the GDP identity, means holding cash or Government bonds *only*. Any other kinds of mutual claims inside the private sector, due to aggregation, cancel out. E.g., commercial bonds as opposed to T-bonds are not part of such surplus obviously. I thought you realized that, but after reading your exchange I am not so sure.”

      What part of the exchange makes you think I don’t agree with that? So long as “financial” is defined as “claims on others” for the purposes of the statement, I agree with the statement. If I’ve implied something else somewhere in what I’ve written please let me know.

    51. Paul Andrews,

      Let me encourage you to read a few more Bill’s posts then maybe find invaluable JKH’s comments or visit other professional sites like the Levy institute rather than go after individual commentators and then deliver a technical-KO claiming the total victory over MMT based on your professional experience as an economist over non-professionals.

      The key issue to me (a software engineer not economist) is the overall stability and benefits of the system based on tracking the gap in the aggregate demand and filling it by government spending rather than tracking inflation indices with a hard constraint on the public debt/GDP ratio (55% in Poland).

      I am not a MMT convert and I still haven’t finished learning.

      Now to the key point you were making:

      “Assume the total resources available are R. Of these, some are idle and would be wasted if not needed by anyone. Call these Ri. Others are not idle, call these Ra. So R = Ri + Ra. The newly employed person will consume some of Ri and some of Ra – call this consumption Ca and Ci. I agree that the consumption of Ri is not a direct negative for the economy (although there may be indirect negative effects). However, the rest of the economy now has access to Ra – Ca, whereas previously it had access to Ra.”

      “Ra and Ri are mutually exclusive by definition. If the resource was idle before the event, it is Ri. If it was not idle before the event it is Ra.
      You are correct that an amount of Ca was happening anyway, because of unemployment benefits. Call the initial Ca: Ca1, and the additional Ca due to the wages being greater than the unemployment benefits: Ca2. So Ca = Ca1 + Ca2. The rest of the economy now has access to Ra – Ca2, whereas previously it had access to Ra.
      An increase in Ci will not cause a multipler effect in Ra, as by definition the resources used to satisfy Ci come out of Ri.
      Ca will cause Ra after the event to be less than Ra before the event. At the time of the event, there is no multiplier. After the event, the private sector may take steps to increase Ra due to the additional demand, but this will not tend to be greater than the reduction caused by the event, and will entail further real costs. Therefore any multiplier effect may in fact be a further drain on real resources.’

      I don’t understand “by definition”. By definition of what? Assuming constant prices (what is generally true during a recession) the “resources” correspond to income/spending. You are implying here “by definition” that the spending multiplier is lower than 1 (additional people employed will subtract from the pool of the resources/income available for the rest rather than add to it) what has been empirically shown to be false. Of course you may claim that resources/income are technically not the same and again we may go into the details.

      But this is what I understand from the original Bill’s post:
      REFERENCE_http://bilbo.economicoutlook.net/blog/?p=6949

    52. Adam,

      “by definition”

      At the outset, I defined R to be real resources, Ri to be idle real resources and Ra to be non-idle real resources. These aren’t commonly used terms, just ones I defined to illustrate the point. This is what I mean by “by definition”. By “real resources” I mean actual physical and mental resources such as iron, coal, gold, muscle-power, brain-power etc.

    53. Adam,

      I’m not interested in whether people are economists or not.

      I think if we read something we think is incorrect, then a positive step each of us can take is to describe why we think it is incorrect.

      The positive effects are:

      If I myself am incorrect, I may be able to find out from others, and increase my understanding.

      Reciprocally, if others are incorrect, I may be able to help them see why, and increase their understanding.

      In many cases neither occurs, because a point is reached where dogma takes over on either side, or people just stop reading and responding. However it is still worth pursuing for the times when new insights can be achieved.

      It doesn’t matter whether the other party is an economist or an MMTer, because in the cut and thrust of public opinion, everyone counts, and people who comment on these types of blogs have more influence than the average person (albeit still very limited influence).

      We are very lucky that we have this technology that allows us to discuss in this way. I find it much more productive than verbal debates, because of the textual record and the thinking time allowed.

      We are also fortunate that blog owners such as Bill allow comments to be freely made even when they do not agree with the opinion of the blog owner. So thanks to Bill and others like him. And by the way the moderation on these comments is excellent whoever does that.

      I think that many of us find the pursuit of knowledge and understanding exhilarating. There is only so much understanding one can achieve through one’s own research and reflections. This medium of debate is an important adjunct to that research and reflection.

    54. Paul:

      “So long as “financial” is defined as “claims on others” for the purposes of the statement, I agree with the statement.”

      Who else, in addition to the government, do you include in “others” ? If “others” == “government only”, do you disagree with the statement ?

    55. “An increase in Ci will not cause a multipler effect in Ra, as by definition the resources used to satisfy Ci come out of Ri.”

      Looks like you just proved that its not worth anybody working. Much better to be idle. The evidence around us suggests otherwise. Which means there’s a flaw in your model.

    56. Hi VJK,

      For convenience, the original statement you made was: “Private sector financial surplus, as taken from the GDP identity, means holding cash or Government bonds *only*. Any other kinds of mutual claims inside the private sector, due to aggregation, cancel out. E.g., commercial bonds as opposed to T-bonds are not part of such surplus obviously.”

      I then said I agreed with the statement so long as “financial” == “claims on others”. So the full version of the statement with with I agree is:

      “Total net claims on others held by the private sector, means the private sector holdings of cash or Government bonds *only*. Any other kinds of mutual claims inside the private sector, due to aggregation, cancel out. E.g., commercial bonds as opposed to T-bonds are not part of such surplus obviously.”

      Hope that clarifies it.

    57. Paul, private sector grows in line with its production and consumption. And what I said it that real assets are not accumulated. They are produced for consumption which is the opposite of saving. Whereas financial saving is tendency, and is in general a left-over from not-spending.

      It is a pointless discussion until you clearly outline your claim fully.

    58. Neil,

      “Looks like you just proved that its not worth anybody working”

      If the employee adds to Ra (through productive work) more than Ca – B + I + T + Ea then it is definitely worth them working.

      (Note: Ra and Ca refer to real resources that may not be able to be quantified in dollar terms. Ra can include intangibles such as knowledge improved through education).

      (B = previous unemployment benefit, I is total interest on additional government debt over the term of the debt, T is the taxation burden that needs to be carried by all workers and Ea is the cost in non-idle real resources to employ the person – e.g. office space, equipment).

    59. Sergei,

      On Wednesday, August 4, 2010 at 18:07, you stated:

      “private sector does not accumulate real assets”

      You then stated in support of the above that the private sector does not include individuals.

      This definition of private sector is most unusual, and if you apply this definition to other statements made by MMT, such as “the total net claims on others held by the private sector = the government sector deficit”, then the statements are not true.

      In any case, even leaving out individuals, private firms accumulate real assets such as land, equipment, intellectual property and more. Some of these depreciate over time but a profitable firm will increase their ownership of these over time – i.e. a net accumulation.

      My claims have been laid out in my previous comments. To summarize, what I have tried to demonstrate is that some of the claims that MMT makes are true only within very limited definitions of the terms used. These claims are then used to justify proposed policies by restating them as if the terms used referred to broader concepts.

      For instance:

      “The private sector surplus is equal to the government sector deficit”

      is used to justify a continuing or increased deficit. It is persuasive – how can anyone deny that a private sector surplus is good?

      But if we restate in context, with the terms defined fully, the statement becomes:

      “The total net increase in claims on others held by the private sector is equal to the government sector deficit”

      If people understand this, they will understand that the call for increased deficits is not necessarily justified unless real assets are increased, because increased claims on others is not an end in itself.

      MMT proponents who come to understand this cannot then in good conscience use the original unclarified statement to argue for increased deficits. They can argue on other grounds, but not, in good conscience, these.

    60. “If the employee adds to Ra (through productive work) more than Ca – B + I + T + Ea then it is definitely worth them working.”

      So that contradicts your first statement that it is not worth putting the unemployed to work.

      Plus it is at odds with the classic Keynes hole filling statement.

      It looks like you are operating at a single point in time and are not taking into account the temporal effects of eliminating the opportunity cost.

    61. Paul Andrews,

      I am sorry if I go too far…

      Are we talking about stocks (value) or flows (income?) I am guessing you are referring to stocks.

      How would you define the “total interest on additional government debt over the term of the debt” if “Ra and Ca refer to real resources that may not be able to be quantified in dollar terms” Surely interests are charged on debt not on “value”… but anyway this is just a minor problem.

      Is the equivalent of the value of interests sent back in time? So the real value is depleted by the interests charged in the future. How can I send something from “now” to “yesterday”? What will happen to that value which is subtracted?

      This does not mean that there will be no redistribution of real resources in the future where bond holders will receive a free lunch. But we can’t talk about sending the real value back in time… Please remember you have defined Ra and Ca as real values.

      (well I sort-of know where this way of thinking comes from – accounting, valuation, compounding interests, etc.)

      OK let’s assume “all things equal” and that we have mastered the art of sending cargo back in time.

      The second issue is even more interesting as this is a common mistake made by the 99% of the economists.

      How can you calculate the value of x(t0) by integrating y(t) for t=t0 to t=t1 where t0<t1 ? You want to know the value of a parameter "now" but it depends of the value of another parameter in the future. Worse, that parameter y(t) may actually be a function of x(t) and some random noise. Certainly our future interest rates may depend on the current deficit spending and the level of spare productive capacities.

      x(t0) is the value of additional "resources" The integral I am referring to is the (real) value of "total interest on additional government debt"

      We must know the future… or rather we have to assume something like "rational expectations about the inflation" otherwise the equation doesn't make sense. But… what about the noise …

      We not only can send cargo back in time but also we must know the future.

      We are GODS… no sorry we are just neoclassical economists.

    62. Paul, private sector is a subset of economy. Economy can be split along any lines but general approach is to split it into private sector and public sector. Private sector is normally further decomposed into domestic and external. Domestic can be still further split into households and corporate. And so on. So where did I say or assume that private sector does not include individuals?

      My next point was that private sector produces real assets not to accumulate them but to consume. Consumption (amortizing or immediate) is the purpose behind any production. Nobody produces for the sake of having. The fact that the stock of real assets grows does not mean anything. Consumption grows as well as the size of private sector. Moreover the claim that real assets accumulate does not include services which stand behind advanced economies. Services are produced but in no way can be accumulated or using your terminology saved.

      Saving is by definition “for the sake of having” or “just in case” and have a goal of improving safety margin of saving agent. When we had barter financial systems people saved in wheat, corn etc. But in modern monetary systems people save in terms of money. Modern money is a nominal asset and claim. You can have your savings on deposit in a bank but on macro level all private sector claims on itself net to zero. The only way private sector can save is to use claims external to private sector. This is government money and government debt.

      So “The private sector surplus is equal to the government sector deficit”. That is fact which starts even with decomposition of economy into several parts. It is not used to justify anything. It is an accounting fact which always happens regardless of whether you like it or not. What MMT says is that if government, domestic sector and external sector all try to save at the same time then somebody will have to give up. And normally it is government who gives up. What MMT further says is that economic cooperation is better than opposition since the surplus-deficit equality will be forced onto the economy but in a worse economic state. So MMT tries to distinguish between good government deficits and bad government deficits and argues for government to be proactive and not reactive.

    63. Very interesting discussion guys. I definitely feel smarter for having followed it this far.

      Paul, thanks for your input here. Its this type of interaction between the “curious non believers” and the “billophiles” which makes this comment section the best on the web for my time. As a non economist who loves thinking about these economic issues this, MMT, is really the only paradigm that strips it down and tries to answer these very important questions. So many things seem to be simply assumed away with all the other paradigms and math is used as some sort of brain scrambler to discourage the uninitiated from even beginning to question.

      I actually have more of a point than just glad handing you all here so let me comment to Paul on something; I have seen you use the term “real” value a lot, or real cost. Its used by many people so really this is a question to the board in general I think, but what IS the real cost or value of anything?

      I have my own sense of real vs nominal but I usually refrain from using it in economic discussions because I cant quantify it and if it cant be quantified, what use is it in our modern monetized economy? It seems to me the only value we should ever discuss is nominal since that is our notation of worth in THIS world. There may be worlds where real can be distinguished but it aint this one. Whatever someone will pay for it is what something is worth. Real costs, as I think you mean by the term, are different for everyone so we should carefully bring them into economics discussions.

      Now it is helpful to distinguish if cash has been payed or if extensive credit was used, since this can determine if full payment is actually ever made but to the seller he cares not if cash or credit was used, unless HE issued the credit himself. I think I actually lament this condition of our economic life. I say I think because I may be wrong about the consequences of this that I see. Those consequences are; Third parties which actually encourage and profit from the issuance of extensive credit. They do take the responsibility of extracting the debt payments and make sure the seller simply gets paid up front but this really removes the seller from caring about the ability of the buyer to pay, thats some banks problem. Trouble is a banks problem is a lot of peoples problem. And when multiple banks are involved it becomes all of societies problem.

    64. I meant to add to my previous post;

      Paul, I do think you might be falling for the fallacy of composition in some of your reasoning. You talk about private savers as individuals but MMT talks about the private sector saving as a whole and there can be no doubt that the sector as a whole saves the amount, to the penny, that the public sector dis-saves. The govt saving money is nonsensical. It never saves money. It can spend or not spend but when it doesnt spend there is not more for later. Even when the accounting says surplus on their balance sheets that is not more money to spend later. As Greenspan said, the govt can guarantee any amount of payment, it cant guarantee what you can buy with it. How can Greenspan be so right about this yet so wrong about so much else?

    65. Neil,

      “So that contradicts your first statement that it is not worth putting the unemployed to work.”

      I didn’t make such a statement.

      “Plus it is at odds with the classic Keynes hole filling statement.”

      If you mean the idea that the unemployed should be put to work digging holes and filling them again, then yes it is at odds with that idea.

    66. Sergei,

      “So where did I say or assume that private sector does not include individuals?”

      Here: “You can save in real estate, private sector can not. You can save in gold, private sector can not.”

    67. Greg,

      “I have my own sense of real vs nominal but I usually refrain from using it in economic discussions because I cant quantify it and if it cant be quantified”

      By real assets I mean actual things that people, firms and governments find value in. It starts with water, food, then shelter. At the other extreme it includes iphone apps and other luxuries. It includes brain power, muscle power, knowledge, systems and other “things in the world” that people can make use of to sustain themselves and the state, and to develop and create more things.

      If those things cannot be created, sustained and increased then any talk of private sector surplus is meaningless.

      As for quantification, everyone has their own subjective relative values for real assets. There is no such thing as an objective value of a real asset. The market can determine a price for each asset, by finding the person, firm or government that places the most subjective value on the asset and allowing them to obtain it in exchange for things that others value more highly. This is the closest thing we have to an objective value determinant for real assets, and works well for many purposes.

      Other real assets cannot be priced or quantified. For instance those things that benefit a country, such as the system of capitalist democracy itself, cannot be quantified. Each person has their own subjective value for this, and because there is no market, these subjective values cannot be crystallized into a single market price.

      When an individual person is forming an opinion as to whether a particular unemployed person should be employed to perform a particular job for a particular wage entailing a particular increase in government debt, they need to use their subjective judgements to weigh up the effects on all real assets. Because some of these things have prices the individual can also come close to objectively quantifying them. However the other things cannot be objectively quantified. The individual should not leave out the real assets that cannot be quantified purely because they cannot be quantified. The individual needs to make a subjective judgement taking in all of the information available to him or her – quantitative and qualitative.

      When a society, through their government, is forming an opinion as to whether to employ a type of person to perform a type of job for a range of wages, the individuals that form that society need to weigh up the same effects on real assets, whether they can be objectively quantified or not.

      I am not asking that everyone agree with me on whether a particular person be employed in a particular government job. I am saying that I think it makes sense for everyone who forms an opinion on the matter to consider the impact on real assets, not on the impact on total net claims held on others by the private sector.

    68. Greg,

      “You talk about private savers as individuals but MMT talks about the private sector saving as a whole and there can be no doubt that the sector as a whole saves the amount, to the penny, that the public sector dis-saves”

      I agree that the private sector saves the amount to the penny that the public sector dissaves, if “saves” is defined as net increases in private sector claims on others.

      This definition of “saves” excludes the increase or decrease in the value of firms, and any other net accumulation or depreciation of real assets.

      Take shares for instance, any increase the value of those shares is not included in your definition. If a company invents a new method of energy creation that saves the planet and increases the value of its shares one-hundred-fold, and increases the wealth of its shareholders, the definition of saving you are using does not capture that.

    69. Dear Paul and others

      I haven’t had time to comment yet on this discussion but the statement “the private sector saves the amount to the penny that the public sector dissaves” (which runs through this thread of discussion) is incorrect. The correct statement is that the non-government surplus is to the penny equal to the government deficit. The private sector is only a part of the non-government sector.

      That misunderstanding alters some of the conclusions you have been making and has limited the overall discussion and if I get time I will reflect on that.

      best wishes
      bill

    70. Paul, you are making a typical fallacy of composition mistake which Greg also mentioned. Yes, you personally can save in gold, real estate, stocks, deposits and etc but private sector can not. You personal saving is an asset swap on macro level.

      Bill, I honestly do not understand why you push for new terminology with “non-government”. I believe that definitions “private – public”, “domestic – external” are common sense and well accepted and understood. Please clarify

    71. Paul, the definition of savings in the national accounts is income not spend. This is precisely the reason why your purchase of gold, real estate etc does not qualify as savings. Because it is income that you spend. Then, if you dig up some gold from your backyard that is production. Production that is not sold increases inventories. Increase of inventories is investment. You should not invent a bicycle and try to confuse everybody. A difference between government sector and public sector can be a valid question to ask but everything above is a well established processes which have nothing to do with MMT :)

    72. Sergei,

      The definition used in the national accounts is not the one that people generally mean.

      e.g. from Bill’s post:

      “So never mind the real damage caused to people’s life savings”

      In this context, savings would include investments such as share funds.

      My point is that a statement is made by MMT, and is correct, if a particular definition of savings is used. However that statement is not correct when communicated to people who have a different definition in mind.

      I am not saying that any particular definition of savings is the “correct” one.

    73. Sergei,

      My apologies, I misunderstood that you were drawing a distinction between an individual as a part of the private sector and the private sector as a whole.

      So your argument is that there is a fallacy of composition.

      There is no fallacy of composition because the non-government sector does accumulate, in aggregate, real assets. This is apparent simply by looking around at all of the real assets currently in possession of the private sector. Buildings, machinery, technology etc. These were not there at the inception of the private sector, hence they have been accumulated by the private sector.

      The “claims on others” is merely part of the accounting for ownership of those real assets, as well as ownership of the future labour of others. The net creditors have a claim on a share of the real assets. The net debtors have some control of real assets that they will need to relinquish to creditors in the future unless they provide sufficient productive capacity to the creditors.

      One of the sad things about any part of the government deficit that is ultimately unproductive is that is plays further into the hands of the net creditors by giving them a greater share of the ownership of future labour of all taxpayers. I’m sure bankers love MMT because it lets them sell more of what they sell the best – debt. When they get worried they won’t be able to collect, they will stop loving MMT.

    74. Isn’t ‘non-government’ a wider term than private + external. Doesn’t it include all entities that have to ‘balance the books’ and therefore include Quangos and the like.

    75. Just to elaborate on: “The net creditors have a claim on a share of the real assets. The net debtors have some control of real assets that they will need to relinquish to creditors in the future unless they provide sufficient productive capacity to the creditors.”

      This process is distorted by the growth in total net debt relative to real assets, because of the price inflation that this causes for real assets. Hence those who borrowed in the last 40 years to buy real estate, did not need to provide as much productive capacity to creditors as they would have had to in an environment with no growth in total net debt relative to real assets. Those who did so recently, or those who do over the next few years are in danger of having to provide more productive capacity to creditors than they expect, as total net debt relative to real assets is likely to contract. By total net debt I mean the total net debt of all debtors, including the government. There is a natural limit to total net debt relative to real assets due to the burden of interest payments that must be funded by the productive capacity of real assets. This is another factor to take into account when deciding whether you agree with increasing the deficit for any other reason than productivity improvements. It’s not great to be a net debtor in a deflationary environment.

    76. Paul,

      But Bill doesn’t advocate public borrowing while the so-called markets dictate long-term bonds yield. Only if this is the case the redistribution of the real income is significant for example for 5% and debt=100% of GDP 5% of it has to be redistributed assuming a stationary state – zero inflation and zero growth in the debt level.

      The natural interest rate is zero in MMT as they want to leave excess liquidity on the interbank market what also implies low long-term bond rates if inflation expectations are low (as the near end of the yield curve is pinned close to zero).

      Maybe my post was written in an unfriendly way but I was actually trying to show that point – we should not make any assumptions in regards to the future real costs of servicing the the public debt (I mean the income redistribution rate) unless we embrace the MMT fully – in that case these costs can be residual.

      Or we always have an option of selling no bonds (what has been proposed by Bill). In that case interest rates will be normally close to zero or to whatever the overningt deposit rate at the central bank is.

      In the MMT world the central bank must hold a lot of debt securities anyway so what’s the point of selling them ? (maybe except for inflation-indexed saving bonds with zero yield for genuine individual savers).

      I still need to learn how inflation hedging can be performed if there is no bonds. There will always be some inflation… New instruments may need to be provided.

      Now the key point. I haven’t seen much discussion about the impact of persistently low interest rates on the other parameters of the economy. Let’s imagine that we got out of the recession with debt = 1000% of GDP – this means that the central bank must be very careful and cannot increase real (nominal – inflation) interest rates much and has to moderate the long end of the yield curve otherwise we are in the trap described by Paul Krugman. But the usual instrument of the monetary policy becomes useless then. If the private sector has so much debt instruments there is a constant threat of dumping the assets (affecting exchange rates) if inflation develops. So the government has to be very careful and intervene very early with fiscal policy (taxes) if there is a risk of inflation caused by credit expansion leading to breaching the productive capacities of the economy.

      But if there is no additional incentive on saving (real interest rate close to zero) the private sector may not increase the ratio of savings to GDP at all. These people who have a surplus will have to invest instead to get a decent return. There is no point in saving in financial instruments. We have to acknowledge that the rate of saving doesn’t have to be constant but may be a function of expected gains.

      But this may be what we wanted to achieve anyway – there will be no gap in aggregate demand provided that there is no debt deleveraging. Bubbles have to be suppressed by the efficient fiscal (taxation) policy as such a system may be quite sensitive to inflationary threats.

      So this is how I would see the proposed alternative “bias point” for the economy when MMT is implemented. Very little income redistribution and banking lending constrained by risk assessment of debtors rather than fluctuating interest rates. Financial sector doing what it is supposed to do – lubricating the productive economy rather than growing like a cancer and feeding asset bubbles.

      Does it make sense or is my analogy with electric circuits going too far? Please be careful as I may be wrong here…

    77. Paul

      You said regarding savings

      “Take shares for instance, any increase the value of those shares is not included in your definition. If a company invents a new method of energy creation that saves the planet and increases the value of its shares one-hundred-fold, and increases the wealth of its shareholders, the definition of saving you are using does not capture that”

      It SHOULDNT take share value into consideration! That can change day by day, heck minute by minute. Once you sell the shares and keep the cash it adds to your savings, and subtracts from someone elses savings because they spent to purchase your stock. This is not to say that these increases in value arent positive or capable of encouraging growth. One can often use these assets as collateral for further borrowing and investment but you certainly wouldnt expect there to be a universal agreement by various sources of lending as to the value of your shares of stock that you wanted to put up. There would be a spectrum of valuation likely. Some banker would not think that stock is worth as much as a another maybe because he doesnt know enough about the company. The share value of a stock is determined by too many extrinsic and variable factors.

      What if that stock you are using as collateral is an energy company stock and a month later that company you referenced invents the new method of energy creation causing the stock you own to plummet in value? The guy who valued your shares at 100 and loaned you money is going to be pissed when the shares end up being worth 25. While the guy who valued them at 30 will not be burned as much.

    78. Greg,

      There is no should or shouldn’t to a definition or concept. One concept of saving includes shares, another doesn’t. Both concepts are valid. My point is that those who use a potentially ambiguous term should make it clear which definition they mean before using it to persuade someone to a particular conclusion.

    79. Adam,

      What Bill advocates, he advocates because of conclusions he has drawn from a chain of logic that we call MMT.

      I believe that the a priori assumptions are invalid and the subsequent chain of logic is also unsound, in part because the terms used are not applied consistently.

      Your comment discusses notions that only make sense if you believe the a priori assumptions and the chain of logic are sound, so I can’t really add anything further to what you have said.

    80. August 4, 15:32

      ”However resources are not homogeneous, so there is still a trade-off.”

      This may well be the case but then there is full employment of those resources regionally and/or in a profession, etc, something I had assumed was not the case. In any event in most developed economies there are plenty of idle resources. Witness the high unemployment of labour, low industrial capacity utilisation rates and low inflation rates. So any trade-off under those conditions is minimal.

      ”Yes, if the person is doing something that benefits the country, and those benefits exceed Ca + the debt service costs on the government borrowing, I agree. However I believe this becomes hard to achieve when the objective is purely to stimulate. It also becomes harder to achieve as the debt service costs increase. The objective should be to benefit the country through productive endeavours rather than to stimulate for stimulation’s sake.”

      Not sure how you define productive endeavours and why that is such a concern. There are plenty of things people can do that are productive: educating themselves or others, assisting the sick and aged, infrastructure repair or building, environmental improvement, beautification of cities, etc, etc. It’s not like there’s a shortage of things that need doing.

      I’m not sure what your point is with respect to debt service costs unless you are assuming the costs are borne by an entity that is not the currency issuer.

    81. Paul,

      “I believe that the a priori assumptions are invalid and the subsequent chain of logic is also unsound, in part because the terms used are not applied consistently.”

      This is interesting. Could you list these invalid assumptions and inconsistencies you found?

      (Note. I’ll be back on Sunday evening and I’d love to continue this thread)

      Adam

    82. Adam,

      I’ve been listing the logical inconsistencies and defending my interpretation above.

      One of the main a priori assumptions is that the validity of a currency is solely due to demand for it from the private sector in order to pay taxes.

      This I disagree with. The private sector is required to use the currency due to legal tender laws. The system evolved to where it is today by starting with the BofE gold standard, on top of which evolved credit money. The BofE system spread across the Western world, with temporary lulls from time to time. The gold standard was then removed, leaving solely the credit money system. There was no need for a government deficit for money to come into being.

      From a purely theoretical standpoint, and as an academic exercise only – even if you had to start a pure-credit system from scratch, the (brand new) central bank could “bootstrap” the system by buying real assets from the private sector (and issuing HPM to do so), or by lending to the private sector using private assets as collateral (again, creating HPM to do so). This HPM would be backed by real assets so the central bank would be in the black from the start so long as the government provided it with some real assets (e.g. land) as an equity buffer. The initial value of the currency would be set by the amount of HPM created to pay for the assets.

    83. Kevin,

      “In any event in most developed economies there are plenty of idle resources.”

      Agreed.

      “So any trade-off under those conditions is minimal”

      I am glad you agree that there is a trade-off. This was my initial point. I don’t think it is possible to dismiss the trade-off as minimal, or conversely assume that the trade-off is prohibitive, without first investigating and forming an opinion on the effect on real assets in detail for each potential new job creation scheme. (Actually I think these would be better called “Public asset production scheme”, because that should be the objective).

      “Not sure how you define productive endeavours and why that is such a concern. There are plenty of things people can do that are productive: educating themselves or others, assisting the sick and aged, infrastructure repair or building, environmental improvement, beautification of cities, etc, etc. It’s not like there’s a shortage of things that need doing.”

      I think we each have our own subjective views on what is productive. For instance, I think that education is extremely important. (I also happen to think it cannot be left purely to the private sector). However it is not just a matter of adding teachers to improve education – education could be improved in many ways without doing that. As one example, I believe economics should be taught much more widely and in more depth, with exposure to all the main and alternative viewpoints, not just neo-classical, not just Keynes. Assisting the sick and aged is also important for improvements in a real asset – our morality and decency as a community. A moral, decent community will be more happy, and therefore in my opinion more productive generally.

      None of those things can be done simply by throwing people into work. The objective has to be improvement of real assets – physical, mental, psychological, spiritual. The objective cannot simply be creation of jobs as stimulus.

      These things cannot be judged by the numbers alone, so not everything can be left to the market. The market is good at things that can be easily quantified, and where actions have early consequences. The market won’t be interested in doing things now that will make life better a hundred years from now.

      However the market is brilliant at things that can be priced, and where actions have early consequences (i.e. where the profit can be smelled some way not too far down the track). Fortunately a lot of things can be priced, and all we need to do is let people freely be productive and be rewarded, while providing a fair environment with protection of property, for those things to grow.

      Government is, in my opinion, better suited to doing those things whose value cannot be quantified with a price. A good government will recognize that what profits society as a whole is conversion of labour into real (but non-priceable) assets. That government will have a good idea of the real assets it wishes to grow, and of how to grow them by spending the minimum quantifiable resources possible (e.g. labour).

      A bad government will waste labour and other resources by ignoring those factors and putting people to work just for the sake of putting them to work.

    84. “I’m not sure what your point is with respect to debt service costs unless you are assuming the costs are borne by an entity that is not the currency issuer.”

      The cost of net government debt is borne by the government.

      In the Central Banking system, deposits come into being when any entity makes a decision to trade future credit for current credit, where the future credit is a higher amount than the current credit. This applies to the government as well as to private individuals and the private sector as a whole. The difference between the total future credit committed, and the current credit obtained, is the total interest burden.

      So the “currency issuer” is actually anyone who decides it’s a good idea to borrow. They add a kind of value by promising future production. That “value” is represented in the system by the increase in total net debt.

      The only case where the new borrower does not bear the cost (except in cases of underwater defaults) is when the central bank buys government debt, because any interest on government debt owned by the central bank is remitted back to the government. In this sense the government has an unfair advantage over the private sector (although the private sector gets its own back through “too big to fail”, bail outs, and sale of securities at above face value to the central bank). However, even in this case the government does bear the burden of eventually paying down the principal.

    85. While I have this in mind: people should be wary of comments such as “the interest rate on government bonds is low, therefore it is OK to keep increasing borrowings”. I heard Joseph Stiglitz on the radio last night saying something like this.

      What this ignores is the potential for deflation. Future deflation may mean that the real interest rate is much higher than the nominal rate. It won’t be possible to simply “issue currency” to avoid deflation, because as described above, productive activities must be found in order to make the debt creation, and hence currency creation, worthwhile. This takes time (if it is even possible), and if the motivation is wrong, will not be done properly, causing a decline in real assets over time.

    86. Some replies:

      Credit bubbles are not sustainable. Easy credit can hide or postpone deflation. I agree with you there. The cause is not the surplus – credit can and does expand without a government surplus. Yes to the latter, but that is irrelevant to what I, pebird etc concluded, and you are denying or are inconsistent or unclear about. The conclusion was the surpluses are highly deflationary, and very easily lead to deflation-postponing unsustainable credit bubbles. We were not saying that all credit bubbles arise that way.

      To me the average standard of living of today is far higher than that of years ago, and is unsustainable, and people should not try to maintain that standard. Well, especially modulo technological advancements in consumer goods, the advancement in the median American’s standard of living is pathetic over that of thirty years ago, compared to the advance from thirty years ago to thirty years before that. Look at the real wage. All of the wealth of the increased productivity has gone to the upper income brackets. What gains there have been have to be balanced against losses – more wealth only comes with less leisure. Two incomes barely support what one did. Under a more full employment economy, run more according to what MMT would advise, there were more and more attractive choices. Now, its either keep up with the Joneses (but not too much, or get trapped in debt peonage) or don’t – and probably land in one of the lower brackets, constantly under attack from the upper. In any case, why is it unsustainable? This is a real, not a nominal, financial question. The only financial part is the way the US current account deficit gets us real goods for dollars.

      Without the real assets created by the private sector, the government would not be able to achieve anything. Either absurdly false or trivially true. Denies the very possibility of a command economy. Governments can and do create real assets. Private sector involvement can be minimal, or nonexistent. Of course they do have to pay actual people for their work on government projects, but I don’t think this trivial truth is what you meant. And there is prison labor.

      How else to gain access to those assets, other than through borrowing or taxation?
      By paying for them with newly created money without “borrowing”. By “printing money”. Which is what the government does. The government does not “borrow” money from anyone. The unnecessary activity of issuing and/or buying back bonds is not borrowing, but exchanging one kind of government debt for another. There is a demand for government IOUs called “dollars” because government has the unilateral ability to demand them back from you, and even take and convert your real assets if you don’t have government IOUs. This question indicates a very basic misunderstanding of government finance and MMT.

      Whether the New Deal worked is a subject of much debate.The debate is between empiricists and ideologists. Nobody in 1936 doubted. Look at the election returns. The New Deal created Fannie and Freddie which worked very well until mortgage securitization. Criticizing anything so long after, after drastic changes is amazing. It is visiting the sins of the grandsons on the long dead grandparents.

      The costs of unemployment, direct and indirect, are obviously so enormous that the rational thing for anyone who has not studied the highly irrational and otherworldly anti-empirical nonsense that passes for mainstream economics is to dismiss the trade-offs as negligible. Of course, MMT, or Keynes for that matter, proposed targetted and rational stimulus. Of course the job guarantee program would do useful work and try to maximize public asset creation – but a job must be a right, not a government whim.

      As someone who has lived off their small business, the idea that people with jobs have “no opportunity to exhibit entrepeneurship”, and that their non-entrepreneurship is a serious loss to the economy, and that this has anything to do with the “inventive capacities of the private sector” is comical. Although I do entertain the hope of convincing Warren Mosler to give up his multimillionaire job to me, so he can exhibit his prowess as a penniless entrepreneur. Yeah, lots of people have said getting fired was the best thing that ever happened to them. Lots more haven’t, because it wasn’t. Sometimes they or their loved ones died soon after.

      That modern money demand is driven by taxes (and legal tender laws are irrelevant – they don’t even exist in Scotland iirc) is not an apriori assumption, but something which has been subjected to study. When you are learning a new subject, you have to give it a chance, and not repudiate everything immediately. You might like to look at Alfred Mitchell-Innes’ two wonderful articles on money written in 1913 and the book Wray edited on them for historical understanding. Credit and state money is ancient. The gold standard is both a new-fangled and discarded invention.

      There was no need for a government deficit for money to come into being.

      Of course there was, no matter what one used as money. Otherwise it would all be sitting in government vaults or as sums in government computers, or as flammable notched sticks in a building. This isn’t an assumption, but a tautology applicable to all forms of credit. No creditor can have credits if the debtor does not have a debt from running a deficit = issuing credits.

      In your theoretical academic exercise, why would anyone accept the HPM for real assets in the first place?

    87. Paul: So the “currency issuer” is actually anyone who decides it’s a good idea to borrow.

      Nobody actually disputes that. And that is how banking system operates and the whole private sector in general (e.g. shares, bonds). But there should be a lending desire for this to operate. However government can issue laws and enforce them and therefore does not have to wait until somehow appears who wishes to lend.

    88. Sergei,

      “Nobody actually disputes that. And that is how banking system operates and the whole private sector in general (e.g. shares, bonds).”

      Great – this is good common ground.

      “But there should be a lending desire for this to operate”

      As long as there are private assets, and trust between people, there will be a desire to lend the assets out. Currencies will naturally evolve in cases where governments do not enforce an overarching legal tender currency.

      In the case where the government does enforce a legal tender, again in the theoretical case of a brand new economy, creation of a central bank with power to create and lend HPM against private asset collateral could supply the seed lending.

    89. Some Guy,

      “The conclusion was the surpluses are highly deflationary, and very easily lead to deflation-postponing unsustainable credit bubbles. We were not saying that all credit bubbles arise that way.”

      OK – my position, to be clear, is that a government surplus or deficit represents an increase in the total net debt of all sectors. i.e. line up all of the net debtors and total up all of their net debt. If this increase is not matched by an increase in real assets through the production paid for with the debt, then it is inflationary.

      To elaborate, if the government has a surplus, the private sector holds the net debt, and in my opinion will in general, but not always, be better at putting that net debt to work to increase real assets, and therefore an inflationary scenario is less likely. However that does not preclude the possibility that the private sector will waste the access to capital, leading to inflation. One possible case is if the government lent to people to fuel an excessive real estate boom (by excessive I mean one that improved quality of houses far and away above what is needed to achieve maximum productivity of occupants).

      Conversely, if the government has a deficit, they hold the net debt. Because of the difficulties that occur on the government side when channeling funds to productive activities, I believe there is a greater chance that the total net debt created will exceed the real assets created, and therefore inflation is more likely.

      Over and above all this, what has had a much greater impact on inflation in my opinion for the last 30 or 40 years has been relaxation of lending standards in the private sector.

      “Denies the very possibility of a command economy. ”

      A command economy appropriates the assets of the private sector through force. I agree that this is another alternative to borrowing and taxes.

      “By paying for them with newly created money without “borrowing”. By “printing money”.” (In response to how else is the government to obtain access to private assets)

      This is the MMT position, yes, but the position is based on incorrect a priori assumptions, and a chain of reasoning that does not use terms consistently. For instance, any activity that exchanges one form of debt for another, in exchange for regular payments of a fraction of the original amount, fits the concept of “borrowing” at “interest” perfectly. You call it “printing money” which is misleading, because it leaves out the payment of what MMT people call a subsidy to the private sector. (Most people call this interest).

      “Of course, MMT, or Keynes for that matter, proposed targetted and rational stimulus.”

      To propose targetted and rational spending is to admit that there are trade-offs. I don’t have a problem with that. I was commenting on a particular comment that Warren made in the introduction of his seminal paper, that there is not a trade-off.

      “Of course there was, no matter what one used as money. Otherwise it would all be sitting in government vaults or as sums in government computers, or as flammable notched sticks in a building. This isn’t an assumption, but a tautology applicable to all forms of credit. No creditor can have credits if the debtor does not have a debt from running a deficit = issuing credits.”

      Why does not having a government deficit imply that money would be sitting in government vaults or those other places? If a government started from scratch with no assets, it would not have any deficit, or any surplus, or any vaults.

      “In your theoretical academic exercise, why would anyone accept the HPM for real assets in the first place?”

      If the HPM is denominated in the only legal tender currency in the country, borrowing from the central bank to get HPM would be the only way to transact business other than barter. Private entities would clamour to be the first to borrow, using their assets as collateral, to get first use of the new currency.

      I will look at Alfred Mitchell-Innes’ articles. I agree that credit money and state money go back a long way. I was referring to the central banking model itself, a particular system for managing credit money, which began with the Bank of England and has evolved since, during a long period of (mostly) growing prosperity.

    90. Paul:

      If the productive capacity of an economy is running at 70% and an increase of spending increases that utilization to 80%, without any increase in real assets, is that inflationary?

      I don’t think there is a simple answer to that question – I want to point out that I think you are implicitly assuming an economy at or close to full capacity (such as “during a long period of (mostly) growing prosperity.”) At or near full capacity (which implies a low unemployment rate), your analysis makes sense.

      Your make the point “If this increase is not matched by an increase in real assets through the production paid for with the debt, then it is inflationary.”

      Consider that prior investments in productive output expected a certain return – which has an implicit assumption on capacity utilization. If the economy’s capacity utilization exceeds that assumption, then those prior investments will more likely meet or exceed their targets, conversely if utilization is below that assumption, those investments will have poorer performance. These effects on return have to be taken into account when making assertions about the relationship between spending and inflation.

      This creates an interesting situation with regard to capital holding different maturities of investment (private portfolio composition). Those that have idle capital (having substantially realized their gains/losses) will have different interests from those who have longer net positions. Those still waiting to realize their returns tend to favor an increase in capacity utilization, while those with realized positions view excess capacity as over-investment that should be eliminated as soon as possible. Why invest in an economy with excess capacity? And help your competitors realize their “bad” bets?

    91. For Paul Andrews, Aug 7, 12:38:

      Indeed I do agree that when resources are fully employed there is a tradeoff and since the world is not homogenous, as you note, there could well be places where idle resources and fully employed resources exist side by side. In that case there will be a tradeoff depending on the extent of the fully employed resources. However I think it is safe to say that the tradeoffs are minimal in most developed countries under current circumstances and will remain so untill all resources are nearly fully employed. I say ”nearly” because of the lack of homogeneity you point out.

      I agree that it is better for governments to put people to work doing constructive things. I suspect I have a greater appetite for government provided services than you do but that is another matter.

      With respect to your post at 12:54 and ”The cost of net government debt is borne by the government.” etc:

      My response: It seems to me this is where the issue of vertical and horizontal money comes in. When the issuer of the currency spends it creates financial assets in the economy and when it taxes it eliminates them. This is very different from what happens for the horizontal users of the currency. This has considerable ramifications. Bill and other MMTers discuss monetary operations at great length in various posts and I leave it to you to read them.

      And thanks for the report of the Stiglitz statement.

    92. pebird,

      I agree that a lot depends on the degree of idleness, as well as the degree of heterogeneity. From my perspective, depletion of non-decaying, finite resources such as oil is a significant cost to weigh up against the utilisation of idle labour resources.

      “Consider that prior investments in productive output expected a certain return – which has an implicit assumption on capacity utilization. If the economy’s capacity utilization exceeds that assumption, then those prior investments will more likely meet or exceed their targets…”

      These kinds of statements need to be researched through nonlinear dynamic modelling in my opinion, as there are many interrelated variables. In general an increase in total net debt not matched by an increase in real assets will be inflationary, but how that exhibits itself over time will be highly sensitive to initial conditions, and to the highly variable behaviour of market participants.

      I think heterogeneity plays a bigger role than most people think. For example “Why invest in an economy with excess capacity?” is not really a question most entrepreneurs would ask, because entrepreneurs are looking to create things for which there is no existing capacity, regardless of what capacity already exists for making other things.

    93. Keith,

      “However I think it is safe to say that the tradeoffs are minimal in most developed countries under current circumstances”

      I don’t think it is safe to say that without doing the research in each case, but it’s a good point to leave this thread, one to agree to disagree on. However I’ll just give a little background on why I think the trade-offs are signficant.

      Some of our most valuable resources are finite and non-decaying, which means they are never “idle” in the sense that unemployed labour is idle. For example, oil.

      On the other side of the equation, productive activities are not necessarily easy to find. For example, in a new society, at one extreme the first teacher would be super-productive, at the other extreme if everyone was employed as a teacher, the last x teachers would be counter-productive. Somewhere in the middle lies an optimal number of teachers – any over and above that will be a net drain. You can’t just keep adding teachers.

      Also, most productive activities are not those that can be performed without specialist skills, unlikely to be found amongst the unemployed, meaning that there are further training costs, even if people with the required underlying capabilities can be found.

      So when a government looks to stimulate there is a high chance that resources will be wasted due to the difficulty (time and cost) in actually trying to find productive activities that the unemployed can perform. The temptation therefore is to be less thorough than one ought.

      If a private entity creates a business that wastes resources, it won’t last long, and the waste will be temporary. If the government does the same thing, the activity tends to stick around because it’s a difficult political exercise to curtail it. The failure rate of private enterprises is high – around 90% failure is the ratio that venture capital firms expect. If the failure rate (in terms of production of real assets) in government activities is anywhere near that (and why wouldn’t it be?), then there is an obvious, significant problem. So attention needs to be given to cutting government waste because there is no natural mechanism to do so, as there is for the private sector.

      “When the issuer of the currency spends it creates financial assets in the economy and when it taxes it eliminates them”

      There is a definitional problem here. In our system, the issuer of the currency is actually anyone who decides to borrow. This was discussed above and I was told that this was agreed within MMT. Under that definition, currency is eliminated when debt principal is paid down (including the government paying down debt [not correct MMT parlance but hopefully translatable] with tax revenue).

      Re: vertical money, as far as I can see the definition is unclear. Definition 1 seems to be that vertical money is money credited to bank accounts by the treasury but not yet drained through the sale of government bonds. Definition 2 seems to be that vertical money is the claims on the government sector by the private sector + central bank, and therefore includes government bonds held by the private sector + central bank (as well as undrained reserves).

      If we go with definition 1, that money is negligible and transient, because the government is required under the central banking model to drain these funds through the sale of government bonds to the private sector (which may then end up at the central bankbut not usually).

      If we go with definition 2, then the differences in the effect of vertical money versus horizontal money are difficult to fathom. The only difference that I can see is that the net debt of the government (vertical money) is likely to be invested in less productive pursuits than the total net debt of private sector debtors (horizontal money). Actually that might be wrong (thinks: real estate investors).

      If you have a clearer picture of the concept of vertical money I am happy to stand corrected.

    94. ON WASTE AND THE PUBLIC VS. PRIVATE SECTOR

      Some have commented that the private sector produces less waste and it has a tendency to eliminate it by the attrition of private firms something missing in the public sector.Here are some points regarding this issue.

      1. The main point regarding sustainable waste is the market power/community authority that firms/institutions have and not the private vs. public sector allocation.
      2. At any point of time/space, wasteful private firms exist even if eventually they disappear and they consist of a much larger share in the economy than public wasteful institutions.
      3. The public sector waste is concentrated in institutions “captured” by private interests that exercize authority purchasing excessive private goods/services that are overpriced with transfer pricing. Notice that even neoclassical Public Choice Theory admitts this point! In a sense they convert social cost into their private gain, based on priviledge immune from the solidarity force among community members that accounts for representation control that reduces waste. This is equivalent but with different dynamics to the administrative control practiced by private firms induced by competition among shelfish interests.
      4. Public sector waste resulting from misallocation among public institutions is “internalized” and not shared with community members. This can be reduced by democratic accountabilty that controls authority and non-shared waste.
      5. Notice that democratic accountability enhances sharing of common purpose/rights/attributes by engaging not only the vote process but pre-voting debate that attempts to achieve community consensus of what consists common purpose that is then confirmed by vote. Democracy is not a state of the majority rule contolling the monority opinion bur building consencus accountability that achieves sharing among members which by definition limits waste.
      6. Notice that there are additional differences in feedback dynamics and optimization methods (I have mentioned this before although I have yet to post the comment that explains it!) when considering behavior within the private and public sectors that mainstream theory is hidding under the table or fails to acknowledge!

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