Daily Archives: November 12, 2012

An MMT Fiscal Responsibility Narrative: Some Truths After A Second Crowd Sourcing Revision

By Joe Firestone

Many MMT posts and other writings on fiscal responsibility, including my own, focus on the myths of neoliberalism, pointing out why they are myths and developing an alternative MMT perspective in some detail. Off  hand, and I may have forgotten something, I couldn’t think of a brief positive MMT narrative related to fiscal responsibility containing primarily the truths, rather than the myths.

So, here’s my version, revised, a second time, after calling for and receiving comments from readers at New Economic Perspectives, Correntewire, FireDogLake, DailyKos, and ourfuture.org, a second time. Thanks to Tadit Anderson, Mitch Shapiro, Devin Smith, Dan Kervick, Nihat, James M., MRW, Marvin Sussman, joebhed, Clonal Antibody, Calgacus, Ed Seedhouse, JonF, Lyle, Thornton Parker, Sean, Golfer1john, Rodger Malcolm Mitchell, econobuzz, Charles Yaker, Lambert Strether, maltheopia, Ian S., Tyler Healy, PG, for contributing significantly to the critical evaluation of the earlier versions.

More comments, criticisms, recasting in more effective form, are all welcome. But this will be my last round of crowd-sourced revision. I hope all readers will feel free to use this version as they think is best to spread the MMT message about fiscal responsibility. To boil that message down: fiscal responsibility is about the impact of fiscal policy on people; it’s not about the old time religion of its impact on a supposedly limited supply of gold standard-based money.

The Narrative

The first four points in the narrative offer some conclusions

– Austerity requiring budget surpluses cannot work in the United States economy, because surpluses, defined as tax revenue exceeding spending, destroy money in the private sector. Unless these financial assets are replaced through revenues acquired by running a trade surplus; the continuous loss of financial assets by the private sector is unsustainable, eventually leading to credit bubbles, recession or depression, and the return of deficit spending. It is mathematically IMPOSSIBLE for the USA to simultaneously run a government surplus, have a trade deficit and increase aggregate private sector wealth! (h/t  Ian S.)

– It is fiscally irresponsible to frame and follow a long – term deficit reduction plan (limited austerity) when both a trade deficit and an output gap exists, because by definition, such a plan is one that must remove more money from the economy than would otherwise be the case every year the plan is pursued. Eventually, if pursued for long enough, a declining rate of addition to financial assets will exacerbate the output gap by lowering aggregate demand and causing both labor and capital to deteriorate, thus reducing the productive capacity of the economy, and the Government’s ability to sustain greater levels of deficit spending producing outputs of real social value without triggering inflation.

– REAL fiscal responsibility is a pattern of fiscal policy intended to achieve public purposes (such as full employment, price stability, a first class educational system, Medicare for All, etc.), while also maintaining or increasing fiscal sustainability, viewed as the extent to which patterns of Government spending do not undermine the capability of the Government to continue to spend to achieve its public purposes.

– REAL fiscally responsible policy, if it works generally as expected, creates greater real benefits than real costs for people! It has nothing to do with conforming to some standard simple measure like an acceptable debt-to-GDP ratio that has only a questionable theoretical connection to the actual well-being of people. It is political malpractice to give greater priority to that kind of abstraction than to full employment, price stability, a strong social safety net, and Government programs that will help us solve the many outstanding problems of our nation. Let’s put an end to the domination of Washington by that kind of malpractice. Let’s put an end to the current misguided fiscally irresponsible campaign to promote a “Grand Bargain” that is sure to do nothing but destroy more private sector money and jobs than would be the case if we either did nothing or increased the deficit and created a full employment budget.

– Social Security has no solvency or “running out of money” problems. The SS crisis is a phoney one. No solution to this “fiscal crisis,” bipartisan or partisan, is needed. What is needed is a solution to the political problem of getting SS’s funding guaranteed in perpetuity  by Congress, just the way it guarantees funding for Medicare Parts B and D.

– The same applies to the so-called Medicare crisis. It too is phoney, and can be solved easily by Congress guaranteeing funding in perpetuity to Medicare Parts A and C.

– More generally, there is no entitlement funding crisis in the United States, except a political crisis where US politicians are determined to ignore their constituents and cut back on an already inadequate safety net either because they believe in, or want others to believe in false ideas about fiscal responsibility and nature of the Government as a giant household.

And the rest of it provides the reasoning underlying them.

– The US Government can’t involuntarily run out of its own fiat money (USD), since it has the constitutional authority to create it without limit. Congress constrains and regulates this ability. But its existence is still a stubborn fact!

– Greece and Ireland are users of the Euro, not issuers of it. So, their supply is always limited and that’s why they can run out of Euros. The US is the issuer of Dollars; so it’s supply of dollars is limited only by its desire to create them, and its ability to mark up private accounts, and that’s why it can’t become Greece, Ireland, or any other Eurozone nation.

– In addition to taxing and borrowing money, the Government (including the combined activities of the Congress, the Treasury, and the Federal Reserve) has an unlimited capacity to create it. When it taxes and borrows, the Government removes money from the private sector, and destroys it. When it creates money, it adds it to the private sector. A deficit is the net amount of money creation minus the amount of destruction due to taxation. A surplus is the net amount of money destruction minus the amount of creation due to Government spending. (h/t Golfer1john)

– Since this is the case, it’s clear that present proposals to reduce the deficit by an average of $400 Billion/year over the next 10 years are sure to remove money or Treasury securities (assuming deficit spending is accompanied by issuing debt) from the private sector that otherwise would have been created there in the absence of deficit reduction.

– The Government of the United States offers the functional equivalent of interest-bearing savings accounts to investors, usually wealthy individuals, large corporations, and foreign nations. The savings accounts are usually called US Treasury securities, and the sum of their face values is called the debt-subject-to-the-limit; or more colloquially, the national debt, even though comparable savings accounts in banks, are for some reason, not called bank debt. (h/t PG)

– The Treasury can keep accepting deposits (“borrowing money”) and issuing securities if we want it to. There’s no limit on this Government “credit card,” just as there is no limit to the deposits a bank can accept, except the one imposed arbitrarily by Congress in the form of the amount of debt-subject-to-the-limit, otherwise known as the debt ceiling. So, if the US does run out of money, due to a failure to raise the debt ceiling between now and March 31, 2013, it will clearly be the fault of the Congress for refusing to grant further authority to the Treasury to elicit and accept further deposits, also known as refusing to raise the debt ceiling!

– Even though it may seem that foreign nations can place a limit on “the credit card” by refusing to buy Treasury securities at auction, foreign nations holding dollars basically have a choice between continuing to hold them and earning no income, or earning interest on them  by buying securities. So, as long as other nations are exporting to the US and accepting dollars as payment; those dollars are likely to be invested in the interest-bearing “savings accounts” known as Treasury securities.

– Bond markets don’t control US interest rates; the Federal Reserve Bank does by exercising its authority to meet its target interest rates. Bond vigilantes have no power against the Fed. If they fight against its interest rate targets by trying to bid them up; then they will “die” in the flood of reserves the Fed can unleash to drive the interest rates down to its chosen target. The Fed can’t control the money supply. But it does control the price of it with its interest rate targeting.

– The bond markets will buy US debt as long as we keep issuing it; but if one insists on considering the hypothetical case where the markets won’t, the US would still not be forced into insolvency; because the Government can always create the money needed to meet all US obligations.

– The US is obligated by the 14th Amendment to pay all its debts as they come due. Nevertheless, our national debt cannot be a burden on our grandchildren; unless they wish to make it so by stupidly taxing more than they spend. This is true because, assuming the debt ceiling is raised when needed, or repealed, we have an unlimited credit card to incur new debt at interest rates of our choosing. So, we can “roll over” our national debt indefinitely. Or, alternatively, we can create all the money we need to pay off the debt-subject-to-the-limit, without ever incurring any more debt. One way to do this is through Proof Platinum Coin Seigniorage (PPCS). A second way is through subordinating the Fed to Treasury and then using the Fed’s ability to create money out of thin air to pay back all debt instruments (“savings account balance”) when they fall due. The first way is legal now. The second is constitutional, but would require politically unlikely action by Congress to authorize it.

– A fiscal policy that measures its success or failure in reducing deficits, rather than by its impacts on public purpose, is fiscally irresponsible and unsustainable. The deficit is a meaningless measure because the US Government has no limits on its authority to create/spend money other than self-imposed ones, so neither the level of the national debt, nor the debt-to-GDP ratio can affect the Government’s capacity to spend Congressional Appropriations at all.  Also, a deficit/debt oriented fiscal policy ignores real outcomes relating to employment, price stability, economic growth, environmental impact, crime rates, etc. which actually can affect fiscal sustainability by strengthening or weakening the underlying economy, and, with it the legitimacy of the Government and its fiat currency. In short, responsible fiscal policy is not about its impact on Government debt. It’s about its impact on people!

– The Federal Government is not like a household! Households can’t make their own currency and require that people use that currency to pay taxes! So, their supply of dollars is always limited; while the Government’s supply is a matter of its decisions alone.

– However large the Federal Debt becomes, it cannot be a “crushing burden” on our Government, because Federal spending is virtually costless to the Government, if it wants it to be.

Conclusion

Current claims that we have a fiscal crisis, must debate the debt, must fix the debt, and must immediately embark on a long-term deficit reduction program to bring the debt-to-GDP ratio under control, all misconceive the fiscal situation, and smack of a campaign to create hysteria among the public. They are based on the idea that fiscal responsibility is about developing a plan to bring the debt-to-GDP ratio “under control,” when it is really about using Government spending to achieve outputs that fulfill “public purpose.” There is no fiscal crisis that will require “a Grand Bargain” including cuts to popular discretionary spending and entitlement programs. It is a phoney crisis!.

The only real crises is one of a failing economy and growing economic inequality in which only the needs of the few are served, and also one of lack of political desire or will to solve these real problems. MMT policies can help to bring an end to the first economic crisis; but not if progressives, and others continue to believe in false ideas about fiscal sustainability and responsibility, and the similarity of their Government to a household. To begin to solve our problems, we need to reject the neoliberal narrative and embrace the MMT narrative about the meaning of fiscal responsibility. That will lead us to the political action we need to solve the political crisis and eventually toward fiscal policies that achieve public purpose and away from policies that prolong economic stagnation and the ravages of austerity.

Will MSNBC continue to shill for the Great Betrayal?

By William K. Black

The Beltway moved immediately from the election to an obsession with the “Grand Bargain.”  The discussion about the budget deal is focused almost entirely on the question of how much increased revenue we should obtain from taxes on the wealthy.  That is an important question, but it is the least important of the four important issues that the deal would address.

The four most important questions, in descending order, are:

  1. Will we inflict austerity on the nation, forcing the U.S. back into recession, raising unemployment, and increasing the deficit?
  2. Will we begin to unravel the safety net, enriching Wall Street and betraying our promises to those most in need?
  3. What social programs will we cut, and how deeply?
  4. What increases will we make in tax revenues from wealthy Americans?

The Grand Bargain that Obama and Boehner reached general agreement on in July 2011 would have inflicted austerity on the U.S. and begun to unravel the safety net.  It would have made extremely large cuts in social programs, including major cuts to the safety net.  It would have produced modest increased tax revenues from wealthy Americans.  Austerity, as was the case in Europe, would have thrown the nation back into a recession.  Unemployment, which was 9.1% in July 2011, would have risen to over 10% and would have been rising throughout 2012 as we went into the election.  Because social programs would have been slashed by the deal the misery of this increasing unemployment would have been compounded.  Obama would have suffered a crushing defeat, the Democrats would have lost their majority in the Senate, and the Republicans would have achieved major gains in the House and in state races.

The austerity component of the Grand Bargain was economically illiterate.  Within the administration, it was the product of refusing to listen to its economists and listening instead to Treasury Secretary Timothy Geithner.  Geithner is not an economist.  Geithner hated Obama’s stimulus program and embraced austerity.  He convinced Obama to embrace an austerity deal that would have inflicted a gratuitous second recession on America and doom Obama’s chance of re-election.

Geithner had a powerful ally in convincing Obama to adopt such a program.  Obama had decided to signal his fidelity to Wall Street by appointing William Daley as his Chief of Staff.  Daley was from JP Morgan Chase.  He came from (and has returned to) The Third Way – a Wall Street front group dedicated to pushing austerity and trying to further enrich Wall Street by privatizing Social Security.  Daley’s Third Way bio emphasizes his roles:

“As Special Counsel to President Clinton in 1993, Daley coordinated the successful campaign to pass the North American Free Trade Agreement (NAFTA).

He was co-chair of the US Chamber of Commerce Center for Capital Markets Competitiveness.”

“Capital markets competitiveness” is code for pushing the deregulation of finance.  The Chamber of Commerce is Obama’s fiercest critic.  The Chamber loves austerity and detests the safety net.

Obama had the great luck that House Tea Party fanatics ultimately caused Boehner not to consummate the Faustian bargain.

But Obama, Geithner, and Daley were not content to have the Tea Party snatch defeat from the jaws of a Republican political victory that would have doomed Obama politically by doing horrific damage to our nation.  When it was clear that the Great Betrayal and austerity would fail Obama successfully sought from Boehner an agreement to create a “trigger” that would impose austerity should the parties fail to agree to an austerity deal.  This led to the creation of what the media now (inaccurately) calls the “fiscal cliff.”

The fiscal cliff is an austerity program (but not a betrayal of the safety net).  It is not analogous to a cliff.  The tax increases and spending cuts take place over 2013.  The great bulk of the tax increases are likely to be retroactively rebated even if the trigger isn’t postponed for several months.  (It is likely that the trigger will be postponed.)  Here is the curious fact – the beltway now believes (correctly) that if we sat back for a year and did nothing the austerity imposed by the trigger would force the nation back into recession, increase unemployment, and greatly increase the misery of those who lost their jobs because it would slash public services the unemployed need.  Most of the Beltway also believes (correctly) that the austerity trigger would increase the deficit rather than reduce it.  Recessions greatly diminish government revenues and increase expenses.  Adopting austerity for the purpose of reducing a “deficit and debt crisis” is a perverse policy that generally causes the deficit and debt to grow.

The Beltway crowd is telling us we must avoid the austerity-induced recession the “fiscal cliff” is purportedly about to cause.  The fact that Obama and Boehner tried to impose even more self-destructive austerity in July 2011 is ignored.  The fact that Obama and Boehner insisted on the trigger that produced the so-called fiscal cliff is ignored.  Given the belated understanding of the Beltway that austerity would be disastrous two obvious questions arise.

  • Why are Obama, Boehner, and the media treating the July 2011 effort to commit the Great Betrayal not as a cautionary tale of the idiocy of austerity but as a tragic tale of bipartisan bickering in which austerity is the path of righteousness and courage?
  • Why are Obama, Boehner, and the media treating it as obvious that we must act immediately to prevent the austerity of the so-called fiscal cliff by imposing greater austerity and unraveling the safety net through the Great Betrayal?

Incoherent is an inadequate word to describe the logic behind the administration’s renewed effort to throw the nation into recession, increase unemployment, greatly increase misery by cutting vital social programs, betray the safety net, increase the deficit, and cause devastating losses to the Democratic Party in the next two elections.

It was predictable that the Washington Post would lead the charge for the Great Betrayal, and it did with a featured op ed from Erskine Bowles, the co-leader with Bob Rubin of the Wall Street wing of the Democratic Party.  The Beltway media have an autonomic reflex that causes them to worship any bipartisanship even if the bipartisan agreement is an economic suicide pact that will harm the nation and further enrich Wall Street.  Logical incoherence is irrelevant to autonomic reflexes.

The only real question was where MSNBC would come out on the budget issue.  MSNBC has strongly defended the stimulus program and the importance of the safety net.  How would it respond to a purported “Grand Bargain” that would inflict self-destructive austerity and begin the Great Betrayal of the safety net?  Logic would compel MSNBC to oppose the deal.  But MSNBC has a warring imperative – its hosts worship Obama and are awash in endorphins as a result of his re-election.

(Full disclosure, I voted for Obama in both presidential elections though I am a strong critic of his financial policies and his administration’s abject failure to hold fraudulent financial elites accountable criminally for their crimes that drove the financial crisis and the Great Recession.  I was one of many who warned before the 2012 election that our task immediately upon Obama’s re-election would be to defeat his efforts to commit the Great Betrayal.  He remains fixated on the dream that the Grand Bargain will establish his legacy and make him famous for his policies rather than for his election successes or his embarrassing Nobel Prize.)

Prior to the election, Lawrence O’Donnell correctly pointed out that the fiscal cliff was a misnomer and that Obama would have far greater negotiating leverage were he to wait to until the Bush tax cuts expired and freed Republicans from any need to violate their pledges to Grover Norquist.  What would happen on MSNBC after the election?

Obama, as he promised, immediately sought his Grand Bargain.  I spent nearly two hours listening to MSNBC’s midday coverage of the issue without hearing a single journalist, commentator, or politician recognize the logical incoherence of this embrace of austerity premised on a claim that the austerity of the fiscal cliff was about to throw us into recession.

I then watched four hours of MSNBC’s evening coverage of the fiscal cliff.  Only Lawrence O’Donnell (of the six MSNBC hosts that I watched that day), noted that the fiscal cliff is not real.  The others treated it as an imminent disaster.  Every host, every journalist, and every guest on the programs who discussed the issue took it as a given that it was essential and urgent that Obama and Boehner agree to austerity and severe cuts in the safety net.  There was no discussion of the merits.  It was treated as obvious.  The consistent message was that it was essential that we support our President unreservedly.

The first day of MSNBC’s coverage of this issue was dismal, but one can hope that the endorphins wear off and the quest for analytics clicks back in.  The truth is that Obama’s interests coincide with America’s interests when it comes to the Great Betrayal.  If he had succeeded in July 2011 in reaching the deal he offered Boehner he would have destroyed his presidency, crippled his nation and his Party, and ruined his legacy.  The same is true today.  The best service media can render to any President is the candor of honest criticism.  Every President has a legion of sycophants eager to provide praise.

 

Chris Matthews Embraces Self-Parody by Calling for Obama to Ignore Krugman

By William K. Black
(Cross-posted and Benzinga.com)

Chris Matthews considers it urgent and essential that President Obama and House Speaker Boehner reach what they call a “Grand Bargain” that would impose an austerity budget and begin to unravel the safety net.  Why is it essential?  Matthews provided no analysis or discussion.  It was simply obvious that austerity and beginning to unravel the safety net were essential because otherwise we would face budget austerity via the so-called “fiscal cliff.”  The form of austerity imposed by the fiscal cliff would throw us into recession, increase unemployment, increase the budget deficit and the debt, cut social programs (and military spending), but not unravel the safety net.  If you think that adopting even greater austerity plus far more severe cuts to social programs and the safety net (i.e., what I term the “Great Betrayal”) in order to avoid “fiscal cliff” austerity is logically insane – then you might be rational.  Matthews, however, thinks that ability to use logic makes you a problem. Continue reading

How the Tea Party, Gang of Six, and Senate Liberals Saved Obama and the Nation

By William K. Black

In July 2011 President Obama and Speaker of the House John Boehner were on the verge of agreeing to the “Grand Bargain.”  The Grand Bargain was not finalized, but its key terms were agreed to.  It involved massive cuts in social programs and the safety net, modest increases in tax revenues, and an increase in the debt limit.  It was a massive austerity program of the kind that was hurling the Eurozone back into a gratuitous recession.  U.S. unemployment was 9.1% in July 2011 and the austerity package and resultant recession would have caused unemployment (and the deficit) to grow.  Unemployment would have been over 10% and rising in the run up to the 2012 election.  Obama would have further enraged Americans by cutting many popular programs and betraying the Democratic Party’s crown jewels – the safety net – in return for far smaller in revenues from the wealthy.  Instead of solving the supposed deficit and debt crises the austerity-induced recession would have likely caused the deficit and the national debt to grow.  Continue reading