Why Won’t Progressives Act Like Progressives?

By Stephanie Kelton


Paul Krugman just addressed a plea from Cullen Roche, who implored him to throw his considerable weight behind a proposal for a payroll tax cut to help bolster the fledging recovery.  Krugman doesn’t really take a position for or against the proposal but instead suggests that it is DOA because the GOP doesn’t support it. Well WTF?

Is this really what it’s come to?  Experts in the field — even those with a Nobel Prize — can’t stand up for what they believe in unless they consider it politically feasible? An extension of the payroll tax cut — or, far better, a full payroll tax holiday (a 0% withholding for employers and employees) should have been a key component of the stimulus from the beginning.  But the deficit doves (the most high-profile progressives out there) never supported it.  Had they advocated such a policy, there’s a good chance the economy would be on sound footing by now.  But they did not, and impatient voters delivered the House to the GOP.  Now Social Security — along with Medicare and Medicaid — will be sacrificed at the alter of the deficit hawks.

Many of us called for a full (0% deduction) payroll tax holiday (employer AND employee) more than 2 years ago, but the beltway “progressives” all fought against it, preferring instead to accept the conservative frame that these programs face long-term solvency problems that can be “fixed” by chipping away at the very programs they claim to be defending.

I agreed (here) with Professor Krugman’s point about the politics of a payroll tax  — Republicans will do whatever they can to prevent the economy from improving before Nov. 2012. But it is the President’s job to call them out — publicly — and make them explain why they are opposed to reducing/eliminating this regressive (and anti-business) tax.
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Oh, and S&P just downgraded the US.  BFD.

100 responses to “Why Won’t Progressives Act Like Progressives?

  1. Very good, Stephanie!Krugman and many commenters over there show how lost the so-called progressives are. Krugman himself, given his exceptionally poor understanding of basic accounting, banking, and the monetary system (all of which are regularly on display at his blog and in his columns) criticizes the payroll tax holiday for not being stimulative enough. Problem is stimulating isn’t the point in a balance sheet recession, fixing balance sheets is; and it’s the people paying more of their taxes to the payroll tax than the income tax that need to fix their balance sheets the most. The private sector won’t get moving until that happens–how much a payroll tax “stimulates” therefore isn’t the point (though a side benefit is the reduction of employer costs and probably reduced inflation as a result). If they take the whole tax cut and just pay down debt for the first year, the recovery is set up to occur that much more quickly.Because Krugman doesn’t understand what a balance sheet recession is (remember his exceptionally stupid statement that one person paying off debt just gives money to someone else?) and instead thinks we are in a liquidity trap, he doesn’t realize the role a payroll tax could play in recovery–every worker would get an immediate 7.5% raise on their first 110k (approximately) of income, and every employer would get the same cut in labor costs. Every self-employed person would get the full 15% raise. How many middle or lower income people have had even a 7.5% raise over the past 3 years combined?

  2. I think it's hard for orthodox liberals to support tax cuts of any kind (even the most liberal) because they see it as undermining the long term liberal agenda via future austerity (since they believe borrowing today must be "paid back with interest" tomorrow).If you think dollars are precious then you want to get maximum stimulus "value" from them, and that means direct job creation rather than indirect via tax cuts or demogrant.

  3. I see the problem as the political divide. What we need is a mix of the sensible Republican policies (concentrate on domestic consumption and getting the tax level right) and the sensible Progressive policies (a decent social safety net that catches people when mal-investment resolves itself).Until somebody manages to mould those two together we're going nowhere fast.

  4. "Many of us called for a full (0% deduction) payroll tax holiday"Did you mean 100 % instead ?

  5. I don't think they're lukewarm because of political feasibility but concern that weakening the program's otherwise perfectly fit finances would open it to further attack: much of the population already thinks it's "bankrupt" because both sides of the aisle have been saying so for decades — Clinton went on and on about a social security crisis and Obama's not much better — so you defund it for a few years and then the headlines are all about how the trust fund is due to run out sooner than expected, and how is Dean Baker going to, speaking in the hyperbolic voice, single handedly mobilize the defense of the program a second time around with weaker numbers? It barely escaped the last onslaught, and is unlikely to make it through this administration without a few flesh wounds as it [email protected]: She meant 0% payroll deduction, rather than a 100% payroll tax reduction.

  6. buer,Good point, I'm sure if you go back into Krugmans writings, you could find him writing about Social Security's "finances". A PTH would probably put the SS Program in immediate "deficit" and then Krugman would have to explain why that didnt matter which would imply that he has had it all wrong for his entire career… I dont believe that Krugman really "gets it" but even if he did, I dont see him becoming that humble so as to advocate policies that expose one of his academic shortcomings… Resp,

  7. I think that Krugman may actually be right in this case. (Technically wrong but due to politics right) The bigger picture is the politics. At what point do you stop appeasing the right? I mean that in the most pejorative sense possible. It seems to me that in MMT's haste to be apolitical a lot of us falling into the same trap that the Democrats fall into. Not standing up to a very dangerous bunch of people.

  8. I liked one thing – Mr. Krugman linked to Mr. Roche's site.

  9. Don't the ironic quotes around ' "progressive" ' in paragraph three answer the question posed in the subject line?

  10. I agree with your comments Stephanie but I do take a small amount of heart that at least Dr, Krugman paid attention to Cullen and even recognized him. Hopefully, it is a sign that Dr. Krugman is reading the MMT posts which, one could hope, will influence his economic thinking.

  11. Buermann,You've hit on the key point unwittingly, namely that MMT and Baker are the only ones explaining how this works (and Baker's not completely there himself, but better than most everyone else). For progressives, the short-term politics of the possible keeps winning over (a) how things really work and (b) longer term principles. The GOP gave that strategy up long ago, and ever since the debate has continously shifted right; they've repeatedly made suckers out of the headline progressives who are always trying to be just a few % left of the center in order to score a short-term win, as the center keeps moving right the whole time.Specifically on SS and payroll taxes, I'm still waiting for a headline progressive to explain to me how it would be harder to cut other programs like defense, subsidies for big oil or big ag, etc., if we were to pretend we financed those programs with a particular tax and revenues from that tax were projected to be insufficient at some point in the future.Headline progressives are in fact the ones that have the politics wrong. It's precisely because we pretend that a particular tax pays for SS that even a Democratic president can be in favor of cutting it. Get rid of that fiction and see if seniors suddenly in the know allow anyone to touch their benefits without serious consequences–kind of like how nobody wants to touch big ag.

  12. Soon after the 2010 MMT Fiscal Sustainability Teach-In, I went to a meeting at CAF offices on the strategy for mobilizing a defense against the deficit hawks going after the social safety nets. There must have been 35 people at the meeting, most representing beltway "veal pen" progressive groups. Jane Hamsher attended the meeting by phone, and Alex Lawson who distinguished himself later on by giving Alan Simpson a chance to rip off his own mask of rationality in an interview chaired the meeting.I introduced MMT ideas about there not be any deficit reduction problem at the meeting and suggested that any coalition emerging out of the group go directly at the deficit hawks by denying the premise that there is a debt/deficit reduction problem. mt proposal was met various comments about specific tactics that might be used to defend SS, and to a lesser extent Medicare. Most people wanted a defensive strategy, rather than the one I outlined. They seemed to want to accept Washington's subjective reality and basically just defend the programs they acquired factual knowledge about. They had little knowledge about the larger economic picture; and no appetite for learning anything about it. It was obvious that they were policy wonks who were constrained by their policy specialization from following what might have been a winning strategy, and influenced by that specialization to think about only tactics within a defensive strategy framework.Since that time they've followed their defensive strategy and tactics, pointing out how popular the safety net is, how well it works, and also that Social Security, especially, had nothing to do with causing our problems. They've done a very good job following their strategy. They are after all competent at what they do. But their strategy hasn't stopped the deficit hawks from calling for cuts in entitlements as the primary way to solve "the long-term deficit reduction" problem.In other words, they've failed to recognize that the politicians don't care who has been at fault in the past. They don't care about considerations of justice and fairness. They're only interested in doing what they think may be politically feasible to solve their imaginary problem, and get the votes of their imaginary independent voters who they believe are more exercised over the deficit/debt problem than anything else. (to be continued)

  13. (continuing my last comment to get around the word limit)You asked why progressives won't act like progressives? I think one reason, is that many of them only know about the specifics of one or a few policy areas, leading them to defensive strategies in those areas. Another reason is because they believe in the idea that the Government can run out of money. I think that the most important thing that MMT can do to change the politics is to persuade people that there are no Government spending limits except those of inflation and real resource constraints. If we can persuade progressives of that we can get them to disbelieve in the deficit hawks framing premise, and they will be more free to act like progressives again.Finally, I think that people like Krugman won't act like progressives because the "serious" organizations they work for use political feasibility as a norm in evaluating their employees. If Paul put forward the policy proposals he thought were the best ones, purely on economic grounds or even on grounds of public purpose, he'd soon run into pushback from others suggesting that he's not politically relevant. His reference group is no longer other economists; it's the smart money in DC and NY. he can be more liberal than others in the commentariat, because that's his role; but he really gets the kudos if a proposal of his is taken up by the powers that be. That's what he wants now, more than he wants to act "progressively."Btw, I did two posts after that meeting I wrote about above:http://www.correntewire.com/opposing_american_death_panelhttp://www.correntewire.com/right_messageSince then I've done many pieces critiquing the deficit doves' acceptance of the basic premise of the deficit hawks.

  14. STF wrote: "For progressives, the short-term politics of the possible keeps winning over (a) how things really work and (b) longer term principles. The GOP gave that strategy up long ago, and ever since the debate has continously shifted right; they've repeatedly made suckers out of the headline progressives …"Letsgetitdone wrote: "I think that the most important thing that MMT can do to change the politics is to persuade people that there are no Government spending limits except those of inflation and real resource constraints. If we can persuade progressives of that we can get them to disbelieve in the deficit hawks framing premise, and they will be more free to act like progressives again."RE STF: The GOP – more exactly, AEI Heritage Cato Olin etc. has deep pockets behind their propaganda. Contributions to the parties is a sideshow, it's the money behind the lobbyists, rightest ideologues, to candidates, and their acquiring hegemony (some people call that "framing") in the MSM that matters. They succeed because they can afford to….So Re Letsgetitdone: Who's our deep pockets?

  15. Wall Street insiders are salivating at the prospect of a double dip recession which will lead to more public & private asset stripping along with corporate consolidation.Cutting the deficit/fiscal restraint will give William Daley (JP Morgan insider & Obama's chief of staff) exactly what he has lobbied for.

  16. Sure, but it should make privatization of SocSec a much harder sell.

  17. Letsgetitdone:I just read your correntewire blog entry and it is spot on as a challenge to progressives. Also, the coinage proposal has gotten some decent blog momentum. A next step could be to get it some time on Keith Olbermann, Rachel Maddow, Larry O'Donnell, Ed Schultz. I suggest Mosler, Wray, Jim Galbraith (?), Stephanie K, or other MMT expert contact MSNBC. NPR has been pathetic in its news coverage, but I would still try them anyway. Any other specific suggestions from readers of this blog site? MichaelC

  18. @Michael C Thanks Michael, for your interest in my proposal. I do agree it would be very good if the proposal got some time at the Cable News Networks.However, I have to say that I don't know how to get it past the screens and into that environment, except to keep blogging about it, and tweeting about it.Also, it's important to note the difference between PPCS using a couple of $1 or $2 Trillion platinum coins and PPCS using very high-value coins, say $60 Trillion. The former doesn't really change the political climate; even though it would have provided a band-aid for the debt ceiling without having to get a debt reduction agreement. On the other hand the very high value PPCS option would hit the country with very high impact, and make it impossible to credibly say that we have an austerity problem and that the Government is running out of money.So, we have to be clear that only very high value PPCS will be transformative.

  19. This article is spot on theoretically but not persuasive politically. The same goes for the fine correntewire article. If MMT were a powerful intellectual force in Washington, cutting the SS tax would be the thing to do right now, but it isn't yet. In the present political climate, cutting the SS tax would provide the Republicans and Blue Dogs and neoliberals with more future ammunition for cutting if not gutting SS.First coin the $30 or $60 trillion coin(s), and then cut or eliminate the SS tax. You can't skip political steps in the real world and expect to be persuasive. This proposal is premature. Please spend your energy planning and executing a big March For Platinum Coins in Washington. It's time to get out your walking shoes.

  20. Letsgetitdone:Thanks for the clarification re the distinction between the high value ($2t) and the very high value ($60t)coins in terms of completely transforming the framework of discussion.I agree with the final point of Wasabi, regarding the need for action/mobilization/organization, although not necessarily his point about SS. And this points back to my question regarding getting time on the liberal cable networks.Perhaps there is a need for a separate "Advocacy" discussion thread in the NEP blog site (a separate tab at the top of the screen) with moderation of comments. This thread could deal with how to transform MMT from a largely academic-based grouping into a mass-based, organized movement with a long-term CAMPAIGN to implement MMT approaches. The discussion would hopefully spawn specific actions or groups that would implement actions such as getting time on MSNBC, organizing marches, teach-ins, meetings, petitions, full-page ads in NYT, raising funds, etc.Or, rather that a separate thread in NEP site, another site could be set up.MichaelC

  21. Michael,Good idea! I'll see what I can come up with for the NEP site. In the meantime, it does (apparently) help to inundate Editors, programming directors, etc. with requests for guest appearances. I watched some guy promote his book on Jon Stewart the other night, and at the end of the interview, Stewart looked at the camera and said, "There. We had him on. You can stop writing to us now." Marshall Auerback has said before that it also helps to call/write after you see/hear an MMTer on TV/radio, just to say that you liked the perspective and hope they will bring that guest back. Finally, repetition is crucial. Leave comments on blogs and websites. Keep repeating, "The US government issues it's own currency. It can't run out of dollars and will never become insolvent." The more often people run across that statement, the more they will be softened to the full force of MMT.Stephanie

  22. Wasabi,You missed the point. The point is that so-called headline progressives are abdicating their responsibilities by not advocating true progressive policies. Your argument is circular–MMT proposals would be ok if it weren't for the politics but then not pushing the headline progressives to do something about the politics. Stephanie's telling headline progressives to do the latter, so we can get the former–she's way ahead of you. As long as they just try to be a few % to the left of what's politically possible right now, we get nowhere, as the last 30 years have demonstrated.

  23. Scott,Right! And this brings me to another point (to be added to the list above) about spreading awareness, gaining access, advancing the cause, etc.Call these headline progressives out! When Reich, Krugman, Mishel, Baker, etc. take a soft-core (deficit dove) position on some policy issue, ask them to make a bolder argument — one that embraces the central tenets of MMT. Keep pressuring them to drop the act and admit that money is no object.And, if you have friends (smile) build a following on Twitter and F/B and share our work with them.S.Kelton

  24. Stephanie,Sorry if this is off-topic here, but I only recently came across your last comment on the 24 July Naked Capitalism post about Scott Sumner and thought it too late now to reply there.I read the links you provided, and see no evidence in them, or Meulendyke or Stigum's Money Markets, that the US Treasury arranges its bond sales to manage the Fed funds rate. In fact quite the opposite; the Treasury aims to neutralise the effect of its cashflows on banks' reserves balances to avoid interfering with monetary policy operations. As the Kenny Garbade paper you linked to describes, to help it get the best prices for its bond issues, the US Treasury tries to make them regular and predictable in terms of timing and size, apart from cash management bills which are used for occasional fine tuning, so most debt sales are arranged much too far in advance to help the Fed with its day to day monetary policy operations. The Treasury minimises the effect of its tax and disbursement flows on banks' reserves balances by receiving taxes into its Treasury Tax and Loan (TT&L) accounts with private sector banks, drawing money from these accounts into their Treasury General Account (TGA) at the Fed only when they wish to spend. Only on rare occasions, such as when an inflow is too large to absorb in their TT&L accounts, might the Treasury prompt the Fed to offset the Treasury's impact on banking system reserves. Note also that it is clear from these publications that Treasury borrowing precedes expenditure, with the Treasury aiming for an underlying balance of $5bn in its TGA to avoid going overdrawn, since it would be ultra vires for the Fed to lend to the Treasury. Naturally, the Fed Open Market Desk personnel talk to the Treasury every day to hear their forecast of Treasury flows, but this is largely to help the Fed allow for those flows and to help the Treasury ensure that the TGA ends the day close to its target, rather than to ask the Treasury to adjust its flows to help the Fed.In short, as I would have expected based on my involvement in central bank market operations in the UK, there is no evidence to support the MMT contentions that (1) the purpose of government borrowing is to manage interest rates and (2) that government spending precedes borrowing.

  25. Rebel,Regarding your middle paragraph and your #1 in your third paragraph, that's exactly as we've always said it. I doubt Stephanie meant anything different, as she wrote the classic paper describing this back in 1998: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=115128I addressed #2 of your final paragraph here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1723198 Best,Scott Fullwiler

  26. Stephanie,Completely agree, and that was your point here, seems to me. This explains my point perfectly.http://smithbowen.net/linfame/stopme/chapter02.html

  27. I don't understand why this is necessarily a progressive policy. It requires me to put too much faith in the MMT dogma that "taxes don't fund government spending," one of the least convincing aspects of the MMT worldview.MMTers need to think harder about institutional facts, ways and means, and propose an actual, sustainable governmental mechanism for funding Social Security, before they try to get progressives to play dangerous games with the payroll tax.When I'm reading the MMT crew, I never know what kinds of values I'm dealing with. Sometimes its progressives who are committed to equality, full employment, security and broad prosperity. Other times, it just seems like financial sector money players who have struck upon a cool theory to defend cutting their taxes.My inclination is to think that progressives should stick with the view that, on the whole and on average, spending is constrained by tax collections and borrowing. To boost the incomes of ordinary Americans, we should identify stores of surplus savings that are doing little economic work of any kind, and then tax those surpluses away and redistribute them to those who have a greater proclivity to either spend or invest them.

  28. Scott,I get a bit tired of MMT people saying read this, read that. If you know your stuff, you should be able to write a focussed response to the key point in a few lines. Nevertheless, I did have a quick look at the two papers you linked to, and of course I am not at all convinced. We seem to share the same facts, but MMTers draw completely different conclusions from me, usually by asserting how you think the world should work – eg by dismissing central bank independence and consolidating public sector accounts – rather than how the people actually organising and executing the debt and monetary operations think the world works.

  29. Well, the government could just credit these social security funds via deficit spending instead of collecting payroll tax for it. It is supposed to be fiscal stimulus, after all.

  30. RebelEconomist,but the Fed does not issue government bonds, it just buys and sells them. Without treasury issuing them fed would quickly run out and fed funds rate would drop to zero.

  31. Well, the government could just credit these social security funds via deficit spending instead of collecting payroll tax for it. It is supposed to be fiscal stimulus, after all.I assume you mean deficit spending not financed by borrowing or taxing, but simply by crediting the appropriate accounts. Which is fine during a major recession with over 9% of the workforce unemployed. But at some point we will be operating near full capacity again, and funding Social Security by simply spending the money into existence will be inflationary and destabilizing. So the idea that Social Security can be administered and funded purely by as-needed money creation is not a long-term, sustainable solution.Now maybe you think that the solution is to use the money creation tool during the recession, and switch back to payroll tax funding later. But I think we know what would happen. The decrease in payroll tax revenues would be seized on by conservatives and others as evidence that Social Security is "out of money" and exploited as a political wedge to slash the Social Security program.Also, the mechanism of spending money into existence without adequate funds in the appropriate Treasury Department accounts is currently illegal. It can only happen through a maneuver between the Treasury Department and the quasi-independent Fed, in which Treasury auctions off securities and the Fed then buys them on the open market. This is a level of institutional and political complexity that MMTers consistently do their best to ignore, since they work with a simplified model of a "sovereign government" with undivided responsibility over all fiscal, monetary and regulatory powers. So if MMTers have some proposal for reforming the monetary authority in the United States, and consolidating fiscal and monetary operations, they had better put it forward, or people will continue to ignore these "proposals".

  32. Thanks Wasabi, I appreciate the support for my proposal."First coin the $30 or $60 trillion coin(s), and then cut or eliminate the SS tax. You can't skip political steps in the real world and expect to be persuasive. This proposal is premature. Please spend your energy planning and executing a big March For Platinum Coins in Washington. It's time to get out your walking shoes."I, too, think that the sequencing is vital, and that the big October March should be demanding that the President defeat austerity; by minting that big coin.

  33. @Stephanie,"Call these headline progressives out! When Reich, Krugman, Mishel, Baker, etc. take a soft-core (deficit dove) position on some policy issue, ask them to make a bolder argument — one that embraces the central tenets of MMT. Keep pressuring them to drop the act and admit that money is no object."I call out deficit doves frequently, including Krugman; I haven't spent a time on the others; but have taken on the CPC budget, Jan Schakowsky, Bernie, and Jeff Madrick in the past.

  34. @Dan Kervick, Dan, what about using the big coin for deficit spending. At some point, that would be inflationary. But as we approached that point we could re-impose parts of, or the whole SS tax. Conservatives couldn't say that SS would run out of money unless we taxed all the time, because we can always mint more $60T coins and put the proceeds into the SS sub-account of the TGA (which doesn't exist now but would exist under my proposal for minting the big coin).

  35. But as we approached that point we could re-impose parts of, or the whole SS tax.Nobody who has observed the recent deliberations of Congress over questions of debt and spending should have the slightest bit of confidence that the tax would ever come back. Conservatives have had a long term plan to diminish Social Security and replace it, by gradual parts, with private sector savings plans. Once the tax is gone, it will never come back – just like the Bush tax cuts.

  36. Dan Kervick,I meant just the regular deficit spending, with bonds added. That's why I said it is supposed to be fiscal stimulus, because that is how they normally work.Deficit spending is in itself spending money into existence. It does not get more or less inflationary by so called "borrowing", where government just converts non-interest bearing IOU's to interest-bearing IOU's. It does not in practice limit bondholders ability to spend or change his wealth position, because bonds can be sold and they mature. They are form of financial wealth, as good as money,

  37. Rebel,You said: I have read the links you provided, and see no evidence in them, or Meulendyke or Stigum's Money Markets, that the US Treasury arranges its bond sales to manage the Fed funds rate. Treasury aims to neutralise the effect of its cashflows on banks' reserves balances to avoid interfering with monetary policy operations.You really can't be serious. Muelendyke lays out a very detailed explanation — and I lay out the same argument in my Taxes & Bonds paper — to explain precisely how, on a day-to-day basis, the Treasury and the Fed coordinate their operations to ensure that the government's fiscal operations don't interfere with the Fed's monetary operations (i.e. interest rate maintenance). Bond sales and the TT&Ls play a key role in this. The public record is so clear on this that it is simply beyond dispute.Indeed, it is why the TT&L accounts were started in the first place! The government realized that its fiscal operations were often a highly disruptive force, forcing the Fed to conduct large reserve adds/drains in order to offset the effects of the Treasury's operations in order to hit its interest rate target. By establishing TT&L accounts at thousands of private banks, the government recognized that it could minimize (not eliminate) these disruptions by avoiding the reserve drain that would otherwise occur, until it needed to offset an anticipated reserve 'add' caused by (net) spending operations. So, e.g., when taxes were paid, the funds were credited to a Treasury TT&L instead of being credited to the Treasury's account at the Fed. This allowed the Treasury to delay the transfer of these funds until the effects of its spending (a reserve 'add') were anticipated. But the spending comes first, as it is logically and practically impossible to subtract that which has not ALREADY been added by the government (the sole source of high-powered money).

  38. STF, I'm calling for marches in the streets to push MMT policies, yet you say my argument is circular! How else change progressives than to get truly progressive and march in the streets? My point is that you can't get from dystopia to utopia simply with theory. You have to do some real work in the political world to change progressives, and that means taking lots of systematic practical action.

  39. @Rebel,"central bank independence"Can you provide a citation from United States Code where this term is defined or this "independence" of the US Fed is promulgated in law?I have been looking for this in the USC for quite some time with no success, any help here would be appreciated.I have already spent some considerable time looking for this term "independence" in the USC. Since you seem to be so familiar with this concept I would expect you should be able to write a focused response to this key point in a few lines. Resp,

  40. As far as I know, the monetary policy independence of the Fed is not explicitly defined in US law, but derives first from the powers granted to the Fed in successive Federal Reserve Acts, and secondly by convention, and is always publicly reaffirmed by US presidents (eg President Obama on his reappointment of Bernanke: "we will continue to maintain a strong and independent Federal Reserve").In most other monetary areas, including the eurozone, Japan and the UK, central bank independence is explicitly enshrined in law.But the underlying reason for central bank independence is that, over many countries and over many years, it has been found to reduce the inflation / devaluation risk premium that creditors require.

  41. There you go again, Stephanie; presenting undisputed facts, and then interpreting them as evidence that the world is as you would like it to be to make MMT work, rather than as the world actually is.Trying not to interfere with Fed reserves management is hardly a "monetary policy operation" as MMTers tend to describe bond sales. And as far as I know, the US Treasury never times bond sales to actively help the Fed deal with other influences on reserves, such as variations in banknote circulation around holidays for example.Since the Fed has monetary policy independence and the US Treasury is not permitted to run an overdraft at the Fed, I would disagree that "the spending comes first" and that the US government is "the sole source of high powered money".

  42. 'I would disagree that "the spending comes first"'You might, but spending doesn't come last either, because the process is circular and concurrent, not linear.As with all banking its just straightened out at the end of the day so that all the rules appear to have been kept.

  43. RebelEconomist,so, what do you think are sources of high powered money then?

  44. Any monopoly issuer of anything is in general best thought of as issuing first and then collecting.And how the accounts clear at the Fed necessarily confirms this for the dollar. as a point of logic and in practice you simply can't have a reserve drain without a prior provision for reserve add. also, K's failed to grasp the ramification of the dollar being a (simple) public monopoly, which also means the gov is 'price setter'.And therefore he's hung up on deficits and inflation. http://www.moslereconomics.com

  45. @Neil Wilson, you are right that the process is circular (which is one reason why I think that it is silly to try to show that money originated with governments back in the mists of time), but the marginal expansions of the money stock nowadays are controlled by the [email protected], the Fed of course. No doubt some might mention that the Fed creates and distributes base money by buying treasuries, but note that these have to have been issued in the primary market first. Also, the Fed's marginal issuance of base money is often done by buying secured bank debt (ie investing in reverse repo), and repo represents the mainstay of most central banks monetary policy operations these days.

  46. @Dan"Nobody who has observed the recent deliberations of Congress over questions of debt and spending should have the slightest bit of confidence that the tax would ever come back. Conservatives have had a long term plan to diminish Social Security and replace it, by gradual parts, with private sector savings plans. Once the tax is gone, it will never come back – just like the Bush tax cuts."The SS tax isn't the same as the Bush tax cuts on the wealthy in that the same political forces won't be fighting tooth and nail to retain the tax holiday. Also, the payroll tax holiday could be automatically and incrementally pulled back according to progress in lowering unemployment. I doubt that the resistance will be heavy to gradual increases for the purpose of avoiding inflation.The Bush tax cut situation is very different in that we cut the taxes immediately, and them scheduled them to end at a date certain far in the future; making it look like a tax hike when the date for eliminating the tax cuts approached, and providing the opportunity for lobbyists to increase pressure as the date approached

  47. Rebel,How much more are you going to critique us by saying things we've been saying for years or just flat out misrepresenting us? That is, you clearly don't understand what we're saying because most of your criticisms just aren't.For instance, your original critique of Stephanie above could have been word for word out of her 1998 paper (with the caveat that Garbade's discussion of some new developments hadn't been published yet).Further, you say, "you are right that the process is circular (which is one reason why I think that it is silly to try to show that money originated with governments back in the mists of time)," but if you understood our arguments you'd see that you are both misrepresenting and incorrectly tying together our position on how money originates now and how it originated thousands of years ago. Since you don't like having links provided, I won't bother giving you one–and hopefully you can appreciate that it "annoys" me to rewrite something every few weeks to answer the same question that's been answered dozens or even hundreds of times before (believe it or not, you're not even close to the first person to provide such critiques).Then you write this:"No doubt some might mention that the Fed creates and distributes base money by buying treasuries, but note that these have to have been issued in the primary market first. Also, the Fed's marginal issuance of base money is often done by buying secured bank debt (ie investing in reverse repo), and repo represents the mainstay of most central banks monetary policy operations these days."Yes, but with whose liabilities are those purchased? As I said in the paper I linked to above (you said you read it, but I have serious doubts given other things you've said here) reserve balances are best thought of as created by government deficits OR Fed loans. And note that we've described in detail the repo process for years. Warren even has it in his paper from the early 1990s.Further above you say this in reply to me:"but MMTers draw completely different conclusions from me, usually by asserting how you think the world should work – eg by dismissing central bank independence and consolidating public sector accounts – rather than how the people actually organising and executing the debt and monetary operations think the world works."This is so full of misunderstandings and misrepresentations it's almost not worth responding to, but here goes:1. We assert how the world of currency issuers under flexible exchange rates works with our descrptions, which is what you are critiquing, not how it should work. 2. We've absolutely never dismissed central bank independence as it is practiced in the real world. We've heard that several times before, but it's a complete misunderstanding of what we're saying. Again, you don't understand the MMT arguments you claim to criticize.3. We almost never consolidate the govt and Fed's balance sheets–I never have, personally. But we do talk about how they are related–ask yourself who would be on the hook if the Fed's MBS's went bad. Ask yourself who writes and enforces the Federal Reserve Act. Ask yourself how the Federal government "finances" its spending on SS benefits once payroll taxes are insufficient and its time to use the "trust funds" to cover the rest–can you show us a difference between how they would do this with and without the trust fund?4. Instead of claiming that you disagree with #3, provide an example whereby our approach misses something of economic significance. Note the difference between saying THAT you disagree with explaining WHY you do so.

  48. Rebeleconomist:"I would disagree that "the spending comes first" and that the US government is "the sole source of high powered money"."I guess nobody pointed out that MMT'ers regularly use "spend" to apply to both Treasury spending and Fed disbursements of any type (i.e. anything that puts high powered money into the system).It's part of the vocabulary mystique.

  49. Scott,While most countries' governments own the central bank (in beneficial terms at least) and retain the power to instruct it in extreme circumstances, for practical purposes a central bank like the Fed may be considered independent for monetary policy purposes. Once you accept this, then reserve balances cannot be considered to be generated by government deficits. And key MMT ideas, like "taxes drive money" and "government spending is never revenue-constrained" don't work.

  50. "reserve balances cannot be considered to be generated by government deficits"All government spending is settled in reserve balances at the central bank, including any spending that happens to be part of overall deficit spending. The fact that reserve balances so created are usually drained around the same time doesn't change this fact.

  51. "Once you accept this, then reserve balances cannot be considered to be generated by government deficits. And key MMT ideas, like "taxes drive money" and "government spending is never revenue-constrained" don't work. "Completely wrong. It confuses the strategy of monetary policy–setting interest rate targets independently of politics–with the daily tactics of implementing monetary policy that are necessarily intertwined with flows to/from the government's account at the central bank.

  52. Scott,Given an independent central bank, the initiative to create all base money is taken by the central bank according to their idea of how much is likely to be needed, assessed in practice through the lens of short-term interest rates and an econometric model linking this to prices. End of story.In this context, the government may be seen as just another enterprise, which because of the nature of the services it provides, decides what to supply by election and charges for its services by mandatory subscriptions. Like every other enterprise, the government simply uses the money that the central bank has provided. It is only because the government is so large and banks with the central bank that the central bank needs to communicate so closely with it about its financial flows.Dare I say that the problem with MMT is that its supporters do not understand the monetary system, because, as far as I know, MMT has no supporters among the operational staff in central banks and national treasuries that actually operate this system.

  53. "Dare I say that the problem with MMT is that its supporters do not understand the monetary system, because, as far as I know, MMT has no supporters among the operational staff in central banks and national treasuries that actually operate this system"There's a point there about Ivory Towers.OK. Who in the central bank will decline a government instruction to pay? What would happen to them in practice if they did? If the president gave a direct order via the Treasury to the Fed to pay, would it decline? With an enterprise, the bank will decline payments when the money runs out and they will decline to accept instructions on accounts other than ones the enterprise owns and the legal system will back up that decision. Nobody will lose their job. Nobody will be hauled over the coals.However if the bank won't decline a direct instruction from the President, then de facto there are no restrictions and you can't treat the government as an enterprise.So who's the guy that's brave enough to say 'No' to a direct order from the President?

  54. Rebel,Please. Publicly reaffirming central bank independence is just that – a public show. Read Greenpan's memoir. He met privately with Clinton, who "encouraged" him to permit the unemp rate to fall without hiking rates to fight (presumed) inflationary pressure. G/span saw it as a challenge — one he accepted.Many more examples here. http://www.forbes.com/2009/07/31/bernanke-volcker-greenspan-fed-independence-opinions-columnists-john-tamny.html

  55. This comment has been removed by the author.

  56. Rebel,"Given an independent central bank,"Which means it sets an interest rate where it wants to, nothing more. And even that is at the pleasure of the government that created the central bank and both legislates its activities and appoints its policy makers in the first place."the initiative to create all base money is taken by the central bank according to their idea of how much is likely to be needed,"This means there are certain operational realities involved with achieving an interest rate target–wherever it may be set–that cannot be usurped. This is key, and you continue to gloss over it in your mistaken belief that MMT glosses over independence."assessed in practice through the lens of short-term interest rates and an econometric model linking this to prices."Yet again you are confusing where the interest rate is set with how it is set. Where it is set, and how the decision is made to set it there, are irrelevant to the points you are critiquing regarding MMT. Dare I say that this is what you repeatedly demonstrate you do not understand."End of story."At least in terms of the apparent limits of your understanding of what MMT is."Dare I say that the problem with MMT is that its supporters do not understand the monetary system,"Typical criticism from people who can't actually address the specific points we raise. I've pointed out your misunderstanding numerous times and you've yet to even acknowledge it."because, as far as I know, MMT has no supporters among the operational staff in central banks and national treasuries that actually operate this system. "Yes, "as far as you know," which again doesn't appear to be all that much. Mosler, for instance, meets with NY Fed operations people regularly. Another example–I was on a panel 3 years ago with Charles Goodhart and Vincent Rinehart on monetary operations and both verbally confirmed my description of monetary operations specifically in their presentations that followed mine. Finally, we've cited research on operations repeatedly, and the core of our operational explanations are repeatedly confirmed in this research. Again, I could provide numerous links, but you've said that annoys you.

  57. Neil,Correct. Three more things. One, if they are allowed to say "no," it's because the govt gave them such authority. Two, they may REQUIRED to say "no" (as in the Fed's inability to provide overdrafts to the Tsy), which again affirms who the boss is. Third, as Beowulf pointed out in the coin seigniorage discussions, in the US at least the law says that if there is a disagreement b/n the Fed and the Tsy that the tie goes to the Tsy.

  58. Rebel,At the risk of providing another link. …. Here's a great post on consolidated government balance sheets. http://bilbo.economicoutlook.net/blog/?p=11218

  59. @Neil Wilson,Perhaps that is why am I not still working for a central bank, and why I style myself as RebelEconomist, but I would have certainly refused any informal government request for an overdraft. Of course I accept that the elected government has the right to instruct the central bank in extremis, such as war, but it must then follow due process and be seen to be responsible for the consequences.This is why I have such contempt for central bankers like Greenspan. He enjoyed public adulation so much that he voluntarily adopted populist policies and cheerled the boom, turning a blind eye to the danger signals that he himself had pointed to in previous years. For example, despite warning about the dangers of narrowing corporate spreads in early 1998, Greenspan readily cut interest rates when long spread product positions went wrong in Autumn of that year. And the rest is history. I am sorry to say that Mervyn King seems to following the same path.

  60. Scott,I am not sure what you have in mind here:"This means there are certain operational realities involved with achieving an interest rate target–wherever it may be set–that cannot be usurped. This is key, and you continue to gloss over it in your mistaken belief that MMT glosses over independence."Don't be so coy!

  61. Scott,I would not assume that policy-making central bank economists know that much about operations. In my time, they (including Charles Goodhart) were very rarely seen in the BoE dealing room (although to be fair, Charles Goodhart is a commendably practical monetary economist). Willem Buiter, for example, used to be quite dismissive about needing to know much about operations – before the financial crisis that is. Some highly regarded macroeconomists (eg Krugman) still seem to think that central banks implement monetary policy by buying treasury bills.

  62. Stephanie,I assume that the comment at 10.28 AM today is from you.That Bill Mitchell paper is a classic of the MMT style. Note, by the way, the inconsistency between Bill Mitchell's comment that "The notion of a consolidated government sector is a basic Modern Monetary Theory starting point" and Scott's comment at 3.52 PM yesterday that "We almost never consolidate the govt and Fed's balance sheets".Because seeing the central bank as a separate entity from government confounds his story, Bill Mitchell dismisses it as "the mainstream macroeconomics obsession with central bank independence [which is] is nothing more than an ideological attack on the capacity of government to produce full employment which also undermines our democratic rights". Note that this is not the same as saying that that "obsession" has not made central bank independence an operational reality in normal times. Frankly, I do not think that someone with such an approach should be teaching vulnerable students.

  63. I suspect you stunned them into silence, JKH!It does seem that coin seigniorage provides a loophole through central bank independence. It's a bit like monetary financing – the central bank may acquire an asset on its balance sheet to match the extra credit in the Treasury General Account, but if the market value of that asset is less than the amount of reserves spent by the government, the central bank cannot sell that asset to mop up those reserves if it considers that they represent an excess. So coin seigniorage is potentially inflationary. It should be OK, however, if the government uses the proceeds of the coin sale to retire debt held by the Fed, and agrees to reverse the transaction on the same terms when the debt ceiling is raised.

  64. JKH,I didn't see anything to disagree with there (aside from the "seizing on coin seigniorage because it's legal" point, which misses the immediate usefulness of getting around the debt ceiling). Was a response necessary other than to say that? (was on vacation and forgot to do that–sorry)

  65. Rebel,Regarding 11:42, yes that's precisely the point! YOu don't know what I mean, yet it's the core point we are making. If you don't want links, I don't know what to tell you. I wrote 6000 words on what I mean there and linked to it in the very first response to you. I'm not going to rewrite it here.Regarding 12:01, yes, neither are operational staff, though both understand operations (though many others don't as you mention–Krugman's particularly bad, I agree(!)). Let me pose the question to you–can you find 1 example of a description of monetary operations from such staff that is inconsistent with MMT's description? I haven't seen one yet, but I'm sure I haven't seen them all (even though I've certainly tried to). Note here that I'm not referring to more general, operational principles like "spending comes first"–that's not the sort of thing operations people deal with (again, I've explained the MMT distinction in the paper I linked to above).

  66. "It does seem that coin seigniorage provides a loophole through central bank independence."It doesn't affect their ability to set the interest rate target where they want it."It's a bit like monetary financing – the central bank may acquire an asset on its balance sheet to match the extra credit in the Treasury General Account, but if the market value of that asset"The "market value" of the asset would be its face value–the value the Treasury stamped on it. How could it be any other? It's the same as with any other coins minted by the Treasury–as if a dime could somehow be suddenly worth 9 cents instead of 10 (nominal terms, of course)."is less than the amount of reserves spent by the government,"Again, wouldn't happen."the central bank cannot sell that asset to mop up those reserves if it considers that they represent an excess."The excess doesn't matter anyway, aside from the effect on the overnight rate. What can banks "do" with the excess? Nothing. Further, the central bank can issue time deposits to drain the balances."So coin seigniorage is potentially inflationary."No it's not. You haven't demonstrated that whatsoever."It should be OK, however, if the government uses the proceeds of the coin sale to retire debt held by the Fed,"Yes, that would be the easiest thing to do."and agrees to reverse the transaction on the same terms when the debt ceiling is raised. "Unnecessary, as above.

  67. Scott, RebelCouldn't resist leaving the link – I thought there might be a slight, if vague, overlap with your discussion here, which I'm finding quite interesting. But I don't mean to distract from the main event.Scott – no, it was a bunch of thoughts that probably didn't need feedback. And no commenter is necessarily "entitled" to a response to any particular comment. I understand that.Rebel – on that particular point, I guess the central bank might have to use some form of liability management rather than asset management to manage the base down, if that's what it wants to do. Or I guess the coin could be denominated down, and the Fed could gradually drain reserves by issuing debt and retiring the coin piecemeal. Haven't thought that through. As to the relative effectiveness of liability versus asset management in those circumstances, that's probably an interesting discussion in itself.

  68. Sorry for being snarky, JKH. It was a very good series of comments. As you know, we focus on the effects of transactions on pvt sector financial statements (including the Fed's, since it affects pvt sector) much more than the internal accounting between, say, various govt accounts. (I consider this different from consolidating govt and Fed; I never do that.)Not that the latter aren't important and interesting in their own right, as you demonstrated, but the post was on inflation and transactions between internal accounts won't affect that. I suppose that would have been good to add, though, anyway, since I did already include the internal transactions regarding replacing tsy's held by Fed with a coin.

  69. Scott,I meant that I am uncertain what the "certain" operational realities you are referring to are, so I don't know where to start!I have no objection to occasional references, but please restrict them to focussed articles. I must say though that I believe that one can get a lot out of interactive debate, both by trying different ways of thinking about and explaining issues, and by identifying and perhaps resolving, the points of difference (which is what I would like to see from Krugman and Fama for example).Regarding operations, as I have written, I generally agree with the facts that, say, Stephanie presents in her description, but not the MMT interpretation of what motivates those actions. It is obviously hard for me to prove a negative, but, for example, if you look at any national debt manager's account of what they do (eg US Treasury here: http://www.treasury.gov/resource-center/data-chart-center/quarterly-refunding/Pages/overview.aspx ), you will find nothing about bond sales being routinely arranged to manage bank reserves, and lots about financing government borrowing at the lowest cost and risk.

  70. Regarding coin seigniorage, Scott and JKH,Let's assume that the government deposits the coin with the Fed, and spends the proceeds from its Fed account without raising taxes, increasing the stock of bank reserves to the point that money market interest rates are being driven below the Fed's target. What can the Fed do to absorb what it considers to be excess reserves?Can the Fed sell the coins for their face value? No, because the value of the platinum in the coins is far below their face value, and the coins bear no interest. Can the Fed sell its other assets, such as treasuries. Yes, but (a) it would probably take a loss on them that would deplete its capital and (b) it has a finite amount of existing assets. The Fed would soon become insolvent, and ultimately have no assets at all. Perhaps despite being insolvent the Fed could keep on operating by selling its own interest-bearing debt, selling yet more debt to pay the interest on earlier issues, but this will become increasingly difficult as it becomes clear that the Fed is running a Ponzi scheme in a struggle with its government that it cannot win. Faith in the currency would collapse, and inflation if not hyperinflation would result.

  71. Rebel,The Fed doesn’t need to absorb excess reserves if it pays interest at the floor rate.But even if you believe it needs to, say because of your own views on monetary policy efficiency/ effectiveness, it can absorb them via liability management – e.g. auctioning off term deposits at any desired maturity to banks. This is essentially the same as a bond auction that’s force-ably captured within the banking system.There’s no Ponzi scheme, any more than there is for the existing Treasury debt management process. CB liability management just makes term debt issuance a discretionary dual function – Treasury for bonds; CB for captured bank term deposits.So I don’t see the overall Treasury/CB liability management process being encumbered by the coin per se. It just invites more options for the liability mix.The overall size of the deficit and debt, however it is funded, is a separable issue I think.Note I’m not defending the platinum option here. Just that I think there’s no reason why it can’t be operationally feasible.Note also that the platinum origination phase is a kind of QE.And it can always be reversed by the government issuing bonds and retiring platinum in tranches by paying with corresponding government balances held at the CB.And all of this is feasible regardless of the "true" economic value of the platinum.

  72. Rebel,P.S.I left our earlier discussion, re Sinn, out of fatigue more than anything else.I suspect we agreed on much of it, and agreed on even more, beneath the surface of somewhat differing language. The conceptual framing of liquidity is always a challenge.To close on that, for the time being, I didn't change my mind on anything there.If I ever do, you'll be the first to know.:)

  73. I don't think so JKH. Paying interest on reserves just presents the problem in a different form. Basically, the central bank loses monetary control in any situation in which it is obliged to purchase at more than market value assets that yield less than its liabilities (unless of course the central bank has the right to demand extra capital from the government, which would be the mirror image of the normal relationship between the central bank and the government).

  74. Rebel,First answer:You're right.You got me.How the hell did that happen?I must be losing it.Second answer:Treasury/Mint can elect to pay interest on what is effectively a platinum coin liability.If you check out my mini-magnum opus again, you'll see that I equated the platinum caper to a form of internal funds transfer with corresponding transfer pricing between two institutional units of government.In that sense, the transfer pricing of platinum and the transfer pricing that is effective in the form of an explicit book interest rate on a Treasury bond held by the Fed are two birds of a feather.And more generally, such a transfer price can be selected to represent rational economic terms in respect of a bookkeeping entry that in its most general form is merely a liability of Treasury and an asset of the Fed.Choose the answer you prefer.:)

  75. Actually, come to think of it, JKH, STF, this debate is rather unnecessary. If the Treasury thinks that the public will accept the coins at face value, it can just use them to pay its bills directly, without involving the central bank (which could be given permission refuse to exchange them for banknotes).

  76. The public has nothing to do with it, and that was made very clear in the original proposal. You should read up on it.

  77. The basic reason being that the purpose of the proposal necessitated an issue size that was ridiculously large in the context of any potential public demand. And that was also the rationale for the large denominations (e.g. $ 1 trillion). It's a bulk issue for a bulk purpose.

  78. Both answers are fine by me JKH. If the government was unable to use its massively increased outflow (by value) of coins to pay its bills, it could offer them at a discount to face value. Note that the interpretation of the discount would be interesting, if you pardon the pun, because the coins are effectively perpetual securities!

  79. I know that the original proposal did not involve the public, JKH – that is my own idea, to get round my own objection! Of course, it's all fine if the government gives the Fed whatever reassurance it needs to go along with the scheme, such as an indemnity for any losses, like the BoE secured for its QE programme.

  80. Rebel,Regarding coin seigniorage and Fed paying interest or issuing liabilities–yes, if they pay interest more than they earn on the coins, then some other arrangement to (a) charge the interest to the Tsy, or the Tsy to pay the interest for them, (b) pay interest on the coin at some spread to interest paid by the Fed, or (c) ignore the negative capital held by the Fed would have to be in place. JKH's suggestions were similar. This is all very gimmicky, for sure, but so is a debt ceiling. Without a debt ceiling, if there were still coin seigniorage just in order to get around the requirement of having a positive balance in the Tsy account before spending, then I would have no problem with the Tsy issuing bills or even medium term notes to drain reserve balances equivalent to the amount of any deficit incurred while "withdrawing" its coins until it spends again. Again, this would all "lift the veil" on monetary operations as I explained in the post. (And, in that case, the Fed would still purchase bills or notes to offset reserve drains from currency purchases by banks, and would thus earn more than its liabilities.)Sorry that I apparently had misinterpreted your original point on the ponzi issue–my turn to misinterpret!

  81. Rebel,"that is my own idea, to get round my own objection!"sorry!

  82. Rebel @4:25"I meant that I am uncertain what the "certain" operational realities you are referring to are, so I don't know where to start!"The point here is that in achieving an interest rate target the central bank must either accommodate banks at the desired target rate or offer interest on the balances (or an interest-bearing alternative). Regardless, flows to/from the Treasury's account are a significant part of this. You appear to understand this process, but are missing the broader MMT point that the achieving of a target rate is necessary done in the context of these flows to/from the Tsy. This is not to say the Fed doesn't have independence, but it is to suggest that when the Tsy incurs a deficit, either the Tsy or the Fed must offer an interest-earning alternative or pay interest on reserve balances. That is, there is no such thing as a "monetized" debt or QE in the context of a positive interest rate target and no interest on reserve balances. IN most every country I know of, the responsibility of draining the reserve balances related to a deficit is placed on the Treasury under the guise of "financing" the deficit. But the interpretation that this is "financing" is simply a result of a self-imposed constraint that the Tsy have a positive balance in its account before spending. If you get rid of this requirement–which has actually been not all that uncommon in the US prior to 1981–then it's clear that the "operational" purpose (more on that word below) of the debt issuance is to drain reserves, since without the issuance the Fed would have to do the same or pay interest.Similarly, the tax and loan operations of the Tsy are to aid the daily implementation of monetary policy. The Tsy reports that the purpose of these is to raise its revenues via these operations because, again, of the self-imposed constraint."I have no objection to occasional references, but please restrict them to focussed articles. I must say though that I believe that one can get a lot out of interactive debate, both by trying different ways of thinking about and explaining issues, and by identifying and perhaps resolving, the points of difference (which is what I would like to see from Krugman and Fama for example)."OK, I agree with that. My point in linking to this article (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1723198) is that it is the piece I wrote specifically to deal with the sorts of objections you are raising (though I do need to edit a bit–it was written in a few hours–sorry in advance for that).The basic point in the piece is to clarify the meaning of "operational" in MMT. I would prefer that we had never started using that word as we do, since it's meaning within MMT has been invented and is therefore a common area for disagreements to arise. At the same time, there is SOMETHING we are referring to when we say that "taxes and bonds don't finance spending," and "operational" (as in "operationally fund") has become that "something," for better or worse."Regarding operations, as I have written, I generally agree with the facts that, say, Stephanie presents in her description, but not the MMT interpretation of what motivates those actions. It is obviously hard for me to prove a negative, but, for example, if you look at any national debt manager's account of what they do (eg US Treasury here: http://www.treasury.gov/resource-center/data-chart-center/quarterly-refunding/Pages/overview.aspx ), you will find nothing about bond sales being routinely arranged to manage bank reserves, and lots about financing government borrowing at the lowest cost and risk."Yes, I would completely agree here. Again, the issue is with the concept of "operational" as MMT uses it.Hope this helps a bit.

  83. Thanks, Scott. I guess I struggle to see what value there is in dwelling on a world without the "self-imposed" constraints. The constraints are not imposed for no reason; they are imposed because experience has suggested that things go wrong without them. They can be relaxed temporarily in emergencies when worse problems arise, but that is not to say that the constraints are not advisable in normal times.Like many critics of MMT, I am sceptical of the idea that, in the absence of the constraints, there would be any advantage to the government spending by creating reserves. I suspect that we would either re-learn the value of the constraints the hard way, by generating inflation, or else end up managing the economy in much the same way as now (eg using bond sales to absorb excess reserves), arriving at that conclusion from another direction.Finally, by the way, it would be quite reasonable for a government to give its independent central bank the mandate to stabilise the value of the currency in terms of labour, rather than a basket of consumption goods, if that was considered to be the key price in the economy. I suspect though that the links between the price of labour and other prices would not be strong enough to avoid a degree of divergence of other prices that would be unsatisfactory to the public – eg tight monetary policy to hold down wages while the price of consumption goods kept rising. For what it is worth, my own preference would be for central banks to stabilise the value of money in terms of a very wide basket of everything that money is used to trade, including assets and labour. Similarly, if full employment is considered important, I would prefer to see that tackled by an honest tax and spend policy with hard (in my terms) money.

  84. "a world without the "self-imposed" constraints"I find it frustrating that MMT doesn't view that world as a different world than the world we have nowi.e. implicitly or explicitly, "self-imposed constraints" are not constraints, according to MMTas I indicated earlier, Scott, I'd present it differently, although I'm now sure exactly how

  85. meant "not sure exactly how"

  86. "I find it frustrating that MMT doesn't view that world as a different world than the world we have now. i.e. implicitly or explicitly, "self-imposed constraints" are not constraints, according to MMT"I think, instead of "operational," we should have been much more precise from the outset and said "general vs. special case" and then been explicit about what "general" means–in our case, it means looking at the logic of accounting and tactics that are inherent and unavoidable in monetary/fiscal operations. I think it has tremendous value to do that exercise–those are "constraints" that cannot be over-ridden without changing the system itself. Economists and scientists have "special cases" and "general cases" all the time–indeed, those that come up with the "general cases" to base analysis on are the ones that become famous and win Nobel Prizes. To turn it around, I find it very, very strange to suggest that a self-imposed constraint that has been discarded time and again in the past when deemed desirable or even necessary (which Rebel even recognizes is true) should somehow be the "general" case. It's fine if one thinks those self-imposed constraints are useful–we can debate that, for sure–but call it what it is so that it's existence can be justified, since it's absolutely not the same thing as say, the "constraint" of double-entry accounting or the constraint imposed by a gold standard. That's what careful analysis in every field does–creates a very detailed taxonomy, and that's what we're doing here, because we find the taxonomy most use to be inefficient and leading to both bad economic analysis and bad policy.

  87. yes, I find your general/specific construction more robust than the "operational" route, although the specification of the general case itself should always be thoroughly justified by robust argument, consistent with the entire logical framework, top-down – you're making a logical choice about ground zero after allbut I'd develop a much broader and deeper taxonomye.g. I don't see double entry bookkeeping at the same level at all as the usual fiat constraints or even gold; it's higherand I'm generally very uncomfortable with references to the gold standard constraint – i'm not convinced that most are sufficiently familiar with banking operations under the gold standard to make robust comparisons or equivalences – i'm very skeptical about this part

  88. also, Mosler occasionally uses the language of "policy options", which I likee.g. policy option to implement the base case, or pieces of itbut that policy option still requires political will to exercise itand i'm not sure its correct to assume there's 100 per cent certainty that it will always be exercised instead of "voluntary" default

  89. "e.g. I don't see double entry bookkeeping at the same level at all as the usual fiat constraints or even gold; it's higher"Completely agree. There's a hierarchy even within the "general" case advocated by MMT, and a choice within that a level of that hierarchy to focus on currency issuers under flexible fx.

  90. "There's a hierarchy even within the "general" case advocated by MMT, and a choice within that a level of that hierarchy to focus on currency issuers under flexible fx"I don't recall reading something that quite formalizes this hierarchy within the general case itself or otherwise – i.e. where the accounting logic is ranked superior to the other choices, etc. Perhaps I'm just not remembering what's already there, but can you point me to something that you or others have written? Or is it something that remains to be done, if worth the effort?P.S. looking forward to Krugman responses today; mine's in there

  91. JKH,You can read about various institutional setups such as the Gold-Standard and the stock-flow consistency, money endogeneity that goes with it in Godley and Lavoie's books and some papers/articles and book chapters by Lavoie. On a different note, (which of course the above auhors do not use), all punchlines can be used. The funds to pay taxes and purchase government bonds comes from the government! Spends first, taxes later too! Simply credits bank accounts as well. There is too much of an incorrect description given in Billy Blog about how the Gold-Standard operated, am afraid. Even mainstream authors knew the "rules of the game" never applied though they have vague explanations such as competence of central bankers!

  92. Sorry should be incompetence instead of competence.

  93. Btw, re Krugman, what he is really saying there is that if the Treasury wants to decide the composition of the public debt which is a bit unilateral with respect to the portfolio preference of the foreign creditors, it can lead to a complete loss of control on the exchange rate in case there is capital flight if foreign creditors do not like rising debt ratios. The inflation which results due to depreciation causes a wage-price spiral. In the case of France, the foreigners did suspect rising debt ratios, and lost confidence. Note, one has to be extremely careful about arguments on sustainability. Extremely extremely. Once you mentioned growth stabilizing the ratios, but doesn't work. Higher growth also leads to higher current account deficits and higher fiscal deficits as a result because the two are related by the sectoral balances identity. Simple deficit spending doesn't work. Remember, I don't think he uses the wrong causality higher monetary base = higher money supply and inflation in the latest blog.

  94. JKH . . . there aren't any. I've been thinking about it, though, since my own systems theoretic background leads me in that direction.Ramanan . . . sounds like you've been reading Marc's stuff on the compensation thesis. Good stuff!

  95. Need an opinion here by anyone. Krugman is right about future costs etc. Here's one way to express this:Think of the US as a closed economy for the analysis…Suppose, the US government promises to pay $40T in benefits (in some proper way of counting) to X number of people in the future. Surely this sounds high. Intentionally chosen to exaggerate the situation. So somwhere between $0T and $40T, there is some right number. One can say the government can tax and control demand etc (in the future) but which of the number between $0T and $40T is right ? Of course, its a political matter but surely there is some analysis to this instead of saying resources only are a constraint etc… ?It could be that the US government's promises of future benefits at the moment is tiny but why tiny ?

  96. The comment on Krugman's blog that I would appeal to MMTers to take most notice of is #82 (not me, by the way).Compare that with Stephanie's remarks above at August 7, 2011 8:31 AM and August 7, 2011 8:47 AM.

  97. Ramanan,My personal forecast for US NGDP over the next 30 years is around $ 800 trillion. That should provide some coverage.

  98. Rebel,Thanks for the suggestion. I don't disagree with the sentiment that MMT'ers should attempt to falsify.One of the things to keep in mind, though, is that given that we are heterodox economists, unlike the vast majority of the profession, we do have a good grounding in the philosophy of science. Heterodox departments are among the only places that sort of thing is taught anymore.And referring to MMT as quasi-religious or whatever he/she said? That's truly the pot calling the kettle black, even if it might not be altogether false (not that I think so, but a good scholar should almost never be 100% sure of something of this sort). The mainstream of the economics profession is the one that didn't see the crisis coming and hasn't changed one bit since–meanwhile, we were writing about most all of this before it happened and predicted quite accurately the outcomes of the policies that have been attempted since the crisis started.Yes, MMT supporters can come across rather "mob" like at times, and that's regrettable for the most part (and I can do better on that score myself than I do at times). But we've all been on the other side of that our entire careers where the "mob" are the ones holding the keys to the best paying academic positions at the best universities, are the guardians of the top journals, and are in control of any significant research funding available in the field.