I have received several E-mails over the last few weeks that suggest that the economics…
Misusing public information
This blog is about right-wing distortion of evidence and how opinion formation in the US appears to be, as expected, inconsistent and ill-informed. The US President brought down his 2012 Budget yesterday and as expected he promised very large public spending cuts at a time when the US economy cannot afford them. In doing so, the President was bowing to the extremist conservative views that get all the airplay and column inches in the mainstream media in the US. Fox News pumps this extremism out all day every day. But if you sought to understand what the “main street” American actually thought about deficits you might be surprised. The New York Times and CBS sponsor a regular poll and recently they delved into the issue of budget deficits. One right-wing journalist actually had the audacity to use this Poll as a vehicle for her claim that even larger cuts are required to balance the budget. It is easy to show how she misused this public information.
To see the scale of the problem we are dealing with at present in the battle of opinions I refer to an article (syndicated by News Limited’s The Australian newspaper) published February 15, 2011 – Obama will have trouble balancing the budget.
The author is from the Hudson Institute which claims it is a “nonpartisan policy research organization dedicated to innovative research and analysis that promotes global security, prosperity, and freedom”. There is that non-partisan claim again – yes, nonpartisan as long as everyone is neo-liberal. They also claim to challenge “conventional thinking” which I found odd given that there publications are all conventional in thought and not innovative at all.
Anyway, the Hudson Institute is just another of these right-wing outfits in the US which has been lucky enough to get solid funding which allows it to pump out its relentless propaganda that undermines prosperity.
The first thing I said to myself when I saw the title was yes he will but why would he want to.
Apparently, Americans are being implored not to:
… hit the panic button just yet. But keep it handy. Without drastic, and I mean drastic, spending cuts, and tax increases, and continued bond buying by the Federal Reserve board to suppress interest rates on the federal debt, America will not be able to balance its budget.
I venture to note that with drastic spending cuts and tax increases, low interest rates notwithstanding, the US government will also not be able to “balance its budget”. The sheer damage such a fiscal contraction would cause to spending and output in the US would drive the automatic stabilisers (lost tax revenue etc) south and increase the deficit. Don’t these characters ever understand that.
Growth is needed for the deficit to fall. Growth comes with spending. If the private sector doesn’t want to spend in sufficient volumes to promote growth then the public sector has to. Otherwise you get stagnation and large deficits.
But moreover, does this writer actually understand what a balanced government budget would imply for the rest of the economy. Under current circumstances where the external balance is negative and not going to be positive any time soon (if ever), a balanced budget means that the private domestic sector (households and firms) would be in constant deficit overall. That is not my opinion.
It is a statement of fact derived from the System of National Accounts. The rule is simple – government surplus (deficit) equals non-government deficit (surplus). The non-government sector is comprised of the external sector and the private domestic sector. If the government sector is in balance, then the non-government sector is in balance. If the external sector is in deficit (that is, the economy is spending more abroad than it is earning from abroad) then the private domestic sector has to be in deficit (spending more than it is earning) to achieve balance. Dollar for dollar.
What does that imply? A continual private domestic deficit means continued increases in private domestic indebtedness. The financial crisis and subsequent real recession was, in part, caused by private debt reaching unsustainable levels (and proportions). It simply cannot be a sustainable economic strategy for the government to run a balanced budget under existing circumstances – even if it could.
Can any one provide an example of a fully sovereign government which did not issue debt in foreign currencies ever causing a crisis such as we are enduring at present? You will not find such an example.
Please read the suite of blogs – Deficit spending 101 – Part 1 – Deficit spending 101 – Part 2 – Deficit spending 101 – Part 3 – for more discussion.
Also, notice the use of the term America here as if the country owns the budget deficit. This blurs government and households and firms all into some sort of common-status sharing of this accounting balance. Like those stupid debt clocks – every man, woman and child now owes $X where X is some stupendous monetary amount. Well I owe none of the Australian government’s public debt. Not a single cent. I am not liable for it. I don’t have to repay it any time and all I can see are the benefits that the public spending has provided me over my life.
Anyway, the article just sets up the stereotypical political debate between Obama’s “liberal base … [which] … continues to call for more government spending” and the Republicans who first of all wanted to hold government “spending to $US35bn below 2010 levels” but since the November elections want “an additional $US26bn of spending cuts”. Somewhere in there are the extreme conservative congress members who say “We have to go for significantly more” cuts than ever imagined.
I actually don’t hear many US politicians calling for more spending cuts and the President’s 2012 Budget which was brought down yesterday (February 14, 2011) promised:
… more than $1 trillion in deficit reduction – two-thirds of it from cuts — and puts the nation on a path toward fiscal sustainability so that by the middle of the decade, the government will be paying for what it spends and debt will no longer be increasing as a share of the economy.
The President promised to “bring this spending to the lowest level since President Eisenhower sat in the Oval Office”. So it seems the “cutters” (aka vandals) are dominant in the US as they are in the UK and elsewhere. I think the President should monitor the UK Office of National Statistics more closely to see what effect fiscal austerity will have on his nation’s economy.
Anyway, all this talk about the politics driving the deficit reduction lead me to think about what the American people actually think. There was an Bloomberg article (February 14, 2011) – Egypt Protests Hold Lesson for U.S. Wastrels by known right-wing commentator Caroline Baum. The article was anticipating the 2012 US Budget.
Baum said:
Freezing domestic discretionary spending for five years, as Obama proposed in his State of the Union address last month, isn’t going to cut it … The president and Congress are going to have to look elsewhere and dig deeper if they want to put the U.S. on a sound fiscal course.
Please read my (other) suite of blogs – Fiscal sustainability 101 – Part 1 – Fiscal sustainability 101 – Part 2 – Fiscal sustainability 101 – Part 3 – for an alternative view of what a “sound fiscal course” might look like, independent of a mindless obsession with financial ratio.
Baum provides some analysis of a recent New York Times/CBS poll on reducing the deficit which had a sample of 1,036 randomly selected adults throughout the US and was conducted between January 15-18, 2011.
She concludes the following:
The American public is all for smaller government — as long as it doesn’t affect their specific benefit. This conflicted sentiment is borne out in various opinion polls … In a Jan. 15-19 New York Times/CBS poll, 75 percent of the 1,036 randomly selected adults throughout the U.S. said the federal deficit was a very serious problem. Twenty percent said it was somewhat serious …
That was not an accurate depiction of the result. If you consult the Actual Publication you will read that “70% of Americans say the budget deficit is a very serious problem for the country”.
Further the size of the deficit is not an indication of the “size of government”. Knowledge that someone is concerned about the deficit doesn’t allow you to conclude they are in favour of smaller government.
You could get a much larger government by increasing spending and matching it with tax increases but with a smaller overall budget balance.
Baum then looked at the question of what to do about this concern and reported that the poll showed that:
More than half (56 percent) of the respondents said we need to take action immediately …
Which was accurate with 38 per cent thinking that it “(c)an wait for better economic times”.
But then you dig a little further.
Baum didn’t bother putting this concern about the budget deficit into context. The CBS Poll report provides the following analysis:
Although concern about the deficit is widespread, that issue pales in comparison to concerns about the economy and jobs. As they have throughout President Obama’s first two years in office, Americans volunteer the economy and jobs as the most important problem facing the country today — 51% name that. The budget deficit and national debt (6%) and health care (6%) are far behind … 41% of Americans are very concerned that someone in their family will be out of work and looking for a job in the next 12 months, and another 25% are somewhat concerned. These numbers have changed little over the past two years.
So the correct reporting would have been to say people are concerned about budget deficits (even if they do not understand them – more on that later) but this is a trifling concern relative to their fear of unemployment.
What do people know about the budget deficit? The Poll asked them this question:
As you may know, the budget deficit is the shortfall when the amount of money the government spends is more than the amount of money it takes in. How much have you heard or read about the federal government’s current budget deficit — a lot, some, not much, or nothing at all?
The answers were stunning.
- A lot – 33 per cent.
- Some – 38 per cent.
- Not much – 22 per cent.
- Nothing at all – 7 per cent.
So 29 per cent of the sample haven’t heard much and another 38 per cent have only heard “some”. Given the loudness of the conservatives in this debate it is a fair bet that those who have heard “a lot” watch Fox news and so have a completely distorted view of what a budget deficit is.That doesn’t appear to be a very informed group at all. That is not surprising but suggests that the progressive side of politics (if there is one) has some public education to undertake to better inform the public about:
1. What an expenditure system is (aggregate demand) and its link to income generation and employment – remember, spending equals income which, in turn, is the reason firms employ people. Without spending employment drops and unemployment rises.
2. What deficits do in the context of an expenditure system – that is, public demand can (and should) support spending and income generation especially at times when private spending is weak (at present).
3. What a sovereign government is – monopoly issuer of currency without financial constraints – so all the debt debate is sheer hoopla when considered in terms of the operational (as opposed to the political) reality of the monetary system. Political sentiment can change but the operational characteristics of the fiat monetary system are clear and unchanging. The operational characteristics need to be understood and include the primacy of the government in maintaining economic stability, the fact it has no default risk, the fact it can never run out of money, the fact that inflation may arise under certain circumstances.
4. The implications of government debt – the currency issuer can always service and repay its debt. It also doesn’t even have to (and should not) issue debt. Exposing the political aspects of debt issuance and showing there are no financial reasons for such a practice are important tasks. Exposing the myths about foreign purchase of debt is also an important task.
5. Relating a firm understanding of inflation – how it arises and to disabuse people of the notion that deficits equal future inflation. They do not!
6. Relating a firm understanding of how intergenerational legacies are transmitted with a focus on the value that public education and public infrastructure provision is for the future generation and how our kids never pay back our public debt.
7. Relating a firm understanding of the fact that imports are a benefit and exports are a cost.
Baum then reported the responses to where Americans would prefer to see a cut in government spending. 62 per cent wanted spending cuts while 29 per cent wanted tax hikes.
She say that:
Here comes the catch. Everyone knows that to cut spending you have to cut where the spending is. Given a choice of reducing federal outlays for Social Security, Medicare or the military, the budget’s Big Three, guess which one Americans prefer?
Bingo. The military (55 percent). We are all affected, now or in the future, by reductions in retirement and medical benefits for the elderly. Unless you happen to be one of the 2.2 million people who are on active military duty, in the reserves or in the national guard, or are among the 545,500 civilian workers that supported the Defense Department last year, or work for the myriad of defense contractors and parts suppliers, you are less apt to be concerned by cuts in military spending, even if they threaten national security.
The reporting of the results is accurate but I was interested in her interpretation. In fact, the CBS Poll provided further information that might lead to another interpretation.
The Poll said that “More specifically, a majority of Americans choose reducing the number of U.S. troops in Europe and Asia as the area of military spending they would most like to see cut”.
So it might just be that the majority of Americans are more concerned with the failed aggressive (martial) foreign policy and the damage this is causing America’s reputation abroad. They might have finally twigged that the “war on terror” has made the world less safe and hasn’t stamped out Islam.
That is probably a better bet than to suggest the response is driven by selfish cynicism.
Moreover, the Poll said that “Medicare and Social Security make up a significant portion of the nation’s budget, and changes to these programs may be necessary in order to keep them paying benefits. Given a choice, Americans prefer increasing taxes on people who pay into Medicare and Social Security rather than reducing future benefits for recipients of those programs”.
That response also puts a different complexion on matters. It is not that the American public eschew public pensions and health care – they just want those who can pay to pay more.
Baum then went onto finish off by promoting another myth. She said:
Ninety-five percent of Americans in the New York Times/CBS News poll said the federal deficit is a problem. Parents readily concede they don’t want to saddle their children with a legacy of debt.
The CBS Poll did ask people if they thought the large deficit would “create hardships for future generations”. 64 per cent said they were very concerned while 26 per cent said somewhat concerned. They were then asked to articulate the specific concerns they had. This is what they said:
- Jobs/outsourcing/unemployment – 29 per cent
- Services cut/reduced – 18 per cent
- Hurt economy in future – 15 per cent
- Future generations pay – 9 per cent
- Country in debt – 7 per cent
- Taxes will go up – 5 per cent
- U.S. become weaker country – 2 per cent
- Nothing – 0 per cent
- Other – 5 per cent
- DK/NA – 10 per cent
So they are mostly concerned about for their children because of less jobs, less public services, and damage to the economy (associated with less jobs etc).
There were very few Ricardians in this sample, which Baum acknowledges was random and representative. That is, people who fear deficits because they think the future tax burden (to “pay back the deficits”) will rise.
Only 9 per cent were worried about “saddling their children with a legacy of debt”. Baum’s representation is thus very misleading.
Relatedly, the respondents were asked whether budget deficits were “generally okay for the government to run whatever deficits it needs, if that’s what it takes to provide important services to people. 2. It is sometimes okay for the government to run deficits such as in emergencies or if the size of the deficit is kept manageable, OR 3. It is never okay for the government to run deficits under any circumstances”
You will find that the overwhelming majority (81 per cent) were in the generally okay (6 per cent) and sometimes okay (75 per cent). Americans might not understand what deficits are but the vast majority do not hate them like the Austrians and neo-liberals do. So the latter have no grounds to cite “popular opinion” for their irrational views.
Finally, Baum finished by trying to draw some link between the US federal deficit and the “30-year autocratic regime” in Egypt:
In Egypt, it took 18 days of mostly peaceful protests to bring about the end to a 30-year autocratic regime. Surely the American public, under no threat of torture, imprisonment or death, can assert itself to get our government to crunch some budget numbers and get them to balance.
Journalism doesn’t come much worse than that.
Conclusion
The scariest part of the Poll (which went into gun control issues as well) is that 65 per cent of Americans oppose the ban on sale of handguns to the public.
But I hope this blog has shown you the way right-wing journalists distort information to weave their pre-determined message. It is clear the the public attitudes to budget deficits are nuanced and probably based on massive misinformation. Baum and her gang of right-wingers help perpetuate the latter which abuses and dumbs-down the public debate.
That is enough for today!
Bill, it’s America, who cares – they get everything they deserve (a polarised, divided country, where the room for deliberative debate was rejected by their founding fathers’ who designed the system of government to encourage FRAGMENTATION rather than the ‘levelling spirit’). Please, instead, encourage them to get the budget back into surplus- and let’s watch what happens.
Your energy is better focused on communicating to Parliamentary systems of government, like Finland, Iceland, Austria, Signapore, Switzerland, Norway, Sweden, not America. America is yesterday’s man.
The trouble is, Bill, that ignorance about how government finances work isn’t a right wingers’ problem. It’s a society wide, indeed world wide, problem. Even the great majority of the economics profession doesn’t understand it. Three months ago I didn’t understand it. A few economists and a (very) few politicians do understand, but the politicians currently have to pretend they don’t understand. The false parallel between national budgets and household budgets is still too intuitively “obvious” for it to have lost its grip on the public mind, anywhere in the world as far as I know. Even in the heyday of Keynesianism, my impression is that government leaders didn’t really understand how government finances work, they just thought governments could run deficits because their borrowing power and capacity to repay was much greater. And of course, being politicians, they liked having more money to spend.
Spadj, that’s not very nice. Have the US citizenry upset you at some time in the past?
@ Alex
I agree with yours points made, and no, it’s not nice – reality isn’t nice. It’s scary. But that’s the reality: the US Constitution (and thus the entire political framework) isn’t there to foster consensus, reason or sound discussion, its about fragmentation, mass hysteria, polarisation and division – ambition must counteract ambition. Federalist No. 10 is a particularly amusing read. So, I’m afraid all this energy trying to “enlighten” Americans is a lost cause and wasted – America is not a country that involves explaining things to. It’s all about made-up hysteria, not empirical reality. It is as Veblen observed, a mere crucible that outsiders can laugh at and be bemused by. Although, agreed, part of this is the almost natural and ingrained tendency to (erroneously) compare sovereign governments operating in a fiat currency regime (monopoly users of currency) to households (who are monopoly users of the currency).
And, actually, yes the US citizenry have upset me; I recently argued we should adopt citizen initiated referenda in Australia (if we were to become a Republic) – something that has served New Zealand, British Columbia (Canada), Uruguay (recreating sovereign wealth funds and refusing to privatise industry) and Switzerland (to build roads, schools etc) well – only to hear the counterargument we’ll become like California (ironically, the deficits these initatives have caused may be saving these states, but that’s another story and other states have CIR but did not capped their property taxes, so its cultural). Alas, Americans’ destroy everything.
Despite being an ardent critic of US imperialism I must say that the people, the ones I have come in contact with, is very nice and friendly and easy to deal with.
Jeffrey Sachs on the budget and the state of USA:
http://www.youtube.com/watch?v=bCPz2SzROFQ
Even if he is a deficit dove it’s quite good critic.
Jeffrey Sachs on the Budget: “Do we really have to have our own Egypt here in the United States?”
The problem isn’t tea-party right-wing nuts (they are anyway immune to reason and logical arguments, you don’t argue with a lunatic) the serious problem is what suppose to be the left or liberals (in US) and definitely the greens, all leftists is anyhow green now. They are like the uninformed US public they don’t like the cuts but seems numb to the issue of how the money system operate. Debt and deficit is a problem but it should be addressed on another time scale than what e.g. Osborne does. From the left point of view it’s all about taxing the rich, which might be a nice thing to do but it doesn’t address the core of the problem. And as they have been greener ordinary people shouldn’t have to much money to spend for “recless” consumption.
falseeconomy.org.uk :
“We don’t deny the deficit. It was an inevitable result of the worldwide recession. Of course it has to come down.”
“A country with a smaller national debt can easily run a big deficit for a few years. A country with a big debt will find it harder to run a deficit as it will finds it harder and more expensive to borrow money.”
Me as a layman have a hard time to argue with leftists, they simply stop listening when you try to make the argument that we live in a fiat-monetary system and there is no such thing as operationally spending constrains on a government in such a system, all they can think of is that taxes pay for government spending. It’s easier to make the argument to a neo-liberal albeit they still think the debt and deficit bogey man is necessary even if it’s fictitious.
Despite its excesses there is more hope that real changes happen in USA than in EUrope where the eurocrats (often socialdemocrats/labour) emptied democracy of its content and made practically illegal the economic policies that once created full employment. USA is probably much more flexible and still have better basic democratic structures if they want to use it.
Bill what I find unfathonable is how you both bemoan the power and influence of moneyed interests and yet say that government deficits should carry on and banks should lend to anyone able to pay them back with a minimal rate of interest. Creating all that money is simply creating a huge overhang of financial power and leaving it to become concentrated in fewer and more ruthless hands. That financial power will increasingly make its self felt and you will increasingly wring your hands about the symptoms (political manipulation, manipulation of commodity prices etc etc) and yet you have an ideological hang up about addressing the root cause by taxing away the financial assets.
Here is more. Just from today:
http://www.ritholtz.com/blog/2011/02/more-astroturfing-ginned-up-study/
http://www.latimes.com/news/nationworld/nation/la-na-chamber-20110215,0,2884792.story
despicable ..
As far as Baum, Here is a quote from an “expert”/s from one of her articles “I know of no case where a central bank that wished to boost inflation and/or nominal GDP was unable to do so” I e-mailed her with an example: Japan. Response from her and her “expert” and I quote : “Japan didn’t try hard enuf.”
enuf said …
I agree with Alex, it’s a world wide lack of understanding. Unfortunately most MMT advocates are not helping. While they may be 100% correct that the best way to fix the economy is through govt spending and direct job creation, it is not what people want to hear. If I start an economics conversation with someone by saying the economy can be fixed with more govt spending, the other person will usually stick their fingers in their ear and say “La La La La I can’t hear you”. But if I start the converstation by saying the economy can be fixed with a payroll tax holiday that will put a few hundred bucks per month in your pocket, the response I get is “how will they pay for future benefits?” Then I get into how government spending actually works at the federal level. I also love to use Mosler’s department store analogy. Most people listen. Some are skeptical but at least the MMT seed is still planted.
While I applaud the efforts of the MMT advocates, I think your message would spread much faster if you told people what they want to hear. They are tired of taxes and spending (even if we – the MMT crowd- know the spending is good).
A few days ago, I read that, perhaps, as many as 50+% of American high schools either mandate or suggest that creationism be taught in science/biology class; why, you ask? Many state political leaders are influenced by the leadership of Christian fundamentalist organizations/churches. The religious fundamentalist influence in the south and in states west of the Mississippi river is a major cultural consideration; the politicians understand and act accordingly. The voters follow advice of the religious leadership; though, they do not necessarily follow the advice when it comes to gender preference/sexual preference among their religious leaders. Lots of stuff on tv does seem to influence human behavior, though, most people only pay attention to sports and weather; the remainder of programming is simply time-filler for advertising.
On the other hand, a good percentage of viewers would pay more attention to CSPAN, Public Broadcasting, or similar media if the programming merited it. For this reason, I advocate that promoters of MMT give consideration to developing media – animation, cartoons, comic strips, etc which might be employed to convery ideas in a combined verbal/visual manner. Such efforts are available on many dedicated YouTube sites and on other blog sites; I have yet to find any which are understandable by the ‘great uneducated masses’ that deal with MMT, though I have found one developed by Brenden McCooney (Kapitalism101) which presents the efforts of an self-educated economist to illustrate the concepts which Karl Marx attempted to convey in Das Kapital (google, and you will find). As most know, many of the MMT promoters have attempted to influence opinion, with very limited success.
Hi Bill, others,
Just found this site and I like what I have read.
I’m in Ireland and we are in the middle of an Election campaign. The biggest party in the pools is the most right wing party in the race. THey are threatening public service job cuts and privitisation of the health service. It’s depressing. The blogs I read here and people I meet seem to buy into it all. Anyway, a lot of you seem to know things about economics. Perhaps someone could answer my queries. I see this ‘Fiat’ money idea a lot.
Can someone quickly explain von Mises’ regression theorem to me as I have a friend who raves about this stuff? Also, what is so special about these Austrian guys I keep reading about on blogs etc?
Cheers,
Kaiser
Hi Bill et al,
I have been reading your blog for well over a year and find it very enlightening and entertaining. Ironically, I found it due to a recommendation from a ‘Lord keynes’ on another Economics blog that was full of hysteria related to ‘walls of credit’ coming from China for us to drown in. Anyway, in relation to the deficit hysteria that predominates in most western countries and probably in other places too, I think that it is really about denial of politics or rather about reducing the degrees of freedom politicians have to do stuff. If you convince the majority that public debt and deficit is bad, then the wiggle room for politics is very much reduced. You have said it yourself many times in this blog: knowing that spending equals income etc etc then the choices of what to do with the increased fiscal power is political in nature. Imagine what would happen if people really knew what was possible in a fiat monetary system? If you had 20% unemployment as in the US at present, then it would mean that the incumbent regime actually wanted it that way – it would be a de facto declaration of class war. Likewise if you introduced a job guarantee, used up all the cheap labour that ‘entrepreneurs’ needed to make lattes and flip burgers, leading to reduced profits etc etc. In those cases politics would become interesting very quickly, people would become politicised overnight.
Forget MMT for a second, if you understand the sectoral balances then there really is no excuse for 99% of what is being done and not being done at the moment by the UK and US govts. When the UK government says that there is no alternative to cutting, then no one can really argue with them since they accept that debt/deficit is bad, so you suspend your political disbelief in that case. It is genius really. But imagine if 50+% of the population understood the accounting principles and that the choices were just political, then you would have to argue your case and the game would be lost.
I would therefore forget about trying to educate people about MMT and concentrate only getting the sectoral balances message across so that people understand the consequences of cutting the deficit in the USA for example. This is turn would force politicians to show their hand.
Kaiser,
The regression theorem merely tries to explain why people demand money in its own right. The reason Mises gave was simple – people value units of money because of their expected purchasing power andwill allow people to receive real goods and services in the future, and hence people are willing to give up real goods and services now in order to attain cash balances. Thus the expected future purchasing power of money explains its current purchasing power.
You friend sounds unique. Tell him Austria’s success as a country – i.e. low levels of unemployment – was thanks to exporting its economists.
Kaiser said: “I see this ‘Fiat’ money idea a lot.’
IMO, the most important thing to learn is the difference between fiat currency, the debt based on fiat currency, and the time differences between spending and earning that debt can create.
Can you explain to me why all NEW medium of exchange is the demand deposits created from debt whether private or gov’t?
Kaiser said: “I’m in Ireland and we are in the middle of an Election campaign.”
Take a good look at anyone who says negotiations about bondholders should start with the possibility of 100% haircuts even if it leads to higher interest rates.
Kaiser,
The problem with Mises regression theorem is that it describes the world how he wanted it to be not how it actually is.
The crucial piece missing in the Mises puzzle is tax driven money.
Mises simply doesn’t realise or ignores the fact that when a government enforces a tax system they also make the money they issue the only means with which to pay those taxes.
If you look back in history you will see that whenever a nation was conquered the first thing the imperialists do is introduce a tax system and then tie that tax system to the money they are the monopolist suppliers of.
I’ve has personal conversations with some well know Austrians about this point and none of them have ever been able to defend Mises position.
stone: concentration of private sector NFA is a separate problem to fix. To say that govts should focus on destroying NFA to solve the issue of excessive wealth/power in certain hands, even at the cost of driving the middle class and poor further into debt, is absurd.
You might as well say that we should reduce govt spending to zero in order to lower defence spending and stop our countries killing people overseas.
@Anders
I can’t speak for stone, but that’s not the problem as I see it. If the government focusses only on spending without taking into consideration the unequal accumulation of NFAs in the private sector, then the resulting unequal distribution can (and does) have consequences. Simply put, money = power. This power may be used to influence government policy, to the benefit of those with most NFAs (c.f. USA). A stable feedback loop is created which maintains wealth differences.
Anders, concentration of private sector NFA is not separate from allowing an excessive build up of NFA. As dnm says money=power. If the richest 0.01% of the population have $1B each then they will have vastly more influence than if they had $100K each. It is vital that power is not concentrated in such a way as the richest 0.01% are incapable of adequately directing matters for the general benefit even if they wanted to. Budget deficits are simply taxation below the amount required to mop up after the spending. If taxation is in the form of an asset tax (applied to cash, real estate, securities etc) then it mops up the wealth accumulating at the top so as to maintain stability and does not impinge upon the poor at all.
dnm: I think you and stone are on the same page.
Spending and NFA concentration are two separate things.
We all presumably agree the following:
1. a capitalist system tends ordinarily to see growing inequality – even with govt deficits (eg late 1990s US). As such, govts ought to track inequalities of wealth and income, and use policy to try and deploy redistributive policies to mitigate the natural propensity towards
2. budget deficits may accelerate the growth of wealth inequality; if so, this increases the task that govts have to try and address it
3. at the margin, a balanced budget may _in itself_ reduce the growth of wealth inequality (although it would hardly in itself stop such growth), albeit that it will also _in itself_ exacerbate indebtedness of those on low and middle incomes.
Where we differ is that you and stone seem to think that the marginal benefit of balanced budgets in terms of slowing of inequality growth, outweighs the marginal cost in terms of poorer people getting more into debt.
So whilst accepting your point about money and power, I would nonetheless reject your argument for a balanced budget. Firstly, it carries an unpalatable externality. Secondly, a BB is a blunt tool to address inequality growth; it can only ever partially attenuate the problem, so you will always need to have govt address the problem through redistribution anyway.
stone – agree with your characterisation of tax as “mopping up”, but what it mops up is purchasing power. I don’t think an asset tax (which of course I favour) mops up purchasing power in the same way, because this is money which was not about to be spent on goods and services (the rich having a low MPC).
I suppose if you’re talking about a fiscal stance which is sufficiently stimulative to low and middle income households, then perhaps Bill wouldn’t object to your proposal. But I do think that objecting to a budget deficit in principal is misplaced – the rich will tend to get richer, whether or not there’s a budget deficit.
Anders, the current set up seems to be for gov spending and taxtion patterns such as to create consumer price inflation of 2% per year and asset price inflation of 8% per year for ever. In effect that is a transfer of power and influence to those who hold the most assets away from those who don’t. What it means is that asset holders will be able to direct the lives of non-asset holders to a greater and greater extent as time goes by.
stone – I’m not clear on the transmission mechanism between handing the private sector govt bonds (increase in NFA), and asset price inflation.
I can’t really engage with the claim of 8% asset price inflation; I’m not sure if it would even necessarily be a bad thing (it doesn’t look sustainable since asset values ought to relate to nominal GDP at some level).
But asset price inflation is not a net concept – and so would seem to have little to do with NFA. If financial institutions are bidding up asset prices using leverage then it won’t necessarily be adding sustainably to their stock of NFA.
I just think you would spend your time better lobbying for Georgist land taxes, for Tobin transaction taxes, for higher inheritance taxes, and against private education, instead of inveighing against budget deficits.
Anders, what I meant was that budget deficits lead to an accumulation of gov bonds and cash and other asset prices increase as a consequence (if people have amassed cash they will exchange it for assets that provide a greater return- because the availability of such assets does not balloon exponetially, their prices do balloon exponentially).
Anders,
I’m going to refocus the conversation slightly. What’s interesting to me is that Bill’s argument boils down to this: the government has to run a deficit if it wants to maintain full employment, while accommodating the private sectors net desire to accumulate NFAs. But the obvious question is WHY does it have to accommodate that desire? Bill doesn’t usually strike me as a particularly accommodating bloke when it comes to the interests of the rich and powerful, yet it is they who are doing most of the accumulating. So what gives?
Spadj Wrote:
“Bill, it’s America, who cares – they get everything they deserve…”
—
While the latter is surely true, the former should give us pause.
Why?
Namely because the right wing factions in both of the larger parties- as well as corporate lobbies here mimic what they see going on in America. Whether they should or not is irrelevant. They’ve adopted many of the same policies, sociopolitical “strategies” and failed ideology.
In short, there’s a sizable contingent that looks at what America does and then for their own shortsighted or even nefarious purposes, would like to bring it home to Oz.
Privitisation is a topical example of that- but there are many, many more.
Now, lest anyone think that there’s not a plurality of fair dinkum educated folks still left in America who see the Neoliberal/Tory/Corporatist for what it is (and who also have the credibility that goes with calling the shot and getting it right- repeatedly) I’d like to offer two articles that dovetail with what Dr. Mitchell has written:
1. Dean Baker, Co-Director of the Center for Economic and Policy Research:
The President as Storyteller-in-Chief
http://www.huffingtonpost.com/dean-baker/the-president-as-storytel_b_822945.html
2. Robert Reich, Former US Secretary of Labor, Chancellor’s Professor of Public Policy at the Goldman School of Public Policy at the University of California, Berkeley:
Why Obama’s Budget Sell-Out to Republicans Threatens Our Economy
http://www.alternet.org/economy/149915/why_obama%27s_budget_sell-out_to_republicans_threatens_our_economy/?page=entire
The gist of the articles are much as we read here- that the policies and the policy direction are based not on evidence- nor on anything remotely resembling sound economic theory, but instead reflect persistent, pervasive and relentless propaganda, They are based in large part on what Paul Krugman refers to as Zombie Lies.
As to Dr. Mitchell’s query re: Obama “…yes he will but why would he want to?”
There are several schools of thought on that in progressive circles- none of which is mutually exclusive.
I’m sure we’ll have more opportunities to get stuck into them down the track.
dnm: good question. In terms of macroeconomics, there is a strict choice between accommodating that desire and allowing GDP to fall. There is simply no way you can refuse to accommodate the desire without repercussions on GDP / employment. If you don’t like accumulation by the rich, then deal with that in redistributive terms; those concerns should speak to the details of your fiscal policy, not your overall fiscal stance.
Bill may look at this differently, but for me GDP has to be governed by a Keynesian-style cross of the govt propensity to run a deficit as a function of GDP vs the non-govt propensity to run a surplus as a function of GDP – Scott Fullwiler’s chart here (“The Sector Financial Balances Model of Aggregate Demand-Revised”) looks pretty compelling.
Do you at least accept the trade off, but prefer the cost of a bit higher unemployment today for the sake of fewer plutocrats; or do you actually think there is a way to both balance the budget and achieve (close to) potential GDP growth and full employment?
Bill demonstrates cogently somewhere or other that low unemployment itself is pretty well correlated with, and seems to contribute to, lower inequality.
Anders, if every citizen was paid a citizens dividend (say $10000 per year) and the entire cost of that and all other gov spending was matched by a flat % asset tax applied to all assets of every citizen where ever in the world they were and whatever form they were in- then their would be no budget deficit.
Such a massive payout to all and sundry would cause plenty of aggregate demand as people could buy whatever they needed and could start up new ventures investing the money etc etc.
Anders, I think it is vital to see the distinction between nominal GDP that is greatly influenced by asset prices and genuine real economic activity. It is perfectly possible to have a “job free recover” with inflating asset prices and a downturn in real economic activity. Likewise a real recovery could coincide with a draining of asset prices.
The rich have not always got richer. The 1929-1960 period was one where wealth became more evenly distributed. Exponential increases in inequalitity can not continue indefinately ( that is a mathematical certainty). The important thing is to nip them in the bud before they collapse in the most tragic way.
Thanks to all who answered my query on Mises.
I’m bothered by this nonsense but don’t have the time to go researching and reading it myself (I’m an Engineer). The Austrian stuff sounds barmy to me too, to be frank.
FED Up. I think we should get rid of all the bondholders in one fell swoop. My problem with this in the debate is that we are dependant on borrowing of Euro to fund our Teachers, Doctors, nurses etc, refusal to bow to the ECB/EU/IMF and we go bust.
Could we get a bilateral loan somewhere at better interest rates than the Troika are giving us (5.8%)??
The only other plan is to leave the Euro and then start our own currency again but how do we prevent inflation if this is the case??
Anyway, thanks again folks,
Kaiser
stone – I think your “citizens dividend” idea proves my point. To allow economic growth and full employment within a BB constraint, you have to resort to a redistributive proposal which is so radical that it bears zero chance of enactment. I would argue that if you confine yourself to redistributive policies which have a chance of being accepted, then you will fall well short of full employment (unless you ditch the balanced budget constraint).
I agree that you can have a job-free recovery, and simply encouraging govts to run deficits per se will not achieve full employment. You need the right policies too – including a well-designed ELR programme. But propagating the idea that budget deficits are a bad idea WILL prevent us from ever achieving full employment in practice – I don’t see how anyone can dispute this.
I also agree that inequality has fallen in the past and that though it will fall again one day it is good to nip it in the bud now. But this is the job for the details of fiscal policy, not the overall fiscal stance. The post-war period was good for falling inequality, but there is zero basis for arguing that balanced budgets had anything to do with this development.
Anders, I just don’t follow the idea that taxation below the level of spending is not intrinsically linked to enrichment of those most adept at enriching themselves. Where else is the money going to end up?
Even if the method of gov spending was exactly along the lines Bill suggests, then matching that with an asset tax that balanced the budget would not reduce employment or genuine economic activity even though the consequent drop in asset prices could cause a one off drop in nominal GDP. Anyway, asset prices and nominal GDP would not continue to fall indefinately. They would bottom out and stagnate at that level and the system would then be sustainable which it isn’t with the present set up. Even if nominal GDP never grew, people could become better catered for due to technical innovations creating efficiencies (eg more efficient transport, faster computers etc). Without the super rich, all the current wealth management industry would be redundant- freeing up many talented people for productive employment. In the 1960s the FIRE sector was a fraction of the size it is today and the increase since then is a wasteful byproduct of the build up of excess wealth. With modern IT a 1960s level of financial service industry could be provided at a tiny cost.
Personally I think it is wistful thinking to imagine that you can create more and more money for ever and not have it cause a malign influence. Historically what is the longest period that an expanding fiat money system has been sustained? How rich do you imagine the worlds wealthiest 100 people will become if we have massive bubbles and bailouts on a five yearly cycle for the next 50 years? Do you not believe that the ever growing ranks of billionaires will attempt to exert stronger and stronger control creating an ever more distorted and destructive system?
I’m also not sure that the citizens’ dividend is so far from acceptability. Milton Friedman of all people was an advocate of it at one time and the UK Green Party had it in their manifesto. In the uk there are some districts where 80% of the population are living off benefits more expensive than such a citizens’ dividend. The difference is that people would be able to work on top of a citizens’ dividend. In effect our benefit system traps people into not setting up ventures that would earn them additional money and perhaps even employ others as partners or employees. There are many people who want to work full time but their are also plenty of people who wouldn’t if their was less financial need to do so. Isn’t it unfortunate to have a system that coerces such people to work more unless there is some point to the work they are doing? Much of the work that gets done now is counter productive and would be best left undone.
stone – you don’t strike me as living in the same world I do. I certainly share your concerns about galloping plutocracy, but right now we have a real problem we can try and ameliorate which is unemployment and poverty. Persuading the world that govts can afford to buy anything which is for sale and which the private sector doesn’t buy is difficult enough. All that progressives like yourself will achieve if you succeed in reinforcing Austrian-ism and stifling MMT is that you will have worsened welfare for the poor and done nothing about the plutocrats.
I’d like to take issue with your detailed arguments, but I am now getting a sense of why, reading through past blog entries, Bill and other commenters on Billy Blog eventually just ignore you. I can only assume the reason you spend time here is to try and peel away potential MMT converts (like myself) away towards some misguided Austrian-style balanced budget idiocy. Here’s hoping you fail in this project.
Anders, the reason I spend time on here is to try and get my head around what the economy is and how it works. I expose my views to criticsm on here because I find feedback from people like you very helpful (thanks for that). It does trouble me that my interpretation of things is generally so badly out of kilter with every one else. I realize that that almost certainly means that I have simply failed to grasp the concepts etc. I certainly do not want to peel anyone away from an accurate view to an inaccurate view about economics. I would find it much easier if I had faith in mainstream neo-liberal economics and somewhat easier if I had faith in MMT -but as yet I don’t.
stone,
MMT is just a description of how the monetary system works. Beyond that are policy choices which are informed by that description.
Neil Wilson, I take your point. I guess the issue is how widely you draw the border around “how the monetary system works”. A core MMT tenet is that budget deficits leak to net savings. When forming an opinion about policy it is vital to consider the possible consequences of accumulated leakages to net savings over a sustained period. My concern is that your assertion that net savings are “money safely locked up like CO2 in carboniferous rocks” might be optimistic.
stone,
Remember that they are ‘net savings’ and they essentially represent the failure of the non-government sector to clear completely, hence the reason the currency issuer has to step in and top up the header tank to stop demand falling.
Don’t confuse them with the various private sector actors saving financial assets. It is perfectly possible to have zero net-savings in the non-government sector and for there to be billions of financial assets in the system unequally distributed with the equivalent liabilities.
In the UK private corporations have been amassing colossal quantities of assets since the millennium, first at the expense of increased borrowing from the household sector and since they ran out of steam they have seamlessly switched to government gilts.
@ Jetpax
Agreed, but it is their system of government which is designed to paralyse any serious debate – American has no national institutions above politics (no constitutional monarch like Norway, no national initative like Switzerland, no shared cultural [but not necesarily economic] belief in localism like the Swiss and Austria) that are the source of national unity, and that may lead to respectful or reasoned debate. It is just a large, polarised country. I agree its due to right-wing pundits, but unfortunately, the system is such that it allows these people – from the left and right – to scream non-sense, ignoring facts in the process.
* I mean on social issues and left-wing can be at times just as bad; I’m of course socially conservative, but totally in agreement with MMT on economic policy.
Kaiser said: “FED Up. I think we should get rid of all the bondholders in one fell swoop. My problem with this in the debate is that we are dependant on borrowing of Euro to fund our Teachers, Doctors, nurses etc, refusal to bow to the ECB/EU/IMF and we go bust.
Could we get a bilateral loan somewhere at better interest rates than the Troika are giving us (5.8%)??”
Probably not. Not sure Ireland should want to.
The only other plan is to leave the Euro and then start our own currency again but how do we prevent inflation if this is the case??”
There will probably be price inflation. I’m not sure how much Ireland depends on imports.
My point is there should probably have been more price inflation and wage inflation in the past if the amount of medium of exchange was increased with currency not debt (allowing for distribution problems). That should have led to higher interest rates in the past so no housing bubble developed (or hopefully any other financial asset bubbles).
The problem is increasing the amount of medium of exchange with debt because it leads to distribution problems (wealth/income inequality) and hoping that an economy continues to grow even though I believe real aggregate demand is NOT unlimited.
If Ireland gets back its own currency and imo, it should strive for 0 debt even if imports are more expensive. 0 debt means not having to worry about interest rates and not having to pay back any loans.