Daily Archives: July 11, 2011

Can Seinfeld Help Obama Start Making Better Policy Decisions?

By Stephanie Kelton

My mother used to say, “If at first you don’t succeed, try, try again.” It’s good advice when you’re encouraging a child to take her first steps or hit a fastball out of the park. You pretty much want the person to stick with the general approach until the effort pays off. But it would be crazy to stand there and flap your arms, convinced that if you just keep trying you’ll eventually be soaring with the eagles.

Paul Samuelson described FDR as a president who “knew which whiskey wasn’t working.” With unemployment above 20 percent, the banking system in complete disarray, and the mortgage market in serious crisis, Roosevelt’s challenges were far more daunting than Obama’s. Of course, he didn’t get everything right on his first pass, but he didn’t stand there and flap his arms either.

When offering businesses a carrot (incentives) to hire the unemployed didn’t spur job creation, he created the Works Progress Administration (WPA), the Civilian Conservation Corps (CCC) and the National Youth Administration (NYA), and he hired the unemployed himself. When modest tweaks to banking laws failed to stabilize the financial system, the government created the Federal Deposit Insurance Corporation (FDIC) and the Security and Exchange Commission (SEC). When the housing market failed to stabilize, the National Housing Act of 1934 established new lending practices, propping up home values. And, when Americans struggled to make ends meet, Congress passed the Social Security Act and the Fair Labor Standards Act (which introduced a minimum wage). And he did much more.

President Obama, in contrast, seems determined to keep flapping. He thinks:

  • Getting our fiscal house in order will create the confidence the business sector needs to start hiring again
  • Removing $4 trillion of aggregate demand will help the economy
  • The government is ‘out of money’
  • We need to raise revenues in order to take care of seniors, poor kids, medical researchers, infrastructure, etc.
  • Job training will fuel job growth
  • When the private sector tightens its belt, the government should too
  • We need to double our exports in order to grow jobs
  • We need to appease the ratings agencies and the bond markets or the government won’t be able to raise money and pay its bills
  • Entitlement reform will ‘make Social Security stronger’

It’s as if every instinct he has is wrong. So maybe he should start doing the opposite of whatever his gut (or Larry and Timmy) are telling him. The general approach is modeled beautifully here:

Pinch-Hitting for Peterson. Part 1: How Progressives Helped Put Social Security on the Chopping Block

By L. Randall Wray

It’s official. Obama has decided to become a one term president. He caved in to the Republicans, agreeing to gut Social Security in order to get them to agree to raise the debt limit. This was never a real trade-off, as it made sense only within the Washington beltway. Obama has adopted the Jimmy Carter approach: promising pain and more pain, presenting a dreary (and false) message of no hope, just mindless human sacrifice to please the gods on Wall Street.

In the days of Carter, it was all about stagflation, running out of oil, and national malaise; today it is all about jobless “recovery” as far as the eye can see and unfunded infinite horizon entitlements for the undeserving. I do not know which is worse, but I am positive that voters will reject Obama’s perverted vision of our future, just as they rebelled against Carter’s. American voters are an optimistic lot and they know our best days are ahead of us. We do not face the futures envisioned then by Carter or today by Obama. Voters do have the audacity of hope, even though Obama does not and probably never did. I do not know who will be the next president, but Obama’s actions indicate he has decided he does not want the job. Voters are looking for the next Reagan who shares their optimism.

It was clear all along that this was the real agenda of the fake debate. It never had anything to do with debts and deficits and tens of trillions of dollars of unfunded “entitlements”. The goal all along has been to find a Democratic president willing to kill Social Security. Washington finally has one. Al Gore probably would have done it—but his “lockbox” proposal was too silly to sell with a straight face, so he never got the chance. Obama became the willing sacrificial lamb.

Wall Street wants blood for its vampire squids, and Obama is willing to deliver it by the truckload. To be clear, he is no martyr. Martyrs have to be unwilling, at least up to a point. It appears that President Obama wanted this outcome from day one.

But that is not the story I want to pursue here. What is interesting is how Social Security’s enemies enlisted progressives to fight their battle for them, lining them up to pinch-hit for Pete Peterson.

In the old days, the enemies were simply too obvious to be successful—using Cold War rhetoric and labeling the program a communist plot, they never gained traction.

As they became more sophisticated, they moved on to railing against future costs of taking care of babyboomers. They enlisted Alan Greenspan, who chaired a commission that unnecessarily jacked up payroll taxes to run surpluses to be “saved” for future use—something that was impossible for a sovereign government to do since Trust Fund assets were simply government IOUs (something later admitted by Greenspan). But the high taxes helped to build hostility to the program.

Then the enemies created the Concorde Coalition—that included some Democrat wolves in sheep clothing—to fan across the country beating the drums and scaring college students about rotten “money’s worth” calculations that showed they’d be much better off “investing” in stocks rather than paying high FICA taxes. The dot-com crash did not help that cause—which was always a hard sell because the Concorde Coalition’s members were so darned intellectually dishonest—people like Bob Rubin, Paul Tsongas, Charles Robb, Sam Nunn, Warren Rudman, and Bob Kerry. I debated them on college campuses and I can definitely attest to the greasy propaganda that they thought would capture the imagination of students. It did not. Bad haircuts, bad breath, leisure suits, and stupid arguments were all they had to offer. It was a big zip. Nada. Zero.

So, finally, hedge fund billionaire Pete Peterson helped push the notion of trillions of dollars of unfunded entitlements that would bankrupt our nation. Unfortunately, he was getting nowhere, even with the help of Reaganites like Pete du Pont, and Larry Kotlikoff.

Until Obama got elected, that is.

A peculiar alignment of the stars pushed the Peterson agenda forward. First of course there was the financial collapse, which brought on the worst recession since the Great Depression (a downturn that is not over and that still might morph into the first depression of this century). That crashed tax revenue and generated a huge budget deficit—fueling the fires of deficit hysterians.

Second, Obama’s campaign platform had featured deficit reduction as a major goal. Those of us with some audacity had hoped he was not serious about this. He was. And he brought into his administration a number of Clinton people, all of whom had sworn allegiance to Wall Street and the Clinton spin that deregulation of finance plus budget surpluses had created Goldilocks. In return for tens or hundreds of millions of dollars of rewards, they had agreed to act as Wall Street’s fifth column. For all practical purposes, Peterson was selected to head Obama’s deficit-cutting team.

Which leads to point 3: many Democrats had learned the wrong lesson from the Clinton boom. They convinced themselves (against all reason) that the Clinton budget surplus caused the boom. In reality, it killed the Goldilocks economy and brought on the Bush recession. But, no matter. Wall Street was very generous with its billions, and it had decided that the Obama wave was something it wanted to surf right into Washington. Whatever finance wanted, finance got. What finance wanted was tens of trillions of dollars of bailouts, Obamacare (more financialization of health insurance), and elimination of Social Security (financiers hate the competition).

Point 4. Finally, Beltway progressives decided to join the deficit hysteria bandwagon. The endgame was a foregone conclusion. With no opposition from the left, the Austerians would get whatever they wanted. And what they wanted was to eliminate Social Security, Medicare, and Medicaid.

But why would Washington’s progressive think tanks decide to join forces with hedge fund manager Pete Peterson to undermine the Rooseveltian New Deal? Here the plot thickens.

Some had actually joined up during the “W” years—using the rising budget deficits under Bush (actually due to the recession he inherited from Clinton) as an argument that he was mismanaging the budget with taxcuts for the rich. If only Bush would balance the budget, Goldilocks would rise from the dead. It was an embarrassing display of stupid politics, as progressives sold their souls to Peterson to beat down Bush as a big deficit spender.

Some Beltway progressives—including organized labor—had actually signed up even earlier, during the Gore campaign, manufacturing a fake financial crisis for Social Security in order to offer lock boxes as a better alternative than Bush’s plan to privatize the program. Joining the bandwagon by arguing that Social Security was unsustainable, they offered critical assistance to Peterson. And, of course, they lost the election. (Oh, I know, they continue to claim “but Gore really won”. Come on, if a candidate cannot beat a “W” by double digits, he does not deserve office.)

Still others signed on to the Peterson agenda after the financial crisis hit, in order to argue against payroll tax relief on the bizarre argument that Social Security already faces an uncertain financial future, hence, if we give payroll tax relief to workers now we won’t be able to afford the program in 2050. (We have dealt with that issue here at NEP and also over at New Deal 2.0.) They desperately wanted to hang the fortunes of Social Security on a supposed American love affair with payroll tax hikes.

Again, too stupid for school. No one likes the payroll tax. It is regressive. It taxes work. It makes American workers uncompetitive. And by tying Social Security benefits to payroll tax revenue, it ensures program accounting insolvency—as the Peterson crowd argues. Indeed, it is only because of the payroll tax that we can calculate bad “money’s worth” and project the exact date at which Social Security becomes insolvent. Eliminate the tax and it becomes impossible to calculate solvency or insolvency. But our progressives instead chose certain death for the program on the argument that the albatross of payroll taxes makes the program too popular to kill. (Hint: they were wrong. Evidence? Obama.)

And, finally, there was the debt limit. In the past, we got political posturing, but the limits were routinely raised. This time around, it was clear that Republicans had much more incentive to draw blood—they would require the Democrats give up some popular program before the limit would be raised, and this would cost them in the next election. Yet, success was far from certain as the Dems could have just called the bluff. But the stars were aligned, because by this time there were no longer any dissenting voices within the beltway on the need to cut deficits.

Progressives had a choice—they could take the high road, which meant isolation from the beltway and its funding spigots; or they could join the deficit cutting party and drink the Kool-Aid. That is, they could swing the progressive bat or pinch-hit for Peterson. They chose to pinch-hit.

So how did the remaining progressives get co-opted? Peterson had the brilliant idea of hiring Beltway progressive organizations to join his team. Why not pay progressives to come up with deficit and debt cutting plans? If you can’t defeat them, pay them off. It is like choosing from among the prisoners which ones get to do the whipping and hanging of the recalcitrants.

So progressives lined up at the Peterson Pig Trough. I’ll have more to say about Peterson’s funding of Beltway progressives in Part 2.

With no Beltway progressives left to fight Peterson’s deficit hysteria, Republicans knew they had a winning hand—so they demanded the so-called third rail: Social Security. Democrats in Congress had nowhere to turn for support. Progressives had abandoned the debate, and Obama had been hand-selected by Wall Street to offer up Social Security. Just as only a Republican President could go to China, only a Democrat could finally kill the last remaining remnants of the New Deal. President Clinton had destroyed all the financial regulations, eliminated welfare, and undercut consumer protection. Now it is up to Obama to eliminate Social Security and Medicare.

Obamacare will hand over the nation’s healthcare system to Wall Street, with elimination of Medicare removing the last remaining obstacle to complete financialization of medical care. Similarly, getting rid of Social Security will put Wall Street in complete control of our nation’s retirement system. Wall Street hates competition.

And so does Peterson. It is unfortunate that Beltway progressives voluntarily muzzled themselves, to eliminate any alternative to Peterson’s propaganda.

In Part 2, I will look at a specific case of self-muzzling by the premiere Beltway progressive research institute. Stay tuned.


In recent weeks we have examined in some detail the three balances approach developed largely by Wynne Godley. In some sense all of that is preliminary to examining the nature of modern money. Further, as many of you have no doubt already recognized, a key distinguishing characteristic of MMT is its view on how government really spends. Beginning with this blog we will begin to develop our theory of sovereign currency.

So in coming weeks we examine spending by government that issues its own domestic currency. We first present general principles that are applicable to any issuer of domestic currency. These principles apply to both developed and developing nations, and regardless of exchange rate regime. We later move on to analysis of special considerations that apply to developing nations. Finally we will discuss implications of the analysis for different currency regimes.

In this blog we examine the concept of a sovereign currency.

Domestic Currency. We first introduce the concept of the money of account—the Australian dollar, the US dollar, the Japanese Yen, the British Pound, and the European Euro are all examples of a money of account. The first four of these monies of account are each associated with a single nation. By contrast, the Euro is a money of account adopted by a number of countries that have joined the European Monetary Union. Throughout history, the usual situation has been “one nation, one currency”, although there have been a number of exceptions to this rule, including the modern Euro. Most of the discussion that follows will be focused on the more common case in which a nation adopts its own money of account, and in which the government issues a currency denominated in that unit of account. When we address the exceptional cases, such as the European Monetary Union, we will carefully identify the differences that arise when a currency is divorced from the nation.

Note that most developing nations adopt their own domestic currency. However, some of these peg their currencies, hence, surrender a degree of domestic policy space, as will be discussed below. However, since they do issue their own currencies, the analysis here of the money of account does apply to them.

Note also, following the discussion at the end of Blog 4, we recognize that individual households and firms (and even governments) can use foreign currencies even within their domestic economy. For example, within Kazakhstan (and many other developing nations) some transactions can occur in US Dollars, while others take the form of Tenge. And individuals can accumulate net wealth denominated in Dollars or in Tenge. However, the accounting principles that apply to a money of account will still apply (separately) to each of these currencies.

One nation, one currency. The overwhelmingly dominant practice is for a nation to adopt its own unique money of account—the US Dollar (US$) in America; the Australian Dollar (A$) in Australia; the Kazakhstan Tenge. The government of the nation issues a currency (usually consisting of metal coins and paper notes of various denominations) denominated in its money of account. Spending by the government as well as tax liabilities, fees, and fines owed to the government are denominated in the same money of account. The court system assesses damages in civil cases using the same money of account.

For example, wages are counted in the nation’s money of account and in the event that an employer fails to pay wages due, the courts will enforce the labor contract and assess monetary damages on the employer to be paid to the employee.

A government might also use a foreign currency for some of its purchases, and might accept a foreign currency in payment. It might also borrow—issuing IOUs—in a foreign currency. Usually, this is done when the government is making purchases of imports or when it is trying to accumulate foreign currency reserves (for example when it pegs its currency). While important, this does not change the accounting of the domestic currency. That is, if the Kazakhstan government spends more Tenge than it collects in Tenge taxes, it runs a budget deficit in Tenge that exactly equals the nongovernment sector’s accumulation of Tenge through its budget surplus (assuming a balanced foreign sector it will be the domestic private sector that accumulates the Tenge).

We will argue that the government has much more leeway (called “domestic policy space”) when it spends and taxes in its own currency than when it spends or taxes in a foreign currency. For the Kazakhstan government to run a budget deficit in US Dollars, it would have to get hold of the extra Dollars by borrowing them. This is more difficult than simply spending by issuing Tenge to a domestic private sector that wants to accumulate some net saving in Tenge.

It is also important to note that in many nations there are private contracts that are written in foreign monies of account. For example, in some Latin American countries as well as some other developing nations around the world it is common to write some kinds of contracts in terms of the US Dollar. It is also common in many nations to use US currency in payment in private transactions. According to some estimates, the total value of US currency circulating outside America exceeds the value of US currency used at home. Thus, one or more foreign monies of account as well as foreign currencies might be used in addition to the domestic money of account and the domestic currency denominated in that unit.

Sometimes this is explicitly recognized by, and permitted by, the authorities while other times it is part of the underground economy that tries to avoid detection by using foreign currency. It might be surprising to learn that in the United States foreign currencies circulated alongside the US dollar well into the 19th century; indeed, the US Treasury even accepted payment of taxes in foreign currency until the middle of the 19th century.

However, such practices are now extremely rare in the developed nations that issue their own currencies (with the exception of the Euro nations—each of which uses the Euro that is effectively a “foreign” currency from the perspective of the individual nation). Still it is not uncommon in developing nations for foreign currencies to circulate alongside domestic currency, and sometimes their governments willingly accept foreign currencies. In some cases, sellers even prefer foreign currencies over domestic currencies.

This has implications for policy, as discussed later.

Sovereignty and the currency. The national currency is often referred to as a “sovereign currency”, that is, the currency issued by the sovereign government. The sovereign government retains for itself a variety of powers that are not given to private individuals or institutions. Here, we are only concerned with those powers associated with money.

The sovereign government, alone, has the power to determine which money of account it will recognize for official accounts (as discussed, it might choose to accept a foreign currency for some payments—but that is the sovereign’s prerogative). Further, modern sovereign governments, alone, are invested with the power to issue the currency denominated in its money of account.

If any entity other than the government tried to issue domestic currency (unless explicitly permitted to do so by government) it would be prosecuted as a counterfeiter, with severe penalties resulting.

Further, the sovereign government imposes tax liabilities (as well as fines and fees) in its money of account, and decides how these liabilities can be paid—that is, it decides what it will accept in payment so that taxpayers can fulfil their obligations.

Finally, the sovereign government also decides how it will make its own payments—what it will deliver to purchase goods or services, or to meet its own obligations (such as payments it must make to retirees). Most modern sovereign governments make payments in their own currency, and require tax payments in the same currency.

Next week we will continue this discussion, investigating “what backs up” modern money.