What is fiscal sustainability? Washington presentation

I am travelling today and have a full schedule ahead and haven’t much time to write anything. But it just happens that the multimedia presentations and documentation for the Fiscal Sustainability Teach-Ins and Counter-Conference which was held at the George Washington University, Washington DC on Wednesday, April 28, 2010 have just been made available by the team which organised the event. The Teach-In was a grass roots exercised designed to counter the conference organised by the arch deficit-terrorists at the Peter G. Peterson Foundation, which was also held on April 28 in Washington D.C. – just across town from our event. While that event also chose to focus on “fiscal sustainability”, the reality is that it will merely rehearsed the standard and erroneous neo-liberal objections to government activity in the economy. Given my time constraints today I thought it was serendipitous that this material became available overnight. So the following blog provides access to video and all the documentation for my session. Very special thanks to Selise and Lambert (and their team) for taking the time to document and prepare all this material.

You can see all the presentations (including transcripts, audio and video) from the our event at the Fiscal Sustainability Teach-Ins and Counter-Conference resource page.

You can see more resources relating to my presentation – Session 1: Fiscal sustainability and you can download my slides.

Session 1 Presentation – Bill Mitchell

Session 1 is in two parts – Part A is my formal presentation which went for about 51 minutes.

There are full transcripts available (below) for this video – see below.

Panel discussion and Q&A

Part 2 covers the Q&A and Panel discussion and goes for about 45 minutes.

There are full transcripts available (below) for this video – see below.

Many thanks to Selise for all her hard work in making these presentations available. Thanks also to Lambert Strether and the great work done by all the other (nameless to me) volunteers in documenting the Washington Teach-In. It was very much appreciated.

Full Transcript of Session I Presentation

Thanks very much to the Volunteer Transcription Team who documented my talk and the overall proceedings. Their efforts were fantastic and appreciated. The following transcript documents my talk on fiscal sustainability in case you cannot view the video (or perhaps understand my Australian accent in all places). I have also left the American spelling unchanged not out of preference but out of respect for the hard work of the American transcription team. Frankly, I will always prefer an S to a Z and an OUR to and OR!

Good morning to all of you, and a good late evening to me. It’s just gone 10 o’clock in the evening. I run a research Center at an Australian university called CofFEE and we collaborate closely with the assembled panel here, over many years now. Before I start, I’ll just say thanks for you coming and some have traveled not quite as far as I but some distance; others have traveled locally. And I also want to thank Joe and his group, who seems to be a relatively amorphous group to me, but I think they’re all very hard-working to put this together in such a short period of time. [00:00:57]

I think the relevant thing for me is that I run a conference every year, and others of us run conferences every year, and they’re academic conferences, and they are discussions among ourselves to some extent, and they to some extent extend the discussions we have among ourselves in the professional literature, the journals that we publish in. But the differentiating feature of this exercise, for me, is that it’s the first real grassroots endeavor that has come from the community. I’m just old enough to go back and identify the lineage of this event, the Vietnam protest teach-ins, that were the starting point, as I know, of the community resistance to something that they didn’t feel they had a voice in opposing the government policy of the day, and my country had a foreign policy in that period which was summarized by “All the way with LBJ.” And it took our boys, in those days mostly boys, into Vietnam with great loss as well. And it was the teach-ins here and the mass street marches in Australia that stopped our governments being involved in that endeavor. [00:02:34]

And what I learned from that historically was that it’s community action that ultimately will stop things like… that the people will see they had no voice in, they eventually get a voice by banding together. Because the top end of town have got their voice: it’s called the money. And I ‘m sure if we go over to Peter Peterson’s session, we would see it as a fairly sumptuous event. They’ve got the money, they’ve got the contacts, that’s the nature of political lobbying. Alternative views, that we represent, don’t have any of that, never have had, and they rely ultimately on groundswell of public opinion. And I see this event as a starting in that sense. So I was asked to give a general overview into the idea of what fiscal sustainability is, and I’ll do that. [00:03:42]

If I think back a couple of years ago, we’d had, maybe, in different countries, different lengths of this, but say in Australia we’d had 25 years of growing neoliberal – what’s now known as neoliberal – thinking, which I characterize by the abandonment of full employment by our governments. The introduction of a diminished social goal which I call “full employability,” that is the supply-side… the OECD agenda of making people ready for jobs, just in case there was a job, but not actually providing jobs, whereas under the “full employment” agenda, governments provided the jobs, or made sure they were provided by using aggregate demand management in the post-war period up until about the mid-1970s. [00:04:41]

And we’d had 25-odd years of this sort of privatizations, deregulations, and what have you, and then this crisis comes along, and I thought at that stage that this was the sort of event that might generate a paradigm change in our thinking, a return of fiscal policy, because within a very short period of time, massive outlays relative to what had gone before – in fiscal outlays – were occurring all around the world without anybody saying “Boo!” It was very quiet, it was very sort of surreal, $80 billion dollars was announced as being injected into the economy, nobody said a word. And I thought this was interesting, because this may demonstrate that fiscal policy really is the main game in town, and this excessive reliance on monetary policy, that had been sort of refined into this inflation-targeting regime that central banks pursued, with fiscal policy being a passive partner, and what that meant was running budget surpluses, if you get away with it, in defiance of the ultimate automatic stabilizer, reaction against that, which I’ll talk about, and I thought “Well, this is a chance…” [00:05:57]

Now, two years later, fiscal policy has saved the world from a Great Depression, no doubt about that. It’s, in my view, demolished everything you’ll read in modern mainstream macroeconomic textbooks about the efficacy of different types of macropolicy, monetary, fiscal policy. Yet, two years later, after the handouts have been gratefully received by the top end of town, after we’ve put some sort of floor into the downward spiral, not enough of a floor, because the fiscal reaction hasn’t been sufficient. But two years later, we’ve now seen this mass hysteria, which almost defies logic, to me, this daily barrage of financial data, I call it “ratio fever.” We’ve completely lost track of what’s happened, and we’re basically setting ourselves up again for the next crash. [00:07:08]

[SLIDE 3 was displayed at this point – see PDF of slideshow]

I don’t need to remind you all, this sort of alarmist rhetoric that comes out everyday, and it’s getting noted… Luckily in Australia we don’t have Fox TV. The owner is an Australian, but he’s rejected his Australian citizenship because he wanted to penetrate Corporate World here. But we don’t have it, and it’s sort of like a curiosity when I see it on TV here, and last night I observed… I was trying to find BBC actually, because that’s about the most civilized thing you can find in America, with all due respect. But I stumbled on Fox News and they’re running this theme, “Drowning in Debt” is their current news theme, and so I did a search on Google Earth and I realized the hotel was slightly downhill from the US Treasury, and I was really worried overnight that there might have been a tsunami of debt hitting me. And then I realized I was on the sixth floor, and I can swim, so I’m not too bad. [00:08:12]

[SLIDE 4 was displayed at this point]

We’ve become.. it’s reached the level of irrationality. We’re getting quotes from our economic leaders, whether you like it or not, Ben Bernanke is one of the world’s economic leaders, and we get quotes that only talk about these ratios. And I could go into quotes every day from our political leaders about this, all just talking about financial ratios divorced from any context or what else is happening or what other goals you might have.

[SLIDE 5 was displayed at this point]

And when you think about it, the whole discussion of fiscal sustainability in the mainstream media and in our governments, in our parliaments, are all applying the logic – and what’s taught students in our universities out of textbooks – are all applying the logic that related moralists to a monetary system that ended in 1971. And people say to me, “Well, economists know that.” And I say, “Yeah I know they know that.” And so the agenda… They know the constraints that apply to governments now are not the same constraints that applied – and I’ll talk about what they are – to governments under the Bretton Woods system of convertible currencies with the US effectively running a gold parity. They know that. And so then you dig further and realize that the whole rhetoric is ideological – that they run a conservative approach to government. They hate government intervention in the economy unless it’s helping themselves, through handouts to the corporate sector, and so they’ve blurred the history and they just blithely go on teaching economics as if it’s the gold standard economics. [00:10:27]

[SLIDE 6 was displayed at this point]

The other thing that’s becoming really central in the research literature – so if you read European Central Bank, Bank of International Settlements, if you read the IMF, if you read their research reports and I’ve spent far too much of my life reading that sort of stuff, I’m afraid, but I can’t help myself. If you read the economic literature from the academic institutions and the research think tanks, as they like to call themselves – I think it’s very generous of themselves to actually assert that they’re thinking [laughter] – you see the way in which the so-called respectable literature – and I’m not… differentiating that from the popular media – are talking about fiscal sustainability is increasingly in terms of these fiscal rules and so fiscal sustainability is defined in the EMU as exemplified by the stability and growth pact: deficits under 3% of GDP, public debt under 60% of GDP. [00:11:34]

If you go back – and I’ve read that literature in absolute detail – here’s no rationale presented for why those particular ratios are. Someone did a back of the envelope calculation at the time and decided that was it. And you read the legislation relating to the fiscal responsibility act in UK, which was brought into law earlier this year, it’s absolute madness. You’ve got my government in Australia talking about as fast as possible getting back to 2% real growth in government spending and 2007 ratio of tax to GDP. That’s got to be their fiscal rule. Makes no sense. And in the textbooks and even in the progressive side of the debate – and those who read my blog know that I have a theme: with enemies like these, who needs friends – and that’s a regular theme. And the progressives even buy into this fiscal rule that you’ve got to balance budgets over the business cycle. And that’s meant to be a more reasonable version than the German constitutional fiscal rule that’s going to ban deficits in 2015. And this “balance the budget”: well, that’s reasonable because we recognize you’ve got to have some deficits sometimes, but then you’ve got to pay them back by running surpluses at other times, and if you balance it out you have a neutral impact upon the economy, independent of the context of what’s happening in the economy, what the other sectors in the economy are doing, how they’re behaving. You just impose these fiscal rules out of context and with no comprehension of what it means. So you get statements from conservative commentators, and I read them almost every day, that are, “We’ve had too much leverage in the private sector, so they’ve got to de-lever,” and “The public sector is about to explode, they’ve got to de-lever,” and meanwhile you’re running a current account deficit. Well if you understood macroeconomics even at the most elemental level you’d know you couldn’t achieve all of that. And it’s this mindless sort of application of sector-by-sector rules that just don’t add up.

[SLIDE 7 was displayed at this point]

And of course, meanwhile, the real game out there, the thing that relates people to the economy, is on the back burner again. And these are just unemployment rates and you can see that they’ve been trending upwards over this neoliberal period but also very high now. This is how people are affected by the interaction of the economy. This is the real thing that’s going on out there. [00:14:35]

[SLIDES 10 was displayed at this point]

I could go on and I’ve got other slides but I’ll show you this one. This is my country and this is not unrepresentative of what happened everywhere over this historical period, 1861 to now. This red period was the post-war period up to the mid-70’s, where the governments, through their white papers after the second World War ended, they realized they’d solved the Great Depression by the military spending, and they wanted to have full employment without prosecuting wars any longer, so they had to work out how to maintain full employment in peace times. And all the countries brought out major macroeconomic statements where they committed to full employment, and they realized that required fiscal policy to behave in certain ways to offset the saving intentions of the non-government sector. [00:15:33]

[SLIDE 9 was displayed at this point]

And that red period was when fiscal policy was very active and in Australia we had unemployment below 2%. Governments would lose electoral office if unemployment went above 2% in that time. There was zero underemployment and zero hidden unemployment. Once we abandoned that in the mid-70’s… we got the confused signals from the OPEC oil crisis, and that allowed some very opportunistic territory seizure by the mainstream economists, the monetarists, at that time that’s what they were called… we abandoned that concept of full employment, we started to worry about deficits for the first time. Australian government ran continuous deficits of different orders through that period, which bounced up and down depending upon the private savings intentions and what was going on with the external sector, and always maintained full employment. It was harder for them to do it in that period, because they were running a convertible currency and a fixed exchange rate. It’s much easier now to actually do that, but they still managed to do it. [00:16:49]

[SLIDE 11 was displayed at this point]

I also like people to see this graph, this is US. It puts today’s fiscal parameters in some perspective, I think, relative to where they’ve been in the past. Most people… I get a lot of emails, maybe I get about 1000 emails per day at the moment, but I get probably 20 a day that are incredibly hostile, and they’re all sourced to IP addresses in the US, with all due respect [laughter]. And they tell me that I haven’t got the slightest idea of US history, that the US government always ran surpluses until recently [laughter]. Well you always ran deficits until recently, with some notable periods where you didn’t – they were very short and they terminated because they put so much fiscal drag into the economy. And you can see a couple of periods where that happened. [00:17:54]

[SLIDE 12 was displayed at this point]

What’s fiscal sustainability? What isn’t it? You won’t find a definition of fiscal sustainability by making analogies between households and sovereign governments. If you go to mainstream economics textbooks, one of the myths that appears in those textbooks whether it’s explicit, and in some textbooks it is explicit, in some textbooks it’s implicit and it becomes explicit by the delivery in the lectures, you will see there is always a parallel drawn between the household budget and the government budget.

And we had a prime minister in the mid-70’s, just after the OPEC crisis, who came out on national TV to give an address and he said, “What the Australian public has to understand is that the federal government budget,” and by now Brettons Wood had been abandoned and we were running a floating exchange rate with non-convertible currency, he said, “What the Australian public has to understand is that just like your budgets, our budget has to- we have to have budget discipline just like you.”

Totally outrageous and wrong statement, but it’s that intuition that makes the deficit terrorists, their message so powerful, because people, the public, don’t know how to argue against that and it feels intuitive. But you won’t find a definition of fiscal sustainability in that analogy, it’s flawed at the most elemental level. The household uses the currency and always has to finance their spending whether it’s through earning income, whether it’s through borrowing, whether it’s through using up past savings or running down/selling assets. A national government who issues its own currency and floats it never has to do that. My colleagues later in the day will expand on that theme. [00:20:08]

You won’t find a definition of fiscal sustainability by referring to these ratios that are now in everybody’s lounge rooms each night. These ratios are largely irrelevant. Largely. And you won’t find a definition of fiscal sustainability in the statement of a fiscal rule, a rigid fiscal rule whether it’s accepted by regulation or legislation or, in the German case, constitution. You won’t find a definition of fiscal sustainability in any invariant fiscal rule. [00:20:54]

[SLIDE 13 was displayed at this point]

So where should we start in trying to come up with a concept of fiscal sustainability? And I add that what I’m doing really is just introducing ideas which will be elaborated on in great detail by my colleagues here. So I’m not explaining everything in detail for that reason. But where I think that you should start, and I think we all agree on this up here, is ask yourself the question “Why do we bother to have a government in the first place?” They take our freedom away from us. They force me to wear a helmet on my push-bike. They force me to drive slowly. They force me to do certain things down the beach that I might not want to do. They take away my purchasing power by taxing me. Why would we want them? They’re a nuisance. [00:21:48]

The reason we want them is because they can advance the well-being of all of us, acting as our agents, in a way that we can’t do it individually. That’s why we’d want them. And we might call that the public purpose of government. And that might be a good place to start because fiscal policy is about governments, a government policy tool. So once we think about what we want governments to do for us, then that’s a good place to work out, Well, what does that mean in terms of the way they conduct fiscal policy?” [00:22:28]

[SLIDE 14 was displayed at this point]

So what are the dimensions of that? Well, the way I think about it, and my colleagues have different emphases here, I think about the state. The basic role of the state is to maximize the potential of all of us who live under its sovereignty. And I have this thing that the sustainable goal of the economy should be the zero waste of the people in the economy. That’s what my view of economic behavior is, that nobody should be wasted as a consequence of the way we structure our economy and the way that policy intervenes to manipulate the economy. [00:23:08]

And then from my point of view, that means, we – the state – should be responsible for maximizing employment: making sure everybody who wants to work can work, with decent working conditions and wage levels that provide them with a sustainable life in the cultural and social setting that we live in. [00:23:32]

Now, what that means in a macroeconomic sense is that once the private sector has made its spending decisions – and I’m talking about households and firms, and they make their spending decisions based upon different motivations, firms invest for different reasons and households consume for different reasons, – once they’ve made their spending decisions – which also mean they’ve effectively determined through the income generation process what their saving desires are – once they’ve done that, then the role of government advancing public purpose in this way is to ensure that its policy intervention is consistent with those private decisions such that you get full employment. That seems to me to be a basic element of what we mean by fiscal sustainability. [00:24:32]

[SLIDE 15 was displayed at this point]

Now non-governments, the non-government sector, typically in historical terms as long as we’ve had data, wants to save over the business cycle. This current period where we’ve had debt binges are atypical in history – private debt binges are atypical – and the accompanying budget surpluses that went with the private debt binges are also historically atypical in all of our countries.

And so if it’s typical that the non-government sector will want to save, then there will spending gaps. And what I mean by spending gap is that spending won’t be sufficient, the private spending won’t be sufficient, to generate output and employment, based upon current productivity levels, to fully employ all of the available workforce. All that to me means that the government then has a choice. It can either fill that spending gap with fiscal policy and ensure that advanced public purpose via full employment, or it can decline to do that and either run smaller deficits than are required or even try to run surpluses, which governments have been doing prior to the crisis, and accept the fact that in taking that decision you will have persistent and chronic underutilization of labor and ultimately that strategy will be self-defeating. [00:25:57]

[SLIDE 16 was displayed at this point]

And this is where I introduce this concept of bad and good deficits. You’ll end up with deficits anyway, under those circumstances, but a bad deficit is one that’s driven by the automatic stabilizers. So if you’ve got an external sector that’s in deficit and you’ve got a private sector, a domestic sector, that’s intent on saving – and that means not spending, by design, as much as they earn – then if the government doesn’t use their spending to maintain aggregate demand at sufficient levels, then you’ll get declining income, declining output, declining employment, declining tax revenue, rising welfare spending. They’re the automatic stabilizers that are built into fiscal policy and you’ll end up with a deficit anyway, but that’s a bad deficit, because at the end of it, you’ve just got a recessed economy with high unemployment, increased poverty levels and nobody’s happy about that at all. And then if you apply fiscal rule on top of that, you’re in the position we’re currently in now, moving into a worse outcome than we had a year ago. [00:27:14]

[SLIDE 17 was displayed at this point]

The alternative of course, if the government adopts what I think is a fiscally sustainable strategy, then it will run good deficits. And note I’ve got – IF the circumstances require, IF – and I’ll say what I meant by that. But it will create, it will still run deficits but with high employment, high income growth, falling poverty rates, and smiling faces. Now what do I mean by “if?” Well, with the private sector wanting to save a bit, budget deficits aren’t always appropriate. Take the Norwegian case. They’ve got such strong external sector that the government can oversee near full employment continuously, high levels of public service provision, first-class education, first-class health, very low inequality in income, great welfare benefits, and they still run surpluses. So it’s not always the case that fiscal sustainability requires the government to run a deficit. But mostly it will be the case, because by definition not every country can run external surpluses. [00:28:35]

And so what I want to come out of that brief message is that you can’t define fiscal sustainability independently of the real economy and what the other sectors in the economy are doing. [00:28:51]

[SLIDE 18 was displayed at this point]

The other important point is that you have to understand the monetary environment, that any notion of fiscal sustainability has to be related to the intrinsic nature of the monetary system that the government is operating. And so it makes no sense to apply logic that applies to say, a gold standard or a fixed exchange rate regime, to a fiat monetary system, which doesn’t have those constraints. One of the most influential books in the current debate has been Reinhart & Rogoff, and everybody– you read these commentators, “Ahhh the public debt ratios above 80%, we’re heading south quick.” And then you read the table with Greece and America and Portugal and Germany and Japan all in the same table, and the logic is very confused. And most commentators haven’t quite read the book anyway, because it only applies to debt – public debt – that is denominated in foreign currencies anyway. And even Rogoff blurs that when he goes into the public arena and gives media broadcasts. And so it holds out that it’s all public debt, whether it’s in domestic currency or not, and it’s a fraud. [00:30:26]

[SLIDE 19 was displayed at this point]

The other point I would make is that a lot of people say to me, “Oh yeah, but you know these public debt ratios are rising, and the government is issuing debt.” And what’s happened is that governments have imposed, under political pressure, a series of voluntary constraints on their behavior that really mimic the actual constraints that they faced under the convertible currency system.

So my government in the mid-80’s, the Australian government, explicitly changed policy such that the Australian government has to place debt into the private markets, dollar for dollar, to match its net spending. And at the time, if you read the historical documents, you’ll see it’s all about the need for fiscal discipline, that we’re unhappy with the option that the central bank might buy some of the debt that the government issued, more than it needs for, at that time, for liquidity management purposes.

And what really needs to be exposed in this discussion are that all those constraints are voluntary. And in a fiat monetary system, the national government doesn’t have to issue any debt at all. And so fiscal sustainability can’t be caught – a pure concept of it – can’t be caught up and tied in with any of these voluntary constraints. [00:32:17]

[SLIDE 20 was displayed at this point]

And most people don’t understand the notion of a sovereign government. I don’t know how many times – I do quite a lot of media interviews in Australia on national TV and radio – and the question always comes out, “Do the taxes have to increase? Where’s the government going to get the money from? The government’s going to run out of money. There’s no more money to spend. We’ve had such a fiscal intervention we’ve run out of options. All of this sort of rhetoric.

And that just tells me that we need to work harder in this debate to really educate the debate as to what we’re dealing with here. We’re dealing with governments,, in the main, that issue their own currency, that issue it under monopoly
conditions, and so the microeconomic rules of monopoly apply to that sort of government in terms of setting price or quantity, and that they can never be revenue-constrained even though it looks as though they are because of these voluntary constraints that they erect as edifices to hide the fact that they are actually sovereign. And we need to get the message across more vehemently that what that means is that our national governments can spend whatever they want. And it has no imperative, like a household, to facilitate funding of that spending. And what looks like to be funding operations, this debt issuance, nothing of the sort. [00:34:09]

[SLIDE 21 was displayed at this point]

And what then emerges in a discussion of fiscal sustainability should be to really articulate what the limits of government spending are. And we’re led to believe it’s all, “Well, once debt ratios go above 80%, that’s it.” or in Europe, “Once the deficits go above 3%, that’s it.” They’re not limits at all. All of these financial ratios are not limits at all, for a sovereign government. The limits are clear that a sovereign government can only buy what’s available for sale. Their real limits, if there’s something out there available for sale, the government can always afford to buy it. And that’s a sovereign government.

And when I look around and see high unemployment, persistently high unemployment, everywhere, then I know that there’s at least one productive real resource that’s available to be purchased, and that’s the labor that has no bid for it in the private market. So that would be a good place to start.

And so when I see any unemployment, I know that the government has no real resource constraint here. [00:35:28]

[SLIDE 22 was displayed at this point]

And this then leads to another component of the journey to understand what fiscal sustainability is, and that’s understanding the nature of costs. When a government prints their budget statistics for the month or whatever the frequency is, and everyone goes, “Ooh-ahh, look at that big figure in the piece of paper, it’s getting bigger, it’s gone above Rogoff’s ratio,” that’s not a statement about costs at all.

Numbers on bits of paper aren’t costs. When governments… My government next month is going to announce its budget austerity plan – and it’ll be media attention about what the deficit ratio is and blah-blah – they’re not costs. When government spends a billion dollars, a million dollars, that’s not the costs of the government program. The costs of the government program are the extra real resources that are required to implement and sustain it. So if you’ve got a jobs program what’s the real costs of that? It’s not whether it’s a half million dollars or 10 billion dollars, whatever. It’s the extra food and the extra materials that the unemployed that you’re going to bring into productive use utilize and consume. That’s the cost. When we’re thinking about…when we juxtapose the concept of fiscal sustainability in the public arena to what I think it is, then the public arena debate’s all about financial costs – alleged financial costs – whereas I only think about it in terms of real costs. [00:37:08]

[SLIDE 23 was displayed at this point]

And then we have to understand the role of taxation, and my colleagues will talk about this in much more detail later. And you know, part of the hysteria is that very soon taxes are going to have to rise to pay the deficit down, and if they don’t rise in the next two years, our poor children and their grandchildren, the poor little bastards, [laughter] are going to be so burdened by our prolificacy that we should hang our heads in shame. That’s the debate.

Now it’s possible that taxes will rise in the future. It’s possible they’ll rise in the next 2 or 3 years. But if they do, it’s also possible they could fall. But if they rise, it will have nothing to do with the funding requirements of our sovereign governments. The role of taxation, in a counter-stabilizing macroeconomic policy framework, is to regulate aggregate demand growth. And so if aggregate demand, nominal demand, is growing too quickly for the real economy to absorb it, then there’s a case to be made, if the political settlement is such that you want to have that much public access command of real resources, then there’s a case to be made, that you want to increase taxes and reduce the purchasing power, and therefore aggregate demand, of your private sector. And so that’s to regulate demand to avoid inflation. It’s got nothing to do with funding. [00:39:02]

[SLIDE 24 was displayed at this point]

The other point, I think, that the public debate misses out on – and I play tricks when I give talks to business forums, because business forums in Australia, as they are here, are principal antagonists to any fiscal intervention – and I say to them, “Well how many people like the deficit at the moment?” And you know I can guarantee that almost all – and they’re all not shy to put their hands up – I can guarantee that the vast majority in the audience will say, “Yeah, we hate it.” And I say, “Well, you can do something about it.” And they sort of look at me stupid, and I say, “If you don’t like the size of the budget deficit to GDP, then if you go and invest some more, and create some more productive infrastructure, and employ a few more workers, then the deficit will go down as a percentage of GDP and you’ll have solved your problem.” And what it brings out is that in general, the fiscal outcome – which is just an ex-post statement anyway of what’s been going on – is really what economists call endogenous: that means it’s determined largely by the spending decisions of the non-government sector. And we don’t understand that in this debate. And we go on as if we’ll have these fiscal rules, as I said, which really undermine themselves if they’re creating compatible scenarios with respect to what the private sector actually wants to do. [00:40:52]

[SLIDE 25 was displayed at this point]

I won’t go into this, you can read this. I’ve spoken a lot about this on my blog and in my academic work, this sort of, the fraudulent, concept of structural budget balances. They always – in the way in which all our international agencies, the IMF, the OECD, our treasuries around the world construct them – they’re always biased toward being too expansionary. In other words, the summary of the structural balance is always more expansionary, as estimated, than it actually is in reality. And so it leads to an inbuilt bias towards contraction and therefore working against public purpose. [00:41:33]

[SLIDE 26 was displayed at this point]

So moving quickly, the intergenerational debate is the sort of long-term attack on fiscal policy. So even though we were quiet for a little while, while the governments were bailing the economy out and putting a floor into the collapse of spending, what’s emerging out of that – and this is sort of the way in which the mainstream work – they were so discredited by this crisis.

It’s absolutely amazing that for the first few months, right-wing colleagues that I know just wouldn’t talk, they just went and hid in their rooms, so discredited and embarrassed by it. But the reasonable ones come out now and say, “Oh yeah, we really did have to have a bit of fiscal intervention, we understand that now, but the problem’s worse than you think, because we’ve got these long-term structural pressures that are going to blow the budget out of the water and make it unsustainable.”

What are they talking about? Providing pensions to our elderly, providing a bit of health care to people who might need a few hip replacements. And what I tell them is, “Look, the only issue is whether there’s enough titanium available to put in our hips and our knees. And if there is, the government’s going to be able to buy it no matter what. And if the government wants people to have a pension, then all they need to do is type a few numbers into a computer and that’ll send some money to the bank. And the only issue is whether the pension check that the pensioners get will be able to buy anything.” [00:43:08]

And the irony of this whole debate about the – we call it the intergenerational debate in Australia, it’s more generally known as demographic debate – the irony of it is that everything that the mainstream wants us to do now about it will actually undermine our capacity to deal with it in the future. So the absolute irony is that the way in which fiscal austerity plans are implemented is – in our country and elsewhere – is to attack higher education and secondary schooling, and not realizing that investing in education is the way you get productivity growth and the way you deal with rising dependency ratios in real terms. It’s moronic.

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Others will talk about the – particularly you people in America – have been living on China’s goodwill. Last time I realized, it was the US government that issued the US dollar and I didn’t think that had been subcontracted out to China. [laughter] [00:44:12]

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The other element, and I’m just giving headings now because the others will elaborate in more detail, the other side of it is the debt side, the sovereign debt crisis we’re all in now and – “Drowning in Debt,” that Fox News theme of the week, I don’t know how long it’s been going on, I’m glad I’m leaving because I’m going to drown [laughter] – the other idea is this notion of public solvency.

For sovereign governments, unless they are totally perverse, they are totally solvent in their own currency. And the big governments – Australia (big to me), Japan, UK, US, these are the big governments – they don’t issue debt in foreign currency. So there is a sovereign debt problem in Greece. That’s because they voluntarily agreed to give up their sovereignty. There’s no sovereign debt problem in the other countries that I mentioned. [00:45:14]

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So to bring that out, to finish up, the way forward, I think, to allow these ideas to expand and broaden in the community, is that what I think is required is a new macroeconomics narrative to emerge. And the challenge for us – I spend all my days in a little darkened room in front of a computer, I go surfing in the morning or riding my bike and then I spend 12 hours or something in front of, in a darkened little room and I hardly talk to anybody – the challenge for people like me is to interact with people like Joe, and others who I don’t know in the audience, to get this narrative out there in a way that’s packaged and understandable, comprehensible.

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And we need some marketing people as well, to be able to have pithy ways to express these ideas, because I’m never going to be pithy. And I haven’t got a marketing bone in my body. And we need to get these operational features of the monetary system out to people. We need to teach people what the opportunities that a fiat currency system offers a sovereign government, to actually create full employment and make the lives of those who don’t have jobs eminently better than we’ve been offering in the past 30-odd years.

And we need to really emphasize that it is possible. I mean, I get emails from Americans, “Sorry, [laughter] you can’t possibly have 2% unemployment.” Well, yes you can. Sorry, you can, it’s very easy, you all could do it. Take me down to the capitol building, I’ll get it organized. [laughter] It’s this idea that what the neoliberals have managed to do is to…

An example is I’ve been doing work in South Africa on the public works program. In the first 5 years a million people were employed. Their second-year plan we’ve just implemented is going to add three million people. Poverty rates fall for those people who are employed. Yet, I’m told by the treasury, which has the IMF regularly going in there, that this problem of unemployment and poverty in South Africa is manifestly complex. That’s the words they use. Manifestly complex. And I said, “What’s complex about giving them a bloody job?”

We’ve just given a million people a job under this program and they’ve been building water systems, roads, better housing for themselves, community infrastructure. Their children have got a chance to go to school because the families that are getting these jobs have, for the first time ever, some personal risk management capacity. What’s manifestly complex about that? There’s not a shortage of work, there’s just a shortage of funds to provide the work. But there’s no shortage if the national government realizes it’s sovereign. [00:48:12]

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We have to get those messages out, that these things are not manifestly complex. There’s this capacity for people to eschew the simple solution, because it can’t be right, can it? Well, in this case, it is right. And we have to really abandon this focus on financial matters and re-orient the debate to the real economy. And I remember Milton Friedman said, and it was about the only thing that I think he ever said that was right – except probably that he loved his wife – but what he said was that we’ve got to get out of this balance of payments obsession and the best way to do it is not publish the data, because if you didn’t publish the data, nobody would know and you’d soon work out that the sky didn’t fall in.

What we’ve got to stop is news broadcasts having a barrage of these financial ratios in our face everyday. They’re largely irrelevant and they abstract and re-orient the debate away from what really matters and that’s the real side of the economy and the capacity of our national governments to work on the real side to improve our lives and advance public purpose. [00:49:40]

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[SLIDE 32 was displayed at this point]

Thanks very much.

Session 1: Panel discussion and Q&A [00:49:54]

L. Randall Wray: I want to deal with one issue that always comes up when we talk about “the government can always afford to buy or hire any resources that are not being used,” and so one response will be “yeah, but the government is always less efficient than the private sector” so I want to deal with that issue. Bill mentioned that we can look around and we can tell that there are… probably the most important resource that any society has is chronically underutilized: that’s labor. So there are plenty of people out there who want to work and the private sector does not want to hire them. Until you get to full employment, the efficiency issue is completely irrelevant. Because if you put them to work, and you get any production whatsoever, it’s an improvement. You only need to raise the efficiency issue once you’re at full employment, and now the government is actually taking resources that the private sector is already using. And then you could raise the question: Is the government putting these people to a more efficient use than the private sector was doing? In that case, it’s perfectly legitimate to question whether the government ought to be hiring people away from the private sector, and other resources too. Of course, then you have to ask the question about the private use versus the public use, the private purpose versus the public purpose, and we can ask those questions once we get to full employment. But outside of World War II, true full employment really never occurs, so the efficiency question is completely beside the point. Let’s get to full employment and them we can talk about efficiency. We can talk about maybe we want to release some resources from the public sphere so that the private sphere can use those. But until that point, there’s never a question of efficiency. [00:52:00]

Marshall Auerback: Just as a general point, because I approach this more from the point of view of being a market practitioner rather than an academic economist, as a number of the people I saw in the Huffington Post responded, we’re just all “a bunch of pointy-headed academics.” I actually approach this like Warren Mosler does, as someone who has been in the markets for almost thirty years, and the reason why the theory interested, intrigued, and finally convinced me was not because it was a theory at all, but because it was an operational reality, because debiting and crediting bank accounts electronically is what I see on the screen every single day. That’s basically the way it works, in that you don’t actually see capital flowing from one country to another in the way you did under a gold standard system, in that some guy pushes a button in Brazil and another guy pushes a button in the US and numbers change on both sides of the ledger, but there’s no actually capital that moves.

And as for the argument that you would see that reflected in the exchange rates, I sort of say, “well no, not really.” The exchange rates move up and down for a number of reasons. People can decide one day, I might decide one day that I don’t like the Japanese yen and I might decide to short it and it might have nothing to do with any particular reason that I’ve seen out there because of capital flowing in or out. There’s any number of decisions that go into a currency movement and a private portfolio preference is not something that can be encapsulated into some sort of basically economic theory. So I think that’s one of the main points that I think is key to understand, that people say always that we don’t really understand realities and markets, but actually many of us spend time, a lot of time, working in the markets, and seeing this on a day-to-day basis. And that’s I suppose why we’re not intimidated by a lot of the junk that you hear coming out of the media every day, because our own experience is very, very different. And some of us have actually made money off the lack of understanding of public reserve accounting as well, so I’ll leave it at that. [00:54:32]

Warren Mosler: I’d just like to add something to what Bill was saying, and it’s probably because he hasn’t watched Fox News quite long enough. One of the other things that’s being said on TV is that it’s wrong for the government to be out there spending and hiring people when the private sector is pulling back, saying. “everybody’s hurting except the government, so it’s time the government needs to cut back also,” so Bill, I just want to add that to one of your lists of absurdities. You probably ran out of patience watching before you heard them say that one. And look, there’s a reason why nobody on this panel is a household word in the United States, or anywhere in the world, and that’s because if we were, we wouldn’t be having this crisis. The idea that there is such a thing as fiscal, I like to call it, what Bill was talking about, I like to call it fiscal responsibility, but it’s the same thing. The idea that there is a solvency issue, that the government has run out of money, there is nobody out there that’s got it right. I don’t know, does anybody here see anyone, anywhere? If there was, it wouldn’t exist, the problem would go away immediately. We don’t have a whole lot of work to do, we only need to get one person who has the national media attention to understand this, and I think the whole thing changes very, very quickly. Because government checks don’t bounce, and we’ll get into some of our other things, so, thank you, go ahead. [00:56:36]

Stephanie Kelton: For someone who does have a national reputation, and is out there in the mainstream media, who does understand it, I would say Jamie Galbraith, and we were hoping to have him here with us today, but unfortunately his schedule wouldn’t permit that. But we need more voices like that, with better penetration, obviously. [00:57:00]

One of the things I wanted to raise, Bill, related to your discussion, that you posed to your students: “What do you think of the of the government deficit? where do you want the government to be?” I do exactly the same thing with my students in Kansas City. I say “Do you want the government to balance its budget, or do you want it to run a surpl—, a deficit?” And they have this in their mind, they think the responsible thing to do is to have the government run a federal budget surplus. And I say “Okay, you realize what this means for you?” And they don’t. I think this is one of the most effective ways that we can push back against this call for fiscal responsibility and governments to live within their means and balance their budgets is to say that there are two sides to the ledger, and if the government takes the surplus position, guess which side you take. You take the deficit position. You are the non-government sector. And so, by accounting logic, if the federal government is running a surplus, the non-government sector will be in deficit. [00:58:00]

It is no surprise today, that, while the federal government’s deficit continues to rise and rise and rise, people are scratching their heads and looking at private saving rise and rise and rise. Right? It’s the other side of the ledger. So, ask someone the next time they talk to you about fiscal responsibility, if you want the government to be in a surplus position, that’s going to push you in the deficit position. [00:58:24]

Pavlina Tcherneva: Just to elaborate on this very same point, it’s the same thing with the debt. If you’re going to look at the debt as the government liability, this is somebody else’s asset. So, all of this argument about the government being responsible and paying down its debt just like households need to pay down their debts, just means that every single private sector portfolio is going to lose a very valuable default-risk-free asset. [00:58:52]

And so, once again, you have to look at both sides of the story. Now there are other reasons we can get into: should the government be injecting all of these bonds in the market, for what purpose are they injected, etc, but to the extent that they reside in your portfolios, if you want the government to reduce the debt, you will be losing that asset. Now, what you will be getting is another asset. You’ll be getting cash. That is also a government liability. So, you just take your pick. How would you like to save? In the form of reserves – dollar reserves – or in the form of bonds? With or without interest? [00:59:33]

Stephanie Kelton: Randy wrote a blog for the blog that we run out of the University of Missouri-Kansas City. Randy did a blog on this point that Pavlina is talking about, and I like this one very much because I hadn’t seen it done by anybody else. He said, when you talk we are seeing the national debt clock, and we are hearing, “your share of the national debt, this is the amount that each of you owes.” And he said, “Owes? It’s not o-w-e, it’s o-w-n.” It is the assets that each of us, if we were to divide it equally, right, by population, it is the amount that we own. We don’t owe. It’s not our liability. We aren’t responsible for paying back the national debt. It is our asset. It is what we own. [01:00:27]

Warren Mosler: Let me just relay a quick story. I was at Citibank for a private client meeting with Bob Rubin back in I think it was the late 90s, maybe 2000, and he, rightly so, indicated, there were about 20 of us, and he said, “this economy could be in trouble because of the low savings rate.” And I thought he was correct, because we had just been running a surplus, so I said to him, “Bob,” and I was the last question, I said, “does anybody in Washington understand that when the government runs a surplus like we just did, it reduces savings for the rest of us, non-government sectors, by exactly that amount, to the penny?” And he said, “No, when we run a surplus, we buy Treasury securities, and that adds savings and investment to the economy.” I said, “No, when you run a surplus, we have to sell our Treasury securities to get the money to pay the tax, and it takes away that much from the economy.” He goes, “Well, I think you’re wrong.” So I said “Okay, what do I care if you think I’m wrong.” But the point was no one in Washington understood how that worked. And so there was zero understanding, and I’ll submit that there’s still zero understanding of that today. There’s no understanding now that the large deficits, as we just said, are responsible for the increase in savings. And you can read that savings are too high, people aren’t spending enough, it’s the highest it’s been since 1993. What was 1993? That was the last time we had a deficit that large. [01:01:55]

Bill Mitchell: Okay, our chair seems to have disappeared, so as formal speaker for this session I’m now the chair, so I think it’s time to have questions, and there’s microphones going around, and because you’ve forced us to name ourselves, you should name yourselves, and identify yourself before you ask the question, please.

Gerald Dellameade: I just recently learned about Modern Monetary Theory and the question that keeps coming back to me – I’m sure you have answers for it, I just haven’t seen the answers – What about inflation, is that an issue, and how do you handle it? Bill mentioned taxation as a tool for helping to manage inflation. And the other question, having mentioned that Norway, because of its external account doesn’t have any constraints, what about the constraints that are imposed on other countries, the donation of reserve currency by the external account? [01:03:17]

Warren Mosler: I guess I’ll go to Bill’s point first, that you don’t get inflation until you’ve used up the resources. And the other thing is, there’s a whole question of what is actually inflation and what are just price increases, and in this country we look at CPI. [01:03:47]

What happened in the 70s was we had an external monopolist in OPEC that was raising prices of oil, and it went from $2 to $40 dollars, and those costs were passed through, had nothing to do with monetary or fiscal policy. And in fact, the inflation broke after the cartel broke, which was largely based on, I think, the deregulation of natural gas in 1978. Where it had been capped at below market levels and so no one was producing any natural gas. We lifted the cap, the price went up to two-fifty or -sixty or something, and suddenly natural gas was everywhere, the electric utilities converted, and OPEC tried to sustain prices. They cut production by, I think, over 15 million barrels a day in the early 80s. Finally they couldn’t handle it, the price collapsed, and the inflation went away. I don’t attribute any of the success in the war against inflation, whatever, to monetary policy at the time, I see it as an underlying thing. [01:04:47]

The other kind of inflation, the kind of inflation that you can get from the monetary system is the demand pull, rather than the cost push, and that, I’ve frankly never seen that in my 40 years. I’m sure it’s possible, and you see it in some countries, occasionally, but you have to get to full employment, run out of resources, and then the government has to continue to be pushing it past that point, and you use the price signals. Right now, we have an enormous output gap by any measures, some might say it’s smaller than others, but it’s certainly large enough where that’s clearly not the problem. I’ll let somebody else continue, just to fill in. [01:05:24]

Bill Mitchell: The question about the OPEC is very interesting, because I think Australian experience was similar to elsewhere, but with slight nuance. You’ve got to understand what inflation is, first of all. A continuous price… a price bubble within a specific asset class, which is… that’s not inflation. That’s an issue, so a real estate bubble is an issue, but it’s not inflation, and the public debate tends to conflate housing booms with inflation. It’s a wrong conflation. [01:06:05]

And you’ve also got to differentiate, as Warren did, the “cost push from the demand pull” type inflation. In the mid 70s, all of our oil-dependent economies had very major cost shocks to the system. The question then was, if you think about what that means, what that means is that there’s a real income loss to the domestic economy. That real income loss has to be shared in some way, and then the cost shock just dissipates very quickly. What governments did at that time was to, for political reasons, was to delay the dissipation of that cost shock. And that’s where you do, you can get demand-side factors interacting with the supply-side factors.

Warren Mosler: Through indexation. [01:07:00]

Bill Mitchell: Yeah, because you don’t want to take the crunch, you don’t have a distributional consensus in your country, whereby the workers will take a bit of the real wage cut, the bosses will take a bit of the margin cut, and it’ll go out of the system fairly quickly.

Warren Mosler: Your decline in the real terms of trade. [01:07:27]

Bill Mitchell: That’s what I’m saying. So you can get an inflation then feeding on itself if the workers and the bosses have a slug-out fest in a distributional struggle where each of them has price-setting power and they can defend their own margin, the real wage and the profit margin, and the government ratifies that through indexation. But that’s got nothing to do with using budget deficits to achieve full employment, nothing at all. All that means is that occasionally if you import a raw material, for example, you’ll be subject to price shock and you have to work out how to distribute that real income loss, that terms of trade shock, you have to work out how to do that. It’s got nothing to do with the fears that are out there in the public domain now about these deficits generating runaway inflation. [01:08:23]

Warren Mosler: The other thing is, the mainstream model has an assumption that you need low and stable inflation or a conclusion for optimal long-term growth in employment, and if you can’t get the inflation right then market forces will work in that direction. But the model’s a relative value model. It doesn’t include the currency as a public monopoly because it doesn’t include taxation as a coercive force. So, they’re right, or they may be right, within the context of the model but the assumptions of the model are not the real world conditions, which is that we do have a state currency, we do have the coercion of taxation, which leads to the unemployment and the counter-cyclical policies we’re talking about. [01:09:10]

L. Randall Wray: I want to add something, and then the second question wasn’t answered yet. When we’re talking about, so far, whether the government can afford to hire underutilized resources or to buy them, we’re not saying that the government should spend without limit. Those are two completely different things. We’re saying the affordability is not a question, the government can always afford to buy anything for sale in terms of dollars in the United States. That doesn’t mean that how much the government spends, or what it spends on, doesn’t matter for prices. That’s a completely different question, and we will be addressing that question as we go along: what form should the government spending take, and can that make a difference to help hold down price pressures? So we will deal with that. [01:10:00]

But we didn’t address your question about the reserve currency. Well, it probably is true that when pension funds around the world decide to add your currency to their portfolio, as they did with the Australian dollar, that it increases the ability of your country to run current account deficits, trade deficits. You probably will run trade deficits if the rest of the world is trying to net save in your currency. They’re trying to accumulate dollar assets, they’re going to try to sell you output so that they can get the dollar assets. So it probably enhances your ability to run current account deficits, but it makes no difference to affordability within your country. Your government can always afford to buy anything for sale in terms of your own currency whether you’re a reserve currency or not. It doesn’t impact your ability to spend domestically, even if the rest of the world has no desire to add your assets to their portfolios. [01:11:11]

Lynn Parramore, Roosevelt Institute: I have a question that has to do with both substance and messaging. I feel like we’re talking about the Copernican revolution in a sense here, because it’s so counter-intuitive, many of the things that we’re describing, to what ordinary people walk around are thinking about. For example, on the 15th, when people pay their taxes, I would guarantee if you ask the first 10 people on the street “What did you pay your taxes for? Where did the money go?” they would say, “Well, it went to pay for things, the government needed my money to pay for things, to build things, etc.” So, as unpleasant as the fact was that they were paying their taxes, they felt some consolation in knowing that it was funding government expenditures. And I feel like I’m not 100% sure what the narrative is that we’re trying to get across here. The taxation affecting aggregate demand, I’m not sure that that’s something the average person on the street can hang their hat on, and I wonder, from a messaging point of view, if there’s something more you can say about that. And another thing is, what is the psychological impact on that kind of thinking about taxation? Is there, I wonder, a fear, that if people really knew what their taxes were being paid for, they wouldn’t want to pay them? So I don’t know, if you could comment on some of those issues, it would be great. [01:12:47]

Warren Mosler: Okay, we’ll take turns. The way I say it is that the government takes away our money to make room for them to spend without creating inflation. It has to take away some of our spending power to make room for them to spend, because if they didn’t, it would just be inflation. I think of it as we’re all shopping in the same department store, think of the economy as one big department store, and if we all spent all the money we earned and the government spent all the money they wanted to spend, it would be way too much spending for what’s for sale in the store. It would just blow the roof on prices, we’d just be competing, it just be a mess. So the government has to take away some of our spending power, so that we have the right amount of spending power between the two of us to go into that store and shop so that everything gets sold, but not too much so we drive up prices fighting over the goods with each other, and things don’t go unsold and we have unemployment. So the idea is to balance the economy correctly so that when we all go shopping, we have the right amount of spending power in the store. As Bill said, that’s going to change from year to year as personal spending decisions change. [01:13:54]

Bill Mitchell: The narrative that I use is I ask people, “Look, do you want to get into your car in the morning and drive down to the corner and negotiate a contract with the private owner of that road; and then turn the corner into the next road and negotiate another contract to access their road; and then on and on until you get to work? Or do you want to take those road resources off the private provider and have the government providing the roads, where you just drive, except for toll roads, you mostly just drive?” It’s very easy, I think, to understand the difference between public use of resources for public benefit and private use of that, which could be the same resources and same infrastructure provision in the private hands. [01:14:43]

People in Australia are so pissed off now about the private tollways in our capital cities that the successive neoliberal governments have implemented. What’s happening in Sydney, for example, is the government’s buying back all the toll roads, because people have become so hateful toward the private ownership of roads. Its a very easy story to tell, that public provision has its place. And as Warren said, you’re competing for those resources, so you’re got to take those resources off the private sector. [01:15:25]

Joe Bongiovanni, Kettle Pond Institute: I want to thank you all, everybody, for being here. very much. I want to raise the issue, if I could, of voluntary constraints. We talk about voluntary constraints as if they’re things that all we have to do is just involuntarize them. And I don’t think that there’s enough of an explanation as to how voluntary constraints manifest themselves in real economies. I guess I would say, “Are we a monopoly issuer of currency in our country, when Goldman Sachs is creating things that serve as money?” And why can’t we have a list of the voluntary that exist, and that need to be undone, in order for us to move into a place where Modern Monetary Theory becomes Modern Monetary Reality? [01:16:20]

Warren Mosler: Let me just start with the first one, which is the President of the United States has said more than once we’ve run out of money; now there’s a voluntary constraint. That’s not true. Number two, we see our Administration, Secretary of State, Treasury, flying over to China to negotiate with out bankers to make sure we can fund Afghanistan and health care; those are voluntary constraints. That’s completely not necessary either; that’s a mistake. They know it, and they play us for complete fools, of course, so those are the top two, I think. Any body else have anything? [01:16:54]

Stephanie Kelton: The debt ceiling is a voluntary constraint, and when you want to get through that constraint, you put a bunch of guys and gals in a room, and they raise their hand, and they vote to raise the debt ceiling, and you avoid that constraint as well. I do have some discussion of this in my presentation coming up, and a list of the voluntary constraints, and what we can do. [01:17:17]

L. Randall Wray: Let me add one that is really important, because sometimes, when you finally get through to somebody, and they understand what we’re saying, “The government can always afford to buy anything for sale,” they say, “Uh oh, we gotta constrain those guys!” Well, yes, you do, but the way you constrain the government is by budgeting. They’ve got to go through the process. They say, “Okay, we need this program, we’re going to budget for it.” Not because we couldn’t afford to spend more, but because we want to hold them accountable. We want to make sure that the funds aren’t just disappearing into the pockets of somebody. So yes, budgets, budgets are absolutely necessary and that is how you constrain spending. First we have the approval process, make sure it goes through Congress, Congress decides, “This is a program we want,” and then we’re going to hold people accountable, to make sure the program gets done without wasting a lot of real resources, which would be a problem. [01:18:15]

Warren Mosler: Also, inflation is a big constraint, because even now, with unemployment 22% if you measure it the old way, you see no uproar over the idea that the Fed might have to raise interest rates soon. That’s just common discussion, it’s understood, and why? Why isn’t there any? Because people are against inflation, rightly or wrongly, the American population would rather see unemployment than inflation. So we’ve got that built-in constraint in our psychology. [01:18:48]

Bill Mitchell: To put a finer point on that, Australia now boasts that we’ve got thirteen and a half percent labor under-utilization, either unemployment or underemployment. Thirteen and a half percent. Under-24s: twenty-six percent of them are unemployed or underemployed. And we boasted that we were the first to put up interest rates in the current crisis. Our central bank’s now put them up three times, next month it’ll put them up for the fourth time. We’re boasting about that, yet inflation’s at the bottom of their so-called “target range.” [01:19:25]

Roger Erickson: I want to make a response, and a comment, and a suggestion to the idea things are not intuitive. I want to make issue with that. I’m an operations person, and what I see here is an operational problem. To make a state change in a complex system like a national policy, you always only need to get the key information to the key people in the key institutions, and two great examples of that are World War II and Reagan’s big run-up in the budget deficits. [unintelligible] when there is a compelling reason, people change their minds very quickly. The other point about what’s plausible is, if we had people in the audience here that were cultural anthropologists, for example, studying tribes, nations, and history of cultures, or biologists that studied ant nests and termite nests, or cellular biologists, just to name a few, my point is, there are wide ranges of people that understand this intuitively, and would say, “Duh! What are we talking about here?” The point is, I’ve looked into that, and I’ve made it a habit, the last six months, of contacting people outside economics and asking these questions., and the almost-universal response is, “We thought people in economics knew what they were doing, so we cede the territory to them.” The next response is, “Alright, if they don’t, we have to start firing people, heads have to roll.” The outcome of that is very antagonistic, so my point is, operationally, one of the things we have to plan for is you can’t win by pushing this upstream as a fight totally within the economics profession. If you go outside, to other areas, I think you’ll find much faster responses, and if you get the information to the right people, even if it does have to be grassroots, that will cause a state change faster than carrying this argument within economics. [01:21:34]

Bill Mitchell: Just as a comment on that, that’s why I think… I know the others here have probably gone through a similar process. I made the decision a few years ago that I would commit myself to writing this blog I wrote. It was an explicit decision, it’s not easy to do every day, and something had to give. For example: two years ago I think I put out fourteen refereed journal articles; last year I put out eight. And the six that I didn’t put out are my blog, and that’s an explicit way in which I engage now with people that I would never have engaged with before. About thirteen and a half thousand are currently reading my blog, and I don’t believe that many have ever read my academic work in the last 30 years. [01:22:28]

Edward Harrison: I’m a finance blogger at Credit Writedowns. I’m going to make the statement that I do think a lot of this is ideological. I come from a different ideological perspective than probably most of you here. I have a ideological predisposition against government intervention, against government, big government, if you would call it that. So, I think a lot of people are probably like that. So when you start making arguments of the government doing X or the government doing Y, I think that you should understand that that’s something that’s not going to go over with a large population within the United States. I think that’s just a given, and I can tell you from my perspective how I feel about that. Now, with regard to the economics of the idea, there are two compelling arguments that you are making, that I think could get your points across that has to do with the accounting. Number one, my deficit is your surplus, if you look at the government, the government having a net deficit is the equivalent of the private sector having a net surplus. If you hammer that point home, over and over again, I think people will understand, in times like these, what is necessary. Second point is, with regard to the government deficit, in terms of how much debt is out there, that the fact that we owe or that we own the debt is a key selling point, I think, to people who want to logically understand we’re not passing this on to our children, this debt we actually own, because the debt is the government’s debt, if you look at it again from an accounting perspective: my debt is your asset. I think those two pieces of information are very important. [01:24:31]

L. Randall Wray: I’d just like to say one thing about big government, and what the government should do. The main point we’re trying to make is affordability is not the question. So now we have to have a public discussion, free of the deficit hysteria, about what we want the government to do. And so, what we are arguing is consistent with a small government, it’s consistent with a big government. And I think that that is a political question, for the most part. I agree with you, it’s an ideological, political question: Do we want the government to do more, or to do less? [01:25:08]

Edward Harrison: That’s what I’m saying, you should frame it those terms: Let’s get out of the ideology of big or small government and let’s go to the facts in terms of the two accounting principles. And let’s get away from the deficit hysteria because it’s not factual. [01:25:29]

L. Randall Wray: I agree with that.

Warren Mosler: I’ll be doing that in my presentation. The difference between a federal government and a state and local government, and the mistake we’ve been making, is that we tend to look at the revenues to decide what government can afford to do. For a state, or a local [government], or a business, that’s actually correct. But for the federal government, it doesn’t get the revenues, it’s just changing numbers down in an account, so it gives you no information. Once you understand that, now you have to drive the model the other way around. Now you say, “Alright, what’s the size government we want and then what’s the appropriate level of taxation?” Once we know what the government we want is, that’s a political decision, then the level of taxation, more often than not, as Bill was saying, is going to be lower than that to provide for the savings so that the private sector will fully employ the resources that the government is not employing. So at the moment, if you look at my proposals, they’ve been a full payroll tax holiday, for example, to restore the private sector to employing the resources it had been employing in the last few years. Someone else might disagree and want an enormous public sector, or expansion, but those are political decisions. [01:26:37]

Bill Mitchell: I’ll just add to that, and it comes back to the point I made about the endogenous budget deficits, that in a sense, the private sector determines the size of government, not the other way around. The discretionary impact of government policy is relatively smaller than the cyclical impacts. And so, if you don’t like the size of government, then do something about it, or accept the fact the government will do something about it, and limit its own size, and you’ll get chronic unemployment and wasted resources. If the private sector thinks the government’s too big, then they just have to invest more. [01:27:24]

Edward Harrison: The second part of what you just said, about the government [inaudible] I would argue that it’s not endogenous at all. That in fact these are political decisions that are not necessarily made by individuals outside of government, but by the government itself. So, it’s not endogenous, it’s not the private sector that’s directing that at all. [01:27:47]

Pavlina Tcherneva: To carry forward this point, the budget is endogenous in one particular sense. You do have exogenous decisions made in Congress. We sit together, we pass a budget, we decide how much we are going to appropriate for different programs. That is an exogenous decision. But you don’t know how many people are going to retire today, or how many people will need to tap into Medicare, so those are endogenous expenditures. You don’t know how much you might need today to dedicate to unemployment insurance, because that depends on the cycle. Taxation, however, it’s very easy to make the argument that you can set the tax rate exogenously, but the revenue that you get depends on the underlying economy, and how well it is doing. So, it’s pretty much misguided for us to be fidgeting with this accounting difference. You need to be looking at the size of the deficit with respect to what is happening to underlying conditions. Trying to hit a particular numerical target is probably not going to be possible anyhow. [01:28:47]

Warren Mosler: The way I frame that is: the way we do things now is endogenous, because we don’t take proactive fiscal policy for the most part. We could. In August of 2008 we could have had a major tax cut so that car sales didn’t have to drop from seventeen million to nine million, and we could have sustained demand in the private sector, but we didn’t. So, in the absence of policy, the budget deficit was going up, endogenously. [01:29:23]

Raicho Markov: Just an MMT enthusiast. I wrote my question because for me it’s easier to place questions in written… I have some difficulties with spoken English. Do you really believe that nobody among the mainstream economists and politicians in the world, both in opposition and in the governments, understand how a monetary system based on fiat money and flexible exchange rate works? And what about the Japanese government, do they do this by accident, or some of you guys gave them some advice, or …? [01:30:10]

Stephanie Kelton: What I think Japan has learned from some of their mistakes of the past, so that when their budget became very expansionary following the bursting of their housing bubble more than a decade ago, they began to recover, and then they made a political decision to try to rein in the deficits. And they began another downward spiral. And so they began another attempt at recovery: they allowed things to expand, and in many ways they expanded endogenously, yet the deficit increased n response to the worsening domestic conditions, and there was another political decision to try to rein in the deficits, and they went down again. So they… I think they’re getting it right this time, so far, and I think, to some extent, it’s probably that they’ve learned from some of the mistakes of their own past. [01:30:57]

On the question of whether people out there have any real understanding, Marshall said, “Tell the Eisner story,” because I told him this story the other day. Years ago, some of us who are here to day were at a conference in Knoxville, Tennessee, an economics conference, and one of the presenters there was Robert Eisner. Eisner was a professor of economics for decades at Northwestern University, and he was, for a time, Bill Clinton’s professor. So, Eisner stood up at this conference and – Eisner wrote a lot about Social Security near the end of his life – and he stood up at the conference and he told us this story. When Bill Clinton was elected President, he invited Bob to the White House, and so Eisner makes the trip to DC, and visits his former student, and President Clinton says, “Well, Bob, what do you think of my economic policies?” And Eisner told him, “On the whole, pretty good, but you’ve got to know: you’re dead wrong on Social Security.” And Clinton’s response to him was, and I quote, “I know, Bob, but you’ve got to understand, this is politics.” And that was really discouraging for those of us trying to do what we’re here today trying to do, which is to help people understand the issues, and the accounting, and the arguments. And because we believe if we could just get people to understand, they’d make the right choices. But, perhaps that not always the case. [01:32:27]

Marshall Auerback: Can I just add to that that sometimes the truth does slip out. I don’t know if any of you saw the 60 Minutes interview with Ben Bernanke last year, when he was interviewed by Scott Pelley and the question arose, “Where did all this money come from? Isn’t this money that’s going to be taken away from the people that you have to tax later?” And Bernanke basically spilled the beans, “No, this is just electronic debiting and crediting on bank accounts.” He actually, literally, did say that. Warren’s quoted this many times, I’ve quoted this many times, and so when it suits them, they do convey the truth. But I see now that he’s gone back to the Dark Side, and he’s talking about fiscal sustainability again, I think he said that again yesterday. [01:33:08]

It’s amusing to me because we were at the Levy Conference last week, and Dick Fisher from the Dallas Fed made a speech, and the first part of the speech was very much restricted to levels of their competencies. He says, “I don’t really want to speak about political matters. I just want to speak about monetary policy.” And then Social Security came up, and of course then he started going on about wasteful government spending, and his grandchildren, what they’re going to have to pay for. So I thought, “Here we go, spreading into his non-competence in fiscal policy.” [01:33:35]

On Japan specifically, because I lived there for five years, and I lived there at the end of the bubble era, and the beginning of the deflation that followed, and even to this day, I don’t think many of them really get it. Richard Koo’s account of this period is very good. He’s not a Modern Monetary Theorist, as Bill has pointed out many times in his blog, but he does, on the factual points, get it right. I’ve met a number of people at the Bank of Japan and in the Ministry of Finance and about three months ago, someone from the monetary policy… the governing committee of the Bank of Japan actually said, “You know, If we’re not careful, we’re going to end up like Greece as well.” So clearly there are people within the Japanese government, or policy makers, that don’t really understand the difference between various currency systems. And I can tell you that the Ministry of Finance itself is full of these deficit hawks, they just hate the notion of government spending. It’s still a very large minority view there. [01:34:34]


Once again I thank Selise, Lambert Strether and the great work done by all the other (nameless to me) volunteers in documenting the Washington Teach-In. It was very much appreciated.

That is enough for today!

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    15 Responses to What is fiscal sustainability? Washington presentation

    1. Tom Hickey says:

      Awesome. Congratulations and thanks to all who participated and contributed both to the event and documenting it. This is a great achievement in knowledge and cooperation. Bravo and encore.

    2. jrbarch says:

      Dear Bill,

      ‘Drowning’ in greed, something darker and far more pervasive than debt is the concern: just wanted to point to just one essential consequence, gathering menacingly on the horizon that scares the bejesus out of people like David Suzuki (something our children will have to ‘pay for’) vis: Let Them eat Derivatives

      Life is still good – it’s the ‘good’ we take responsibility for matters!

      Cheers …

    3. Steve Sorrell says:

      Dear Bill

      This looks extremely useful. But would it be possible to include a downloadable mp3 file?

      Thanks, Steve

    4. bill says:

      Dear Steve (at 2010/10/27 at 21:28)

      If you go to the site I indicated had additional material you can download the audio file only.

      best wishes

    5. alienated says:

      I agree with Tom. Awesome. :) I’m about to work my way through the rest of the presentations rather than doing what I’m supposed to be doing …

      Bill, your workload sounds brutal, but the output is so valuable.

    6. Matt Franko says:

      Best ‘day out of the office’ I experienced ALL YEAR!

      Many thanks again to all!!!


    7. Rob says:

      Awesome, I would love to attend next year!

      Very insightful presentations and I will stop bugging about an MMT explanation of stagflation as the panel discussed it in a number of presentations. Still looking forward to a future post about it though.

      Thanks for all the great work.

    8. stone says:

      Where is the bit about how MMTers recognise the importance of the size of the stock of money as Scott Fulwiller says you do? You seem to be saying throughout this that leakage, to savings that will never be spent, can go on willy nilly indefinately.

    9. JKH says:

      Outstanding presentations and discussions.

    10. Eric says:

      Thank you all — Bill, Stephanie, Warren, Marshall, Pavlina, and Randy — for these enlightening and engaging presentations, and thanks as well to Salise, Lambert, and others for making them available to the world.

    11. BFG says:

      Excellent presentation Bill and special thanks to those who organised and participated in the conference. Your work is greatly appreciated.

    12. Sergei says:

      Bill, I am curious about that quote of Milton Friedman that you mentioned, tried to google but did not find. Do you have any reference to it?

    13. bill says:

      Dear Sergei (at 2010/10/29 at 5:24)

      If you can find it please send it to me as well. It is a recollection I have from a visit Milton Friedman made to Australia while I was a postgraduate student – and just before the digital age. I also haven’t been able to find it.

      best wishes

    14. Some Guy says:

      Tried to find the quote. I guess it is from his 1975 visit, about which he published a book Milton Friedman in Australia, 1975. Might be in there. Found this interesting paper on his visit: How Milton Friedman Came To Australia: A Case Study Of Class-Based Political Business Cycles , viewing it through the frame of the famous billyblogged Kalecki paper. The Balance Of Payments: Free Versus Fixed Exchange Rates looks like a possiblity too.

    15. Stephan says:

      I don’t know what Milton Friedman said in Australia but I read the paper mentioned by Some Guy and it seems to me it wasn’t such a good idea to issue an entry visa for Milton Friedman. Anyway he said the same thing to US congress before the U.S. Trade Deficit Commission in 1999:

      Ignorance is sometimes bliss. Imagine the public reaction if the Los Angeles Times and the San Francisco Chronicle were to come out with headlines reading ‘California Faces a Multibillion Deficit in Payments to Rest of Country.” Could Sacramento have refused to respond in some way?

      As an empirical economist, I very much welcome detailed government statistics on almost anything including international trade, yet as a political economist and citizen, I often sympathize with my old teacher at the University of Chicago, Lloyd Mints. who contended that U.S. trade policy would be far better if, like California, the U.S. had no such data.

      Here’s the link: Consequences of Trade Deficits

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