The “Fiscal Cliff” Validates MMT

By Thornton “Tip” Parker

The fiscal cliff of increased taxes and reduced federal spending resulted from the hasty wedding of Congress and the Administration a few months back when the debt ceiling became a shotgun.  Now, all parties want something different.

            Republicans say that tax increases, which are scheduled to begin in January, will take money from the economy, increase joblessness, and lead the economy back into recession.  Democrats say that the legislated spending cuts will kill jobs and lead toward recession by reducing the flow of new dollars into the economy that it needs.

On November 8, the nonpartisan Congressional Budget Office said that both right!

Putting all three together shows that we should neither take money out of the economy by increasing taxes nor stop putting it in by cutting government spending.  Instead of trying to balance the budget, if we want to add jobs and avoid another recession, we must run deficits.

The fiscal cliff was not designed to teach a lesson, but that is exactly what it is doing by showing that we must choose between a reduced deficits or a healthy economy—we can’t have both.  So which should we pick?

Some keep playing the Johnny-One-Note theme that a balanced budget is most important.  This view of fiscal responsibility says, in effect, that people don’t count, only dollars do.

But those who have analyzed how America’s money system works today explain that true fiscal responsibility requires creating money as it is needed to keep the economy healthy, create jobs with adequate pay and benefits for those who want them, educate the young, allow older people to age with dignity, expand healthcare, and provide the facilities and services that a modern society must have.  In their view, the first requirements of a civilized country are to meet its security, human, physical, and environmental needs.  Money is a means toward those ends.

It was hard to meet those ends when the amount of money available was limited by gold stocks.  Today, however, any lack of money is a mental or political problem, not a physical or economic one.  Just as depression children remember saving bits of string in balls, most Americans, including our leaders in both parties, still think the federal government is like a family that must get money before spending it.  That was true in the gold standard days, but not now when the government creates money by spending more than it taxes.

The fiscal cliff threatens to dump us back into recession quickly.  That danger is obvious to almost everyone, so it won’t happen if cool heads prevail.  What can happen, though, can be just as bad if we fail to learn the lesson that cutting the deficit, either by increasing taxes or reducing federal spending now, will cost jobs and lead toward recession.  There is a high risk that just extending the time schedule for reducing the deficit will convert the cliff into a long, downward spiral.  And if history is any guide, even greater deficits will be needed to recover after that happens.

The only true way to be fiscally, socially, and politically responsible is to put people who need good jobs and productive capacity that is underused to work as soon as possible.  None of the human losses or days that will pass until that is done can ever be recovered.  The only way to reduce them is to get the economy growing again, and that means running deficits, at least until economic health returns.

 

25 Responses to The “Fiscal Cliff” Validates MMT

  1. Deficits ? Why ? Even you people seem to believe in chartalism, government money, with which there is NEVER a deficit ! Not necessary. the government simply prints what it needs if taxes and fees don’t cover expenses , which of course can get out of hand, so my thought on that is to have the states with their powers of nullification/ 10th keep an eye on all money generation/printing , but we can’t even do that because of the fact that the private banks of the federal reserve print/generate all our money that is domestic and the government uses legal tender law to make sure the those such as the proponent of “liberty dollars” , however well backed..with gold even, cannot be used . I can stop here, but there’s a lot more. If money is still overprinted, it’s time to change their employment in the next election, or worse scenarios, as we see developing with the “cliff”, as many states are seeing petitions to secede, etc.

  2. What are the chances on both of the parties not only extending the tax cuts and reversing the cuts but also dumping a new round of tax cuts/spending onto the economy?

    • None. Everyone who won in this election ran on a platform of increasing taxes and reducing spending (“balance”, that is called). Jobs and the economy was the issue. Romney at least would have cut taxes (or wanted to), but he also would have wanted to cut spending. He lost. The American people don’t want to cut taxes, is what this election said. That is why MMT has to start by educating the voters. If only 2% of the voters understood MMT, this election would have gone the other way, and we’d have half the solution (maybe more because the Dems would have blocked any large spending cuts).

  3. Really good! But, since we shouldn’t be managing fiscal policy using the size of the deficit as any kind of standard of adequacy; it’s not that we have to run deficits until recovery. It is that to get recovery, deficits will have to be a side effect; and they will be an inevitable side effect of a full employment economy as long as the private sector wants to save and we all want to import more than we export.

    • Good post Tip. To piggyback on Joe’s comment, I wonder if we can and should make an effort to avoid the word “deficit” as much as possible, and instead refer to (and relentlessly emphasize) the federal government’s unique and important role in supplying enough dollars into the private sector to support full employment, healthy economic growth and our collective desire to save as “fiscally responsible households and businesses.”

      Though I’m not expressing this very well (it’s still early here in CA), the main point I’m trying to make is that, in terms of language, it might help if we emphasize that an MMT-based perspective identifies and enables multiple components of fiscal responsibility, including support for fiscally-responsible decisions by households and businesses.

      One key component, which Tip does a good job of explaining here, is that the federal government is being “fiscally responsible” by spending money to support much needed jobs & economic growth. The second is that government spending is supporting the “fiscally responsible” decisions of millions of American businesses and families to increase their savings.

      So, rather than relying heavily on the “deficit” word, with all its deeply-ingrained negative connotations, we should, whenever possible, use language that emphasizes the value of government spending in supporting the fiscally responsible goals of: 1) providing productive work for the unemployed and; 2) increasing our collective private savings.

      To the extent we can accomplish this, we’ll be helping to shift public perceptions from the negative connotations of “deficit” in the direction of positive perceptions related to “supporting job growth AND fiscally-responsible private sector savings.”

      • Hmmm. Our FICA tax is called a “contribution”. Maybe when the government spends more than it taxes, the difference should be called its “contribution” to the citizens of the country.

      • Thornton Parker

        Thanks, Mitch. You are absolutely right. We are in an area where perceptions are reality from the standpoint of getting things done.

        Tip

    • Thornton Parker

      Thanks, Joe. Your point is right. Incidentally, I didn’t write this post to interrupt or confuse the work you are doing. I wrote it for a conservative, local paper in very Republican area. Word count limitations prevent it from being complete.

      Tip

  4. But those who have analyzed how America’s money system works today explain that true fiscal responsibility requires creating money as it is needed to keep the economy healthy, create jobs with adequate pay and benefits for those who want them, educate the young, allow older people to age with dignity, expand healthcare, and provide the facilities and services that a modern society must have. Thornton “Tip” Parker

    A major reason new money is needed is because the banking cartel creates the principal but not the interest for loans. That interest has to come from the monetary sovereign unless it too is lent into existence by the banks for even more interest, delaying the problem by making it worse.

    • Thornton Parker

      I agree with you about interest and the banking cartel. I also think that income and wealth inequality are bigger problems in this country (and elsewhere) than most people recognize. I do not see that MMT really addresses the concentration issue. It seems to me that one reason why injections of ever more modern money are required is to keep the real economy running as money that is already in the system rises, like cream, to the top. It is almost as if the money were leaving the country. I haven’t wanted to raise this point yet for fear of distracting from an already detailed and intense discussion of Joe’s work.

      Thornton “Tip” Parker

      • “as if the money were leaving the country”

        Exactly. MMT recognizes that money leaving the country, via net imports, must be replaced. Likewise, money hoarded within the country must be replaced, just as if it were leaving the country, just the same as the money that does leave the country. It’s known as “leakages”. The sectoral balance equation tells us that the government’s deficit is exactly equal to the sum of the private sector surplus plus the foreign sector surplus.

        • Thornton Parker

          If this is true, then I think that it may expand the appropriate role of taxation from just limiting inflation to recycling some the money that gets hoarded, often in financial assets, that MMT treats as savings.

          Tip

          • Well, many in MMT believe that the natural risk-free rate of interest is zero. If we maintain 0% interest, the incentive to hoard is reduced, and instead of being saved the money will be recycled by spending on real assets that produce a greater return, or on consumption that produces greater satisfaction.

            I think if there were full employment, there would be less concern about inequality. Overpaid executives (or overpaid labor of any type) represent an opportunity for competitors.

  5. Mark Robertson

    “Most Americans, including our leaders in both parties, still think the federal government is like a family that must get money before spending it.”

    Really. Why do so many people think that politicians are innocent, and simply “don’t get it”? Is it so awful to admit that politicians want to impose austerity in order to increase the gap between the 1% and the 99%? If you find a burglar in your house, will you chuckle and say he simply “doesn’t get it” that he is robbing you?

    “The fiscal cliff threatens to dump us back into recession quickly.”

    Back into a recession? Is it so awful to admit that we are already in a depression, and it is getting worse all the time?

    Why all the euphemisms? I see that a lot on this blog.

    • “Really. Why do so many people think that politicians are innocent, and simply “don’t get it”? Is it so awful to admit that politicians want to impose austerity in order to increase the gap between the 1% and the 99%? If you find a burglar in your house, will you chuckle and say he simply “doesn’t get it” that he is robbing you?”

      Depends on the politician. While I do think that there are politicians that ‘get it’ (Romney, Reagan, Rove) and are hiding behind deficit chickenhawk idiocy, the vast majority of politicians are REALLY THAT CLUELESS. I strenuously doubt that, say, Reid and Pelosi intentionally pursued policy positions that would reduce their political power and made them come dangerously close to being kicked out of Congress.

      Obama in particular I think is really that stupid. Krugman had a quote from him saying that if the stimulus wasn’t big enough he thought that he could go back to the well. Not ‘that’ll shut up the rubes’ or ‘I think that’s all I can get’ but ‘I’ll get a second chance to fix this using my LOGIC and REASON’.

      This of course doesn’t excuse their behavior. I prefer an evil ruler to a stupid one. But when even countries like China and Saudi Arabia and Russia show that don’t really understand MMT — countries that cheerfully have no reason to hide their evil or malice towards the less fortune — the sad fact of the matter is that our so-called leaders are seriously that stupid. There’s no James K. Polk-ian ‘taking one for the team’ inscrutable motives between American, European, or even Chinese rulers; they’re just dumbass Inner Party members getting high off of the prolefeed.

    • “Why do so many people think that politicians are innocent, and simply “don’t get it”?”

      Two reasons. First is that what the politicians are saying is just what the people were taught in school about economics, that a government is like a household. They are also innocent, and don’t get it.

      Second is that there is no need to assume evil intent if simple incompetence is a sufficient explanation. Most people are willing to give them the benefit of the doubt, even if they recognize the mistake, the majority of writers on this blog notwithstanding.

  6. Don’t forget the new marketplace and who USA has to compete with. It’s not just an overpriced underproduction EU.
    If we are to compete with China, India and South America we should start looking for higher profit goods to sell them. Our intellectual property rights should be top priority as we are the great creators of product and business. Remember most big business came from a dreamer in a garage. Efficiency is paramount.

  7. So enpixelated money is required in additional massive sums because that’s what it takes to make the economy grow enough for everyone that wants a job to have one, right? The mere existence of a medium of exchange is all that’s needed for a booming economy? If the government of Belize wants more people working then all it needs to do is print more BZD? Or have them printed in Germany or wherever and then used by the Belizean government to buy fighter jets and aircraft carriers from the local companies that will spring up to supply those items? It all seems so easy, so obvious, what could possibly be the drawback of such a procedure? Flooding the country with attractive bills paid to newly employed welders and grinders couldn’t possibly drive up the price of mangoes and eggs. The maintenance of those fighter jets, and the fuel to make them operational, would require more ink on high-quality rag-based paper, too. But not to worry, Belize is a sovereign country and its checks can’t bounce. The bales of bills needed to pay the wages of the pilots and sailors will arrive weekly from the printing plant. Inflation? No way, taxes will keep it under control. Enough money will be destroyed to keep prices rising at just the right amount, maybe 2 or 3% a year. The wages paid to the military and government workers will be distributed throughout the country, used to buy increasingly more valuable houses, durable goods and consumer items. A single-payer system will finance a comprehensive medical system with motivated and highly-paid well-educated health professionals. No problem.

    • Just what is the mass of enpixelated money, in grams per cubic megabyte?

      But, yes, subject to the constraints you laid out, if Belize had high unemployment and wanted more people to be working, they could hire more government workers, or buy more stuff from the private sector, or have a tax cut. If they did create more than 27,000 kilograms of enpixelated money, though, it could cause some inflation.

  8. “Republicans say that tax increases, which are scheduled to begin in January, will take money from the economy, increase joblessness, and lead the economy back into recession. Democrats say that the legislated spending cuts will kill jobs and lead toward recession by reducing the flow of new dollars into the economy that it needs.

    On November 8, the nonpartisan Congressional Budget Office said that (they are) both right!”

    They all have a “gut feeling” behind their position. Not true understanding, though. But the gut feeling is sufficient because it serves their separate constituencies. They also do not share each others’ gut feelings. Republicans think that reducing a handout will increase one’s motivation to go out and earn their living, while Democrats think that high income earners will work as much more as necessary to maintain their after-tax income. They’re both partially right about that, and they each recognize that the other is partially right, and so that is why they will compromise on a fiscal slope instead of a cliff.

    If confronted with the accepted Truth of the quoted sentences above, they will each have their reasons for supporting their own positions and opposing the other. “The rich” can afford to pay more taxes, and the deficit is bad, too. The spending is “unsustainable”, and will bankrupt us if we don’t get it under control. So we will have a tax increase for some, and reduced spending for some, and continued low growth and high unemployment.

    The good news is that the spending cuts that are under discussion for SS and Medicare are not immediate, but scheduled to be phased in starting in 10 years or more. Nominal spending will continue to grow, and would have continued to grow even if Romney had won.

    Here’s a compromise that could work, but would not be agreed to: Maintain the FICA tax holiday and enact the Romney tax cuts, and schedule the SS/Medicare adjustments for 10 years out. For 10 years, as long as unemployment is over 5% and inflation is under 4%, continue cutting FICA taxes each year and send money to the States without strings attached, $300 per person to start and increase $100 any time unemployment is over 5%. When unemployment reaches 5%, enact a phased-in JG program, initially available only to those whose UI has run out. Maintain 0% interest rates, and don’t worry about deficits. If inflation goes over 4% without an oil shock or other disruption, we were wrong and you were right, and you’re free to do whatever you want. When unemployment reaches 4%, make JG available to everyone. After 10 years, if inflation is still under 3%, postpone the cuts to SS and Medicare for another 10 years.

    It won’t take 10 years for the evidence to be overwhelmingly in favor of MMT. But they won’t do it unless they already believe in MMT, and MMT has not the standing to be considered a serious participant in the negotiations.

    • I learned recently that most people and politicians and mainstream economists seem to not understand what “inflation” really means, and the distinction between actual inflation vs “CPI” or some other index rising.

      Inflation-proper is when private + Govt purchasing of goods/svcs in general exceeds available supply and all possible growth of supply. In other words, when everyone has a job who wants one and if the govt is still trying to hire more people, without importing labor from elsewhere, then that’s wage inflation, beyond just a “tight labor market”, which can be very good for labor/consumers/sales/profits.

      Now I know what MMT people meant when they said the last time the USA had actual inflation-proper was World War One. The Govt was attempting to buy more steel and hardware than existed. Factories and suppliers could not ramp up, or not fast enough. In that case, Govt demand literally drove up prices, and/or retail had to be rationed (apologize for my lack of specific historical knowledge on the details).

      Fuel gouging by retailers or wholesalers due to Sandy or Katrina is not “inflation” per se. The 1973 oil embargo drove up prices, but it was not “inflation” per se.

      A rise in commodity prices due to Phil Gramm’s laws signed by Clinton deregulating energy and other commodities and stifling existing regulators, and creating the situation in futures markets where 70% buyers vs 30% “froth” liquidity by speculators was flipped to 30% buyers vs 70% speculative “froth” (incl some Goldman futures index funds). This is known as “paper oil”, for which there is more demand than actual oil or fuel.

      This whole large long-term situation with the “revolution in finance” smells to me like those other “disasters” causing prices to rise, but a slow long-term kind of “disaster” shortage, but NOT because Govt was actively trying to buy up more than what was offered for sale in the real market.

      I am stating the obvious for some readers, and perhaps making some false assertions, but I’m informed by a number of experts including Prof. Lynn Stout, who spoke on a panel led by Bill Black, on the definition and history of “derivatives” in commerce.

      • I think in WWII the government needed to buy more stuff (and more labor, soldiers) than would ordinarily have been available at current prices. That caused shortages, and caused women to go to work in factories, but the government also implemented price controls which prohibited price increases, and rationing, which managed the shortages without need for a price mechanism to do it.

        There are many definitions of inflation, but the important aspect of inflation is not the precise definition, nor the type of inflation (cost-push or demand-pull) but the effect: generally increasing prices. It’s hard, but CPI is only an attempt to measure inflation, not to define it. There are other indices (e.g., PPI) which measure particular baskets of goods that are important to subsets of buyers, and several CPI subsets for various consumer groups. They just measure changes in price of their particular basket of goods. There are long-term trends in many prices, including upward trends in land and everything that requires land as an input, and downward trends in technology. Oil is very important because most of our transportation depends on it, and most of the stuff we buy has to be moved from producers to consumers. Some prices are volatile, like food, because the size of the harvest depends so much on weather. It’s not easy to tell, sometimes, whether prices in general went up or down in a short period of time, much less measure it to the implied accuracy of 0.1%.

        However, looking at prices of goods that continue in use over very long periods, there is a definite upward trend not explained merely by supply shocks or wars. Maybe with a rising population and a fixed land mass, it is inevitable and we ought not to worry so much about it. Prices are going to double every 24 years or so no matter what, so maybe we should get used to it, plan for it, and quit complaining.

  9. Predatory Capitalism demands money be created with a very big hidden debt tax. The Chinese Communist Party has proved with the exceptional growth rates of the Chinese economy that was Marx right. It doesn’t have to be and you can still have free market capitalism.

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