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Stimulus, stimulus, stimulus – a fact is not an exaggeration

I’ve been travelling for most of today (now back in Newcastle) which has cut the time available to write anything. So this will be a relatively short blog and focuses on the way in which my profession is always trying to reconstruct economic issues when they find some policy proposition uncomfortable. The vehicle to demonstrate this phenomenon is an article published by Bloomberg (February 10, 2012) – Sachs Says Krugman Is ‘Crude Keynesian’. It summarised the radio interview (mp3 link – running for nearly 15 minutes) with Columbia University’s Jeffrey Sachs. The latter is well-known for providing advice to the old Soviet economies, which led to the massive transfer of public wealth to the private oligarchs via privatisation. Under Sachs’ guidance, the so-called “shock therapy”, hastily imposed deregulation, privatisation and the abandonment of price controls (on rent etc) on the previously planned economies – with disastrous consequences. In the Bloomberg interview, Sachs is highly critical of “macro” interpretations of the current problems – claiming that the major challenges are all micro in origin.

As a prelude, the standout disaster that Sachs was involved in as he sought to impose shock therapy on the world was Poland. In that country, the Sachs-inspired reforms were imposed from early 1990. Once government price controls were abandoned and state enterprises were privatised not only did inflation rise quickly, but unemployment soared and individuals and households lost the savings that they had worked hard the years to build up.

Sachs claimed at the time that his approach was providing a long-run solution. The problem is that the long-run is just a sequence of short-runs and shock therapy meant that a vast number of older members of the population, who had worked all their lives to achieve a modest, but secure, standard of living now faced poverty in the midst of lost pension schemes, market-based rents and rising unemployment.

This sort of policy shock was applied in many countries once the Soviet system fell with similar, disastrous, results.

The Bloomberg Interview started by noting that the “apartness of the Chicago School and the east coast school – the economics of Princeton and Harvard and these generalities we talk about” and then asked Sachs “How far apart are the economists of Chicago from another given academic school?”. He replied:

I think everybody right now in that public brawl is exaggerating. Krugman has staked out a rather crude Keynesian position and unrelentingly so. He knows one thing, which is stimulus, stimulus, stimulus and expand deficit spending and all the rest. It’s a pretty oversimplified view of the economy.

On the other hand I think the Chicago School did not acquit itself very well in recent years.

Regular readers will know that I often disagree with propositions put by Paul Krugman in his NYT column. Overall, I consider him to be a deficit-dove who considers fiscal stimulus to the “safe” at present because he thinks there is a liquidity trap operating.

That is, he doesn’t believe that in the short-run fiscal stimulus will drive up interest rates and “crowd out” private investment spending.

This is a very conventional mainstream “Keynesian” position, which proponents of Modern Monetary Theory (MMT) reject outright.

The deficit-dove position reduces to an advocacy of balanced fiscal budgets averaged over the business cycle.

A deep understanding of national accounting tells us that if a government was successful in achieving this fiscal goal, then the private domestic sector balance (the difference between its spending and income) would be equal, on average over the business cycle, to the external balance (the difference between income flows in and out of of the nation).

The import of this is that if a nation was running a continuous external deficit, then the private domestic sector will also, on average, be in deficit. Which means it would be continuously accumulating debt – an unsustainable dynamic.

So while Paul Krugman is at present advocating increased fiscal stimulus to promote economic growth in the US and elsewhere, his position remains highly conditional and flawed.

But in saying that I agree with Paul Krugman that at present the only way out of the crisis in any reasonable time-frame is for the government sector to increase net spending (that is, increase deficits).

While that view could easily be dismissed as being “oversimplified” its comprehension is based on a sound understanding of the nature of the current crisis and the options available to government to address it.

There is nothing “oversimplified” about this policy advice.

At present the global economy is trapped in a “balance sheet recession”, which has special characteristics and leads to the conclusion that the economy requires long-term public deficit support to achieve sustainable recovery. Please read my blog – Balance sheet recessions and democracy – for more discussion.

We are now in a sustained period of private sector deleveraging, which means that private spending growth has returned to more subdued levels relative to those seen during the credit binge.

That process will extend for at least a decade. Without public deficits supporting aggregate demand growth the economy will languish in stagnation.

To advocate fiscal stimulus in the current context does not negate a nuanced approach to other pressing matters including migrating supply chains and stagnating industry structures.

It is also important to understand that many so-called “structural” problems are, in fact, disguised cyclical events. I will come back to that in a moment.

In relation to Sachs’ quip about the Chicago School not acquitting itself very well in recent years, Bloomberg interjected by saying “With the idea that markets could clear themselves, the markets could discipline?”.

Sachs replied:

Yes we have seen how markets were core destabilising features of the whole global economy. And I don’t think the Chicago School was on top of that beforehand and did us much of a favour.

But this brawl is really a brawl of extreme positions. It’s not very illuminating, but it is rather entertaining.

The Chicago School position is certainly extreme. Many of its advocates deny that the crisis negates the view that markets are efficient. As I noted in yesterday’s blog – Yesterday austerity, today growth – but leopards don’t change their spots – some of the main advocates claim the crisis was all government-driven.

There is nothing extreme about the underlying position supporting ongoing and increasing fiscal stimulus.

It is in fact based upon the most simple, introductory theoretical notion one should learn in macroeconomics.

To repeat: spending equals income equals output – which drives the demand for labour.

It is not an extreme position. If the economy fails to record aggregate demand sufficient to generate output commensurate with “full employment” labour demand (that is, the level of employment that provides jobs for those willing to work at the current wage rates), then unemployment occurs.

Such a shortfall in spending can occur as a result of decisions in the private domestic sector and/or the external sector. It is the responsibility of government to ensure that its spending will offset any decline in spending of the other two sectors, expressed at their “full employment” levels.

In this context of decentralised spending decisions all aggregating to determine aggregate demand, it becomes a primary responsibility of government to generate full employment.

It is an extreme position to argue that unregulated markets will ensure there is enough spending in the private sector to continuously achieve full employment.

That battle was won by those who support fiscal stimulus as long ago as the Great Depression when the fiscal austerity-approach only made the situation worse.

So I strongly disagree with Sachs constructing Paul Krugman’s position in this regard as being extreme, and at the other end of the continuum to the free-market view expressed by the Chicago School.

The Bloomberg interviewer interjected – “Well from John Cochrane … from the .. University of Chicago .. that spending can spur the economy is not part of what anybody has taught graduate students since the 1960s.

Sachs replied:

That is also is an exaggeration. Everybody is exaggerating here. But I have been surprised – Paul has a powerful bully pulpit in his New York Times column, and he’s been on one theme for three years and I think he has exaggerated it frankly. He has under-emphasized the risks of growing debt, he’s over-asserted what we really know about the effects of these policies and he has in my view underestimated the long-term needs for public-sector change and reform. On the other hand he is battling ideologues on the other side who have been equally extreme.

I should note that Sachs has not been shy in self promotion over the years. I considered some of this interview to be reflecting some underlying professional jealousy on the part of Sachs. I can’t prove that but it resonated in that way.

It is true though that Paul Krugman enjoys a very privileged position as a major contributor to the New York Times, although my profession occupies powerful bully pulpit’s when they impose mainstream macroeconomic theory on their students by way of lectures.

I would conjecture that the damage done to the world from undergraduate economics programs is far greater than any influence Paul Krugman has as a result of his New York Times column.

As noted above, I don’t find the reiteration of a basic macroeconomic theory proposition to be an exaggeration.

It was very interesting in this interview that Sachs chose not to provide any further articulation of his view that in expressing the need for further fiscal stimulus the proponents are under emphasising the risks of growing debt.

What risks? Sachs doesn’t elaborate but rather leaves the listeners in a state of limbo – presumably because Sachs wants them to then rehearse the basic faux propositions of mainstream macroeconomics.

These are that rising public debt increases interest rates and ask crowds out private spending. The rising public debt pushes a government closer to insolvency. Rising public debt requires higher future tax rates in order for the government to pay it back.

Each one of these propositions is inapplicable to a fiat monetary system.

The historical record does not validate the mainstream predictions concerning a rising public debt, either in absolute terms or, scaled by GDP.

One can find correlations between rising public debt issuance and bond yields but even that outcome is not unambiguous.

It will typically signal an improving economy where investors broaden their risk and start purchasing other financial assets. The reduction in demand for the risk-free public asset then drives up yields, under normal circumstances pertaining to the conduct of public debt auctions.

The central bank can at any time control bond yields should desire to.

Second, the crowding out story is predicated on a flawed view of the way the banking sector works and how deficits impact on financial markets. I dealt with this in several blogs, but the deficits suite linked below, is a good place to start.

For a start, governments merely borrow back what they already spent. And then, if you appreciate that bank loans create deposits, and that bank loans are limited by how many credit-worthy customers demand credit (notwithstanding capital constraints), then you will see how stupid the notion that government borrowing reduces the availability of loans to the private sector is.

Please read this suite of blogs – Deficit spending 101 – Part 1Deficit spending 101 – Part 2Deficit spending 101 – Part 3.

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

Sachs then went on to outline what he thought the main issue facing America (and implicitly the World) was. He said that we don’t “time for nostalgia we have a very changing world economy and a very fast changing American demography and political and social reality … trying find again some inclusive society so we are not leaving half of our country behind.”

I agree with that viewpoint. But as I noted in this blog – Davos – an exercise in denial not solutions – the dramatic shifts in supply chains etc have not undermined the fiscal primacy of a currency-issuing nation state.

Modern Monetary Theory (MMT) provides us with a way of understanding that currency-issuing monopoly embedded in the national state is still powerful and can be used to advance domestic prosperity independent of the way in which global changes manifest.

That is not to say that these major changes in supply chains and changes in the pattern of energy demand etc are not major events which are forcing national economies to adapt. That clearly is the case and I have written about it at length.

But even with the pressure of these changes, the national state remains relevant.

The reason why mass unemployment occurs hasn’t changed as a result of globalisation. It still remains that if aggregate spending is not sufficient to purchase the total supply of goods and services, there will be an unplanned increase in inventories leading to a rise in unemployment and/or underemployment.

To avoid this situation, net government spending (the budget deficit) must fill the spending gap. So mass unemployment always reflects a choice made by government to provide lower net government spending and accept higher unemployment.

When involuntary unemployment exists, nominal (or real) wage cuts cannot “clear” the labour market unless they somehow eliminate the desire of the private sector to net save, and thereby increase its overall spending in the economy. That is, of-course, unlikely in the extreme. The opposite is highly probably.

The Bloomberg interviewer then asked Sachs “How do you fold economics into that analysis?” The response was standard mainstream thinking:

I don’t view the macro perspective as adequate. I view as a core problem that we face that our kids are not geting the education, the skills that they need to compete in the 21 century and that’s why I call for an active role of government at all levels.

I don’t think that simply pulling back as we;re doing, as one agreement after another in Washington actually is leading to – is going to solve the problems of a hugely unqueal society. But even more than the inequality, is the fact that we’re only putting 1/3 of our kids through college right now …

If you look at 25-29 year olds right now its about 33 per cent of 25-29 year old young men who have a bachelors degree. And we aren’t just going to have a middle-class society that we want if that is the case.

When you track that out you see for minorities, for example, hispanic young men aged 25-29 – its 11 per cent with a bachelors degree. That kind of social inequality, but equally important, lack of education and training needed for competitive middle class jobs is really the core problem that America faces.

And that’s not going to be solved by stimulus, by QE or whatever those are not macro problems, those are much deeper social and microeconomic problems

This response is very much in the OECD 1994 Jobs Study mould. It locates the deskilling in modern economies at the level of the individual and denies )or downplays) the existence of systemic failure.

If you start with the proposition that mass unemployment represents a systemic failure of the economy to generate enough jobs and the labour market then shuffles the queue of unemployed according to “personal” characteristics (such as, education levels, ethnicity, age, gender, etc) then it is likely that the problem of underinvestment in education will be viewed in both macro and micro terms.

When there are not enough jobs available – and this shortage is chronic and spanning generations – then there is little incentive for disadvantaged workers to invest in their own skill development.

Further, a systemic lack of employment is driven by inadequate government spending, which often manifests in a failure to invest in first-class education, public housing, public transport and other types of public infrastructure which enhance social mobility.

While the existence of urban ghettos, full of idle teenagers with vastly adequate levels of formal education, is clearly a micro problem (it affects the local level and individuals), it is crucial to also understand this type of socio-economic problem in macro terms.

I agree that quantitative easing is not the solution to deficient aggregate spending.

But if the degree of fiscal stimulus was better calibrated to the current output gaps in all of the mobility benefits of higher employment, lower unemployment, and higher participation rates would significantly reduce the burden that these disadvantaged communities bear.

Structural adjustments, such as targeted increases in educational and training investment, and made easier when the labour market is strong. Little structural adjustment can occur, without massive economic and individual damages being incurred. When the economy is weak.

To say, dismissively, that this is “not a macro problem” is to miss the point completely.


A fiscal stimulus Is not a panacea for all economic ills. Even at full employment they might be significant challenges, including poor productivity growth, stagnant real wages growth, spatial disparities in economic outcomes, etc.

But an economy labouring with high unemployment and high underemployment will not be able to address these other issues effectively.

The role of fiscal stimulus is to ensure that spending overall is adequate in proportion to the real capacity to economy to produce goods and services.
There is a primary macroeconomic responsibility of government. What needs to be done after that becomes more easily identified once the burden of mass unemployment is eliminated.

The mainstream denial of the effectiveness of macro stimulus relates more to their ideological dislike for government intervention at the aggregate level then any sound notion that such intervention is damaging.

In this regard, I congratulate Paul Krugman on maintaining his consistent voice in this regard. We should chant each day until our political leaders take heed – stimulus, stimulus, stimulus.

Saturday Quiz

The Saturday Quiz will be back sometime tomorrow – probably easier than last week – in order to stop people posting despairing comments outlining their low scores (-:

Next week will be very busy – more details later.

That is enough for today!

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    This Post Has 26 Comments
    1. The neoclassical economists seem to love this rhetorical strategy. Displaying supercilious amusement at the naivety and simplicity of alternative schools of thought as a cover for their unwillingness to engage with the ideas.
      Becomes ridiculous when you deploy the strategy against a Nobel prize-winning fellow economist. Poor Krugman ! Such a simple fellow. Can’t comprehend the subtleties of neoclassical thought.

    2. @jms.grmwd
      The ridicule is for the “nobel prize winners” . As you should know there is no nobel prize for economics, only the bank of sweden prize in memory of alfred nobel create by neoclassical economists in the 60’s. This prize is a scam and a farce, an humiliation for science as a whole. The rewarded economists never contributed to the study of the economy or anything, they are just selected for their right wing ideology, their pro market, liberal views. The simple creation of this prize shows the unethical caracter of this profession ( serious sciences or academic fields like geology ,computer science or history would never decide to create their own “nobel prize”, but the ideologicaly driven pseudoscience of neoclassical economics did !). And for your information, Krugmann is a neoclassical economist like Sachs and didn’t received his “nobel prize” for works in Macroeconomics. The sad thing is that the scam worked, ordinary people do not know the names of serious and trully prestigious scientific prizes but know the word Nobel ( because of the nobel prize in Physics and Einstein) and wrongly thing that the false economics “Nobel prize” has value. If it has been called more logicaly the Adam Smith prize or the Bank of Sweden prize, no one would never have heard about it.

    3. It’s funny how this guy explains unemployment as a result from low ratio of young peolple going to college while here in Spain, some other claim that we have too much people with high qualifications and that not everybody can have a qualified job. So what’s the mainstream explanation? Whatever they think people is gonna believe. I don’t know the figures but nobody can find a correlation between college education ratio and unemployment ratio, or maybe it’s the other way round, as yu say that unemployment creates a lack of incentive to invest in education and skills.

    4. I can’t tell whether I agree with Sachs or not. Is he really saying that the source of structural educational problems lie at the level of the individual? Or is he just saying that those problems can’t be fixed simply by targeting an increase in aggregate spending that is indifferent as to the choice between any particular outlets for that spending?

      This is just part of the big debate on how much of the problem of mass unemployment and stagnant or falling incomes is due to structural factors (i.e. skills deficiency) and how much is due to cyclical factors, financial shocks, supply shocks and other such events. I take it the Sachs position is this: he thinks Krugman is too focused on the indifferent provision of countercyclical spending increases to combat the latter kinds of problems, and not enough focused on the specific and targeted spending needs called for by the structural problems.

      Because he thinks the problems require spending on specific kinds of target social investment, and not just an increase in spending as such, he thinks the challenges require microeconomic thinking and not just macroeconomic thinking. Here “micro” does not refer to the level of individuals or firms, but rather any kinds of theorizing or policy proposals that move beyond the level of the gross aggregate categories of the national income accounts to recommend specific decisions about how and where to spend. It might seem weird to describe a policy recommendation to spend a trillion dollars on education as a microeconomic policy, but that’s just the way economists think, isn’t it?

      Now here’s where I think that MMT has to be part of the story. The debate about structural vs. cyclical unemployment between people like Sachs and Krugman would be a nice debate to have if both sides weren’t bogged down by the self-destructive popular perception that we are “broke” and “out of money.” Unfortunately, we can’t do any of the things we need to do so long as this popular fears and misperceptions about the national government’s budgetary constraints persists. All we get then is a paralyzing and anti-growth debate about how to move resources around even as we cut spending and raise taxes.

      So, what I’m much more worried about is Sachs’ invocation of long-run public debt problems, and Krugman’s similar New Keynesian attitude that the budget must be balanced in the long-term.

      What the public desperately needs to understand is that (i) the monopoly issuer of the national currency can never be “out of money” and can create whatever financial instruments it needs to mobilize resources and put them to productive use; (ii) in environments like the current one with massive underutilization of national resources and capacity, expansion of national spending and investment via the creation of monetary assets is not an inflationary policy, and (iii) even in the long run, the national budget never needs to be balanced, and economic growth should be matched by a consistent budget deficit representing a consistent growth in net financial assets.

      If both Sachs and Krugman would start endorsing these positions, then the rest of their debate would be a useful exercise in optimizing positive developments rather than an another epicycle in self-destructive paralysis.

    5. It only seems fair to strip Sachs of his income, savings and pension and give him a dose of shock therapy so he can fully realise the value of his contribution to humanity.

    6. Bill,

      Great blog, I just started reading it after reading Wray’s blog and his book on MMT.

      You may be interested in Esping-Andersen’s work on the welfare state. As a sociologist he is interested in crafting welfare states to meet the changing demands of labor markets. With that said his approach, while well intentioned, suffers from the structural OECD 1994 job study problems too. He’s work is mostly about skill upgrading and integrating women into the workforce (particularly in Europe) but not about how to ensure full employment. Thus my recommendation is about someone who has a flawed understanding of the macro-economy but its always good to know what’s out there.
      Keep up the good work.

    7. Apologies for a very general question that probably belongs elsewhere. Let’s say a government runs deficits to keep its economy growing and its population employed. I realize there are many variables and a lot of possible paths, but what is the eventual outcome? Suppose debt to GDP rises to 200% (Japan) or 300%, or 400% … As explained in MMT this is private savings. Would it be the case that eventually those savings would start to be spent and in order to avoid excessive demand and inflation the government would then either reduce spending, or if that is not consistent with its public functions, increase taxation to reduce demand? And, that would probably mean a government surplus for some period, which as I understand it, is no more an ‘evil’ than long-run deficits, if it leads to stable prices and near full employment. Is that plausible, likely?

    8. Mr. Sachs advised Bulgarian post totalitarian governments as well.

      The tragic result was summed up by one of the prominent Bulgarian journalist in his column this week. Something like this (translated from Bulgarian):

      “During WW2 world population had shrunk by 2.5%, during Mao period the Chinese people shank by 9%. During Bulgarian “democracy” Bulgarian citizens living in Bulgaria shrank by 14%”

      Last fall I personally gave Mr. Sachs an MMT flier when I saw him giving an interview at OWS area in Zuccotti Park in lower Manhattan. I saved Mr. Sachs a punch in the face – it was probably a mistake. :-)

    9. Ryan, not that I approve of violence, but if you had punched him in the face, I trust you would have caught it on video for us to see afterwards. :-)

    10. @ peterc,

      I am against any kind of violence as well.

      But still, I should have done it and post it on Youtube.
      Who knows, it could have gone viral, and I was wearing my special MMT hat – any publicity is good publicity, isn’t it? Even with the risk of being arrested. :-)

    11. As a Polish guy I have to make a correction: inflation didn’t “explode” after Sachs’ shock therapy. Poland had inflation before 1989 due to Weimar-like scenario – we took out too many loans in dollars to save the “communism” and then printed money to try to pay them off. Sachs and his Polish counterpart, chicago-school adherent Balcerowicz actually battled inflation with heavy wage controls and the like. We needed that. I think we also needed to have the enterprises face the unpleasant reality: the old ways were untenable. We totally lacked managerial cadres so there was little choice than to tell the state owned enterprises “you are on your own, no more state subsidies”. After that the industry died, but I am not sure it could have been saved. We lacked the wage advantage the China had, and our market was small, so we couldn’t demand the transfer of technologies in exchange for allowing foreign firms to operate in the country.

    12. The real issue is what chance does MMT, or at least Keynesianism with an overlay of Functional Finance, have of truly entering broad public consciouness, public discourse and public understanding? I would say (sadly) the chances are vanishingly small. Bill Mitchell et. al. are performing a veritable labour of Sisyphus in attempting to fight public ignorance, public prejudice and public “common sense”; the latter really being the indoctrination of minds by neoclassical and corporate propaganda.

      The only way this current system will fall is after a series of what I term “salutary disasters”. Due to the maladaptive nature of endless growth corporate capitalism these salutary disasters are now imminent driven by resource depletion, climate change and species extinctions induing a general collapse of the “holocene benignity” of the biosphere. A new way of thinking must seize public discourse (what remains of it after these disasters) and sheet home the blame to where it truly belongs, namely to the ideology of endless growth corporate capitalism and the reckless despoliation of the earth. Only then is it just possible that something worthwhile might be built on the ruins.

    13. Great blog, Bill Mitchell. Both Sachs and Krugman do not have the answers. Neo-classical economics is hopelessly flawed, Keynesian economics is worse still. I do wonder though, whether MMT really holds the answers. Today’s blog got me thinking a bit about three points. The first point relates to crowding out and that most economists really do not understand crowding out. This is the standard view:”These are that rising public debt increases interest rates and ask crowds out private spending. The rising public debt pushes a government closer to insolvency. Rising public debt requires higher future tax rates in order for the government to pay it back.”

      You don’t need rising interest rates to mount a sufficient argument for the existence of crowding out. Schooling is a prime example. Private operators struggle to get a gig because just about every bit of land that could be put to this use hosts a government school (complete with sub-standard curriculum and increasingly sub-standard “teachers”). In other words, government spending creates barriers to entry, which, in this case, results in a vast under-expansion of private schools. The ones that do exist tend to be very exclusive (to the point of being elitist), face very little real competition and charge accordingly.

      The second point has to do with the idea that the fiat-money-issuing monopoly held by the nation-state is somehow a good thing and that governments, at least technically, cannot become insolvent, and that the central bank can control bond rates… Once confidence is lost in a currency (whether it’s hard-backed or not), then economic agents will move to transact using other methods and will refuse to accept the government-issued currency. There are countless examples of this. In fact I am not aware of any fiat currency that has stood the test of time. In terms of bond yields, the central bank can influence outcomes but it is money market interest rates that matter. Think about what happened during the GFC when government authorities slashed official rates yet the cost of borrowing skyrocketed and in many instances debt simply could not be rolled-over.

      The third point relates to unemployment. You seem to argue that labour markets fail to clear due to inadequate aggregate demand. Another reason is that wages are sticky downward due to various institutional forces. At the end of the day, markets are not perfect but they are the best system there is to get out of this mess – not more government intervention. Government failure is often mistaken for market failure and this results in further regulation and more bad outcomes. Even if MMT provides the right approach to get through this mess and to avoid it happening again: the crony-corporatist state would never allow it be implemented unless the vested interests of the politically-well-connected and of the state itself were being served.

      Fiat money systems appear doomed. A free market money system would be better. What would eventuate? Probably fully asset backed money as that was the tendency for centuries. In any case, the government backed gold std that existed in the US and Great Britain was a disaster thanks to the behaviour of central banks. A third-best solution is the system we had under Bretton Woods – which really was just a phony gold std, that again had no constraints on the Fed Reserve’s money printing-type activities.

      And if intervention was the right way then FDR would have been a genius. Clearly this wasn’t the case because the US didn’t really come out of the depression until 1947! A whole bunch of companies that should have gone bust were kept afloat by the New Deal, which saw the confiscation of all private gold and a whole host of anti-competitive laws that tried to keep prices artificially high (rather than allowing prices to fall and demand to eventually return). The New Deal was disastrous for the people of the US but great for the government and its cronies.

      On a recent trip to Europe I was surprised by how high prices were in Greece. At least we agree that austerity is not the answer. What is the answer: I would cut spending (don’t fall out of your chair!) but I would cut taxes by a whole lot more. Government needs to shrink before it causes any more damage. The private sector will eventually fill the void. It’s not perfect (indeed there is no perfect solution) but I think it is the best way.

      Cheers and, again, great blog!

    14. The real issue is what chance does MMT, or at least Keynesianism with an overlay of Functional Finance, have of truly entering broad public consciouness, public discourse and public understanding?
      Chances are increasingly high. The failure of new-classical thinking is obvious in Europe; elsewhere the likes of Krugman (yes, him too), Mitchell, Mosler, etc. open big cracks on the establishment. The Austrians, even though in complete opposition as to what the currency is, contribute to our cause as well – should the matter be put on the table as a greenbacker vs bullionist thing, the options and the potential will be clearer.

      The Saturday Quiz will be back sometime tomorrow – probably easier than last week – in order to stop people posting despairing comments outlining their low scores (-:
      And I that did not reveal my low score (1/5 by the way) so as to not lead you to make the questions easier…

    15. The obvious failure of false doctrines has never been enough to disaude adherents from believing in said false doctrines. In fact, the standard response of humans is to redouble belief in their false doctrine, deny empirical evidence even harder and to start killing those who do not agree with them. The only empirical setback which which will topple false doctrine is the failure of their real material support base. Thus endless growth corporate capitalism will only fail when its production system fails. This is starting now as we have pretty much hit “peak everything”.

    16. @ jo

      Don’t worry, I’m well aware that the Nobel prize for economics isn’t a real Nobel and that theoretically speaking Paul Krugman has more than a few neo-classical tendencies himself. Nonetheless, Paul Krugman at least tends to argue his case from the evidence. Sachs in this interview aims for polite belittlement. Krugman’s views aren’t just wrong, they’re “crude”. His debate with the deficit cutters is “entertaining but not very illuminating.” Sachs doesn’t bother to explain why Krugman’s macro perspective is inadequate, just belittles it and carries on with his own micro perspective. This kind of intellectual arrogance is simply unattractive.

    17. Neoclassical microeconomics is an ideology and religion. It’s adherents are impervious to real world evidence. Any time empirical evidence contradicts their views it is the empirical facts that are wrong not the doctrine. Blind faith adherents are never amenable to logical and empirical argument. They, their views and their systems must pass on and collapse before there can be any change in the world. It’s a natural process. Physical and natural laws always trump ideology. It just takes time.

    18. @SteveK9

      Thanks to the way automatic stabilizers are employed, if in the future the private sector decided to spend its savings at a greater rate, the government budget would on its own move from deficits and toward balances. Should the private sector spend enough the budget will move into surplus and gradually remove net financial assets from circulation. Eventually demand would fall, unemployment would begin to rise and the automatic stabilizers would move the government’s budget back toward deficits.

      Please note that some countries have broader, more sophisticated stabilizers than others. The U.S. in particular would need to expand its budgetary “machinery” to ensure deficits and surpluses are enacted in a timely enough fashion to keep aggregate demand at the desired levels.

    19. Neoclassical microeconomics is an ideology and religion. It’s adherents are impervious to real world evidence. Any time empirical evidence contradicts their views it is the empirical facts that are wrong not the doctrine.
      Indeed, what you say is true – but most people don’t adhere to those doctrines. The common people on the streets know nothing of those complex models and machinations. They see austerity and they see their failure. And all one has to do is to explain in the most simple form the reality of things to the people – they have no economic indoctrination!

    20. @ Ben

      Thanks. I would take that as a ‘yes’ to my questions. Some of these scenarios don’t seem to be well spelled out in the reading I’ve done to date (not for too long … which may be obvious). I have a similar set of questions regarding trade deficits. I’m not sure where to post these, but I’d like to get someone knowledgeable to look at it. This along the same lines of ‘well a trade deficit is not a problem ….’ True in the short, maybe medium term, but one wonders what a natural progression will be.

      Well, here I’ll write down the questions I posted on another site. I didn’t get much of an answer, maybe you or someone else here can direct me. I’m sorry to be off-topic.

      I am interested in something specific, China/US Trade, but maybe these questions are general:

      This is a topic I would really like to understand better.

      A Chinese company makes a sale through a distributor in the US. They receive dollars in payment. They have to pay their workers (and themselves) in Yuan. They exchange the dollars for Yuan at the central bank. Is this done at an exchange rate completely under the control of the PBC? Are the Yuan simply created by the PBC? So the dollars are now owned directly by the government? And, they exchange these reserves for Treasury securities. Must we offer this exchange? Or, could we force them simply to hold the reserves (until if/when they decide to buy something).

      I’m not sure what ‘dumping’ the Treauries would mean. Simply an exchange back into their ‘checking account’ (reserves)? In which case why would we care?

      So, what do they do eventually? The Chinese public could start buying American goods, in which case they would (in effect) exchange Yuan for Dollars back at the PBC. Or, could the Chinese government simply decide to spend the Dollars directly (they ‘own’ the Dollars now, correct)?

      What dangers do exist for us, if any? If the Chinese decided to really start ‘buying American’ I suppose that could drive a high rate of inflation (and employment of course)? That would hurt them I suppose as their Dollars would not buy nearly what they sent to us in the first place (or is that not true?). For us, higher prices and full employment (not sure that is so bad).

      The second thing I would guess they can do is invest in the US (buy up America as we once feared the Japanese were doing). Would it be a problem if they bought a lot of productive assets in the US … profits going to Chinese investors? It also seems that we, in point of fact, simply block this from happening, as we did in the case of Unocal, when a Chinese oil firm wanted to buy them. But, what would be the effect on a typical US citizen if the Chinese had a significant ownership of ‘American’ assets (they would be Chinese assets in that case).

      A last, even more off-topic, question: It seems the Chinese recognize that the current model doesn’t really make a lot of sense at this point. They have more Dollars in reserve than they could possibly need to support the Yuan. It seems they are in a position now where, in order to maintain employment they have to keep the export machine going. But, that is only true because of the incredibly low rate of consumption in China … I think it is now below 35%, which I understand is unheard of, for a modern economy (and maybe any economy in history). So, the question is, what is the best path for the Chinese to increase consumption and get off the export treadmill? I realize this might be more of a micro Chinese question than a macroeconmic question. Thanks.

    21. Talvez writes, “…they (the common people) have no economic indoctrination!”

      I disagree. There is an enormous amount of political, economic and consumerist indoctrination poured into the common people. Many common attitudes, constituting “common sense”, are really the crystallisation of this indoctrination. Whilst the more abstruse mathematical modelling of neoclassical microeconomics and its (fallacious) assumption of representative rational agents, its (fallacious) aggregation of said agents and its
      woeful ignorance of the reality of emergent beahviours are all unknown to the average person in the street, the trickle down simplifications of neoclassical microeconomics are heavily indoctrinated into the populace.

      In Australia, this indoctrinated “common sense” includes the following false beliefs which are held by the majority of the populace or are at least dimly perceived and acceded to in some form;

      1. A national budget is just like a household budget and must be balanced.
      2. The Government should always pay down its debts and run a surplus.
      3. Government surpluses are always good and government deficits are always bad.
      4. If the Government spends too much it crowds out private enterprise.
      5. Markets are always efficient and we should let market operations govern and run our society.
      6. The Law of Supply and Demand controls prices.
      7. The NAIRU (Non-Accelerating Inflation Rate of Unemployment), which refers to a level of unemployment below which inflation rises, is a Law that always holds true in the modern economy.
      8. Extra government spending (deficit spending) always causes inflation and will not cause any other effect (like the employment of idle capacity).

      You talk to most people and you will find they hold to the above beliefs as implicitly as asserting that water always flows downhill and the sun will rise tomorrow. The difference of course is the latter are observed regularities of nature (leading us to the discovery of physical laws) whereas the former are political economy assertions which sometimes manifest as self-fulfilling prophecies but which are mostly contradicted by the empirical evidence.

      The common people (at least in Greece) now know they do not like the effects of neoclassical economic policy (for example a 23% minimum wage cut during a fifth year of recession) and they know they simply cannot live like that. But unless they undergo a process of proper education and de-indoctrination (in workers’ societies and meetings if need be) they will not fully understand what needs to be done to correct the situation.

    22. @Ikonoclast
      Ah, I see where the point is.
      Here in Portugal you’d have to take out everything below point 3 (exclusive). and point 2. is increasingly under question. Even in traditional academia of “sound finance”, 3, 4, 5 and 8 are not hold very highly.
      The “inherent market efficiency” never really gained roots here, and I think that even in the heart of the most neo-liberal countries, the failure of the banking sector showed that really well.

      Inflation is not a problem in the collective minds of the Portuguese – only unemployment is. Times of high inflation correspond to IMF interventions; before that, under the dictatorship, the economic growth and the full employment made any inflation a non problem.

    23. Yes, sorry Talvez. I tend to forget how American-ised and right wing Australia has become and how little Australians are aware of world history. I tend to forget that the European public are more experienced, historically speaking, and more ideologically aware having lived through much more tumultuous histories and seen far more movements to the left and right. The bulk of the Australian populace are politically speaking relatively unlearned, insular and parochial as well as being very conservative.

    24. Peter,

      You are obviously right. I remember these events perfectly well. “Real Socialism” was finished because it didn’t work, the continuation of “PRL” would have looked exactly as the fossilised command economy of Cuba or North Korea. The prices had had to be freed and meat rationing abolished, this was done by Mieczyslaw Rakowski, the last communist PM on 01/08/1989. The inflation was a result of the transition as there had been a so-called “inflationary overhang” caused by forced saving and artificial wage-price system maintained since the imposition of communism in the late 1940s. A wage-price spiral developed when the straitjacket was removed (this process was halted when a Keynesian “Popiwek”, a tax on wage increases, was introduced). A very thorough critique of the communist system and analysis of early attempts to introduce market mechanism was provided by Wlodzimierz Brus and Kazimierz Laski in “From Marx to the Market” (1988).

      Let me try defending or explaining what was done in 1989 not because it was economically sound (it clearly wasn’t) but because it was the safest political option. L. Balcerowicz, and Stanislaw Gomulka wanted to irreversibly destroy the communist economy in one go so that any restoration of the previous system would have been impossible or too costly. The first non-communist PM, Tadeusz Mazowiecki, followed strictly the advice given by G. Soros and J. Sachs (IMF). Also – the role of Catholic Church and the Pope in the transition process is difficult to underestimate. They virtually replaced PZPR (the Communist Party) as the “leading force” of the society, giving their full authorisation to the neoliberal reforms.

      We must keep in mind that in 1989 Soviet Union still existed and Poland was occupied by over 50000 Soviet troops armed with a few hundred nuclear warheads (see Polish wikipedia “Północna Grupa Wojsk”). The threat of relapse of communism in the Soviet Union was absolutely real as shown by Gennady Yanayev on 19/08/1991 when an attempted coup took place. We also have to remember that the democratisation was halted in China when demonstrations were crushed in 1989 and nobody had anticipated the reforms of the 1990s. This is the true historic context and looking from the contemporary point of view there was not much room left for incremental reforms.

      The shock therapy implemented in Poland was obviously very expensive for the society in terms of the decline of GDP and grave social consequences. Therefore I fully agree with Bill’s economic critique of J. Sachs’ “best advice”. It is not true that the successors of Michal Kalecki could not have anticipated the dire outcome. But I was not interested in economics at that time. I studied electronic engineering and my position was based on deeply entrenched emotions – like the majority of the people living in Poland in 1989 I simply hated communism, the Soviets and anything what had anything to do with “socialism” of any kind.

      Unfortunately the world is not that simple and I have to admit more than 20 years later that the facts are best described by the theory of a socialist (reformist) / Post-Keynesian economist Michal Kalecki rather than the neoclassicals.

      I think that I may have quoted the following fragment already but it is worth mentioning again – this is what prof Kazmierz Laski wrote in “My career as economist and the role of Kalecki” (retrieved from the website of Polish Economics Association):

      “At the very beginning of the shock therapy in Poland I had the privilege to be invited to prepare an experts` report of the expected results of this policy package. I came to the conclusion that GDP would fall over 1990 by 15 to 20 percent instead of tacitly assumed (although not published) decline of about 5 percent (Laski 1990). In 1990 GDP fell by 11,6 percent and 1991 by another 7 percent. As far as I know there was no other economist to foresee this development. This was not the result of any personal prophetic ability; I had simply used the method of Kalecki and tried to calculate the results of the decline of effective
      demand. My expertise was of course completely ignored and shelved.”

      Not everyone is bent on maximisation of the “utility” function by increasing overconsumption “here and now”.
      This is what I believe drives the Chinese:
      US Manufacturing, value added USD (2007, 2008, 2009, 2010):
      1,788,900,000,000 1,740,500,000,000 1,674,159,019,179 1,814,341,314,639
      1,149,720,335,327 1,476,429,425,062 1,612,276,720,351 1,756,820,740,084
      (source: World Bank national accounts data, and OECD National Accounts data files.
      Catalog Sources World Development Indicators)
      What is this for? This is my personal view presented already a few times: When we realise that we live on a planet where natural resources are limited it makes perfect sense to increase the share in manufacturing and build infrastructure when non-renewable resources are still relatively abundant. The Chinese would be perfectly OK with concentrating on increasing their domestic consumption in a world where resources weren’t limited and access severely constrained. By becoming the world’s factory they have also gained better access to the resources. Another reason for the “irrational mercantilism” is purely political – they want to make the profits of American corporations dependant on the Chinese export what would guarantee that the American state (ruled by the corporate plutocracy) will not go after them. This is far better that relying on the nuclear deterrent. It is not in the Chinese interest to collapse the US or to dominate the world as another sole superpower. This would be a repetition of the costly mistakes of the USSR and USA. The Chinese plan is to create a different multi-polar environment when their interests are fully respected and nobody wants to impose one global order on everyone else. Does this require the de-industrialisation of the US? The latest book written by Zbigniew Brzezinski “Strategic Vision: America and the Crisis of Global Power” gives in my opinion a clear answer – the Americans haven’t learned enough yet. So the process will continue.

    25. ‘not unambiguous’… not use DOUBLE NEGATIVES…..THERE IS NO EXCUSE FOR THEIR USE.

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