A little bit of economics can be a truly terrible thing, for the introductory classes in micro and macro-economics are the most dogmatic and myth-filled part of the neo-liberal curriculum. Dogmas that have been falsified for 75 years (such as austerity) are taught as revealed truth. The poor indoctrinated student is then launched into the world “knowing” that austerity is the answer and that mass unemployment and prolonged recessions are small prices to be paid (by others) to achieve the holy grail of a balanced budget. Students are taught that national budgets are really just like household budgets. These dogmas are not simply false, they are self-destructive and cruel. Neo-liberal economics is so bad and has gone downhill at such a rapid rate that it now worships the economic analog to bleeding patients – austerity – as a response to a Great Recession. Millions of people are indoctrinated annually into believing this long-falsified nonsense, and that includes people who consider themselves progressives.
The remarkable aspect of neo-liberal economics is that the power of its myth has survived for many progressives even after its failed dogmas caused massive economic destruction, massive elite fraud with impunity, and crony capitalism so corrupt that it cripples democracy. Indeed, the brainwashing they received is so effective that even after the eurozone ran a massive experiment with austerity that proved (again) to be a catastrophic failure they remain neo-liberal acolytes. This column discusses three examples that exemplify the problem.
The Guardian (U.K.)
The Guardian is the U.K.’s most famous paper of the left, but its finance editor’s embrace of the neo-liberal austerity myth is passionate and inane. Consider this remarkably incoherent discussion of the “fiscal cliff” by the paper’s finance editor.
“The fiscal cliff explained: what to know about the biggest story in Washington. Is America really heading off a cliff? Why can’t Congress and the president strike a deal? Get the lowdown with our handy primer.”
I chose the Guardian’s coverage as the first example because it begins with the most basic and common neo-liberal myth supporting austerity – a nation with a sovereign currency is really just like a household.
“So let’s start at the beginning: what is the fiscal cliff?
It’s not one cliff, but two things: a group of spending cuts and tax hikes that will come into effect on January 2.
Why now?
The US has about $2.3tn of money coming in, and it spends about $3.6tn. So imagine you were making $23,000 a year and spending $36,000. What would happen? You’d be in debt, and you’d have to cut your spending. The US is in the same pickle. Except, instead of a few thousand, it has to cut $1.3tn.”
The U.K. did not adopt the euro, so it retains a sovereign currency. The U.K. allows the value of the Pound to float freely and it borrows overwhelmingly in its own currency. The Guardian, therefore, has no excuse for failing to understand a national economy like the U.S. that also has a sovereign currency. A nation that borrows in its own freely-floating sovereign currency is not a target for bond vigilantes. It can and should spend considerably more than it brings in through tax revenues in response to a recession. That is what “automatic stabilizers” do. Automatic stabilizers greatly reduce the severity and length of recessions. Austerity does the opposite. Nations with sovereign currencies can create money directly through key strokes on the central bank’s computer or by borrowing at exceptionally low interest rates during a recession. The U.S., the U.K., and Japan all borrow long-term (10 years) at interest rates below two percent because they have sovereign currencies. Nations with sovereign currencies typically run budget deficits in most years. The U.S. has run a budget deficit over the great bulk of its history.
If a household reduces its spending because its income falls during a recession there is a negligible effect on the Nation’s economy. If a national government cuts spending because a recession reduces its income it directly reduces public sector demand and indirectly reduces private sector demand. A recession occurs when demand is seriously inadequate. Governmental austerity inflicts a far more severe recession on the nation by further reducing demand. A household and a Nation should follow the opposite strategy when their incomes fall sharply. The Guardian’s claim that they should follow the same strategy shows their indoctrination into one of neo-liberalism’s most destructive myths. The fact that the Guardian is making this claim in December 2012, after seeing the recession that austerity inflicted on the eurozone, proves that the problem is dogma, for only dogma is impervious to facts that repeatedly falsify its predictions.
The Guardian, of course, knows that the eurozone has been forced back into recession by the “troika’s” policies, but it reverses the causality. Here is a related piece by the same finance editor about the world’s reaction to the failure to reach a deal on the “fiscal cliff.”
“Q: What does the rest of the world think of this?
They think we’re ridiculous, and that we’re playing fast and loose with not just our own economy, but that of the world. IMF chief Christine Lagarde said the US is becoming its own worst enemy by delaying a decision. Still, this is a case of pots and kettles. It’s not like Europe can really look down on us: they’ve been delaying the same hard decisions on spending cuts for over three years and have been on the brink of a meltdown many times since. Should we be smart enough to look at their example and avoid the same troubles? Yes, technically. But this is the nature of negotiations: they go down to the wire.”
The Guardian’s remarkable explanation of why the Eurozone has been forced back into recession is: insufficient and delayed austerity! If only the Eurozone had made promptly made deeper “spending cuts” things would have been much better. That “logic” comes from assuming that nations are just like households. The Guardian’s answer to the fact that bleeding the patient makes the patient weaker is to bleed them more, and faster.
Note that the Guardian’s finance editor also seems to believe that sovereign monetary systems like the U.S. and the U.K. suffer the same risk of “meltdown” that nations that abandoned their sovereign currencies because they adopted the euro experienced “many times.” The “meltdowns” that the eurozone nations have suffered “many times” because of the deadly vulnerability of nations that lack a sovereign currency to the toxic mix of recession, austerity, and the debt vigilantes. The Guardian’s finance expert’s failure to understand such fundamental and critically important features of the financial system is a testament to the danger of dogma.
The U.S. has “avoid[ed] the same troubles” as the eurozone following the Great Recession. It has not suffered financial “meltdowns” “many times.” It has not been thrown back into recession and it does not suffer Great Depression levels of unemployment. The U.S. budgetary deficit has been reduced at a record rate over the last three years. The U.S. has been able to “avoid the same troubles” as the eurozone because it has not embraced the austerity dogma and it has not given up its sovereign currency. The U.S. did not provide remotely adequate stimulus of the kind recommended by competent economists, but the modest stimulus has been sufficient to produce a modest, sustained recovery. The Guardian, however, implies that we have failed to avoid the eurozone’s troubles after the onset of the Great Recession.
Governor Howard Dean
Governor Dean served as Chairman of the Democratic National Committee from 2005-2009. He was an early opponent of the invasion of Iraq. His self-description is “progressive Democrat.” He is a physician. Dean is a frequent guest on MSNBC’s evening programs. Dean takes the position that the U.S. should go off the “fiscal cliff” because austerity is desirable. He claims that a “balanced budget” is essential and that “everybody” should pay higher taxes to balance the budget. He thinks, contrary to the history of the U.S., that no nation can continue to run deficits.
On CNBC, Dean cheered for the austerity that the “fiscal cliff” would inflict on the nation. He did so even though he believed it would cause a recession for at least six months. He predicted that the recession would be short and mild and a small cost to reduce the deficit. He assumed that austerity would reduce the deficit even though he conceded it would cause a recession.
Dean, a self-described progressive, and one of the nation’s most prominent Democrats, is more dogmatic than Speaker Boehner on austerity.
Andrew Stern (former head of SEIU)
Andrew Stern headed one of the largest unions in America. He made it a growing union and a political force devoted to progressive causes. He was a member of the Bowles-Simpson (BS) deficit reduction commission appointed by President Obama. Obama appointed co-chairs he knew were zealous supporters of austerity and unraveling and privatizing the safety net. Erskine Bowles is a leader of the Wall Street wing of the Democratic Party and Alan Simpson is a very conservative Republican. Stern declined to vote in favor of the BS austerity recommendations, but his vote was not based on any rejection of austerity.
“Why I Voted No On Simpson-Bowles
On December 3, 2010, I voted “no” on the Simpson-Bowles report presented to the National Commission on Fiscal Responsibility and Reform. Here is what I had to say about it at the time:
This Commission report also challenges our President to offer his plan for economic growth, and fiscal responsibility no later than his State of the Union, and challenges Congress to adopt a plan no later than Election Day 2012.
I voted no, despite my admiration for the effort, because any plan, I feel strongly, must tackle both our fiscal and investment deficit needed to create jobs and a dynamic economy. No family would willfully balance its budget by not sending their child to college. No business can successfully compete with outdated equipment. And no nation can simply cut its way into prosperity. I felt the plan should better balance revenues and spending cuts, could balance Social Security while preserving more benefits, made too many short term cuts in health care before full reform was implemented in 2018, and did not have shared corporate responsibility.”
Stern now says that he regrets voting against the BS recommendations.
He pushed for the “Super Committee” to “go big” and adopt massive austerity before it statutory deadline in November 2011.
Stern’s co-panelists at the conference, organized by one of Pete Peterson’s groups, whose participants unanimously urged the “go big” super-austerity plan included the former CEO of the AARP, Bill Novelli. Novelli’s support for austerity is particularly noteworthy given the BS plan’s proposals to cut and begin to privatize Social Security – Wall Street’s unholy Grail.
Conclusion
Neo-liberal economics has devastated the global economy and produced all of the predictive failures and evil consequences that progressives have long attributed to its micro-economic myths. Far too many progressives, however, continue to believe the similarly mythical and self-destructive macro-economic myths about deficits, debt, and austerity. It is hard enough countering Pete Peterson’s billion dollar campaign to inflict austerity and unravel and privatize the safety net. Peterson funds myriad front groups. We also have to counter the Wall Street wing of the Democratic Party, which dominates Treasury, OMB, the Justice Department, and the office of the Chief of Staff and favors austerity and unraveling the safety net. We should not have to deprogram progressives indoctrinated into repeating neo-liberal economic dogmas.
Progressives should be able to observe that the neo-liberal macro-economic predictions have been consistently falsified by reality. They should have seen documentaries like Inside Job and Capitalism: A Love Story about the catastrophic failure of neo-liberal economics and economists. They should read sites like New Economic Perspectives and Paul Krugman’s columns that explain why austerity is self-destructive and why the safety net need not, and should not, be attacked. Progressives need to say “no” to anyone who wants to “bleed” the economy through austerity or cutting the safety net.
They should have seen documentaries like Inside Job and Capitalism: A Love Story about the catastrophic failure of neo-liberal economics and economists.
Yes, but I can’t blame progressives for finding Krugman’s message confusing. As far as I can tell, his basic line seems to be that the New Consensus neoliberal framework, with its crowding out, Ricardian equivalence, loanable funds model, market-determined treasury prices, and Fed inflation targeting offsetting fiscal expansion, is all pretty much right – except when a liquidity trap temporarily flip the off switch on the model. The message they take from that is that we should delay austerity in the immediate term, but implement it later. And that is exactly how the White House is selling its deficit-fighting packages.
I would only add that while progressives need to say “no” to the right things, we also need to learn to say “yes” to the right things again. And our “yes” has to be more than either the sum or the inverse of our “no”. We need to stand up and not just demand, but howl for things which we know perfectly well are politically impossible in the current climate:
A 100% write-off of student debt.
A living minimum wage, permanently indexed to inflation.
The absolute prohibition of payday-loan usury.
Repeal of 2005 bankruptcy law.
Re-nationalization of the Postal Service, with a guarantee of no-cuts-in-service and no-price-increase.
This is not intended as a letter to a liberal Santa Claus – this is what program-writing used to look like. We don’t just need to look at vulnerable people who are being targeted and play defence – we need to look at people whose just needs and requirements are being ignored and play offence. I would be just as happy to have the argument about “affording” a decent minimum wage as “affording” Social Security or Medicare.
Cheers
What about those of us who worked our ways through school and didn’t borrow, or the muppets who were dumb enough to pay back their student-loans – shouldn’t we get a hand-out too? Is it only the wise-guy/deadbeats who are deserving of tangible sympathy?
Well, Roger, I’d rather give you a refund, than keep the student loan chains around the neck of the economy, and keep the big banks in the chips for doing very little of value, since the Government never had to have them in the middle in the first place.
Yeah – the student-loan thing is an example of the best liberal intentions leading straight on to Dante’s ‘Road to ….’. The kindest thing we could do IMO for new college students is kill the program entirely – experience has demonstrated that teens and early 20-somethings can’t cope with the seductive enticement of so much money ‘here and now’ while maintaining a proper grasp of the future cost of taking bites from that poison apple.
IDK what to do about the hopelessly indebted that would be ‘fair’ to them and everyone else. Nobody else does either, best I can see. For sure, that Wall Street got things it didn’t deserve doesn’t determine the matter IMO. Besides, The Street paid fair-n-square for the pols it owns in DC – the students didn’t.
Refund the interest, too.
Roger, congratulations for not being fooled by the siren’s song of student loans. But, just because you didn’t wreck your metaphorical ship on the rocks, doesn’t mean we shouldn’t rescue those who did. This is an awfully selfish attitude coming from a progressive.
I’m no ‘progressive’. IMO, rewarding irresponsible conduct by giving a valuable benefit to those guilty of it – a benefit denied to those who were prudent – is the worst type of policy a society can adopt. (Which proves I’m not a progressive, right?)
I always enjoyed Charlie Pierce’s riff on David Brook’s dog, “Moral Hazard.” A spaniel, if I recall correctly.
If progressives want to persist in the family budget myth, they should realize that this family is special in that funny old uncle Sam (Walton?) set up a trust fund at the family’s bank with instructions to cover any and all overdrafts presented to the bank. He didn’t tell the family how much is in the fund, but whenever the family overspends, no matter by how much, the checks are always honored. This is Uncle Sam’s family, very special indeed.
Hi William,
thanks for the article. I’m based in Columbus, Ohio. What do you suggest we do in terms of organizing anti-austerity measures locally, while connecting that process with regional, national, and global action to oppose austerity ?
These austerity measures are happening not only in the US, but in Western Europe and in other parts of the world, along with related measures on every continent, as part of the abusive excesses of global capitalism. Therefore we need a stronger global justice movement.
In my opinion, that movement will be more successful if we base our tone and our core objectives on love. Some, such as Nathan Schneider of Waging Nonviolence, say we need organized religion to be more involved for a more effective movement. But I suggest it’s a matter of love, not religion, per se.
If we look at it that way, we can include churches, though not base movements for positive social change on religion.
If you’d like to offer input about love as a basis for social movements, we could set up a time to phone, if that’d work better for you.
Thanks,
Tom Over
Hi William,
Thank you very much for you posts here at NEP. I enjoy reading them very much. This is another excellent one. Great idea but probably a hopeless task at this point.
Dean must read Krugman and Reich too so he has to know whats up with austerity. But it appears he might be more swayed by Greenspan. A post at this site by Professor Kelton had a couple of clips of Greenspan talking about the fiscal problems:
http://neweconomicperspectives.org/2012/11/will-the-real-alan-greenspan-please-stand-up-for-america.html
In the CNN video I believe it was Greenspan states: “…..if we have to a have a moderate recession ( read to mean the imposing of severe austerity) to solve this huge fiscal crisis then that is a small price to pay”.
If my conjecture is right about Dean (and so probably other progressives too), how do you undo all the damage Greenspan does virtually every time he’s in front of a camera?
See http://www.canopycanopycanopy.com/10/to_have_is_to_owe
to wit:
“…Theories of existential debt always end up justifying—or laying claim to—structures of authority. What we really have in the idea of primordial debt is the ultimate nationalist myth. Once we owed our lives to the gods who created us, paid them interest in the form of animal sacrifice, and, ultimately, paid back the principal with our lives. Now we owe our lives to the nation that formed us, pay interest in the form of taxes, and, when it comes time to defend the nation against its enemies, pay back the principal with our lives. This is a great trap of the twentieth century: On the one side is the logic of the market, which insists that we don’t owe one another anything. On the other is the logic of the state, which insists that we are born with a debt we can never truly pay. In fact, the dichotomy is false. States created markets, markets require states, and neither could continue without the other.
The true ethos of our individualistic society may be found in this equation: We all owe an infinite debt to humanity, nature, or the cosmos (however one prefers to frame it), but no one else can possibly tell us how to pay it. All systems of established authority—religion, morality, politics, economics, the criminal-justice system—are revealed to be fraudulent ways of calculating what cannot be calculated. Freedom, then, is the ability to decide for ourselves how to pay our debts…’
Somehow the term “progressive” is like chewing chalk, it is an empty promise, lacking substance, flavour, history or relevancy. Its use as a political tag should be discontinued at the earliest opportunity (except to indicate someone of flaccid principles).
The education of the United States no longer exists at local levels and is rapidly disappearing at the very highest institutions. Those few who still read, fewer still are able to comprehend what they read, those drawing conclusion or inferences from what is comprehended has become a vanishingly small portion of the population. For most, opinion is fed their consciousness by their favored propagandist and cemented in place by endless repetition. In this regime, facts are not favoured but beliefs guard neural access. Like in economics, it is ‘too big to fail’ betting ‘it’s too big to fall’. Good luck with that outlook. The Chinese had an observation at the change of dynasty, the falling dynasty had “Lost the mandate of heaven”. So too, those in thrall of the neoliberal theoconomics are faced with the loss of the mandate of heaven, and there is nothing anyone can do to stop that happening, just be prepared to pick up the following mandate of heaven which surely will come.
Nominate this for comment of the day.
I’m not surprised the leaders of the progressive movement have BOUGHT into the indoctrination, because all the elected progressive leaders were literally BOUGHT by the 1% and their corporations through (re)election campaigns. The root of the indoctrination is our abominable electoral system—from single mark ballots, taking money from corporations they regulate, gerrymandering both left and right, the two parties being privileged over third parties, independents not allowed to vote in primaries, etc. And the capper, of course, is the beneficiary of these huge sums of money is the mainstream media (MSM) and their so-called journalists. How can it ever change if the public doesn’t get it? How can they ever get it, if it is rarely reported on and frequently glossed over? For example, you’d think the only thing wrong with our election system is SCOTUS’s Citizen’s United ruling. It’s a red herring that draws attention away from genuine electoral reform. And the hilarious part is, after all that “disastrous” SuperPac money was spent, it was a status quo election with the left and right money coming to a draw—except to drown out the real issues. Finding an angel ally, to promote MMT and its sibling electoral reform, that is not co-opted by the 1% would be huge. Ideas?
The UK and US national budgets are just like your family’s budget provide that your family runs a protection racket that demands payment in money that it prints.
Austerity is reptilian economics. It’s about economic elites pushing policy that makes a large fraction of people much poorer following the belief that there will be a greater share of resources available for them. It’s really that simple.
More misunderstanding over at fabiusmaximus.com, where a “James” tries to explain the evident. Fabius seems to be a rather dense and pompous sort, but the defense is spirited from a couple of readers.
Bleed the patient … the patient is not getting better … bleed the patient more. Of course austerity is not working and the MMTers do a great job of explaining the needlessness of deficit hysteria. But we need to offer up an alternative plan.
Stagflation can be turned on its head. Food, energy, housing, water and transport costs can be deflated wrt wages by supply expansion and the government could lead the way. The government should be spending massively right now on agriculture, energy production, house building, water security and transport infrastructure.
This targeted spending can be funded using Alternative Quantitative Easing (AQE). The central bank can create some new money and instead of buying gilts and giving banksters and other wealthy persons more paper wealth – use it to buy government bonds. Ok some will say this is printing money and the vision of a wheelbarrow full of cash being exchanged for a loaf of bread will come to mind. That is why it could be called AQE instead of PM and any suggestion that it is PM vigorously denied.
When the cost of living is affordable for all then suddenly the crazy economy (luxuries, excessive variety and entertainment) has twice as many customers and the taxes flood in. The deficit then gets reduced, everybody is employed and we all live happily ever after. For more check out The Populist Manifesto @ kindle store, Amazon.
30 yr treasuries @2.9%, Fed window 0.75% (not a typo), industrial capacity 79%, unemployment 8%
And we’re held hostage to the spectre of “wheelbarrow full of cash being exchanged for a loaf of bread”?
Okee-dokee.
I am trying to spread the truths outlined in this article. The one principle of MMT that I find the hardest to spread is that tax dollars are not used by the federal government to pay for costs incurred with government contracts. Everyone I know is convinced that their tax dollars paid to the U. S. government, are then used to cover the expenses of military expenditures, social security, Medicare and so on. If someone can give me some ideas on how to overcome this one objection, I would really greatly appreciate that.
Ray, try this: Bush cut taxes but ran up a huge debt fighting two wars. If the treasury were to strike 16 trillion dollar platinum coins and pay off the national debt totally, there would be no need for additional taxes to pay that debt. If Bush had not collected any taxes at all, just a few more trillion dollar coins would still cancel the national debt, so taxes were/are not necessary– only needed sufficiently to insure acceptance of the dollar by most citizens.
When they ask what taxes are used for then, just say, “Since taxes must be paid in U.S. currency, taxes are to control inflation.” Everything else is printing.
Sorry, I don’t see the cause-and-effect there at all.
Are you saying that we collected $2.5 Trillion in taxes last year to control inflation?
You want the friends to buy that?
And then we want to END f.i.c.a. so that we can counter this anti-inflation with some needed inflation?
Gather round, friends.
Try this.
It’s a tough point to get across, for sure, but the causality is straightforward.
Just imagine what would happen if the federal government eliminated all taxes but kept spending where it is. The government would not ‘go broke’ (it would remain, as it is today, the only source of new U.S. dollars in the world). But demand unleashed by elminating all federal taxes would soon outstrip the ability of the economy to respond with new output, and prices (in dollars) would rise across the board. Moreover the desire to hold dollars as a store of value would likely soon plummet.
The reason why this is difficult to accept is because of the implication that getting out of our current pattern of slow economic growth is trivially easy: just do in moderation what that thought experiment contemplates doing to excess, namely, reduce the federal government’s drag on the economy.
I think it helps also to keep the analogies sledgehammer simple: To drive a car you need both an accelerator and a brake. Federal governement spending is the accelerator; federal taxes the brake. Use them properly, in conjunction, and you can maintain a steady cruising speed, regardless of the changing conditions of the road–the ups & downs, twists & turns. But overuse one or the other, at the wrong time, and you either go too fast or too slow. Right now we are trying to climb up a long steap hill, and our politicians and pundits are debating how soon and how hard to stand on the breaks.
Actually, the logic is more problematic than the causality.
If the federal government eliminated all taxes, it would be broke in five minutes.
And, yes I do mean broke in the sense that unless it issued new debt in four minutes, it’s TGA account would be empty.
It doesn’t HAVE TO be that way, but that’s the way it is, caused mostly by what get referred to here as “self-imposed constraints” against government largesse.
We have laws and regulations that ‘constrain’ or determine government financial operations.
The government is obliged to actually have money before it spends money.
Or, more accurately, the government must have a positive bank-credit balance in its TGA account before it can debit that account and make a payment.
Are you familiar with government financial operations?
Which brings us to the second point you made, thanks.
“”The government would ……..remain, as it is today, the only source of new U.S. dollars in the world.)””
Here’s the thing about that.
Unless you use the term ‘new U.S. dollars’ to mean printed currency notes, and not just $US-denominated additions to the national money supply, the government is not the source of any new money, either at home or anywhere in the world.
All of the increases in the things that serve as money and change the amount of money in circulation have been created by the private commercial banks, and also, if you go far enough up the convoluted money aggregate ladder, the investment banks.
Yes, those $US Trillions that sank the economy a few years back were ALL created by the private bankers. As are all the increases in our money supply today, coins excepted.
Unfortunately what I just wrote is true, yet it cannot be true if the government creates, or is the source of, all the $US money when it spends.
Which is related to the above point here.
The only logical explanation for the claimed fact that the Treasury took in $2.5 Trillion in taxes so as to reduce the aggregate demand in the economy would be if Treasury department didn’t know what they were doing.
Perhaps the workers at the Department of Treasury thought they were collecting those taxes to pay for government services, including their salaries.
If this is the case, then I think we ought to shoot them over a note to clear up the fact that those operations manuals are not needed anymore.
While I agree that the federal government COULD readily provide for spending our way to well-being if it had the authority to do so, which authority it should have, like I have said here, the federal government does not have that authority.
I have, honestly for years, asked that MMTers provide a list of the legislative and regulatory changes needed to remove all ‘constraints’ against the free operation of our sovereign fiat money system.
Had we some proposed legislation, we would be in agreement on what we could do if it passed, and bring on the real world discussion of what ‘should’ be done.
Many people here believe that what could, in theory, be done can, in fact, be done now, despite all those self-imposed constraints.
Perhaps constraints are what should be discussed.
Thanks.
Spot on. Damned good metaphor. I’ll be stealing this idea for future discussions.
Ray, federal tax revenue does not pay for the federal government. Federal tax revenue is effectively destroyed upon receipt. This is a cornerstone of MMT.
One reason why people reject these facts is that people do not understand how fiat money systems operate. People think money consists of something physical, like gold, or paper bills. Fiat money is not physical. Fiat money exists only in the computerized ledgers of banks. The Federal Reserve Note in your hand is not a dollar. It is a claim of ownership of one dollar’s worth of the “full faith and credit of the USA.” It is a claim of ownership of a dollar’s worth of digital value in various banks’ collective ledgers, or spread sheets. Again, fiat money has no physical existence.
This fact strikes most people as absurd, just as a primitive savage might think that manned flight is absurd. “How could an airplane fly on thin air? It’s impossible!”
When a bank wants to issue a loan, or the U.S. government wants to spend money, the numbers are simply changed in computerized spread sheets that exist in various banks’ computers.
In FY 2013 the U.S. government expects to spend $3.8 trillion. That money will come from nowhere. It will simply be credited to (i.e. added to) the bank accounts of vast numbers of recipients (e.g. 65 million Social Security recipients, or 47 million food stamp recipients).
In FY 2013 the U.S. government expects to steal back $2.9 trillion in the form of federal taxes. That money will be deducted from the bank accounts of everyone who pays taxes. The U.S. government does not need or use that tax revenue, any more than a football scoreboard needs to ask someone for more points. (State, county, and municipal governments DO need tax revenue.)
The U.S. government creates money by typing numbers on computer keyboards. The money becomes real when it is “spent,” i.e. when it is entered as a credit (i.e. deposit) in some bank somewhere.
The U.S. government could abolish all federal taxes today, and its ability to spend would not be reduced by a single penny.
This is how our money system actually works, here and now in the real world.
Likewise, banks create loan money on computer keyboards. When a loan is paid off, it is zeroed out, and the loan money ceases to exist, although the bank has gained the interest that was paid during the life of the loan.
Remember: gold is physical. Currency bills are physical. But these are merely units of account. They are not money. Actual fiat money is not physical.
Mark:
“”Ray, federal tax revenue does not pay for the federal government. Federal tax revenue is effectively destroyed upon receipt. This is a cornerstone of MMT.””
Not exactly what I would look for in a good cornerstone.
So, you want the friends to buy into the notion that their real wage-earned money that could have gone to real economic demand has instead gone to the government, ostensible to pay for government services, but in fact the government has actually destroyed that money that Ray’s friends, and mine, have paid?
Well-controlled inflation, indeed.
Mark, how do you know that government (agents of Treasury) destroy the cash-paid tax money that is collected? Is it via Mosler’s cash-shredding anecdote?
Who pays taxes with cash anyway?
Talk about leading with your chin.
I oft request ANYONE who has seen the IRS shredding cash money it receives in tax payments, rather than depositing them into the Treasury account.
Never had a taker yet.
Have you?
Have you read the IRS manual for handling cash-tax-payments?
It’s all in there and no shredder is involved.
So it must not be the cash money that is destroyed and thus we are left with somewhat of a riddle.
Claim is here made that the Treasury destroys tax money, and does not spend it.
Yet law and regulation require quite specifically that Treasury maintain a positive account balance prior to the account being debited for payment of services.
I’m sorry I meant to say PRIOR TO.
So, if the GUV both HAS the tax money to spend, and yet destroys the tax money it receives, how, pray tell, does the GUV pay for my medicare?
That’s an anecdotally-based conundrum. Not a cornerstone of modern monetary economics.
I never said a word about shredding cash. Few IRS offices are equipped to take cash payments for federal taxes, but in the rare instance when it happens, the cash is credited to an IRS account such as a TT&L account. The bills themselves wind up in a bank somewhere, exchanged by the IRS for credit to the IRS TT&L account.
Anyway the entire issue of “shredding” is irrelevant, since money is not physical. If I send a check to the IRS, then the IRS debits my bank account. Whether the IRS then credits its own TT&L account does not matter, since it’s digital numbers. The Treasury can credit various accounts even with no federal tax revenue coming in. Therefore, effectively, federal tax revenue is destroyed upon receipt.
I don’t expect you to understand that, since you obviously are not familiar with MMT, but I recommend you spend some time on this web site.
The rest of your commentary is pointless gibberish that does not merit a response.
Mark,
Thanks for the reply on that part of my comment.
And also for a clear explication of the effect of making cash payments to the IRS for taxes – that cash tax payments are not destroyed, by shredding or otherwise, and are transferred ultimately into the TGA, ostensibly for paying expenses of government.
Or, why would they send them to the Treasury
I hope your comment, and its implication, is clear to everyone on this thread, but to no one more than Warren Mosler, who is always fond of citing some ‘theory’ that cash tax payments are shredded.
Anyone venturing forth from the SevenSins has seen this portrayal.
Pgs 14 and 15. :
“Then, after you, the tax payer left the room, he’d take that hard-earned-cash you just forked over and throw it in the shredder.
Yes, it gets thrown it away(sic). Destroyed! Why? There’s no further use for it.….Can you now see why it makes no sense at all to think that the government has to get money by taxing in order to spend?””
My answer would be, ‘No, even if that shredding part were true, which it’s not”.
You can see here exactly how Warren has portrayed this limited, speculative anecdote into an MMT truism.
The Warren goes on to explain how “keystroke money” provides the government spending power, since all tax revenues, not just the cash, were destroyed. He does this without, I may add, saying how the 99.999 percent of tax payments are destroyed.
Mark, you did make the statement that I quoted, again: “”Federal tax revenue is effectively destroyed upon receipt. This is a cornerstone of MMT.””
This is consistent with what Warren has last written.
And since we have established that certainly cash tax revenue is forwarded to the government’s accounts, can you please explain to us all how governments tax receipts are “effectively destroyed”, in an act that is, again, a cornerstone of MMT belief.
Please. How is the tax revenue that goes from my M1 checking account to Treasury ‘effectively destroyed’?
Thanks a lot.
The point is that taxes are not required to fund spending, spending creates the money for taxes. The way things are currently set up, the treasury has a revenue and spending account. So it taxes, the money “goes” into the revenue account, then into the spending account, then out to whatever the government wants to use it for (SS, Afghanistan, Solyndra, whatever). If there isn’t sufficient money from taxes, treasuries are sold to make up the difference.
However, neither of these actions are necessary for the government to spend, it just happens to be the way it is currently done. We don’t need to issue debt or collect taxes in order to spend, the government could simply credit the bank accounts it wants to spend its dollars into the same way it does now; it just changes numbers in the computer up or down. Debt and taxes (while useful for other functions) are absolutely not needed for this operation.
Jerry,
“If there isn’t sufficient money from taxes, treasuries are sold to make up the difference.”
We should probably say, spending beyond tax revenue is “borrowed” back as treasury securities. This allows the Fed to drain excess reserves (caused by the deficit spending). Excess reserves cause the interest rate to fall to zero. Issuing bonds at a higher interest allows the Fed to hit it’s interest rate target. So the Fed is “borrowing” the money the Government spent beyond which was taxed. Household borrowing and Government borrowing are NOT the same.
I’m not sure I’m understanding the distinction here – maybe you can restate your point in a bit simpler terms?
jerry,
” We don’t need to issue debt or collect taxes in order to spend, the government could simply credit the bank accounts it wants to spend its dollars into the same way it does now; it just changes numbers in the computer up or down. Debt and taxes (while useful for other functions) are absolutely not needed for this operation.”
Sorry, I doubt a word of that is true today.
We (the government acting through Treasury) DO need to collect funds either from taxes or proceeds from issuing certificates of indebtedness and put those funds into the TGA prior to spending money on anything. Today. Right now. In law and regulation.
Not, in theory.
The government cannot change numbers in ANYONE’s computers except via its procedures for government financial operations, which again require the prior positive TGA balance that must be debited when making a payment.
Thus, debt-and-taxes ARE absolutely needed for this operation.
Please explain otherwise.
Thanks.
Did you not read the first paragraph?
Jerry, yes, you’re right that the first para included the explanation of the way things work today.
But the opening statement and what followed were what I was addressing with an attempt at a clear distinction between what we can, in fact, do and what we cannot do.
The operations of government finance are not whimsically laid out, they follow a base of the law and then relevant regulation so that the government does not have any more fiscal- monetary power than it should.
You start out in para 1 by saying this:
“The point is that taxes are not required to fund spending, spending creates the money for taxes.”
My point is that taxes are required to fund spending, and the spending by government never ‘creates’ money for taxes. This is because the government is the user of the privately-created, bank credit money system. That is what MMT’s ‘ENdogenous money system’ is all about.
If the government actually created money when it spends – ON PURPOSE – then we would have an EXogenous money system.
Certainly taxes flow from M1 to TGA to M1.
But there is no money created in that series of transactions.
I’ll say again that it is possible to change the laws and regulations so that debt need not be issued to fund government, but taxes will always be be necessary to fund government unless the economy is capable of growing by the full amount of the expenses of government in any year.
So, we have a $4Trillion government budget and if the government did not use taxation, then the ‘creation-by-spending’ $4Trillion would be new money added to the economy – currently about $14 Trillion, so the economy would have to grow like 28 percent in order to not effect serious inflation.
Same next year, etc.
Sorry that I didn’t acknowledge some of that first para statement.
My error.
Thanks.
“This is because the government is the user of the privately-created, bank credit money system.”
The government spends money into existence, the banking system lends money into existence. The government does not go apply for loans from JPMorgan to pay social security benefits or drone missiles, it just credits the bank accounts of the recipients, creating net financial assets in the process.
“So, we have a $4Trillion government budget and if the government did not use taxation, then the ‘creation-by-spending’ $4Trillion would be new money added to the economy – currently about $14 Trillion, so the economy would have to grow like 28 percent in order to not effect serious inflation.”
Exactly, and therein lies the purpose of taxation – to remove money from the economy so there is not too much demand. It has nothing to do with balancing the books or paying back debts or funding spending.
“The government spends money into existence,”
No, Jerry, the government does not spend money into existence.
It did once in a fairly major way by issuing Greenbacks.
There was a law passed.
Specific amounts.
Specific printing.
Specific payments.
The Greenbacks remained ‘money’ for 125 years.
You can believe that the government spends money into existence, but the government does not believe this.
Nor do I.
Have you ever SEEN the government spend money into existence?
I mean the government.
I mean money.
I mean – ‘out of thin air’.
Nor have I.
The government does no such thing.
I’ll say it once more.
The government cannot ‘keystroke’ payments for government services from its TGA account UNLESS AND UNTIL there is a positive balance in that account equal to the payment.
That’s the way it is, Jerry.
Here you say “Exactly…that’s why we have taxation”, yet above you said and I quoted that we do not need either taxes or debt to fund the government. That was what I was responding to.
If you want to change that to say that we don’t need to issue debt, I would agree, given passage of another Greenback Bill.
But like I said, we will always need taxes unless Norquist wins the bullshit battle and the government slides down the drain.
joebhed, You’re not connecting the dots here. When the government spends beyond what it taxes, what happens? It borrows its own reserves from the banks and gives them treasuries in exchange (both of which it has an endless, monopoly supply of). Then, it spends this money into the economy. The economy gets the spent money, the banks get the IOU that pays interest, which they could then sell or hold on to and get money when it matures. This is net financial addition to the private sector.
The point I made above was to say that taxes are not needed to FUND SPENDING. What they are useful for, as you alluded to, is to regulate aggregate demand. If there is too much demand or inflation, you can tax money away to cool the economy down.
jerry,
Thanks.
In trying to follow your dots, … I want to make this observation.
MMT’s conflation of Functional (sectoral) Finance with the national monetary system causes many mis-turns in comprehending the actual operation of the latter.
Your explanation is a great example.
Government spends more than taxation, thus borrows what, as bubbleRefuge explained above, is already-created money.
The Treasury does not borrow ‘reserves’.
As Bernanke explained in the video I linked to from NakedCapitalism dialogue (hat tip diptherio) , reserves are not money, they do not advance, and are not capable of advancing, the amount of money in circulation. More reserves are ZERO benefit to Treasury.
As the Bernank said of the QE excess reserves created – “they just sit there”.
And the reason they just sit there is, da-da, they are not money.
So, there is no ‘borrows its own reserves’ dot to connect to.
What Treasury borrows and spends is previously created, private sector, money.
And unfortunately, in today’s private, debt-based money system, the government does not have a “monopoly, endless supply’ of that privately-issued, debt-based money.
Although, in fact, the Treasury SHOULD BE creating, and issuing, all of the nation’s money without issuing any debt.
Please permit me the license to paraphrase the balance of your comment.
First, the cause. The government does not have access to its money-creation powers due to the Federal Reserve Act of 1913, and is thus NOT the ‘monopoly-issuer’ of the currency..
As such, whenever it does not tax sufficiently to pay for needed government services, it must borrow from the private sector by issuing certificates of public indebtedness.
Then, the effect. As such, these certificates increase the private holdings of public IOUs and we the people – those whose government HAS the Constitutional power to issue the nation’s currency – will be taxed FOREVER to pay the interest on those private holdings – colloquially in MMT called “net-financial asset” holdings of the private ‘functionally-financed’ sector.
As you said: “This is net financial addition to the private sector.” (Whooppee ?)
For some reason, MMT’s purport of having a public-purposed monetary system fails to recognize a foundational truth about the debt-based money system, it is THE VEHICLE used by the wealthy for maintaining the disparity of incomes (ability to pay debt-service) and for increasing the accumulation of wealth by the holders of the monetary assets on which we the people pay the rent.
Throw out the mud-dirty ‘money-is-debt’ bathwater and you will find that the squeaky-clean public money baby is, as The American Revolution provided, ours for the taking.
Thanks.
For the Money system Common.
joebhed, I’m not sure what your point is, I guess you want to quibble endlessly over how we phrase the same concept.. but we are agreeing that the government can and does add net financial assets to the private sector. The banks also can create money, but never a net addition. The government borrows money, the banks get the IOU, the economy gets the spending. Then the next year it all starts again, government takes on more debt (if we’re running a deficit).. and on and on we go like this. There is nothing unsustainable about this, nor is our interest burden a problem. I agree that the private banking system is a useless appendage of sorts, and we’d be better off with the government spending debt-free, but I don’t see how that changes or invalidates anything put forth by MMT.
jerry,
Thanks, but no, I never want to quibble.
My points are always substantive, though often endlessly required.
From what you wrote, and my agreements.
1. the government can and does add net financial assets to the private sector; Agreed (but WHY should we?).
2. The banks also can create money, but never a net addition; I want to agree, but, “also” ??? You didn’t say the government creates money above, which is why I agreed. Banks create money by issuing cancellable debts, so that no new assets are added. Repay the debt(loan) and bank asset is zero.
3. The government borrows money, the banks get the IOU, the economy gets the spending. Agreed – the government borrows already-created money, and issues an interest-bearing IOU to whoever holds it. But, why?
4. Then the next year it all starts again. Agreed.
5. There is nothing unsustainable about this. Totally do not agree.
6. Nor is our interest burden a problem. Totally do not agree.
7. The private banking system is a useless appendage of sorts, and we’d be better off with the government spending debt-free. Definitely agree.
8. I don’t see how that changes or invalidates anything put forth by MMT. Please see how it might do so.
Further Considerations on Money and Debt.
First, and this is big.
The private endogenous money system is a useless appendage. Corollary – government debt-free spending money into circulation is preferred. Our Agreement.
That postulation is monetary reform in a nutshell, but it violates one of the tenets of MMT – THAT Money Is Debt.
Debt-free spending of money into circulation is what was done with Greenbacks.
But if government spends money into circulation without debt,then how can money BE ‘debt’?
We’d all be better off indeed if what banks did was banking(financial intermediation), and what the government did was money creation and issuance – that which A.Lincoln called the supreme prerogative of a sovereign government.
But then we’d have an EXogenous money system.
Look around, jerry, there IS an endogenous, private debt-based system of money in place – has been for a hundred years.
Please accept this in the spirit in which it is offered – there is no government creation of money at all, c.e..
So, the problem is that MMT says that government creates money when it spends – but it does not.
You imply public money ‘creation’ by issuing debt, like banks do.
But banks CREATE money when they make loans.
The government doesn’t get to do that.
The government borrows already existing money from the so-called savers; in reality the money-creating banks and their agents.
The growing debt and interest burden ARE unsustainable, and are a problem for our collective well-being.
This goes to whether there is any need for reform.
And it goes to the need to distinguish between money and debt.
Money is the distributive agent for the wealth created in the national economy.
Please have a read of Soddy’s “The Role of Money” sometime.
Debt-free money obviously becomes the more egalitarian, more democratic distributive mechanism than the debt-based money method.
Debt is a claim against the future production/consumption of national economic wealth.
As such, you need future MONEY to pay debt.
Picture a future national economy without monetary reform.
That national economy must produce exchange media (about $15 Trillion at present, rapidly rising, with interest appended thereto) that should be used to provide the ‘wealth-distributive’ function, but that media never goes to real resource conversion and exchange that real people can enjoy. Rather, because of the ‘debt’, it can only go to enhance the financial well-being of the holders of these so-called monetary assets.
The whole concept of the ‘financialization’ of the national economy – in opposition to the creation of real productive, and therefore distributable, wealth – is what is at play.
Every $US-denominated, debt-based monetary asset is a claim against the future well-being of the people.
Today, the existence of so-defined toxic assets of the major shadow and investment banks are what threaten our national economy.
Eventually, it is the point-one percent that will own ALL the monetary assets and the ninety-nine, point nine percent who will pay the interest.
NEVER, by the way, paying the principal.
I offer this video by German economist Dr. Bernd Senf, a noted professor emeritus at the Berlin School of Economics in his first-ever English-language lecture on what he correctly portrays as “The Fog Around the Money”.
http://blip.tv/file/4111596
It would be good for all MMT adherents to add this lecture to their understandings about money.
Thanks.
“The growing debt and interest burden ARE unsustainable, and are a problem for our collective well-being.”
No, they are not. What pieces of information are you using to arrive at that conclusion?
All you’ve done this whole time is restate all the points I made in the original comment that you responded to.. that we currently must borrow to fund whatever spending is beyond what is raised by taxes; that we could get rid of the whole process and just have government issue money debt-free. Whether you want to call it endogenous or exogenous, I don’t really care. You can say the government creates it, or that it continuously accrues debt from the private sector that it has no problem paying back. Save me the long-winded responses and round-about reasoning next time and cut to the chase! I fear your comments are not “endlessly required”.
“Wealth, Virtual Wealth and Debt.”
“The Role of Money”
Dr. Frederick Soddy.
Besides, if you watch Dr. Senf’s video, it answers all your questions.
Ray,
I always like to point out that a currency USING private citizen (or municipality or business) needs to acquire money before they can spend it. And if they need to spend more than they can acquire via income they must then obtain a loan.
When a government is the fully sovereign ISSUER of a fiat currency it does not need to acquire that same money before it spends it – its actually illogical. It creates money by spending on real things. It creates NET NEW money when it deficit spends regardless of the operational choice to issue bonds or just print the currency.
Bonds and currency are both liabilities of the government. The only difference is one pays interest and the other does not. When the FED performs QE or any other form of so called “money printing” it is not actually creating any net new money or net new spending power. It’s like trading a BUD Lite for a Budweiser and expecting the person to get more intoxicated. If you really want to get more intoxicated you need someone to give you a can of beer without taking a like one away. Government spending is giving someone money it creates in exchange for a real resource. The government ends up with net new resources and the non-government ends up with net new money in exchange.
Taxes do have their purpose, but its not so the currency ISSUER can acquire its own currency to fund spending.
If your friends want some better evidence, I love this quote from former FED Chairman Marriner Eccles taken from his testimony to Congress in 1947 regarding why preventing the FED from directly funding the government is not operationally possible – bond sales are an illusion of borrowed money: “If Congress appropriates more money than Congress levies taxes to pay, then, there is naturally a deficit, and the Treasury is obligated to borrow. The fact that they cannot go directly to the Federal Reserve bank to borrow does not mean that they cannot go indirectly to the Federal Reserve bank, for the very reason that there is no limit to the amount that the Federal Reserve System can buy in the market. That is the way the war was financed. Therefore, if the Treasury has to finance a heavy deficit, the Reserve System creates the condition in the money market to enable the borrowing to be done, so that, in effect, the Reserve System indirectly finances the Treasury through the money market, and that is how the interest rates were stabilized as they were during the war, and as they will have to continue to be in the future. So it is an illusion to think that to eliminate or to restrict the direct borrowing privilege reduces the amount of deficit financing. Or that the market controls the interest rate. Neither is true.”
Why not start a white house petition asking our questions, stating MMT positions?
I’m going to start a white house petition to discontinue white house petitions. Deport Piers Morgan? Arrest David Gregory? Secede from the Union? Just another circus ring for idiotic attention pimps.
Since Black apparently doesn’t read the comments over at Naked Capitalism I’ll repost them here:
Howard Dean? Really? When he became governor in 1991, Dean faced an economic recession and a $60 million budget deficit. During his tenure, the state paid off much of its debt, balanced its budget 11 times, raised its bond rating, and lowered income taxes twice. (http://www.governing.com/poy/Howard-Dean.html)
Mirabile Dictu! (as Yves Smith is overly fond of saying) Howard Dean ran a very progressive state using exactly the principles that Prof. Black says he should be “deprogrammed” for. Tough austerity can be too much as it has been in Europe. Black should have left his argument there but sank himself weaving broad generalizations.
He may be pretty smart fer a perfesser, but remind me again what Black has run successfully using different economic principles?
Corinne,
Please study the concept of monetary sovereignty.
Thanks.
Corinne,
I believe he is referring to states with a sovereign currency.
Since Black hasn’t responded, I’ll post how NakedCapitalism commenter “from Mexico, December 29, 2012 at 12:04 am” responded to your assertions:
“The way to balance the [federal] budget is for Congress to cut Social Security, move the retirement age to 70, cut defense, Medicare and veterans pensions, while the states cut everything else.
– HOWARD DEAN, “And politicians wonder why they aren’t trusted,” Newhouse News Service, March 5, 1995
Upon becoming governor of Vermont in 1991, after the sudden death of then-Republican Governor Richard Snelling, Dean made a sharp turn to the right and pursued that course ever since. In his 11 years as governor, Dean would shift rightward on one position after another, all the while claiming to be concerned for the needy and less-fortunate, and disappointing all who thought they were getting someone who would govern from the liberal end of the political spectrum.
Dean inherited a massive deficit in the state budget from Snelling. Refusing to raise taxes on wealthier Vermonters (and rendering the tax system more regressive than previously), Dean declared in his first State of the State address that it would be his mission to balance the state budget with some “tough” cuts. Even though Vermont has no law requiring a balanced budget, Dean promised, “The pain for Vermonters will be real.”7
Dean slashed millions of dollars from all sorts of social programs, from prescription drug benefits for Medicare recipients and heating assistance for poorer Vermonters to housing assistance funds. In defending his cuts to social programs, Dean said, “I don’t think I have to shy away from that just because I’m supposed to be a liberal Democrat.”8
Throughout the 1990s, Dean’s cuts in state aid to education ($6 million), retirement funds for teachers and state employees ($7 million), health care ($4 million), welfare programs earmarked for the aged, blind and disabled ($2 million), Medicaid benefits ($1.2 million) and more, amounted to roughly $30 million. Dean claimed that the cuts were necessary because the state had no money and was burdened by a $60 million deficit.9
But during the same period, Dean found $7 million for a low-interest loan program for businesses, $30 million for a new prison in Springfield, VT, and he cut the income tax by 8 percent (equivalent to $30 million)–a move many in the legislature balked at because they didn’t feel comfortable “cutting taxes in a way that benefits the wealthiest taxpayers.”10 By 2002, state investments in prisons increased by nearly 150 percent while investments in state colleges increased by only 7 percent.11
– KEITH ROSENTHAL, The Dean Deceiption”
Federal government is what he’s talking about, not state or municipal. The latter operate like a household budget, and taxes indeed pay for everything (or federal money, etc.). The former, what’s being discussed, is the opposite.
Read the article again, paying close attention to the descriptors “national” and “sovereign” and keep in mind that states don’t issue currency, don’t have recessions (themselves, as opposed to feeling the effects of a nationwide recession), can’t control the things described in the article, and therefore are not the target of the discussion at all.
Part of the problem is when people who are actually good at managing companies, or successful state finances try to apply the same principals to a fiat currency-based government. The fact that Howard Dean is so good at balancing a state budget merely proves that he’s good at doing the wrong thing. Whether or not he understands what needs to be done at the federal level is unproven.
Corinne,
Vermont is a state – it is a currency USER just like you and me. It can go bankrupt. It must “live within its means”.
The US government is a full sovereign ISSUER of a fiat currency which floats on the open market. It is within it fiscal power to create enough demand (via tax cuts or spending increases) to always ensure full employment. Pursuing a policy of austerity while millions are unemployed is bad policy – the only “means” it must live within is the wise use of REAL resources.
Bill, can you share your experience participating in the panel of economic experts that worked with Bernie Sanders this past year to develop legislation to restructure the Fed and tighten rules on conflicts of interest, ensure that the Fed fulfills its full-employment mandate, increase transparency, protect consumers and reduce income inequality? I believe you, James K. Galbraith, L. Randall Wray, and Stephanie Kelton participated on that panel. Did you think that Senator Sanders “gets it”?
Can someone help me out with this –
Didn’t Zimbabwe have its own sovereign currency at the time it went full-bore on ‘print-‘n-spend’? Anyone recall how that worked out? Japanese apparently don’t, ’cause they seem intent on replicating that program, starting now. Maybe we should just stay cool (and try to stay solvent) ’till we see how it works in The Land of the Rising Sun, huh?
Zimbabwe was coming out of civil war with its agricultural base nearly decimated, as well as lots of external debt to the IMF. This was more a case of cost-push inflation, similar to oil shocks in the 70’s. You may have noticed that Japan has been fighting deflation for decades and despite all the hysterics about inflation, there has not been any. To point to one or two extreme cases of hyperinflation (Weimar Republic usually being the other) and try to conclude that government cannot spend because it will cause the collapse of the dollar is just absurd.
Cool, Jer – do us all a favor and name some examples from history where ‘print-‘n-spend’ has worked as you and Prince William assert it will. And while you’re at it, please inform us – at whose detriment did the printing presses run?
Umm I duno, how about the last 100 years in the United States, where we’ve almost always run deficits?
So, you’re saying MMT is nothing more than what we’ve been doing for a hundred years? Gotta wonder if the other proponents of the theory share that view. Gotta wonder also – did we ever face these kinds of serial existential financial crises prior to 100 years ago? IDTS.
So also, you’re saying more of the same that got us to where we are now is going to get us out of it? Ask any pro trader – the key to survival is knowing when to throw-in a losing hand.
Modern Money Theory is based on empirical research done by the likes of Wynne Godley and Herman Minsky. You can read there works by searching at the Levy institute or any online bookseller. Two empirical facts shown by MMT:
1. The money that circulates in our economic system has one source-the government; a logical corollary to that is that when more financing is needed to help circulate more goods and services that money can only be spent into existence by the government.
2. Every time the government takes in a surplus (more tax money coming in than what is going out in expenditures,) the private sector shows a deficit and we sink into recession. The Clinton years are supposed to be an exception but you can look at Professor Wray’s analysis which shows the Clintonian bubble of private debt-enabled by one Mr. Alan Greenspan-gave the appearance that the economy was flourishing but the private encumbrance of trillions was hidden by all of the rosy ‘orthodox’ reports on how we were in the midst of prosperity. Financial Bubbles, in all of their inherent glossiness, look like prosperous times. We are headed there again.
http://www.doctorhousingbubble.com/should-i-buy-in-california-real-estate-flippers-flipping-shows-market-supply-real-estate-ca/
I would say that MMT is in part a description of how things are conducted, at least since Nixon in ’71. The other part of it is how things could/should be done after taking the first point into consideration.
I’m not sure what the connection is you’re trying to draw between financial crises and government fiscal/monetary policy. A big part of the problem leading up to the crisis in ’08 was way too much private sector indebtedness – not enough money available for the private sector combined with financial deregulation essentially resulted in a massive ponzi scheme.
If you’re not seeing the clear explanation that MMT offers regarding our current situation – and that government spending is not at all the problem – I would recommend reading more about it. Mosler’s seven deadly innocent frauds or Wray’s MMT primer are pretty good places to start.
Well, I see it differently. IMO the problem since ’95 (and earlier) stems from too much money being available to the private sector. When given too much rope, folks invariably fashion a noose and ….
Roger: Have you given consideration to engaging with the responses given, instead of merely reformulating your original talking point with different words?
WWII
This I sort of agree with – the sacrifice of liberty and wealth demanded during the War and later is the one persuasive example of ‘print-borrow-spend’ that actually worked – but it came at a giant cost to society. Citizens put up with it because of the perceived justice and necessity of sacrifice in time of war. Maybe I’m dense, but that same willingness to sacrifice doesn’t seem to me to be present these days. Rather the opposite – folks are desperately in search of some nostrum (like MMT) that purports to solve the problem without requiring any sacrifice by anyone. Most disturbing of all – some of the people pitching that kind of thing purport to believe that it actually exists.
Once again, we have the term of abuse thrown out — in this case, “nostrum” — with no attempt at substantive engagement. Perhaps you should get that knee seen to?
Zimbabwe wasn’t sovereign in its own currency because it owed external debts to the IMF in a currency not its own. Not owing debts in foreign currencies is one of the requirements for monetary sovereignty. Other requirements are that one’s currency be issued by oneself, that it be non-convertible and that the currency be allowed to float freely on the International currency market.
Zimbabwe’s other problem was that it destroyed much of its agricultural productive capacity, destroying its ability to meet the domestic demand it was whipping up. We haven’t done a similar thing quite yet. But if we continue sacrificing our manufacturing capacity to finance capitalism, and keep allowing our labor force to go unemployed and experience skill obsolescence and erosion, then eventually we will find ourselves in a situation when increases in domestic financial demand may become too great for our productive capacity to meet. We have to quit wasting people, lives, and capacity, if our nation is to prosper in the future.
Well, I have a hard time wrapping my head around the concept of a “non-convertible” currency that is at the same time “allowed to float freely on the International currency market.” (Maybe the powerful aura of MMT has diminished my capacity to maintain mutually contradictory assumptions – don’t ya’ just hate it when that happens?)
With you about the need to get things moving again and not allow stagnation to atrophy the entire economy. We’ll be able to start crafting a plan to accomplish that just as soon as we get past the fiction that the solution won’t cost anyone anything.
There are two definitions of inconvertibility. The one you use does indeed lead to a contradiction, the other one is “2a: not redeemable for gold or silver specie”. In other words, a fiat currency.
Aargh! Just because ‘austerity’ has yet to show socially acceptable results does not prove that money printing will give better results. And Krugman and his followers make no predictions about how long money printing must continue before it will show results. The prescription ‘we must do X until it works’ would be perceived as absurd in any other context. Here, the excuse is either ‘we didn’t print enough’ or ‘we gotta keep doing it until it works’ is unquestioned gospel. Is it so difficult to ask: ‘what if there is no painless answer’?
@GeorgeM –
There is no painless answer – it’s only a question of who is going to swallow what portions of the pain.
It’s all about The Haircut.
But, on the brighter side:
http://www.bgladd.com/FiscalCliffDiscountEconomy.jpg
Silly link, BG – you can do better. When you’re done with cartoons you might give us some hints – on whom do you think the burden should fall, and where does it actually fall if MMT fantasy is exercised IRL?
It was meant to be silly. 50 seconds in Photoshop. Visual exasperation.
Hint?
Those who stole the money to begin with. They’re comin’ back around to pick up what they didn’t abscond with a few years ago.
We never learn.
Let me ask you. What is the proper moral justification for an economy, one above hunter-gatherer subsistence?
BTW, I don’t think MMT is gonna get any traction near-term. I take no pleasure in that prediction. Big fan of Bill Black.
http://bgladd.blogspot.com/search?q=tranche
“Let me ask you. What is the proper moral justification for an economy, one above hunter-gatherer subsistence?” (BG)
I’m gonna presume to recraft you question to read – ‘what is the ethical justification for some having so much more material wealth than others?’ There’s only one answer that I personally find satisfactory – ‘those who have more ‘earned’ it.’
When we finally get around to allocating the burden of what needs to be done, IMO one of the first targets should be those whose wealth that wasn’t personally ‘earned’.
OK, so you don’t want to answer my question, but will instead pose one of your own and answer it instead?
There is a painless answer – abolish further credit creation, at least temporarily, and bailout the entire population with new fiat metered to just replace existing credit as it is repaid for no net change in the money supply until all deposits are 100% backed by reserves.
Look, FB – we’re not plotting-out a sci-fi/econ novel here – this about IRL stuff that actually is capable of being implimented IRL. Your proposal, as best I ‘get’ it, appears to fall outside those constraints. Let’s try and advance the discussion a bit, with an ethical question that frames a proper strategy –
Which is less morally objectionable – deficit spending funded by QE *or * deficit spending funded by borrowing ‘in the market’ and without benefit of QE?
this about IRL stuff that actually is capable of being implimented IRL. Rodger Fox
A universal and equal bailout of the entire population, including non-debtors, would be immensly popular especially if it could be done with little price inflation risk. Who could legitimatly oppose it? And morally the entire population (sans bankers and the uber rich) is entitled to restitution.
As long as you maintain that there is a solution that costs nobody anything – you and me may as well be on different planets. Just sayin’ ….
Well, there are some who are looking for obscene gains via deflation and those who don’t want a relative (but not absolute) decrease in their wealth wrt to others but I don’t count those as worthy of concern. Do you?
For the rest of us, a universal bailout can be done without either nominal or real losses IF it is combined with a temporary ban on further credit creation and if it is metered appropiatily.
Of course, “real life” is the exact opposite of an ideological construct….
Historically based, too, reading the Old Testament Jubilee Year as what we have of the record. I’m sure there are other examples of equitable bailouts.
It isn’t as if we are sitting around watching the Euro countries try austerity and thinking “hmm, I wonder if this is working or not, maybe if we cut a little more”. These countries have slowed way down, unemployment has skyrocketed, people are digging through dumpsters looking for food in Greece, increased suicide rates, etc. It is about as obvious a cause-and-effect as anything can be in the world of macroeconomics. Britain went almost immediately into recession after implementing austerity.
With stimulus, on the other hand, we have clear evidence of the effects it has had in the US. Even though the deficits have not been nearly big enough, the difference in the recoveries from the GFC (which originated in the US and would presumably have the largest effect domestically) is pretty obvious.. take a look at page 4 in the report here: http://www.treasury.gov/resource-center/data-chart-center/Documents/20120502_EconomicGrowth.pdf
We don’t want money printing, we want government to continue its economic contribution*, and preferably increase it.
But backwardian economists get causal relationships wrong; they think that private sector savings finances government deficit spending, while in reality it is other way around, government deficit spending finances private sector savings.
* a.k.a fiscal deficits
We’re not talking about “printing money” here. We’re talking about spending money in excess of tax revenue on productive activities that will produce valued outcomes consistent with the public purpose. The Fed “prints money” to swap it for debt or other assets to drain reserves and hit its target rates. The Treasury is supposed to spend only on valuable things. Our job is to make sure that Congress requires that it do so by making wise appropriations including ones that involved “deficit spending.”
We know that deficit spending on productive things produces good results, because we have plenty of history to show that, including much of the New Deal building projects, World War II spending, Fair Deal spending, and Great Society Programs. We know that austerity doesn’t work because it has failed in nation after nation. We need to go back to what works.
Finally, MMT isn’t like Krugman, some of us will make predictions about time periods, conditional on our policies being implemented by the Government. For example, Warren Mosler offered a program and made a flat prediction about how long it would take to get out of the recession (3 months), if the program were followed. Warren’s Senate web site seems to be gone, but this post of mine discusses the proposal and predicts that it would be successful in a year if followed.
We know that deficit spending on productive things produces good results, … Joe Firestone
Don’t be morally timid! The entire population deserves restitution for theft by the counterfeiting cartel, the banks, and that restitution would produce “good results” by definition since people generally spend on what is “good” for them.
But Progressives can’t seem to perceive the evil of lending stolen purchasing power, can they? So they don’t perceive the need for restitution? So they have to find excuses to defict spend instead of taking the bull by the horns?
I love the idiom “printing money.” It’s Orwellian in this sense:
“Printing money” in that “dump of worn-out metaphors.” Only the most zombified reactionary, ignorant of the real operations of a fiat money system such as ours, could possibly use a form of words that implied our currency was paper-based. Sadly, as Orwell new, dead metaphors still walk the land of the living…
I really appreciate Dr. Black’s fine work here in explaining the neo-liberal economic stranglehold against global academic freedom and discourse.
And also his correct portrayal of Dr. Dean as a progressive wannabe.
Turning that around will take volumes.
But I don’t see the policy space being discussed in the comments laid out very clearly by Dr. Black. And Dr. Black’s observation require a little more understanding to be purposeful.
Here: ““The Guardian, therefore, has no excuse for failing to understand a national economy like the U.S. that also has a sovereign currency…. A nation that borrows in its own freely-floating sovereign currency is not a target for bond vigilantes. It can and should spend considerably more than it brings in through tax revenues in response to a recession.”
There is no process laid out by which a sovereign fiat-money nation “can and should spend considerably more than it brings in through tax revenues”, implying therefrom the need to borrow whatever spending is not covered by taxation.
Later, Dr. Black offers this: “Nations with sovereign currencies can create money directly through key strokes on the central bank’s computer or by borrowing at exceptionally low interest rates during a recession.”
The problem with getting a new progressive monetary paradigm out is that, except for copious public borrowing as an option, this is just not true. Keystrokes on a CB computer are not capable of creating new money. I offer this video of Chairman Bernanke’s explanation on the nature of reserves:
http://www.youtube.com/watch?v=mWl6JI4KBTg
Jump right to minute 19 and stay tuned for 4 or 5 minutes as the Chairman explains that massive new reserves do not increase the money supply, and thus why reserve-expanding monetary policy is not inflationary.
I offer this quote of the Bernank by commenter ‘diptherio’ over at NakedCapitalism.
“…the amount of currency in circulation has not been affected by these activities. What has been affected…is reserve balances…And so the banking system has a large quantity of these reserves but they are electronic entries at the Fed. They basically just sit there, they’re not in circulation.”
Reserves that just sit there are no counterpoint to austerity.
I hope Dr. Black receives this observation in the spirit in which it is offered.
We do need a complete new progressive paradigm to replace the neo-liberalized brand of false and corrupted monetary economics.
But, absent any truth to the claim that the CB creates the nation’s money by ‘keyboarding’ reserves, and absent the truth to the claim that the government creates money when it spends – viz, that there MUST be a positive account balance in the TGA BEFORE government can write a check – the ‘government-as-monopoly-issuer-of-the-currency’ is an emperor without clothes when we operate an exogenous debt-based money system.
We NEED a clothed public money creating entity, and MMT does not provide one.
Or, am I wrong about any of this?
Ever upward.
Thanks.
Joe, Your questions are good and express a genuine interest in understanding MMT, but I don’t think you still have a good understanding of the nature of money and the role of a sovereign currency issuer. L Randall Wray’s MMT primer goes into the very questions you are asking and provides the answers you are seeking, although it is not easy to understand every concept and explanation without really working at it. I guess if it were easy and obvious to understand MMT would be a lot closer to being implemented than it currently is. I urge you to study these posts more, particularly the sections dealing with the creation and destruction of money. Offered in the spirit of mutual understanding.
Offered in the spirit of mutual understanding. Backatcha.
Thanks a lot, Sunflowerbio.
I appreciate your comment and genuine concern that I misunderstand the nature of money, and that perhaps by reading Wray’s Primer I can come to understand the creation and destruction of money – leading to understanding MMT, and thus the role of a ‘monopoly’ sovereign currency issuer.
That would not be a problem, were it not for one thing.
Back about 25 years ago, when the collective of MMT cadre were cobbing together a new understanding of money based on a theoretical monetary sea-change that ended the Bretton Woods gold-exchange standard for national CURRENT ACCOUNT BALANCES, I already had 15 years experience as the son of a bonafide monetary reformer – one who completely understood the nature of money well before Dr. Wray’s ponderings, my Dad having read Dr.Frederick Soddy back in the early 60s.
Sorry to say it is actually Dr. Wray who does not understand the true nature of money. And based on that misunderstanding, we have here a postulation that money’s nature is in its ‘unit-of-accounting’. Nothing is further from the truth.
Money’s nature is founded upon a legal social construct to have a national system of money, and its natural function and role within that system is exactly what Soddy found about 80 years before the birth of our new-Chartalism. Money serves the ‘distributive’ function of the wealth that is produced and consumed in the national economy. This is the essence of the science of money: what it is and how it works.
See Frederick Soddy: ‘The Role of Money’.
Also: ‘Wealth, Virtual Wealth and Debt’.
Finally his Cartesian Economics : ‘The Bearing of Physical Science Upon State Stewardship’.
Money’s primary identity then is as the media for exchange of the national wealth.
Being distributive in nature, money ‘cannot be’ debt.
Money is wealth-distributing.
Debt is wealth-concentrating.
It is, as such, that “you are here*”
I don’t understand why MMT misses this reality, and embraces debt-based money.
Here’s the thing. Only MMT has the guts to recognize and call out for the monetary power that SHOULD reside with the people’s government – as the actual monopoly issuer of the currency. All of its conclusions about how money COULD work to achieve our social, political, economic and environmental goals are soundly drawn. As theory. Three cheers for Dr. Kelton’s public speaking on austerity.
The Achilles heel of MMT is exactly as I have lain out here and on many blog sites. We do not have a government monopoly currency issuer. And, we NEED one.
The government has no monopoly on issuance, or on creation, of our money supply.
The government remains a ‘user’ of the money system, despite its ‘inherent’ power to create all the money.
Having read through the Primer – including leaving many comments there – and having read both of Dr. Wray’s publications on Understanding Modern Money and Modern Money Theory twice, the main thing I am convinced of is that the MMTers are often, collectively, the smartest kids in the room, and always have the interest of using the money system to promote the people’s general welfare right at the forefront of their thinking.
The problem is in the thinking that ‘we can’ or that ‘we do’, rather than ‘we could’ and ‘we will’ as soon as we are able. It is because of a flawed belief in what it is that ‘we do’ today and what ‘we can do’ whenever we want within resource constraints, that MMT finds no NEED for reform of the real money system.
But without reform of the money system, in fact, we don’t and we can’t.
Thanks for listening.
Thank you for your detailed reply. I am impressed by both the depth and extent of your study. Since I am very new to these topics, I do not feel qualified to defend or critique them further, other that perhaps to try to add clarification of my own understanding. I will reread some of the primer looking for your comments to see where agreement and dispute lie. Thanks again.
Private lending creates private bank deposits. Treasury spending also creates private bank deposits. The Treasury’s spending account at the Fed is funded via taxation of previously issued currency ( as a point of logic) and Treasury security sales to primary dealers who then sell them back to the Fed in many cases.
Congratulations.
Well, explicitly, succinctly stated.
Perhaps too clear for most.
Thanks.
Joe, Here is a little thought experiment.
It’s Friday, April 15th. All $2.5 trillion of the tax revenue for the year has been deposited in the IRS T&L account and will be sent over to the Treasury on Monday morning to fund the government for the next year. Over the weekend someone hacks the IRS computers and zeros out the T&L account. On Monday morning the IRS director call the Treasury and explains, the checks have been returned to their respective banks and been shredded, there is no money to fund the government. Tim Geithner says (ha), “No problem. We were going to cover the shortfall of $1trillion dollars anyway. We’ll just add another $2.5 trillion to our computer entry.”
The question is, was the money destroyed? What if, instead of a hacker, an IRS employee zeroed out the T&L account after making the electronic transfer? Is there any functional difference? Any thoughts?
Here’s the thing.
The Money System is real.
There are laws about the money system that prevail.
Accounting comes later, and computer operations last.
Whether a computer glitch, hacker, disgruntled laid off worker or saboteur hacked the balance from the IRS computer is not really a relevant hypothesis to the discussion as I know it.
This is an IT question, and I’m sure we can specify the corrective protocol if needed.
Unfortunately for MMT, money is not really about accounting and computers.
The money system operation prevails.
A ‘correcting entry’ is made, balances are restored via backup, and we all live happily ever after.
To your questions:
IRS and FRB protocols do not allow the chief to return Treasury payment checks to banks for shredding.
So, there is a way to fund the government.
My thoughts are this is a kind of shoe-horning exercise that results from misunderstanding money, banking and government finance.
If you thought through the chaos in the national payments system from such an action, you would move on to study something more relevant.
Thanks
Do you think chaos theory would be more relevant?
Yes.
Absent a technical fix to a technical fault with the national payments system, chaos would prevail.
Which is why there is redundancy and contingency-planning for any foreseeable event.
If the unforeseeable occurs – and it did in September 2008 – then it is up to the innovators to effect repair.
And the Bernank did a good job with his emergency powers, and later Congress changed the accounting protocols to avoid financial breakdown and the chaos caused by un-payable debts.
Your earlier postulation had actors violating their own rules – in terms of destroying the tax money balances once collected, making it hard to say what the outcome would be.
But if a bunch of bad-actors and saboteurs purposely crashed the national payments system, chaos would prevail for a time.
But again, this has little to do with the study of the mechanics of the modern money system.
Thanks.
A welcome article, for progressives definitely need to be ‘Deprogrammed’ as concerns austerity, for yes with so called progressives like Obama and Dean in charge, as the good tools of finance capital that they are, genocide will be loosed upon the land….as it has been for quite a long time.
Part of this problem is the deliberate failure of “Occupy” to put forward economic demands against the 1% who use both parties, to get their way: Austerity.
This fall a group of people have come together, under the invitation and political union of a “United Front Against Austerity” http://againstausterity.org/ to so pick up where Occupy left off, to so come together, not only to say no to the genocide of austerity and the death to what is left of the American economy, to say no to austerity with demands and a programmatic platform of solutions.
Voted on in the initial meeting in NYC, the weekend before hurricane Sandy, we call for:
-1% Wall Street Sales Tax: Make Wall Street pay for the depression, provide revenues off of the quadrillions in derivatives turnover to prevent the social safety net from being destroyed, but to expand it. This would serve to put a brake on the insane derivative swindle.
-Federalize the Federal Reserve: Yes Fed the Fed, recreate a Hamiltonian banking perspective where credit is created towards investment in the productive economy.
Our focus must be on the productive economy not the speculative one. There must be real investment happening, both public and private.
We are also calling, and in formulation, a call for a return to Parity Production as regards raw materials, specifically raw material, and particularly agricultural, such that producers such as farmers are guaranteed 90% of parity price, and where the minimum wage reflects parity. Right now farmers are getting around $8.50 per bushel of wheat, where the parity price is $18.30.
Would you allow yourself to be so cheated from your labors? Well we all are when we do not follow the parity equations, and so pay for production, vital production whose profits are multiplied throughout the rest of the economy.
The 1% are against parity, because the present oligarchy works to stay in control through the credit and debt system, that we are seeing played out with the macabre evil of Obama fiscal cliff charade.
We as Americans take back our power by getting out of the controlled dialectic, left-right of the two controlled parties, with a platform, historically proven, that can once again be embraced by the majority of Americans, who will be empowered by standing on a platform which becomes the litmus test.
The first rule of the litmus is this:
If you are for austerity, then your economics are wrong. Austerity is anti-american. Thrift is not, but this is not about thrift, but about theft, theft against us, the U.S. to be a slave state. Austerity means kill your parents and make sure your kids have no future, so that America can continue to be held hostage by the bankrupt bankers and hedge funds of the monster known as the Federal Reserve.
It is time to stop this evil.
BobbyG is right in saying that “Freedom, then, is the ability to decide for ourselves how to pay our debts.”
Our new insight into how Nature allows environment to intervene in gene expression is revealed in the new science of epigenetics. Essentially this means man-made cultural decisions will rapidly affect our genome and we aren’t slaves to the dogma of “survival of the fittest.” Our eusocialty as a species stems from genome acceptance or expression of the idea that we benefit from “owing a debt of support to each other,” what we know as basic human morality.
george matkov December 29, 2012
“Aargh! Just because ‘austerity’ has yet to show socially acceptable results does not prove that money printing will give better results. And Krugman and his followers make no predictions about how long money printing must continue before it will show results. The prescription ‘we must do X until it works’ would be perceived as absurd in any other context. Here, the excuse is either ‘we didn’t print enough’ or ‘we gotta keep doing it until it works’ is unquestioned gospel. Is it so difficult to ask: ‘what if there is no painless answer’?”
Isn’t it time you confronted reality and did a little historical research?
http://www.debtdeflation.com/blogs/wp-content/uploads/2012/12/Keen2012FiscalCliffLessonsFrom1930s.pdf
Just curious, did the Guardian run this headline last week: “Obama dumps US economy on Lew”?
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The interview area of Inside the Actors Studio ends with Lipton asking a couple of questions from French journalist Bernard Pivot.
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