Blinder Leading the Blind

By Dan Kervick

The establishment’s debt and deficit hawks have taken flight once again, this time to launch a counterassault against Paul Krugman’s sensible and increasingly successful campaign to get people to stop clutching their pearls over the federal budget situation, and to focus attention on more pressing matters of high unemployment and economic stagnation.  Joe Scarborough, Ezra Klein and the Washington Post editorial board are among those springing into action on behalf of deficit worry, and against the dangerous movement of calmness and sobriety breaking out all over.  One thing that becomes more apparent as this debate unfolds is that the budget warriors frequently confuse broader public policy challenges that happen to have a budgetary component with narrower problems related to size of the budget deficit itself.  A recent Atlantic piece by Alan Blinder unfortunately contributes to that confusion.

There is no secret about the fact that there are a lot of people who wish to shift many of the responsibilities that are currently borne by the federal government to the private sector.  Others wish either to maintain the federal government’s responsibilities as they are, or else increase the government’s responsibilities.  These are important debates.  What they hang on are questions about whether the private sector or the public sector is more effective in delivering certain kinds of goods and services.

What these debates don’t hang on, or shouldn’t hang on, is the current size of the federal deficit or debt.  How we manage the financing of our federal government’s spending commitments, given the choices we have made about what those commitments ought to be, is separate from questions about whether the government should or should not be taking on those commitments in the first place.  It is true that there might be certain goals that we would like to achieve but that our society just can’t afford to pursue because of limits on our real resources.  But the government is an agent of the society as a whole, so there is no meaningful sense in which the government can’t afford to do something that the society can afford to do.  If there is something that we can achieve as a society and that we have decided is the proper job of government, then we can always financially empower the government to carry out our wishes.

Consider the case of health care.  Many people claim that we are facing a social crisis over the long-term path of our health care expenditures.  But if there is indeed a crisis over our society’s total projected long-run health care obligations, then we need to label it as such.  It’s not a deficit problem, or a public debt problem, and pretending it can be addressed by “fixing the debt” or reducing the government’s deficit is, at best, simply an irresponsible punt.  At worst, it is a dishonest attempt to exploit public fear and confusion over budgetary matters in order to push Americans into accepting a less prosperous and more unequal society in which the wealthy continue to detach themselves from the rest of the country and its shared commitments, and force the less affluent to accept a lower overall level and quality of health care.

Consider this analogy: Suppose there is a dam outside your city that is owned and operated by that city and its government.  The dam is essential for flood prevention, electricity generation and providing the city with its water supply.  But it is in bad repair and crumbling, and every year the city’s emergency dam maintenance expenditures have been going up.   Ultimately, the city will either have to spend a lot of money in a short period of time to repair the dam for good, or else accept mounting annual maintenance costs that over the long run will cost much more than the one-time repair.  Now suppose a city councilman rises to speak, “We have to do something about this dam problem!  We must reduce our long-term dam maintenance budget!”   I think it would be obvious to people that reducing the maintenance budget alone has nothing to do with addressing the problem.  Deciding not to spend money to address a growing problem is not the same thing as fixing that problem.

It is possible that our pseudo-responsible councilman might also recommend selling the dam to a private sector firm, letting that firm provide the city with its electricity, water and flood prevention services, while also carrying out any needed maintenance.   But here again we should note that you also don’t fix the crumbling dam problem simply by selling the dam to a private utility company which will then take on responsibility for those burdens, and tack the dam maintenance costs onto everybody’s water and electricity bill.  The people of the city will pay either way.   Maybe it makes sense to sell the dam; maybe it doesn’t.  But there is no argument to be made for privatizing the dam based just on pointing out that the cost of maintaining the dam will shift from the public’s tax bills, payable to the city, to their water bills payable to a private company.

So it’s just totally dishonest to say about any problem, “We have to reduce the public commitment, because the government will never be able to afford this”, while saying with the same breath that the whole society will be able to afford it.   If the society can afford it, then obviously the government can afford it since the government is just an agent of the society.   The separate debate about public provision vs. private provision is a debate about delivery mechanisms, not about budgets and affordability.

The same moral should be drawn when we shift the discussion from dams to health care.  Suppose under current projections our society will spend $X on health care in 2025, of which $Y is projected to be spent by the federal government, and $(X-Y) by private sector accounts.  Suppose we then reduce our long-term deficit by reducing the 2025 public health care commitment to $Z, where Z is some amount that is less than Y.  So far that that means only that the expected private commitment goes up to $(X-Z), and the private sector is now on the hook for the difference between $Y and $Z.  Either way the society’s total commitment remains $X.

If there is indeed a long run health care spending crisis for our society, there are only two ways of addressing the crisis, and they both require policies that address our society’s total health care expenditures, public and private combined:

a. Reduce the cost of health care delivery over time via efficiencies and productivity increases, so we get the same health care bang for the same amount of real expenditure. 

b.  Reduce the overall amount of health care that is delivered over time per capita, so that the amount actually delivered in 2025 is less than what is currently projected.

Of course, we will probably employ a combination of both strategies.  But whatever we do, we can see that the name of the game is to address the total social cost of health care.   The question of what roles should be played by the public sector and private sector respectively, and what happens to public and private health care budgets as a result, is a separate further question.

The approach I favor, and that has long been favored by many other progressives, is to rely more on the public sector as a purchaser of health care, to leverage the public’s purchasing power in an organized way power to drive down waste and demand efficiency in the health care sector, and thereby reduce the amount of the total expenditure drained off of by extravagant and unnecessary profit-taking and rent-seeking.  We can have more efficient, better quality and more equally distributed health care at a lower overall social cost if we get serious about using the latent monopsony power of the American people as a unified bloc of consumers of health care.

Alan Blinder recently addressed the issue of long term health care spending in a piece in the Atlantic.  But he does so obliquely, and unfortunately his deficit-focused discussion seems to be a classic case of the “councilman’s punt” that I discussed earlier.  Blinder tries to address the issue of the role of health care spending on the federal budget in isolation from the larger question of the total social cost of health care and the best means of providing that health care.  And he bases his case for reduced federal commitment on arbitrary numbers and budget targets with no discernable independent public policy motivation.  The result is a very unconvincing case.

Blinder begins by saying that we have a “truly horrendous” long-term budget problem attributable to health care:

The truly horrendous budget problems come in the 2020s, 2030s, and beyond. But while the long-run budget problem is vastly larger, it is also far simpler, for two reasons. The first is that the projected deficits are so huge that filling most of the hole with higher revenue is simply out of the question. Spending cuts must bear most of the burden. The second is that there is only one overwhelmingly important factor pushing federal spending up and up and up: rising health care costs.

He then adds:

Any serious long-run deficit-reduction plan must concentrate on health care cost containment. Simpson and Bowles knew this, of course. But they didn’t know how to “bend the cost curve” sufficiently. Neither does anyone else. So they just recommended a target–holding the growth rate of health care spending to GDP growth plus 1 percent. In short, Simpson and Bowles, brave as they were, punted on the most critical issue.

But as we have seen, this is a blinkered approach to the health care problem.  If public expenditures are projected to grow as a result of increasing social health care costs, it makes no sense to address this problem simply by reducing the planned public side of the expenditures – as though the government’s obligations stop at the border drawn by its current budget, and as though health care spending outside the federal budget is someone else’s problem.  The government is not just some kind of big human resources department that might decide, due to anticipated revenue decreases, to cut back on the dental benefits it provides its employees, and let the employees pick up the cost of cleanings and fillings themselves.  The government’s role is to consider the public good in a holistic fashion, and decide on the best mechanisms for pursuing that good.   And a national government’s options for commanding and organizing the resources the country has available to meet its social challenges are much less limited than the private company’s options.  The company can’t just decide to lay control to a larger portion of society’s resources, without increasing its sales, in order to provide its employees with expanded dental coverage.  A government has no such sales constraint on its revenues, and its power to claim resources and organize their use for public purpose is far broader.  So the only question then is whether it makes more sense for the public sector or private sector to carry out the kinds of health care expenditures in question.

An obvious response to Blinder here is to say that if the volume of health care expenditures is projected to increase, and it makes sense for the public to carry out those expenditures through such programs as Medicare, or an expanded and progressive single payer system, then the government will simply have to increase its tax revenues.   If the public wants to spend a certain amount on health care, and they want the government to organize the disbursements, then they need to turn over some appropriate amount of revenue to the government.   But Blinder says that addressing the public health care commitment problem can’t come simply from more taxes, or even equal amounts of tax increases and federal budget cuts, but must come from “mostly cuts.”  This position is illogical.   If the private sector can cough up some quantity $X in additional spending to pick up the health care spending slack caused by reduced government commitment to health care, then it can surely come up with $X in additional tax payments to fund an the same amount of spending through the public treasury.   Cutting the federal health care budget is not the same things as cutting the amount our society spends on health care.

So why does Blinder think the only solution is cuts?  He puts forward an arbitrary criterion for thinking about public policy decisions and revenues – an 18.5”% rule.  After considering the possibility that US government revenues might rise to a larger share of GDP, Blinder says this:

There are four takeaways. One: The interest bill–which is the vertical gap between primary spending and total spending–eventually comes to dominate the budget. Two: Historically normal levels of taxation (the bottom line) do not come close to covering even primary spending (the middle line), not to mention interest payments. Three: Primary spending as a share of GDP rises steadily, from 22 percent of GDP now to over 32 percent by the 2080s. Four: The government can cover no more than a small fraction of the projected deficits by raising taxes. Sorry, Democrats, but the Republicans are right on this one. Americans are used to federal taxes running about 18.5 percent of GDP; they will not allow them to rise to 32 percent of GDP. Never mind that a number of European countries do so; we won’t.

This is a rather imperious and groundless statement, issued on behalf of all Americans, about what they will and won’t allow, and might or might not choose to do in the future.  Whether Americans are willing to pay more for a given government service surely depends on what they conclude about the quality of that service, and about whether entrusting it to government saves money for them elsewhere.  I wonder what Americans would think if they were told their tax bill was going up, but all of their out of pocket health and dental care expenses were going to disappear.

Blinder bases his case for the 18.5% rule on the historical record of federal tax revenues as a percentage of GDP:



In fact, federal revenues have exceeded 18.5% a few times.   But that’s not what is really important here.  Here is another historical record, the percentages of the population over the ages of 65 and 85 respectively:



Should we say that since the over-65 population of the US has never been greater than 13%, then Americans “will not allow” that percentage to ever grow higher?  Of course not.  One can’t simply look at a path of percentages over time and declare that the maximum previous numbers are the cap beyond which the public will never permit a large number.  That’s not scientific public policy thinking.  It’s numerology.

There are also some options for public financing of health care that Blinder doesn’t consider.  If revenues as a share of GDP don’t increase, but government spending as a share of GDP – driven by health care – does increase, then on the mainstream picture the difference will have to come from public borrowing, and as a result the interest payments on the public debt will grow.  Depending on the volume of the growth, that might create a long-run sustainability problem, as Blinder notes.  But for monetarily sovereign governments like the United States, the option always exists of spending in excess of the total amount borrowed or collected in taxes.  In other words, the government can engage in functional finance.  While MMTers have long endorsed functional finance and have studied its ramifications, an increasing number of mainstream figures are beginning to engage with the functional finance option, including Adair Turner and Martin Wolf.

But both mainstreamers and MMTers recognize that if there are substantial increases in the size of the federal budget as a share of GDP over time, then taxes will likely have to go up to cover at least part of that increase.  Taxes are a tool for shifting resources from private control to public control.  The conventional picture is that the money that is taxed comes from some mysterious private sector source, and must first be captured from the private sector by the government so that it can then used to purchase goods and services.   The MMT view is that the government provides the money to the private sector in the first instance and then taxes it back to give the currency value and sustain the demand for the currency.   At full economic capacity, the government also increases taxes so that it can increase its own contribution to the aggregate demand for goods and services without enabling dangerously inflationary private sector competition for those goods and services beyond what the society is capable of producing.  Either way, taxes are part of the process by which the government provisions itself with resources and procures services from the private sector.   So if there is an increased public responsibility for the provision of some kind of good, there will generally be at least somewhat more taxation.

Where Blinder goes wrong is in declaring an arbitrary cap of federal revenues as a share of GDP somewhere in the vicinity of 18.5%.   This idea that there is a permanent limit on the size of government baked into the budgetary DNA of the American republic is without warrant.  Progressives should continue to press forward aggressively with calls to boost the public responsibility for health care without worrying that they will exceed Alan Blinder’s budgetary speed limit.


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43 responses to “Blinder Leading the Blind

  1. I’m still trying to understand why it would be a bad thing to privatize ‘the dam’? Government regulates a the private sector manages, why is that an issue?

    • The point is that that subsidizing the return on investment expected in a corporate setting are well above what the likely costs would be to operate this bit of social infrastructure on a public basis. In all likelihood the government would nonetheless have to subsidize the privatization as it has for the so called nuclear industry and as it has in effect had to backstop corrupt bankers with the FDIC. The US post Office is another example where the fictions of the un-affordability of the US Postal Service, by rigged fiscal priorities imposed by corrupted public political leadership. It seems that you are in deep water and don’t even understand the basics of money, fiscal priorities, or even what amounts to functional economics. I sure that others will chime in with similar suggestions.

    • I’m still trying to understand Kervicks’s cred in this domain. A Graeber he is not.

    • I’m not saying it would necessarily be a bad thing to privatize the dam. Maybe it would be, and maybe it wouldn’t be. I’m just saying that it’s a mistake to think that if we privatize the dam then we no longer have to pay to maintain it. Yes we do. We just pay a private company to maintain it instead of paying the government to maintain it.

      The public choice here is this: Do we wanted to spend the money doing it ourselves, or pay some private company to do it for us? Privatizing and moving the expenditure off the government books doesn’t save the public money in the aggregate; it just changes which enterprise the public pays to deliver the service – a public enterprise or a private one.

      So if there is a case to be made for privatizing the dam, it can’t just be that privatizing saves the taxpayer money in funding the city government’s budget. The taxpayer doesn’t save money if the reduction in the tax bill is offset by what they now have to pay a private company to do the same job. If there is an argument for privatization, the argument has to be that – for some reason – the private firm will do a better job, or will do the job at lower cost even though the private firm is taking some of its customers’ money for profits, rather than putting it all into the dam.

      • Another factor to consider is that not everyone will pay the same costs or receive the same benefits if the dam is privatized. Those individuals or companies who use little water, produce their own electricity (have solar panels), or live on higher ground might favor privatization, while opposite counterparts might see increased costs and favor public ownership.

        • Yes, and depending on the level of regulation, the utility company might also come up with a bunch of clever pricing packages with different levels of service. Basic service might get you 4 hours of electricity a day; platinum service gets you 24 hour electricity. The highest price level also gets you 10-minute to the door emergency repair service and on-demand light bulb replacement, while with the lower levels you get put on a waiting list for service and you buy your own light bulbs. No matter what, we know that a certain percentage of your fees are being used to pay the company’s stockholders for doing nothing.

      • If you privatize the dam the private owner will then demand profit from their investment, a cost that is absent if the dam is owned by the municipality or local government. That IMHO is the missing item in almost every privatization discussion I read these days. Last time I looked there’s a 1.5 percent to 2 percent overhead in Medicare which beats the overhead costs of 11% or more for private health insurance.

    • “Government regulates”!!!!!

      In what alternative universe does the American gov’t, owned by the klepto-plutocracy, actually regulate on behalf of the people???

      What a truly specious, disingenuous statement.

  2. While I agree, Lord Adair Turner’s speech was a 49 page mass of double back flips and searching for supporting material from a variety of neo-classical sources. While the targeted audience also had the same general profile, I’m not sure that they also have the attention span or analytic capacity to admit their own cognitive dissonance for the fear and loathing of retaining their courtier status to the economic royalty. Andrew Sheng also made a recent contribution to the discourse favoring economic and fiscal functionality that was a mere 15 minutes short.

    Your example of the power plant bears a reasonable similarity to Dennis Kucinich’s effort to save the public ownership of Cleveland Municipal Light. One of topics not covered in the typical recitation of the history of the New Deal was the pathetic condition of US infra-structure, in particular rural roads and bridges by which agricultural produce could be moved from farm to market, and much, much more. It is one major factor in the increased capacity of our economy, after the New Deal. And then there was the benign consequence of the development of factories to produce armaments and munitions,via bastard Keynesianism, particularly as they were re-tooled after WWII to serve domestic related production.

    Just as a piece of perspective, the first House Un-American Activities committee was formed in 1938. This was also a furtherance of the nominal conservative and courtier political economics dating even further back into US political economic history including the American Liberty League as one whistle stop along the way. Prior to that the other depressions of the 19th century, that were not really addressed at all in their time. My point is that this not just an economic puzzle to be solved and accepted by the polity at large and small. It is also a cultural problem that will require more than positivistic thinking. This is well beyond the economic bindings and blinders. The plutocrats are very convinced of their special special entitlements, after all it defines their presumption of their own definition of liberty, and will not hesitate to promote the fabrication of drones in the Dayton area as a solution to the local economic depression, which is exactly what is now in motion. This also a discussion and a fiscal priority that the MMT/FF community need to confront and challenge. Thanks for the essay.

    • I agree it is a massive cultural problem to change these ideological mindsets. But we can start by just calling out some of the Three Card Monty games the budget hawks play with the public.

      We can contrast the case of health care with a different case: a small town deciding whether to install sidewalks. If the town decides not to build the previously budgeted sidewalks and to reduce its budgeted spending by that amount, then the sidewalks aren’t going to be built by private citizens or a private company. They just won’t be built at all. So the town’s decision not to spend the money amounts to a decision by the townspeople just to do without sidewalks. If the mayor says, “We have to cut the sidewalk budget because we just can’t afford them”, there is nothing misleading about that.

      That’s not what happens though when health care spending is cut. In that case, the health care still gets produced and purchased, but the people pay for it in a different way. So the official who says “We need to cut the health care budget because we just can’t afford it” is saying something misleading. He just means he doesn’t want people to purchase their healthcare via the government, but wants them to buy it some other way. That’s not saving the public the costs; it’s just shifting the costs to different payment mechanisms.

      • Much of the health care spending, if shifted to the private sector, will be spent anyways. However, some portion of it will not. One might call this the “Let them die” portion of privatized health care non-spending. This often elicits shrugs when talking about “someone else”, but elicits high excitement when talking about oneself.

        • Yes. You still get the death panels – but death panels Hayek style. Death panel by invisible hand. No wonder the elite is so attached to the councilman’s punt.

  3. This article is clarification for me that this is not solely an MMT blog site. The macroeconomic framework explanations of how our monetary system works vary. It isn’t clear to me how revenue or borrowing pays for U.S. government spending. I am interested in hearing more about that.


    • In my second to last paragraph, I tried to summarize my understanding of the MMT view of the role of taxation. MMTers agree that if a government doesn’t make full use of its capacity to engage in functional finance, then the public will be overtaxed. But it doesn’t claim that public spending can rise indefinitely without any increases in taxes.

      • Perhaps I don’t get what MMT really is then.

        To me, MMT should be about the government having the ability (it clearly has the right under the constitution and under Supreme Court case law in the legal tender cases a/k/a the greenback cases) to create its own money out of thin air. The very fact that we discuss things like budgets, and deficits, and debt, and the need for government income via taxation, are a priori evidence that it is not the government creating money out of thin air; it some one else who gets to create money out of thin air and someone other than the government is doing it..

        If I could create money out of thin air, I would care less about having a budget, and I would have no debt, and I would have no need for a source of income. The government, if it was actually creating money out of thin air, would have no need for a source of income either, and it would not need to tax as a source of income. It might need to tax to take excess currency out of the system, or to achieve some reasonable level of economic parity between citizens, but it would not need to tax as a source of income.

        In Kervick’s anlogy of the dam, if the dam was a federally owned dam, the federal government, if it had the ability to create money out of thin air, would simply create the money out of thin air and pay to build and maintain the dam without a need to borrow the money or tax the people to pay for the construction and maintenance.

        If on the other hand, the dam was built by a state or local municipality, neither of which have the right under the Constitution to create money out of thin air, these governmental entities would need to borrow and/or tax to construct and maintain the dam.

        If MMT is not advocating that the government reacquire its right to create money out of thin air, I guess I am on the wrong blog. Anything less is just hacking around at the same old system that has clearly not worked for the vast majority of society for the last few centuries.

        • David, the government has the ability to create money out of thin air, and doesn’t need to get it from elsewhere. In one way or another, it can create unlimited quantities of the stuff. But that in itself doesn’t tell us much about how to handle the public policy challenges.

          Consider this possibility: The government decides that every person over 65 will henceforth be entitled to $10 million in annual income. It can always meet this nominal obligation just by creating the money. Should it do this? Presumably everyone under 65 will scream bloody murder, since they are working every day and not getting $10 million in free cash annually.

          OK, so suppose the government decides everyone should get $10 million a year in non-strings government cash. It can meet this obligation too. ($3 quintillion in total if my math is right.) What will be the result? With $10 million in cash I could currently buy a lot of awesome things – big houses and cars, a pool, frequent vacations abroad. If the government created $10 million dollars for each citizen annually, and sent it out to them in weekly installments, what do you think would be the result? Would we all be rich? Would massive quantities of houses, cars and vacations just appear to satisfy the same level of demand that is represented by $10 million in current dollars?

          Ultimately, we procure goods and services through the investment of other goods and services. Money is a tool for organizing all this business, and for distributing the output. If we change the monetary system in various ways, we can produce more and distribute the results more fairly. But our ability to produce and distribute goods and services is limited by the real resources we possess. The fact that we have more or less unlimited capacity to produce money doesn’t mean we have an unlimited capacity to produce real wealth.

          • You are absolutely right that just because it can, that does not mean it should.

            But shouldn’t these decisions be up to Congress? It should not be you or me making these decisions nor should these decisions be made by banks or by economists. If the people are stupid and elect officials to give them $10 million a piece, won’t they quickly learn the hard way that doesn’t work and try something different?

            I am not always happy with the decisions of Congress. In fact, I usually am not happy with their decisions. But if we are going to have a democracy/republic, that is the price we pay. I can live with Congress making these decisions far better than I can live with the decisions being made in secret by a banking cartel, which has demonstrated for several centuries now, it acts strictly in own interest.

            • The banking cartel acting in its own interest is not the entire problem either. The power and ability and usage of the power to create money should not be concentrated in the hands of a few powerful elite. These people have had this power for many generations now and have used it for their own ends. Nothing has the ability to corrupt like money. When these elites want war, the get it. When they want assassinations, they get them. When they want poverty in a certain populace they get it.

              We really need the checks and balances of putting this power in the hands of all the people, not of having this power in the hands of a few. This is what most of our founding fathers wanted. A few like Hamilton, did not. But Hamilton had the banks behind him and his faction ultimately won out. A small lesson in its own right, about the power of money to corrupt.


      You probably want to read through the primer and Mosler’s free e-book. Some parts of Mosler’s first (or second?) chapter delve into public policy, but most of the book it focused on monetary operations, which makes it an interesting short read.

  4. RayW,

    I sympathize with your desire to have MMT explanations be the main point of these blogs. As an old philosophy prof and newcomer to the MMT subject, I too have seen a wide variety of tones, approaches, and political views here. Kervick, Kelton, Black, Wray, Hoexter and Firestone e.g. have ‘viewpoints’ that differ greatly. Most of them are ‘progressives’ politically, it seems to me. Why that is so would be an interesting discussion. Personally I am turned off by the more ‘angry’ blogs, e.g. what I have sometimes seen in Firestone; but one needs to chose, I suppose.

    But I recommend Michael Hoexter’s NEP current blog showing that ‘Via Government fiscal and oversight policies, ethical values are expressed in money values.’ It speaks to your point, I think. Kervick above and elsewhere certainly makes clear the difference between political disagreements, and macroeconomic theories. Personally, I think economics – especially macroeconomics – is ultimately ethics anyway; i.e. its interest is to define the “public good,” and if possible show how to bring about the best society.

    • Yup. Hoexter’s blog is excellent. The old name for “Macroeconomics” was “The Theory of Money”. And since money is nothing but credit/debt, a moral concept, a monetary system is nothing but a system of morality or ethics. State money, public debt is nothing but a statement of how the holder has advanced the public purposes of the state, an award of patriotic brownie points. Bank money, any sort of private debt is the same, for private purposes.

      I think it is better to say that the interest of macroeconomics is to describe how the monetary system operates. Once this is done, the actual public goals that it embodies are made more obvious. Imho, they often aren’t too pretty.

  5. Excellent article. I thought it was crystal clear and was surprised that the author had to repeat some of the points here in the comments. Whatever it takes, I guess…

  6. Pingback: Austerity, MBTA, Blinder | Dollars & Sense Blog

  7. Pingback: Blinder Leading the Blind | Fifth Estate

  8. Change the name ‘public debt’ to ‘public equity’ and suddenly everything will look a bit different.

  9. Pingback: Budget Wars Roundup « Multiplier Effect

  10. “There is no secret about the fact that there are a lot of people who wish to shift many of the responsibilities that are currently borne by the federal government to the private sector. ”

    The private sector has little responsibility to the public at large. Its function is to provide profits for shareholders and pay employees the minimum they can get away with. If it provides services that are deemed to be in the public interest, that is quite incidental.

    • That is primarily the result of a corporate system where entities incorporate for the primary purpose of having “limited liability.” Limited liability is just a euphemism for privatizing profits and socializing losses.

      So when you privatize a dam, look for the corporation to pass any losses or societal harm that it can get away with, on to the society as a whole. If there is a dam collapse, it will not be the corporation that picks up the tab, at least not the entire loss to society. The officers and directors duties to their shareholders are to pick up as small a tab as they can get away with.

      We really need to get back to a concept of corporations having a societal purpose as well as a profitable purpose as was the case when corporate charters were first given in this country. In the early days of the country, corporate charters were usually only given for 20 years and then it took an act of the incorporating state legislature to extend the charter. If the corporation failed in its societal purpose, the legislature of the incorporating state revoked its charter.

  11. Social benefits and private benefits often overlap as do social costs and private costs. Our congressman wants all levee improvements to be paid by the landowner who is being protected as a benefit tax. Overall the city of Sacramento benefits even thought all property is not subject to flooding. Many suffer from flooding not just the property owner. You could extend the social benefits to the public at large as rescue costs would less because of no flood. At the same time he is pushing for a dam to be financed by the nation’s taxpayers who may or may not benefit from a dam on the American river in Auburn. Whether we have levee improvements or the Auburn dam is a decision not to be made on who pays but on the probability of a once in a lifetime calamity. Floods do occur and damages are horrendous and we all pay some more than others. Taxes, I think, kind of even it out.

  12. Government holds a monopoly on its currency and tax liabilities can be extinguished only with the government currency which is one way to build demand for the currency -the other being services provided by government that also require payment in the government currency. Is this ‘monopoly’ a source of instability within the structure? Does MMT address the diversity vs. efficiency nature of systems? The most efficient fighter plane design is also the most unstable.

    • Fighter planes are now obsolete now that we have remotely controlled drones that can fire missiles.

    • I think the more important question is: “Who should have this monopoly?” A monopoly is necessary. If there is no monopoly, then all of us ought to be able to create money out of thin air. If the monopoly is private, then only a select few, get this awesome power. So the monopoly should be in the hands of the government (we the people) where we all have some theoretical say about its use with a vote (providing elections are legitimate which there is a better chance they will be than if the monopoly power is in the hands of a few select private individuals).

      Democracies are not known for their efficiency. The idea of a democracy is to make power as diverse as practical.

      If a government monopoly creates instability, then I still think this instability is preferable to allowing the creation of money being private or even partly private. Should our judiciary be private or partly private even if it might be more efficient or stable?

      • It’s hard to see how the economy can be more destabilized than it is now with continual swings between booms and busts caused by the private creation of money.

        • I’m not much of a fan of Ron Paul, but I do see where he recently made the prescient comment that it was no coincidence that the century of perpetual war was also the century of the central bank.

          Its amazing the harm those engineered busts can create.

          • “If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered…I believe that banking institutions are more dangerous to our liberties than standing armies… The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

            Thomas Jefferson

          • Actually Ron Paul’s comment was not prescient except when you consider the fact that he is a Republican. For a Republican it was prescient. Jefferson’s was prescient however.

      • You make some excellent points about a government monopoly on money creation. Monopoly money 😉

        What the largest entitlement program is: the “right” to create money, not social security or medicare.

        To make it workable, we could have some rules as to how much money should be put into circulation. For example, it could be a fraction of the prior year’s GDP or connected to a specific (but accurate) rate of unemployment.

        This assumes that full employment will be an accurate measure of human development, now that robots and computers do a lot of the grunt work performed by earlier generations. Shall we have a Brave New World according to Huxley or Orwell’s 1984 ? If I had to choose, it would be Huxley.

  13. I simply don’t understand why anyone would pay any attention to Blinder, part of that Chicago boys “shock and awe” team in the former Soviet Union that radically screwed things up, most purposely, and he’s the clown who promotes jobs offshoring, than warns about increasing jobs offshoring — who could take someone like that even remotely seriously?

    • American manufacturing businesses set up factories in China to take advantage of the cheap labor and also to avoid paying US taxes by routing the imports via a tax haven company thus keeping the profits offshore.

    • Nassim Nicholas Taleb criticized Alan Binder in his book “Antifragility” for trying to sell him an investment product at Davos in 2008 which would allow an investor to circumvent the regulations limiting deposit insurance and benefit from coverage for near unlimited amounts. Taleb commented that the scheme “would allow the super-rich to scam taxpayers by getting free government-sponsored insurance.” He felt this was an abuse of his position as a regulator. Binder argued against an increase in deposit insurance in an op-ed in the Wall Street Journal. In the article, he did not disclose that he was associated with efforts to circumvent this limit on behalf of high-value clients.

  14. Nicely done.