There is no federal public debt problem in the US

I would have thought the role of a Professor of Journalism at a university would be to teach students how to write copy and to research issues in the field of journalism. I would not assume that such a person would claim expertise in macroeconomics and start pontificating about national economic policy. But I was wrong – again. In this article (July 31, 2011) – American dream comes with a heavy cost – which was published in the Melbourne Age (but previously the UK Guardian) one Rosalind Coward proves how little she knows about economics. Contrary to the sway of media opinion from these “tin pot” experts – there is no federal public debt problem in the US.

Coward, a professor at Roehamption University (near London) starts like this:

The US debt debate reveals a nation living beyond its means.

The US debt debate in the US Congress is solely focused on public debt. In fact, the propositions advanced by both sides of politics – to cut net public spending indicate that the politicians are in denial of private debt.

Why do I say that? Answer: given the current account deficit which is not going to be eliminated in the foreseeable future, a cut in movement towards a budget surplus will simultaneously be a move towards a private domestic sector deficit. Further, by cutting aggregate demand at a time when the private sector is trying to save to reduce its debt exposure, the government will be undermining the private efforts.

So if we are focusing on the public debt, then the debate in Congress is not about “living beyond its means”. As I have noted in the past, a sovereign government has no means by which I mean real resources. What such a government has is its monopoly over currency issuance which means simply that it can always purchase whatever is for sale in that currency. Always means always.

I know some will say the debt debate proves otherwise – that the Government is bound by the rules of Congress, which can stop it spending. Yes, the government can stop the government spending. I don’t want to get into debates here about what the government is in the US. Clearly, the combination of the legislature and the Administration forms the government.

Further, even if we considered the US government to be the Administration, the statement that there are no financial constraints on its spending hold. I think the discussions over the last few weeks have shown that if the US President had the will he (in this case) could ignore the US Congress and continue to spend without further debt accumulation (a vastly preferred option from the perspective of MMT).

This article – 3 ways Obama could bypass Congress by a US constitutional lawyer is interesting. The discussions (growing) that I have read in the last week confirm to me that the US Treasury could just ignore Congress and spend anyway. That would mean that all these elaborate voluntary accounting conventions that have given life to the “debt ceiling” debate are just a hoax and provide fiscal conservatives with a soapbox.

Anyway, the only “means” that the government has are those that it can tease out of the private sector via public spending. The role of taxation, in part, is to provide the incentive for the private sector to “accept” this spending and transfer real productive resources (labour, goods and services) into the public sector.

This is the way a government can pursue its socio-economic charter.

Then we ask – what might signify that a nation is living beyond its means – where nation means include all the productive resources that are available to it. In other words, I am asking who is “its”?

While we might debate that at the margin what means are available, the US as a whole is so far from being at that margin that I think we can agree that with 9 per cent unemployment, about double that in idle marginal workers (the US Bureau of Labor statistics U6 measure) and vast quantities of idle capacity (productive equipment) the “nation” is hardly stretching its means.

For many Americans they are living well and truly within their means at present because their productive capacities are being squandered by a government intent on giving breath to the irrational Tea Party demands for small government.

The author then claimed that:

ONE word is missing in the American debate over the debt crisis: austerity. It’s a revealing absence. In spite of the vast deficit, and despite the US being the home of individualism, no way is being offered for individuals to make a difference by changing their lifestyles.

People in Britain have become familiar with talk of the “new age of austerity”. Politicians of both left and right use the expression to frame the narrative about the cuts Britain is now facing. While both sides “warn” about this coming era, austerity is not negative in the British psyche. Associations with wartime Britain soften it. Austerity is associated with personal changes that benefited society and made sense to people who learned to tackle wastefulness, to “make do and mend”.

I actually thought that austerity was the centrepiece of the “debt debate” at present. The irrational belief that fiscal austerity – that is, lower spending overall – will actually spawn higher spending overall is what is driving the positions on both sides. Both sides of politics share that religious conviction – the differences are only about so-called equity issues – should the rich be subjected to higher taxes or not etc.

In that context, I found the description of the US debate and the British example to be mind-numbing and confused. The vast deficit – by which I presume she means the Federal budget deficit in the US is a sign that “individuals” have adopted a path of austerity themselves after a decade or more of credit-binged consumption.

She appears to be implying that a “vast” budget deficit is a sign that the government is spending too much relative to its income. While that representation is common among ill-informed commentators it is a complete mis-representation of what budget deficits are and what they do.

How would we know if the US government was spending too much overall in net terms (that is, relative to its tax revenue)? Answer: if there was full employment, full capacity utilisation and inflation was being driven by nominal aggregate demand growth outstripping the real capacity of the economy to respond by increasing output.

A deficit per se – large or small – has no independent scale – by which I mean that one cannot say that it is excessive or deficient without reference to balance between nominal aggregate growth and the growth and utilisation of real productive capacity. Using descriptors such as “vast” just reflect one’s ignorance of what a deficit is.

It is quite clear that the US federal budget deficit is way too small at the moment and the “deficit-cutting” agreement the leaders in Congress signed off to today (Monday Australian time) proves they are intent on damaging the economic prospects of their nation. The irony is that the “agreement” once enacted (if) might not even deliver lower deficits. If the damage to the private sector of the public spending withdrawal is such that tax revenue slumps even further we could see a rising budget deficit on the back of the automatic stabilisers.

We are seeing that in Ireland, the UK, and elsewhere at present.

The other point to note is that the proposed fiscal austerity is offering “individuals” the path “to make a difference by changing their lifestyles”. But it will the wrong individuals and there will not be any volition. The proposed cutbacks will impact mainly on the most disadvantaged individuals in America and work the damage up into the ranks of the middle classes. The rich will be largely untouched.

Arguably, if we are worried about reduced private sector “spending” then a policy position that mainly attacks the unemployed and lower income earners is not a very effective way to reduce overall private spending.

The author links “austerity” to the:

… environmental issues of recycling, cutting consumption and reducing our carbon footprint.

I support the moves to reduce our carbon footprint and they should be at the forefront of public policy. But the fiscal austerity being imposed in the UK is not aiming to reduce the private use of resources in any systematic way.

The answer to the challenge to reduce our carbon footprint is not to create unemployment and impoverish individuals accordingly. Yes, that is the surefire way of reducing consumption but it doesn’t make much sense in terms of humanity. We could significantly reduce the carbon footprint by killing off millions of people in nations that haven’t the capacity to militarily defend themselves.

What is needed is a clever re-appraisal of resource usage and a expenditure-switching fiscal intervention to ensure we steer resources away from carbon-intensive uses towards production of goods and services that use less carbon.

Market systems fail to do that unless taxes or regulations are introduced which force producers to “price” the carbon created as well as the other real resources used in the production process.

Further, we have much better chance of reducing carbon if we steer resources into the public sector in the form of personal care and environment care services. These activities are unlikely to be “profitable” in the narrow private cost-benefit calculus sense but have the potential to increase our welfare and sustain our lives on the planet for longer. That implies that over time public activity will become more important and that budget deficits will be higher than in past decades – independent of the state of the cycle.

The author however claims that she has:

… never heard the word austerity in political discussion. There was nothing about individuals living beyond their means. Yet the US deficit is founded on overconsumption, made possible by too much consumer credit and, less well recognised, too much environmental credit.

In the current war of words in Congress, there is no reference to the immoral lending that encouraged people who could not afford it to invest in the American dream. Yet that is what led to the property crash and the financial crisis. From individuals I heard nothing about the need for prosperous people to change their ways. There are, of course, many worthy ”green shoots”, such as the ”locavore” movement or the ”greening the campus” initiative at the university I was visiting, where a newly appointed sustainability officer tries to cut energy use. But people like him have their work cut out

Once again the public deficit has risen because the private sector are finally cutting back its spending. I agree that the the private sector spending patterns – driven by crooked Wall Street financial engineers – was unsustainable both financially and environmentally. I agree that the private sector could not continue to accumulate debt as its consumption binge continued.

That was always going to come to an end and it was only a question of time and how bad the crash was. It took longer than I expected but the crash was commensurate with my expectation – very big.

So I support policy that encourages private agents to reduce their debts and be more circumspect in their spending. But that requires several changes that are totally absent in the current discussions.

1. Real wages have to grow in line with productivity growth to ensure that the spoils of real growth are spread among the real producers (workers) and to ensure that aggregate demand grows in proportion to output growth thus reducing the need for credit to underpin consumption.

The neo-liberal years were characterised by the gap between real wages growth and productivity growth widening which redistributed billions towards the top-end-of-town who then channelled this largesse into the Wall Street casino – and the rest is history.

There has to be a fundamental redistribution of national income back to workers for the reliance on credit to be broken and full employment returned.

2. Budget deficits will remain indefinitely (unless the nation has substantial net exports). In most nations, given the unemployment, budget deficits have to be larger. Moreover, the demand for more environmentally-suitable activity suggests more public activity and less private activity.

Some might argue that public funding of suitable private activity is a preferred way of achieving this. I do not support the public subsidy of private activity in a market economy. If there is an opportunity to pursue environmentally-good activities and the private sector does not want to do that within an appropriate set of market prices (so true costs and benefits) then the public sector should take up the “space”.

I have no pre-conceived ideas that private is more “efficient” than public or whatever. It all depends on how activities are managed and implemented. The financial crisis (and Enron etc before that) clearly demonstrate that the private sector doesn’t have a monopoly on efficient production.

If one wants the private sector to cut back (for environmental then to achieve and sustain full employment the public sector will have to fill the gap. Yes, we might get to a point where we will be so productive that we can work less and enjoy life more (with less demand on real resources). That state of Shangri-La is a long way off yet. Millions of people need to work more and eat more! That requires aggregate demand to be focused on activities that will achieve higher employment levels and income levels for those millions in need.

If the inflation barrier is reached in achieving that end then taxation hikes and targetted spending cutbacks are needed – perhaps on top income earners who are also big spenders in absolute terms. But that sort of approach is not the fiscal austerity that is being pursued at present.

The author notes of the US that:

The whole of the east coast and the rust belt are vast, shocking landscapes to which many Americans seem oblivious. This is a society that has lived not just beyond its economic means but beyond its environmental ones, too, as the hundreds of miles of abandoned buildings, abandoned cars, and endless highways bear witness to.

Yet the American dream survives. You’re either in it, or out of it. Being out means destitution. In Britain I know many people who reject consumerism, getting involved in poorly paid environmental or political work. We regard them as rather honourable. In the US, if you don’t have money you don’t count.

I have sympathy for the view that the human footprint has become too heavy. In relation to the US, when I go to Florida and see the concrete everywhere I conclude as much.

When I see the inner city of places like Baltimore I conclude that urban policy is poorly set and implemented.

But sustainable lifestyle changes are not facilitated by cutting budget deficits when a nation has high and chronic unemployment. The lifestyle changes that occur when fiscal austerity is imposed are brutal and counter-productive and do not get to the heart of the problem of over-consumption and waste.

Marx said when there is a generalised overproduction the producers themselves are underconsuming. Which was a neat way of capturing the idea that generalised overproduction indicates an aggregate demand failure and the unemployed who lose their incomes and are forced to stop consuming are the very workers that had created the “flow of income” which is sitting idle.

The theme of over-consumption was also taken up by the UK Guardian economics writer Larry Elliot (July 31, 2011) in his article – US economy needs to rid itself of debt addiction – which stated that:

The US can solve its debt crisis but sustainable prosperity lies in improved productivity and real wage growth not asset bubbles

Elliot recognises that the “high levels of public borrowing are symptomatic of a problem of private-sector debt addiction”. The debt crisis in the US is a private debt crisis. There is no public debt crisis given that the US government is fully sovereign in its own currency.

The press and politicians have wrongly cast the issue as a sovereign debt crisis and in doing so are missing the point which Elliot acknowledges – the future has to be characterised by stronger productivity growth and real wages growing in line with that growth.

America will only be able to regain sustained prosperity if it redirects the largesse currently going to profits back to workers (the ones who produce the real output). That would require a significant reduction in the command over real resources by Wall Street which tells you how big the problem really is in the US.

The issue is not that the budget deficit or public debt are too large. The issue is that Wall Street is too large.

Unfortunately, Elliot then eulogises the Clinton surpluses but seems to ignore they were followed by a major recession. He wants the US private sector to reduce its reliance on debt but fails to recognise that the Clinton surpluses were only possible while the asset boom was being driven by ridiculous private sector borrowing.

You cannot have it both ways. Either you have a growth strategy supported by sustainable private spending (that is, allowing for some saving) and budget deficits or growth driven by private accumulation of debt fighting against the fiscal drag created by budget surpluses. The former approach is indefinitely sustainable the latter blows up.

Elliot also quotes some National Australia Bank who demonstrates how little he knows about budget deficits:

Even now there are Americans still in denial about how big a hole they are in. Some take comfort in the fact that the United States is not Greece. But as Nick Parsons, of National Australia Bank, points out, many individual US states – California, for example – are exactly like Greece in that they have high levels of personal indebtedness, public spending that exceeds income by a considerable margin, lots of people out of work and are locked into a monetary union with no exchange rate flexibility and where decisions are taken thousands of miles away.

“A similar picture can be done for many of the States and literally thousands of municipalities and cities across the country,” Parsons said. “In this respect, the debt concerns in peripheral Europe are set to replayed right across America; the significant difference being that instead of relying on the generosity of Germans to bail them out, the US is dependent on Chinese goodwill.”

What? California could be bailed out any time the federal US government desired as part of the federal system. There is no financial constraint on the US federal government giving each US state a demogrant to assist their ailing economies. Such a boost to aggregate demand would quickly restore private activity and improve the budget situations of each state. Ideology is the only thing stopping this from happening.

The EMU is a different kettle of fish altogether. There is no federal fiscal authority. Instead they have been relying on the ECB to play a quasi-fiscal role which has saved the day but at the cost of pernicious and unnecessary austerity. Everyone would have been better off in the EMU if the EU bosses had have recognised that the scale of the private spending collapse was such that deficits in most countries had to rise significantly and be maintained at the higher level for as long as it took for private spending to recover.

The ECB could have avoided all the bond market dramas in Greece, Portugal, Italy etc by just funding those higher deficits accordingly. The give with one hand (buying public debt in secondary markets)-but take with the other hand (enforcing fiscal austerity) approach the ECB and the EU have adopted has made the situation much worse than it should ever have been.

Finally, Chinese goodwill has nothing to do with the capacity of the US government to help the states in the Federal system. China does not issue US dollars. Only the US federal government has that capacity and it can always help its ailing states independent of whether the Chinese or anyone desires to accumulate financial assets in US dollar denominations.

The National Australia Bank spokesperson doesn’t know what he is talking about and shame on Elliot for perpetuating that nonsense.

The rest of Elliot’s article is a litany of spurious arguments about the need for fiscal restraint in America. It doesn’t warrant any further comment.

Conclusion

Time to stop.

That is enough for today!

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    29 Responses to There is no federal public debt problem in the US

    1. Nick says:

      Thanks, Bill, for tracking this series of awful articles which have appeared in the Fairfax newspapers over the past week or so. The audience targeted by these papers (which I’d characterise as bien-pensant doctor’s-wife types) seems usually more interested in “social justice” issues, and can be misled (i.e. dragged to the right) on economic matters.

      It’s interesting to see the rhetorical sleights being used. As you say the columnists use the reliable old method of discussing public deficits as though they are like personal overindulgence. In the case of the PIIGS countries over the past few years, this has involved tapping in to racist stereotypes about lazy and corrupt southern European loafers. Now we are seeing anti-Americanism employed: “Oh, the citizens are all obese and drive SUVs to the mall, etc. Clearly the federal government is just like that, but on a grand scale, and in suits.”

    2. GLH says:

      Over the weekend I listened to an interview with Michael Hudson who explained -as you have said- that this is an invented crisis in which the two parties are playing good cop, bad cop. I understood that O was delivering SS to his people on Wall Street, but Mr. Hudson explained that in introducing a balance budget amentment the Republicans are trying to tie growth in the economy to the private banks so they could get a cut of the pie. Wouldn’t that introduce a system similar to the Euro, which is already failing?
      By the way, let me thank you for this blog. If it hadn’t been for my daily trips here I may be in the same group as the tea partiers. Your blog is important. I even have Pete Peterson’s book from the ninties somewhere in my basment. When I find it I promise I will dispose of it.

    3. Ciaran says:

      Nick,

      Here in Ireland, the ‘good student’ of the IMF/ECB, we were told at the outset of this whole austerity fiasco that ‘we all partied’ (our own Finance Minister – at the time – actually used this phrase). This was followed by a PR offensive by and on behalf of the Government to apportion a huge share of the blame for the morass to ordinary people (as opposed to deluded builders) for running up massive amounts of personal debt. Ignoring the fact that even at the time we were running the beloved surpluses back in the middle of the last decade, personal debt outstripped income in Ireland.

      The latest PR whizz from the (new) Government, and faithfully disseminated by the political correspondents in the mainstream media (Irish Times, RTÉ, etc.), is that the Irish situation is entirely different from Greece, and that we should ‘stay the course’. This is helped by occasional pats on the head by the ECB/IMF, who praise us for our forbearance before kindly urging us to accelerate the austerity measures. This was illustrated after the ‘troika’ kindly reduced the interest rate on our enforced debt, by a gargantuan 1% – very much like giving a bald man a comb for Christmas. Even though this was hailed as marvellous news, we were told in the same breath by our current Finance Minister that the upcoming Budget (in December) is probably going to be even harsher than first projected. I suspect that they’re going to ‘find’ that public service costs are more ‘out of control’ than ever in the lead-up to Christmas. But we’re different from Greece, because, as their protesters were chanting, ‘We’re Not The Irish – We Fight Back!’

      I know that Bill has been urging Ireland, among others, to leave the eurozone. Personally, I’d prefer that the ECB would become the focal point for a transfer union, and actually start acting like the central bank it styles itself as, rather than acting as the hired goon for finance houses. Nevertheless, if Ireland has to go it alone and reintroduce the punt, I still believe it’d be far better than the current enslavement, which is going to lead to record unemployment and mass privatisation of essential public utilities. The only problem is, that the debts the Irish Government signed up to, in their wisdom, seem to be contractually payable in euros – in fact, it only ‘emerged’ recently in the Irish media, that a condition attaching to the money given by the UK Government last year was that in the event of Ireland pulling out of the single currency, the debt was repayable in sterling!

      In any event, if Ireland attempted to pull out of the eurozone, you can be sure that the media could be trusted to embark on a massive propaganda offensive, warning us that we’d be isolated for ever and ever, that capital would fly out of the country never to be seen again. Never mind the fact that Ireland should be perfectly placed to embark on ‘green’ stimulus spending – however, the political and media classes (including mainstream economists here) (a) hate public spending of any kind: they believe in the ‘crowding out’ myth; and (b) only feign concern for the environment when it comes to inventing opportunities to levy flat taxes for drinking water, refuse collection, etc.

      The Irish public is constantly bombarded with the message that ‘we need to sort out our deficit’, and agonising over the notion that ‘we are spending more than we are taking in’, as though (a) this is the first time this has ever happened in the history of the State and (b) all our debts fall due on the same date. It would take a serious public education campaign to get the message across that there is a better way to run an economy than keeping it in the kind of straitjacket that equates a country with a household – an illusion which is only maintained to allow mainstream economists and business unions to urge measures which are intended to jeopardise employment prospects, as well as to bust public sector unions.

      Bill, I hope I haven’t gone completely off-topic with this rambling post, but I’m just letting you and others know about the kind of obstacles one would face in Ireland, when attempting to bring some sanity to the ‘our deficits are out of control and it’s the fault of the public sector/unions/unemployed/pensioners’ narrative. Maybe you should get in contact with the Irish Times or a similar publication in Ireland, and set out a simple basis for MMT and how it could apply in Ireland. I should warn you, though, that if you did get such a piece in the Times, plenty of space would be set aside for ‘right-of-reply’ articles, just in case anyone had the bright idea of thinking that leaving the eurozone would be a palatable option, or that the Government should spend money on anything at all. After all, you have to remember, a lot of the political and media class in this country like to take holidays, and their greatest fear (aside from a rise in the rate of the dole) would be to have to queue up at a bureau de change!

      Anyway, long-time reader, first-time contributor, with zero economics background – it’s a wonderful blog you’ve set up here, but I should also say, it’s one of very few comments sections on the internet I don’t look at from between my fingers!

      Keep it up.

    4. Benedict@Large says:

      A note from the Language Patrol:

      The word “redistribution” (as in “a fundamental redistribution of national income”) should not be a part of the MMT parlance, as the MMT accounting model severs the direct link from tax collections to government spending which is present in other models. All income derived from government spending is “new money” being DISTRIBUTED for the first time, not REDISTRIBUTED from existing monies.

    5. binve says:

      @ Benedict@Large

      That is a very good point. Most people do in fact think about money that the government spends as being ‘redistributed’ from inflows (bonds or taxes). But they never seem to ask the question “where did they money come from that we could loan to the government?”. MMT obviously tells us the source of the money is from government spending ‘out of thin air’. And as such is in fact ‘distribution’. It is a point that MMTers ‘get’, but the correct language avoids ambiguity for people who are still learning about this. I will start to apply that language in my future writings.

      On a similar topic, you were asking about inflation on Bill’s other blog post recently and I offered a response. I actually have been thinking about that a lot more over this weekend and put together a post that discusses it in more detail (among other points): If you are interested See this post.

    6. Jan says:

      Someone can explain me the differences between the central bank discounting assets and the central bank buying assets from a MMT perspective? Where can i find some literature abt that? Thanks.

    7. Re: the debt ceiling debate

      I am reminded of what Max Liebermann said in 1933, that he couldn’t eat enough to throw up on the scale the Nazi takeover required.

    8. Ian says:

      GLH,

      Do you happen to have a link to that Hudson interview?

      Thanks.

    9. GLH says:

      Go to Michael Hudson’s blog and look for ‘Wall Street’s Euthanasia of Industry.’ It’s an excellent interview with Bonnie Faulkner.

    10. Matthijs says:

      Have been reading your site and a couple of other sources about MMT since this weekend and it’s like everything I knew (thought I knew) about economics and money has turned upside down. I understand the basic equations and principles, but intuitively it’s completely contrary to everything I knew. Still have a lot to learn and I have many questions (I have no economic background).

      Why does almost nobody understand this? Why is everybody in the mainstream media, politics and population explaining everything exactly opposite? I mean, you say “there is no federal public debt problem in the US”. That’s exactly the opposite of what everybody believes and has been in the news for years now (“the growing and growing debt of the US is looming as a big danger above us!”).

    11. Robert says:

      I’m wondering if the accumulation of money by 1% of the population has a deflationary effect. Effects may include: less money being spent into the real economy; a greater portion invested towards speculation; a greater portion used in exchange for assets; a greater portion simply left idle – all due to the behavior of the top 1%.

    12. Robert says:

      @ binve – excellent post

    13. graham says:

      Marshall,
      was that Max Liebermann also the person who was the famous artist (painter)?

      Graham

    14. Bob says:

      Like Matthijs, I have recently starting reading about MMT, which I discovered a week or so ago by trying to research economics views on the “debt ceiling crisis” in the U.S. I’ve read a lot of stuff on this blog, Mosler’s blog, etc.

      Following up on Matthijs’s post, I wonder what the economic effects of the “common beliefs” are. It seems to me that MMT explains a lot about the interaction between the government and the central banks, but a lot of what goes on internally in the private sector will also affect the economy… and a lot of that is impacted by what people (including economists, bankers, media people, etc.) think they know about how the economy works.

      So, for example, there are threats from credit ratings agencies to downgrade the U.S. if it doesn’t get its deficits under control. Surely those rating changes will have some economic impact. If MMT says to ignore the beliefs of the ratings agencies, doesn’t that risk causing as many economic problems as increased debt might fix? Or, to put it in terms of money supply, MMT tells us about the interaction between the government and base money supply (M0), but isn’t GDP and productivity also tied up with M1 and M2? And aren’t the relative ratios of the base money supply to M1 and M2 related to fiscal policies in the private sector?

      It just seems to me that if you have almost everyone — from bankers to investors to the media to the public — believing that debt reduction is the right way to go, won’t that make it harder for a pro-MMT debt expansion to have positive effects? At some level, might the debt expansion even have negative effects because everyone thinks it should, so they don’t allow the positive effects by inadvertently counteracting them in the private sector?

      I’m just trying to learn here. The MMT theory seems to make a lot of sense, but when you bring up the fact that most people don’t believe it, it seems difficult to argue that its effects will work smoothly. Or am I missing something? Links to articles or other resources I can read to catch up would be greatly appreciated.

    15. Grigory Graborenko says:

      Bob:

      What you are suggesting (please correct me if I’ve misunderstood you) is that perhaps Ricardian Equivalence will nullify or reverse the beneficial effects of MMT policies. Bill addresses this concept several times, notably here:
      http://bilbo.economicoutlook.net/blog/?p=8252
      http://bilbo.economicoutlook.net/blog/?p=13236

      Bottom line: people may believe all sorts of things, but it’s the decisions they make in day-to-day life that add up to macroeconomic reality. Bankers may whine endlessly about the deficit, but if a credit worthy customer walks through the door, and they can make money off them, they will lend. Citizens may be scared of future tax rises, but a nice paycheck will still be spent.

    16. Some Guy says:

      There is no federal public debt problem in the US Sure there is! There is not enough of it, and it should be spread around more evenly – “redistributed” :) .

    17. Matthijs says:

      What, to me, also seems to be a problem is that the government spending there is, is spend wrong. After reading about MMT for a few days, I understand the basics. Government spending is needed to fill up the gap that private spending leaves. For private balance to be positive, government balance must be negative. However, the big problem in most of the western world is the huge and rising inequality. And the consequences of that, which are corrupt politics (big money ruling politics). In that situation, government deficit spending going only or mostly to the big companies is only making matters worse.

      So take some middle- or lower-class person. Even without understanding MMT, he might be in favor of spending for basic necessities like social security, building roads, paying teachers, etc. However, he sees where all the money is going. And even though he knows government spending cuts will also hit him, he just doesn’t want the big players getting any more money (his tax money, he believes). Does this make any sense?

      Anyway, very interesting stuff and am learning a lot here, so thanks for sharing all this.

    18. Bob says:

      Grigory Graborenko:

      Thanks so much for your response, as well as the links, though I’m not sure that I meant to invoke Ricardian equivalence. I don’t know a lot about that theory, but on the face of it, it sounds silly that the general population wouldn’t spend new income because they are in fear of future tax increases (if I understand the basic idea correctly).

      What I meant is more like something that Bill discusses a bit in the first link, namely that there are all sorts of multiplier effects that occur in relationship to a change in the base money supply. Consumers putting money in savings is only one thing. But the real monetary effect on the GDP (as I understand it) depends a lot on how investments are made, how loans are made, etc. In other words, to take an example from what you said:

      “Bankers may whine endlessly about the deficit, but if a credit worthy customer walks through the door, and they can make money off them, they will lend.”

      While that may be true, won’t the definition of “credit worthy” for the banker change depending on perceived economic factors? Won’t mark ups on interest rates for less desirable customers change depending on perceived economic factors? It’s not just savings. If investment and lending patterns change because finance people are scared due to perceived government overspending and its supposed impact on the economy, can we guarantee that those changes in private sector policy won’t have a significant economic impact?

      As I understand it, and again I’m welcome to be corrected, GDP and productivity usually relates best to a broader definition of money in the economy, but the creation of that broad money from the monetary base depends on the willingness of the private sector to generate it. So, to clarify my question, if the private sector makes financial decisions that lessen the multiplier effect, could the broad money supply remain relatively static even as the base is increased? Or, in a somewhat related vein, if inflation fears cause private sector action that doesn’t push new money toward increased productivity, can’t inflation result?

      I don’t have a professional understanding of macroeconomics, so maybe these questions don’t make sense. I understand why MMT says that deficit spending will increase the money supply. What I don’t understand is how increasing the money supply guarantees positive results, instead of private sector panics that might work against it or even potentially shuffle that money toward inflation while maintaining relatively static productivity, if that makes sense.

    19. Mike says:

      @ Ciaran

      Great post & good to see another Irish person here ‘getting’ MMT! The situation in Ireland/Europe is just surreal eh?

      If the people of Ireland could just ‘cop on’, what a transformation we could have.

      @ Bill

      Your commentary on the debt ceiling farce has been just excellent – thankyou so much for all the time & effort you put in here. It really helps to see how we could benefit from a sane economic & monetary system. One day…

    20. Grigory Graborenko says:

      Bob:

      The worst the banks could do is stop lending entirely – they would never suddenly call in all loans at once. The worst thing consumers could do is stop spending as much and save more. But these are good things! The exact opposite of that behavior is what led to the great recession. We don’t want growth fueled exclusively by private credit. What it would mean in terms of policy is just simply more deficit spending, until the tipping point is reached. That point is when consumers have paid off their debts and saved enough to feel confident about their own individual finances, and banks see enough people with steady well paying jobs.

      Just remember that deficit spending will directly lower unemployment and raise GDP in the first round of spending, regardless of any multipliers. The private sector can do it’s best to slam on the brakes and drag growth down – this just means there is more of a gap to fill. People can only ignore basic economic indicators for so long before they accept that things are going well, despite any public debt hysteria.

      Inflation can come from three main places: people asking for raises, businesses raising prices, and raw materials (e.g. oil) rising in price (perhaps due to supply shortages). Most people’s economic fears come from not finding a job or losing the one they have. If they are terrified, the last thing they will do is ask for a raise – quite the opposite. They will work extra hours and even take pay cuts if asked. If a business owner is terrified, why would they raise prices? Their main concern is to sell their goods. They would only raise prices if things were selling better than before – and that only happens in good economic times.

    21. Bob says:

      Thanks, Grigory, you’ve helped to clarify a lot of things. I really appreciate it. I still am confused by one thing, though:

      “Just remember that deficit spending will directly lower unemployment and raise GDP in the first round of spending, regardless of any multipliers.”

      I suppose I get why GDP would have to go up, because of how it’s defined. But does that necessarily mean a better economic situation overall? If the government does not spend wisely, might significant amounts be absorbed in ways that don’t help the economy that much? Surely not all money added to the economy will have equal benefit, and it could be used very inefficiently, no?

      And I don’t understand why deficit spending *must* directly lower unemployment. If the government directly goes out and hires people with its spending, that obviously makes sense. But short of that, how do we guarantee that any other spending in the economy will go toward hiring unemployed people? In most cases, shouldn’t full employment be *theoretically* possible with whatever amount of money is available? Why does simply adding money to the money supply guarantee more employment?

      Again, you’ve been very patient, so if it’s too much of a bother to answer, I’d be grateful if you could even point me to links or resources that will explain this.

    22. Grigory Graborenko says:

      Bob:

      It’s no trouble at all, glad to help.

      What the government spends on will of course determine how many jobs are created – a job guarantee like Bill advocates is by far the most efficient way to lower unemployment. However, almost all increased spending will have at least some jobs created. Most western governments have steadily reduced their direct capacity for doing stuff, like building bridges and whatnot. They outsource a great deal of their work. So if the government is paying to get something done, then it’s very likely they will hire some private company for some major contracts, who in turn hire people to cope with the extra work. If they need to buy raw materials, they will likely buy from at least some local suppliers, who then hire more people.

      It’s very difficult to introduce new spending flows into the economy without creating at least some jobs, however inefficiently. The exceptions are if the money is just used to buy imports like oil, or use it to bail out banksters who then stash it all in a Swiss account.

    23. Bob says:

      Okay, now I’m completely confused. This may not be the appropriate venue for posing such questions, but since the discussion started here, I’ll say this here.

      I finally found a post by Bill that seems to address the issue I initially raised:

      http://bilbo.economicoutlook.net/blog/?p=10733

      Perhaps I’m misreading this, but I get the impression that two separate arguments are being made: (1) traditional calculations of money multipliers are just bad theories and they don’t adequately predict the relationships between MB, M0, M1, M2, and M3. (2) Because traditional economic theories don’t work, MMT doesn’t really care about money multipliers, because they are “horizontal” transactions internal to the private sector which neither create nor destroy high-powered money (HPM, or MB/M0).

      I absolutely agree that traditional money multiplier theory is horrible. But just because we don’t have an adequate theory of the relationship of MB to M2 and M3 doesn’t mean that the value and trend of M2 and M3 don’t have significant economic impacts. Unless I’m grossly mistaken, one of the reasons for the various bubbles and subsequent economic downturn in the U.S. in 2008 was because of gross mismanagement in the private sector of the assets that constitute M3. One can’t just dismiss that by saying that these are simply “horizontal transactions” — they have real, and potentially severe, economic consequences.

      So, after reading MMT theory intensely for the past couple weeks, I’m at an impasse. I thought it had a lot of insight, and I still think it does concerning the vertical transactions between government and the private sector. But with all of the focus on the vertical transactions, I haven’t seen developed theories of the horizontal transactions and their economic impact. Maybe I just haven’t read the right stuff yet.

      But until I understand how MMT deals with internal private sector dynamics and how that can affect vertical transaction policy, it seems to me that I can’t draw any policy conclusions from such a macroeconomic theory.

      To return to the point I made in my first post, there may not be a true “federal public debt problem in the US,” but lots of people in the private sector believe that there is. And it seems that they could potentially wreak havoc on the horizontal transactions in the private economy based on these irrational beliefs, regardless of any reasonable vertical transaction policy. Sure, MMT might say that everything might work out in the end as people stop reacting irrationally, but so far in the blogs and intros to MMT that I’ve read, the private sector is treated as a kind of black box. Bill’s blog post I linked to only seems to solve the problem by saying that *eventually* all that matters is HPM, which is undoubtedly true to some extent, but that doesn’t help to prevent short-term (or even slightly longer term) economic disaster in the private sector.

      Or does it? I’m so impressed with what I’ve learned about economics from MMT so far, but this stands out as a big hole in my understanding.

    24. Neil Wilson says:

      “Government spending is needed to fill up the gap that private spending leaves.”

      We call it government spending, but really it can be generalised to ‘direct injections by the currency issuer to purchase real output for public purpose’.

      The unwritten assumption in MMT is that the entity it calls ‘government’ is working for the general population. Given the shenanigans in the US over the last few weeks I do wonder whether we should revisit that assumption and check it is accurate.

    25. Matthijs says:

      I’m with Bob in this. I understand the basics but fail to see how the problem of wrong allocation of public spending can be solved. If public spending (increasing “state debt”) is mostly going to big corporations and wall street, it only makes matters worse for the 95% at the bottom. More money at the top -> more power/political influence at the top -> lower wages and lower rights for the bottom 95% -> less spending power -> less GDP -> more state spending needed, etc etc in an endless spiral.

    26. Grigory Graborenko says:

      Bob:

      Bill’s written a huge amount of posts, and quite a few of them do deal with private sector internals. A recent one that springs to mind is this one:

      http://bilbo.economicoutlook.net/blog/?p=11245

      Especially follow the links within that one to the others. Bill likes to link back to his favorites.

    27. Bob says:

      Thanks, Grigory. I will read the post you linked to and start following more links. (I know Bill has written a TON here, which is fantastic, but it’s a bit daunting for a newcomer to sort through it all, let alone other MMT sites and blogs.)

      It’s not that I think MMT doesn’t have good theories of private sector stuff, and I look forward to reading more. But most of the first stuff one finds when looking for information about MMT tends to focus on convincing people that they have gross misunderstandings concerning the vertical interactions in fiat currency systems. I think that’s appropriate, but it’s sometimes hard to make the intuitive leap from vertical transaction theories to the fiscal policies that MMTers seem to argue will solve our problems.

      Personally, I’d love to see one of Bill’s “simple” models (i.e., the parent giving tickets to the kids posts) that clarifies what effects private sector wrangling might have on vertical transactions. So far, skipping through many of the “highlights” (the posts Bill links back to a lot), I see a number of posts dealing with exports and arguing about why inflation isn’t necessarily a problem, but fewer on other problems that could arise when dealing with real private sector economies.

      Anyhow, thanks again so much for your help. I’ll go back to reading… :)

    28. Jeff65 says:

      Bob and Matthijs,

      MMT does not itself address the issues you see with the horizontal interactions. This seems to be a common complaint made against MMT.

      But why should it solve those problems? You don’t need to cripple the workings of a monetary system when a few simple laws would suffice such as:

      Banks must keep all loans they make on their books
      Credit Default Swaps must be subject to established regulations for insurance products
      Limit what counts as bank capital (no junk with fake AAA ratings from ratings agencies)
      Bring back Glass / Steagal separation of traditional banking and investment banking
      etc.

      People want to believe that some self regulating system exists, but such a system is a fairy tale.

    29. RayW says:

      @Benedict@Large Tuesday, August 2, 2011 at 1:45

      I think that the wage share is being redistributed in the sense that at some time later the allocation is more equitable.

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