A Plague on All Your Budgets

By Joe Firestone

The Sector Financial Balances Model:

Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0

is an accounting identity that provides a focus for macroeconomic analysis, explanation, and prediction by economists applying the Modern Money Theory (MMT) approach. It leads to a very critical line of thinking about the budget deficit projections produced for our consumption by the Congressional Progressive Caucus (CPC), Congressional Budget Office (CBO), the House, and the Senate. The US has recently had a sharp decline in its balance of trade deficit. It now stands at about 3% of GDP; which means that the rest of the world has a surplus, a balance of +3% of US GDP in its annual trade with the United States. 

Assuming that surplus is unlikely to shrink anymore, we can see from the equation that unless the Government balance is less than -3% of GDP, the Domestic Private Balance in the United States economy will not be positive (a surplus, and addition to nominal financial wealth) and is very likely to be negative (a deficit, a subtraction from nominal financial wealth). So, the private sector taken as a whole will be losing rather than gaining Net Financial Assets (NFAs), every year for as long as the situation lasts. 

The Table below presents the CPC, CBO, House and Senate budget projections through 2023.

2013 Budget Projection Comparison
The table shows that any space for the Domestic Private Sector to accumulate Net Financial Assets would quickly disappear if any of these deficit projection plans were actually adopted and worked as advertised. The CPC projections are OK for 2013 and 2014. They provide some space for continuing repair of private sector, including household, balance sheets after the crash of 2008. But by 2015, the space for savings in the private sector would be nearly gone, and from 2016 – 2023, we see nothing but deficits small enough that the domestic government balance doesn’t even cover the aggregate demand leakage due to the foreign sector balance, much less any demand leakage that the private sector desires in the form of savings. Sooner or later a budget course like that projected by the CPC would, in the absence of the banking system blowing a big credit bubble the way it did during the Clinton and Bush 43 Administrations, result in a new crash. 

The CBO projections are worse than CPC’s from 2013 – 2015; but thereafter, its larger deficits are less damaging to aggregate demand than the CPC’s deficits. But they are not large enough to provide for anything but economic stagnation, unless, again, there’s a credit bubble, which would then mean a crash from mere stagnation somewhere down the line.

Of course, the most austerity-filled plan of the four is Paul Ryan’s House Budget which begins its projections in 2014 with a deficit slightly above 3.0%, and then quickly arrives at minimal deficits ending in a balanced budget projection for 2023. If these projections were enforced through an activist Government policy, and the trade balance did not move towards a US trade surplus, then we would have declines of private sector NFAs ranging from 2.3% to 3.0% of GDP every year from 2015 through 2023. There’s no way that course would persist until 2023. But if it did, then nominal financial wealth in the private sector would decline by about 28% of nominal GDP over that period.

I can’t predict when this continuous decline in private sector NFAs would result in another financial crash and great recession/depression, because the banking system can blow new credit bubbles sustaining “paper” growth for some years if it wants to. But eventually, without increasing private sector NFAs to sustain such a bubble, a new crash would surely occur. My guess would be that if anything like the Ryan Budget were passed, then the next crash would come within a five year time frame.

The last of the four budgets whose deficit projections are included in the table is Patty Murray’s Senate Budget. It’s very similar to the CBO projections for 2013 – 2015, providing little space for private savings. From 2016 – 2023, this budget projection provides less space for private sector savings than CBO’s projection, which itself is far from expansionary, but more than both the CPC budget, and Paul Ryan’s House budget during those years.

So, the bottom line here is that all four of these budget projections, if implemented could only correspond to a bleak, stagnating economic future for the United States, with the House Budget producing the worst result by far. I’m sure this analysis would be strongly objected to by the authors of all four budgets. But of the four, the most credible claims against what I’ve written would probably come from CPC neo-keynesian budget proponents.

They’d claim that the back-to-work 1.4 T and 1.2 T of deficit  spending their budget plan envisions for 2013 and 2014, would bring the economy back to much lower unemployment levels, so that by 2015, increasing tax revenues would support reductions in deficit spending projected for later years without austerity. In making a claim like this, however, the CPC would only be exhibiting its own lack of understanding of the Sector Financial Balances model, and the constraints on the economy it implies.

Let’s grant that the back-to-work budget works to create enough new jobs by the end of 2014 to bring the U-3 unemployment rate down to 5%, so that tax revenues have made a big comeback by 2015. Then the SFB model still applies, so that if the deficit goes down to 3.3% as projected for 2015, and given the foreign balance of 3%, then there will be only a fraction of a percent in overall addition to private sector nominal financial wealth, which taking even a low rate of inflation into account, would actually represent a decline in inflation-adjusted nominal financial wealth.

There might well be less than that if increasing demand in 2013 and 2014 leads to a growth in the foreign balance to 4% in 2014 – 2015. If that happens, then private sector savings would be underwater by 2015, and way underwater if the CPC budget course were somehow maintained into later years. Again, we could expect domestic private sector savings losses from 2016 on, and even perhaps in 2015. We could not have too many years of those without hitting another great recession. So, the CPC budget may be better than the others for a couple of years, but the danger in it is that the CPC will take it seriously and, assuming its success in the first two years, would then push forward on the budget course projected, deterred eventually only by the inevitable crash, which hopefully would occur in very short order, rather than being postponed by another credit bubble, only to be even more severe later on.

Moving to all four budgets, I want to emphasize that apart from the above macroeconomic considerations and their significance for declining domestic private sector wealth over time, the situation looks even worse when we take economic and political power considerations and their likely effect on the economy into account. The history of the US since 1970 shows clearly that when the private sector gets a cold, the household sector gets pneumonia.

Big businesses, the financial sector, and wealthy oligarchs will use their economic and political power to see to it that their nominal financial wealth will continue to increase even as the private sector as a whole is losing 20% – 30% of its financial wealth. Over the period of a decade, that will exacerbate the already ridiculous level of inequality we see in American society, and accelerate the movement toward plutocracy in America if we allow any of these austerity plans, or any variations between the CPC proposal and the House proposal to be passed and implemented.

So, where are we with these budgets? I think they’re all illustrations in fiscal fantasy, or perhaps I should say, in fiscal science fiction using bad fiscal science. In taking a fiscal approach based on reducing budget deficits, all the budgets are doing the wrong thing for the economy and the wrong thing for America. The right approach to take to fiscal policy is to design and implement programs that will guarantee full employment at a living wage for everyone who wants to work full time and is able to do so.

If the government does that, then it will let the domestic private sector determine what both the foreign balance and the domestic private sector balance should be. Then these sector balances would drive the government balance. That balance could be a surplus or a deficit of a particular size, though in the case of the United States it would probably be a large deficit, or, as I prefer to call it, a large Government addition, to domestic private sector wealth, for some years to come. But it would be determined by the wishes of those in the domestic private sector, with the Government’s role being one of accommodating the surpluses or deficits. 

Seeing this conclusion, I’m sure that some of my readers will ask: how can the United States afford to run deficit after deficit while continuing to accumulate its national debt? Well, first, it doesn’t have to accumulate and can even pay off its national debt without inflation. I’ve explained how it can do that in my new e-book on Fixing the Debt without Breaking America. But second, even if the US does the politically unwise thing of continuing to accumulate a larger and larger national debt, it can do that without either solvency or inflation problems. Scott Fullwiler has done a very good job of explaining how that can happen in a recent series of his, which concludes here. 

So, it turns out that deficits can be run indefinitely by nations with non-convertible, fiat currencies, with floating exchange rates, and no external debts in currencies not their own, without either solvency or inflation problems as long as the Government doesn’t deficit spend beyond full employment. That’s the kind of fiscal policy we should be making, not fiscal policy deliberately aimed at deficit reduction. So, to all the fiscal budgeteers in Washington looking to implement long-term plans for deficit reduction: a plague on all your budgets. You’re ending America, as we’ve known it!

 

47 Responses to A Plague on All Your Budgets

  1. sunflowerbio

    Thanks again Joe for leaping into the breach. I just wish there were some way to get some Congressional traction on this issue, but it just looks like a race to the bottom, with Paul Ryan leading by several lengths. Wie schada.

  2. If I may add another implication on the international front, many developed nations such as the Arab nations peg to the dollar and allow free capital flow at the same time which means importation of US monetary policy. We have all seen what happens as inequality widens in these Arab nations from the birth of Al Qaeda in Saudi Arabia, 9/11 and Arab Spring which all had a massive impact on the world. Like it or not the US leads and many follow to the point that some nations such as Saudi Arabia simple copy and paste much of how the Fed operates.

  3. And the Chinese announced in the last month that they are going to boost, not reduce, their deficits by 50% to jumpstart their economy. Guess who’s going to win? Not Simpson and Bowles. Not us.

    China plans to raise its budget deficit by 50 percent this year as the central government cuts taxes and boosts measures to support consumer demand in the world’s second-biggest economy.
    […]
    The larger fiscal deficit indicates China’s incoming leaders may step up efforts to support expansion and address income inequality, with growth forecast to fall below the annual average of 10.5 percent the country reported under President Hu Jintao and Premier Wen Jiabao. Officials have pledged to make expansion more sustainable, emphasizing quality over speed and Wen said today he’s targeting 7.5 percent economic growth this year.

    “The higher fiscal gap and improved consumption will be positive for the economy,” Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong, said before the report. Boosting spending on the social safety net and education subsidies would reduce inequality and “help reverse the rising trend in the savings rate,” he said.

    http://www.businessweek.com/news/2013-03-04/china-plans-higher-budget-deficit-in-2013-to-support-demand

    • It just shows that China’s leaders will not tolerate high unemployment, too bad we don’t have the same fear. This is only good news for us. Eventually the Chinese may buy more from us, which will help employment.

  4. Auburn Parks

    Great post Joe
    As depressing as it is to see how hopelessly ignorant our elected leaders our, I do have one potentially positive note to to hit for the class.
    I don’t know how widespread the use of the sectoral balances was prior to the Great Recession, but if you google “sectoral balances accounting” now….40 million results pop up from dozens and dozens of sources in just the first few pages. So what does this mean?
    Well, when we do have another recession, people will look to see who predicted it right and how they did it….leading to even more people using this approach and getting it right….eventually, hopefully, we’ll hit a critical mass of people who understand leading at long last to rational fiscal management. And throughout this whole process, more and more people will wonder where this whole thing came from anyway….why MMT, thats a nice little approach you have there (thank you Godley) what else are you guys right about……everything : ).

    So you see, its all rainbows and sunshine from my POV…..It’s my hopeful delusion and I’m sticking to it!

    • Nobody (except the ones who predicted them) looked to see who predicted the last two recessions. Unless MMT gets some more traction on mainstream media (and I’m not talking about openly Progressive cable channels like CNBC here), nobody is going to notice next time either. The non-MMT crowd owns the mainstream outlets. They will decide who predicted and who to ignore. “Nobody could have predicted this” will be their delusion. Again.

      • Auburn Parks

        (GJ) “Nobody (except the ones who predicted them) looked to see who predicted the last two recessions.”
        If this is just run of the mill hyperbole….then I’m not going to argue about that. If you mean this literally….then I am sorry but you’re just flat out wrong.

        Results matter. No one can credibly make the case that ideas and their acceptance are static. Conventional wisdom has been overturned countless times throughout history and will continue to do so forever. Systems evolve….change is unstoppable. Everything depends on time scale. I can very well understand the cynical view and in a short enough time frame the cynical POV is going to be right far more often than the hopeful. But one thing we can know for certain……the misunderstood gold standard view of the world is not permanent and whether its overturned in 1 year or 50, its only a matter of time.

        On a side note: CNBC is not a progressive station at all…Its views on the economy are as center right as possible.

        I

        • Well, I don’t get cable anymore and didn’t watch CNBC much when I did, but the few clips of MMT people on TV seem to be all from CNBC or Huffington Post. Up with iforgethisname (Chris Hayes?), where Stephanie appears, for instance, comes right out and bills itself as a Progressive show. I’ve seen other clips here, that I can’t recall at the moment. Maybe something that Bill Black was on? If there are talk shows on CNBC with hosts and guests like Paul Ryan or Rand Paul, I’ve never seen them. Those types are on NBC, ABC, and Fox, along with Krugman and Reich. And Stephanie and Bill are not.

          If you’re talking 50 years or more, then OK there is a chance. Maybe after the next generation of Nobel economists takes power, and some of them were trained at UMKC. Not the next recession though, and probably not the one after that.

          Even now, look how we’re stumbling through. Eventually unemployment will be back around 5-6%, and they’ll say their policies worked. And who has a big enough megaphone to contradict them? Not Chris Hayes, or whoever he is.

          As for the last two recessions, who (other than MMTers themselves) is saying “Hey, those MMT guys TOLD US this would happen. Let’s get them on board and see if they can fix it”. Nobody I’ve heard. I would love to be wrong about that. I haven’t heard that on NBC, or ABC, or CBS, or the NY Times, or the Washington Post, never mind the center-right press like WSJ and Fox news. The only things I hear about on the MSM are debates about how much austerity to impose, and when.

          I’m sorry to be so gloomy. I can be optimistic when I see something to be optimistic about.

          • Auburn Parks

            Hey….no worries about the gloom John….I am probably gloomy more often than not….but somebody has to write about the other side.

            Everything you’ve said about CNBC is true……its just that you’ve mixed up the letters……its MSNBC that is the left of center channel and yes, Chris Hayes was the show that had Stephanie on.

            Believe me I wish that the whole world would accept MMT faster, but it has spread pretty far and fast for a completely new and revolutionary heterodox take on the economy…..Just ask the actually founders of MMT and they’ll tell you how quickly its spreading now compared to 10 years ago. But yes its taking far too long and countless millions of people are suffering in the meantime.

            • I knew it was one of them NBCs

              • 1) Comcast owns NBC, Telemundo, E Entertainment, Versus, 14 TV stations, Universal Pictures, and Hulu.

                2) Disney owns 10 TV stations, 277 radio stations, ABC, ESPN, A&E, the History Channel, Lifetime, Discover magazine, Bassmaster magazine, Hyperion
                publishing, Touchstone Pictures, Pixar Animation, and Miramax Film Corp
                .
                3) Viacom owns 10 TV stations, The Movie Channel, Comedy Central, BET, Nickelodeon, TV Land, MTV, VH1, and Paramount Pictures.

                4) CBS owns 30 TV stations, Smithsonian Channel, Showtime, The Movie Channel and Paramount Network Television.

                5) News Corp. owns 27 TV stations, the Fox Network and Fox News Channel, FX, National Geographic Channel, The Wall Street Journal, TV Guide, the New York
                Post, DirecTV, HarperCollins publishing, Twentieth Century Fox and MySpace.

                6) Time Warner owns HBO, CNN, the Cartoon Network, Warner Brothers Time magazine, Turner Broadcasting and DC Comics.

            • Also…..MSNBC is only “left of center” to the extent of its prime time/weekend liberal lineup (Chris Hayes, Rachel Maddow, Lawrence O’Donnell, Ed Schultz, Melissa Harris-Perry, Al Sharpton). They still have Joe Scarborough and Chuck Todd of Roll Call to fly the conservative flag in the morning. When Stephanie Kelton is actually hosting an MSNBC show or gets to be on a regular weekly panel, then we can talk about them being more “left of center”.

  5. @Auburn Parks: As depressing as it is to see how hopelessly ignorant our elected leaders our …

    Are we still seriously saying that there is some sort of mass delusion among our elites that explains the rush to austerity? Is it really even plausible to suppose that the simple arithmetic of sectoral balance accounting is beyond the cognitive capacities of our leaders? Does the “austerity as ignorance” position really stand up to common sense – not to mention Occam’s razor?

    The answer is right here, in the post:

    Big businesses, the financial sector, and wealthy oligarchs will use their economic and political power to see to it that their nominal financial wealth will continue to increase even as the private sector as a whole is losing 20% – 30% of its financial wealth. Over the period of a decade, that will exacerbate the already ridiculous level of inequality we see in American society, and accelerate the movement toward plutocracy in America if we allow any of these austerity plans, or any variations between the CPC proposal and the House proposal to be passed and implemented.

    Get it? The demolition of any hope of prosperity for the 99%, and (more significantly) the demolition of popular self-government, is not an unfortunate side-effect of misguided thinking. Rather, it is the point of the entire operation. It is why Obama is our president, and why he is what he is and why he does what he does. Petitions for relief addressed to the Czar, or to the little Czars in Congress, are futile – not because they are “ignorant,” but rather because they know exactly what they’re doing, and who they’re doing it for.

    A plutocratic class of vampires has seized control of the state. Our task is not to relieve them and their toadies (aka “our leaders”) of their benighted ignorance, but rather to combat them. The first step is to recognize, as the MMT propagandists have, that austerity is immensely destructive – economically, politically, culturally, and morally. The next step, which the MMT propagandists have been hesitant to take, is to recognize the coup for what it is – no accident, but a purposeful effort to destroy our prosperity and our capacity to govern ourselves.

    • Auburn Parks

      I would absolutely say that mass delusions are not only likely, but they are the norm for humans. They are rather frequent actually. Of course the most obvious mass delusion belongs to religions. Believing in an unverifiable god is one thing, believing in the literal mythology of any single one of the thousands of religions that have come and gone throughout history or one of the hundreds practiced currently…..is a delusion. Economics are almost a religion in and of themselves and Money…….now, thats a god worth worshiping.

      Elected leaders must operate within some sort of context commensurate with their constituents. Yes, the elite are trying to control the system……when have they ever not tried to btw? Its undeniable that the evolutionary arc bends towards more representation and small d democracy.

      On a more practical level…look at how quickly and dramatically the tea party took over the GOP and turned them into crazy right wingers. Real demonstrable change is possible in a relatively short period of time. Maybe the next time will have a tea party for good and not for ignorance.

      • — “look at how quickly and dramatically the tea party took over the GOP and turned them into crazy right wingers. Real demonstrable change is possible in a relatively short period of time. Maybe the next time will have a tea party for good and not for ignorance.” —
        Excellent point and that assessment needs to be considered. What should be pointed out in conjunction is that behind the tea party stood the likes of the Koch Brothers-see this article about that.
        http://www.huffingtonpost.com/brendan-demelle/study-confirms-tea-party-_b_2663125.html
        I seem to remember numbers in the $67,042,064 dollar range along for spending on the dissemination of global warming disinformation,. I’d have to research that one to get exact numbers . (see this article http://www.greenpeace.org/usa/en/campaigns/global-warming-and-energy/polluterwatch/koch-industries/) Peter Peterson has come up with similar amounts of cash-often used to fund ‘research’ by paying scientists to sign off on fake so called studies about the harm done by government deficits. The point is that on the other side of the political fence, if there is even another side here (perhaps some inkling of the other side includes the likes of Dennis Kucinich) the funding is a small fraction of those numbers.

        Not that funding is everything but when the money buys a voice and that voice is in a well placed position the overall effect is to supply the general public with enough bad information that they will inevitably choose the source of bad information -a corollary of Gresham’s law -“bad money drives out good money” -in this case the money is information and it seems to apply to about any topic one would care to delve into.

        • Auburn Parks

          I wholeheartedly agree that rich people especially and money in general plays an extremely deleterious role on modern american politics and media. However, there is no clear dominance of total political spending by either side.
          http://www.opensecrets.org/orgs/list.php?order=A
          Conservative donors seem much more concentrated and single minded, generally just more effective (it could be argued). Its shouldn’t be held against the Kochs for successfully exploiting an opportunity…..they just spent their money more efficiently in this instance. Can’t blame the tea party for being what it is….I blame the coalition that dominated in 2008 and 2012 for sitting it out in 2010 even though they represent the majority of the country.
          Both sides spent over $5 billion on the 2012 election (a pittance really…..Americans spend more money on Easter than national elections) so its not like we can just blame money from the “evil conservatives”….that seems to me to be a little bit of wishful thinking, bordering on naivety.

      • Elected leaders must operate within some sort of context commensurate with their constituents.

        This is a fancy way of saying that they lie.

        Let’s put this another way: presumably, most anyone following this site would have kept up with Bill Black and taken him seriously. Thus, most anyone following this site would agree that the Great Recession was precipitated by massive endemic fraud. Furthermore, most of us would probably agree that the refusal to recognize fraud, a la Lanny Brauer, is itself pernicious. Ok, fair enough. So why when it comes to austerity, we don’t have the same antennae? Why do we switch from “fraud” to “delusion” or “mistake” or “ignorance”? After all – and this is important – just as with the control fraud that helped wreck our economy, the austerity fraud has beneficiaries and victims — in fact, the same beneficiaries and victims. And the same enablers, who themselves are beneficiaries. (Read The Payoff.) So why is it sensible to assume double dealing in the case of, say, the men (and women?) behind Magnetar, but misguided delusion on the part of, say, the men and women behind “Fix the Debt”?

        Or, consider this thought experiment: assume that I’m right, and that the people pushing America (and Europe) toward plutocracy are themselves plutocrats (as described in the article.) Assume further that such people, to a man (or woman), are actually completely ignorant about sectoral accounting, and honestly believe that deficits, the debt, etc. are really problems the way the various Pete Peterson organs publicly describe. Now, finally, suppose that one night the angle of MMT swoops down upon these plutocrats and grants them insight, like Paul on the road to Damascus, so that they now know the truth – a nation sovereign in its own currency cannot go broke (etc.) So here’s the question: would our enlightened plutocrats, given that by definition they have a vested interest in being and remaining plutocrats, act ANY DIFFERENTLY on the morning after conversion? That is, should we strike at this delusion that concerns us, would it make any difference in the least to how these plutocrats act, except to convert honest falsehoods to intentional lies? The answer: of course not. Then we need to ask how credible the assumption of innocent misapprehension was in the first place.

        • A lot of the time we make the mistake of thinking that the change is going to come top-down. As Stephanie Kelton noted during her Modern Money and Public Purpose seminar, when they went to a congressman and explained the whole MMT thing to them, the response was “I can’t say that”. And that makes perfect sense; after all, politicians are not visionaries or ideologues, they’re used car salesmen in slick suits that pimp themselves out to the highest bidders. Unless the people become that highest bidder, and the MMT perspective becomes mainstream, then there is no reason for a politician to stand behind it. In fact, it would ruin their chances of being elected.

          The ‘Fix the Debt’ oligarch types are the other possible route of implementation, but given the progressive nature of the MMT paradigm, I don’t see any of them lining up to give the power back to the people any time soon. No real way for the vampire squid to profit off of a jobs guarantee program or single-payer healthcare.

          • “I can’t say that”

            Exactly. There are a very few politicians who are ideologues and visionaries, but they do have to say things that resonate with voters, and maybe have to have some luck in the quality of their opponents. MMT can be made appealing to voters of all political stripes, but it won’t happen automatically.

        • Auburn Parks

          No, that sentence doesn’t mean they lie (I mean of course politicians lie….thats part of their job////to poltick). It means that politicians are ultimately beholden to their constituents. If the constituents are, in the majority, too stupid to understand relatively simple concepts…..we get the government we deserve.

          As to the rest of your reply:
          1. You didn’t address my “mass delusions” are normal claim…..because you can’t….it stands
          2. You couldn’t propose enough lobbying, campaign finance, and revolving door control to be to the left of me. Congress is nothing more than a mediator between parties…..No other arbitrator in the world would be considered serious if it accepted money from the side it was advocating for…..the fact that “We the People” allow legalized bribery to fund all our elections baffles me to no end.
          3. I agree with everything you said about the motivations of the wealthy elite and how they try to manipulate the public.
          4. I can’t even convince my progressive 67 year father that the Govt doesn’t borrow its own currency and that the national debt is nothing more than our accumulated financial asset savings….nor even that the Fed controls interest rates and thus we don’t have to worry about the size of the debt…..he accepts none of this despite my best efforts.
          In conclusion….the topic is complicated. I don’t accept that all this ignorance and poor public management is only the fault of a wealthy cabal. It strikes me as unsatisfying and self-serving. The notion erroneously exonerates the people for having displayed ZERO motivation to fight and to learn. There are many, many people who simply can’t understand this stuff….its too counter intuitive. Sure they might come to accept the realities MMT lays out after everyone else has….some people simply can’t accept that the beliefs they’ve had their entire lives were all wrong…..religion again.
          Publicly fund elections so that we have a better chance of overcoming the inherent hurdles of convincing people that everything they’ve ever thought about the govt and money is wrong.

          • “I can’t even convince my progressive 67 year father that the Govt doesn’t borrow its own currency and that the national debt is nothing more than our accumulated financial asset savings….nor even that the Fed controls interest rates and thus we don’t have to worry about the size of the debt…..he accepts none of this despite my best efforts.”

            Then maybe there is another way to pitch it. I thought I was conservative, until I got my brother (60) interested and converted to MMT. We had never really talked politics before, but he is somewhere to the right of Rush Limbaugh, and he understands and accepts MMT now. There is a way to present even the job guarantee so that it appeals to conservatives. The idea that China creates dollars and lends them to us is just too ridiculous for anyone to defend, once they think it through. But they do have to be open-minded, and they do have to believe they are smart enough to understand economics, at least a little.

            • Auburn Parks

              The US dollar comes from the US Govt

              It can’t get any simpler than that…..and then even if they accept this….INFLATION….AAAHHHHH!!!!!
              Its so aggravating

              • But MMT has a strong message on inflation. I think it is a tactical error that they don’t emphasize it more, bring it up themselves. Leaving it to be brought up as an objection tends to make people think they haven’t considered it, when they have done so quite completely.

          • In conclusion….the topic is complicated.

            Well, yes and no. The psychology of crowds and all that is complicated, sure. But the punchline really isn’t: we’re being screwed, and by a class that well knows that it is screwing us, knows how, and knows why. By your last response, I wouldn’t say that you disagree with that. The problem I have with this “ignorance of our leaders” trope is that it at least implies that we’re somehow being screwed accidentally, as if our leaders are just well-meaning dupes or something. They are not – not well meaning, and for the most part, not dupes. WE are the ignorants here, and blame us all you want, and rightfully so, for our indolence, submissiveness, stupidity, bigotry, and all the other peasant vices. But don’t lose sight of the fact that there is a fundamental incongruity here, between the 99%, which is ground to dust by the austerity myth, and our masters, who profit from it. My point is simple too: it stretches credulity to the breaking point that think that the masters of austerity don’t know that their game isn’t just a bunch of guff to hoo doo the peasantry.

            As for convincing people of anything: Nobody really gives a damn about sectoral balances et al., nor should they, except to the extent that such matters can be directly and concretely tied to the lived reality of the peasants that you’re trying to enlighten. Just hollering, MMT-style, that the peasants should get smarter doesn’t seem to work too well. Try instead hollering that the peasants are getting screwed by them (be sure to point in the right direction), and then, maybe, you’ll have a little room to explain. Hell, maybe you’ll get the chance to bring up sectoral balances.

            Besides, at least in my experience the obstacle is not some deeply ingrained belief in the efficacy of balanced budgets. Rather, the obstacle is the propensity of the American peasant to attribute his sense of being screwed not to the master, but to the dusky-hued Other. At the risk of sounding like a comp lit major, I think we can’t separate the issue of social and economic justice from the big “R” – race.

            But that’s all for me. You can have the last word. Caio.

            • Auburn Parks

              No on the last word for me…..I feel comfortable with the bow you put on it…..it was a pleasure and good day.

      • I assume that you have read “Extraordinary Popular Delusions and the Madness of Crowds” by Charles Mackay. Nothing has changed.

        http://en.wikipedia.org/wiki/Extraordinary_Popular_Delusions_and_the_Madness_of_Crowds

        Among the bubbles or financial manias described by Mackay are the South Sea Company bubble of 1711–1720, the Mississippi Company bubble of 1719–1720, and the Dutch tulip mania of the early seventeenth century. According to Mackay, during this bubble, speculators from all walks of life bought and sold tulip bulbs and even futures contracts on them.

  6. Pingback: A Plague on All Your Budgets | Real Economy & Geopolitics | Scoop.it

  7. Thank you, Joe. Good stuff as always…

    In your concise and well-articulated summary, the highlighted phrase is what concerns me:

    So, it turns out that deficits can be run indefinitely by nations with non-convertible, fiat currencies, with floating exchange rates, and no external debts in currencies not their own, without either solvency or inflation problems as long as the Government doesn’t deficit spend beyond full employment.

    While I concur with this on a theoretical level, from a political perspective, I struggle. Although the mechanisms for determining a budget and appropriating spending are well-defined, well-practiced, and have well-enough friction in place to keep it all from going off the rails, it seems that much of this friction is due to self-imposed constraints that are technically inaccurate. These constraints allow differing factions to argue about over- or under-spending (e.g., equating the Federal budget to a household budget, viewing Federal taxation as revenue, etc.), and while technically wrong, they do add resistance to the process.

    Given the poor grasp of economics among legislators, the driving force of personal ambition, pressure from special interests, and concomitant corruption, wouldn’t targeting full employment be open to manipulation, as well? If the Federal Government took to heart the ability to spend so much more freely, wouldn’t it find ways to rig the system to accommodate building bridges to nowhere everywhere?

    Given that the elite, who own both sides of the aisle, demonstrate that they don’t seem to care if they destroy the nation, as long as they get theirs, and given that they will always be able to still get wine, while the masses are consigned to rationed victory gin, what restraint keeps their efforts in check?

    Similarly, since the “need” to borrow externally would be removed, the too-big-to-do-much-of-anything-to banks would not accept this and would require financial methadone to replace the financial heroin they are used to receiving, wouldn’t the means be found to still create limitless dollars for the financial markets to continue their reckless habits?

    If the answer is to have the populace wake up and become active politically, I really cannot see this, considering the control of the political apparatus and informational media that these elite have. One-off public crusades will win an occasional skirmish, but the relentless overwhelming pressure from the limitless and indefatigable resources of the powerful, renders lasting victory simply not possible. At least in my view.

    How practically can a Congress beholden to the elite and their own personal ambitions be reined in to target full employment in some semblance of good faith?

    • Yeah, there’s some other discussions on this topic. The economy does have some automatic stabilizers, so that when a higher deficit, whether by tax cuts or spending increases, starts to cause unemployment to go down, then spending on things like food stamps and unemployment benefits also goes down, and tax receipts will go up. If you were to try to have a $100B tax cut, for instance, calculated using CBO techniques, you’re going to end up with maybe $40B or $60B, not $100B. So it’s very hard to overshoot, right off the bat. And really hard to measure the effect, because there are so many uncontrolled variables in a large economy. Same thing with spending. The tax system is more sensitive than GDP is to stimulus. Even since 2009, with anemic growth, tax receipts have been going up by almost $160B a year. It amounts to almost $10B over 10 years, if it were sustainable, more than twice what they want to try to do to the deficit by austerity.

      Even with automatic stabilizers, Congress is too unresponsive as an institution to fine tune the economy. We have a very responsive system for managing monetary policy, and could do something similar for fiscal policy. A quasi-government agency modeled on the Fed could adjust a low-rate, broad-based tax in very small increments at quarterly meetings, like the Fed adjusts interest rates in small increments on a similar schedule.

      To achieve truly full employment, where everyone who wants a job has one, requires the MMT Job Guarantee. The Phillips Curve lives, despite the fact that MMTers don’t like it. On the approach to full employment without a JG, local shortages will develop before full employment is reached, and inflation will rise as buyers bid up the price of whatever resource is in short supply and cannot be produced or imported. Further traditional stimulus will only cause more resources to be in short supply. The JG itself is a very powerful automatic stabilizer, and will always have workers involved in it, enough (if managed properly) to prevent inflation. They are the buffer of the employed, preventing rising prices, instead of the buffer of the unemployed.

  8. “The Sector Financial Balances Model:
    Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0
    is an accounting identity that provides a focus for macroeconomic analysis, explanation, and prediction by economists applying the Modern Money Theory (MMT) approach.”
    Readers should always be aware that this theoretical model is actually based on empirical evidence: hard and fast statistics derived from the Federal Reserves’ and Bank of England monthly reports on the cash, money and stock flows. Wynne Godley was one of the early prophets on this model.

    “Big businesses, the financial sector, and wealthy oligarchs will use their economic and political power to see to it that their nominal financial wealth will continue to increase even as the private sector as a whole is losing 20% – 30% of its financial wealth.” Very true, and not to hone too fine of a point, however, I am wondering how one would characterize oligarchs who download terror into third world nations (see Google searches on ‘civilian deaths attributed to: Iraq War and Drone strikes), who regularly step up the degree of militarization of our society and increasingly use their political and social power to move us to a police state, who regularly induct new members into an underground army of millions of marginalized citizens via the so called criminal justice system?
    see this link for a beginning of this discussion
    http://rense.com/general37/char.htm
    Of the fourteen characteristics of fascism, these stand out as true of our current society and the surrounding cultural artifacts-movies, press releases, novels, comic books and songs.
    4. Supremacy of the Military
    7. Obsession with National Security – Fear is used as a motivational tool by the government over the masses.
    9. Corporate Power is Protected
    12. Obsession with Crime and Punishment – Under fascist regimes, the police are given almost limitless power to enforce laws.

  9. Nice discussion, everyone. I wanted to say something about Jerry’s comment.

    The ‘Fix the Debt’ oligarch types are the other possible route of implementation, but given the progressive nature of the MMT paradigm, I don’t see any of them lining up to give the power back to the people any time soon. No real way for the vampire squid to profit off of a jobs guarantee program or single-payer healthcare.

    I’m not sure the oligarchs are really a class quite yet. I think they have conflicting interests. For example, both big retailers and small businesses would profit from Medicare for All, and that includes Walmart. I think they’ve been stupid not to get behind it.

    As for the Job Guarantee, I don’t see why that hurts the oligarchs. It seems to me it siphons off discontent and keeps people out of trouble, Of course, it would have the initial effect of raising wages to a “living” level again, and businesses like Walmart would have to pay more to hire people away from the JG. On the other hand, by placing a floor on aggregate demand and forcing all wages up to the living wage level, the boost in sales for all businesses would easily compensate for the rise in wages many of them.

    • Yes, most of the oligarchs would be better off with full employment. And I think most of them realize it, although I can’t say there are none who focus on “the gap”, as some call it. This MMT really is new, at least in my lifetime. I’ve seen it said that it was basically understood in the 1940’s, but those people are gone and MMT never made it into the textbooks. People in charge today never heard of MMT while they were learning economics. Maybe a few at the Fed understand it, but politicians and business leaders don’t. I believe that for the most part they believe austerity is the right course, the government is like a household, and they don’t understand the implications of monetary sovereignty. I can relate to that, because that was me before I learned MMT. It’s what I was taught in college in 1970. And I didn’t need to convert to Progressivism to change my mind about economics.

      Maybe in 2050 MMT will be common knowledge.

    • Good points, there are certainly a lot of conflicting interests depending on which industries we’re talking about and which legislation specifically. I don’t see any industry besides the health insurance industry – which is of course pretty massive in its own right – that would oppose Medicare for All. Yet here we are, with the most expensive healthcare system in the world. And given that the insurers just dodged a huge bullet with Obamacare, I think it’ll be some time before we see healthcare on the national agenda again.. pretty depressing to see just how powerful lobbying can be in Washington.

      I’ve been reading James Galbraith’s book ‘The Predator State’ which goes into a lot more detail about a variety of industries in our economy and how the predator/oligarch class has aligned itself, definitely recommend it to any of you who haven’t come across it yet. I am very optimistic about the MMT message on the whole, but these kind of paradigm shifts take a long time to come about.

  10. It would really be great if we could turn the discussion into ‘are private-sector savings too large?’.

    We should keep in mind though that the answer can actually be yes. If people have too much money that can start an inflation spiral. Definitely not something to worry about now, but I don’t think the intimation that deficits (savings) can never be too large is a good tactic. On the other hand, I wonder what the limit would be … putting everyone to work in a productive job, can produce an awful lot of goods and services.

    I think we might see this in Japan. The total savings is likely to decline, when many more people are retiring than joining the workforce in the near future. Could see some significant inflation (maybe productivity will be high enough to prevent).

    • If abundance in savings left nobody left interested in borrowing or spending, private sector demand for exports and domestic goods/svs would contract-and the job market, I’d expect. Economy like that may be more apt to go the other way-deflation.

      I think Japan might welcome inflation at this point – for good little while, anyway.

      • “If abundance in savings left nobody left interested in borrowing or spending”

        But it goes the other way. It is unsatisfied savings desires that cause people to reduce borrowing and spending. Once they have “enough” savings, they will spend the rest of their incomes.

        Japan is saying that they are targeting policy to produce 2% inflation, but they have not yet done it. Demographics should help them achieve it.

        • OK, we just had two different images in our heads of what “too much” could look like.

          A sizable burst in PS spending following a long period of aggregate saving could result in inflation – especially if the economy sacrificed too much-if the ability to produce withered away in the interim.

    • “If people have too much money that can start an inflation spiral”

      Or an asset bubble.

      But what is the proper response by government if measured inflation is not out of control, and unemployment is still present? Government’s response during the dot-com bubble and the housing bubble was to reduce deficits, even to actually run a surplus in the first instance. Perhaps more accurately stated, it allowed the deficits to be reduced without taking action to stop it. That didn’t work out. Or was the mistake made after the bubbles burst, in not quickly pumping up deficits high enough to make up for the lost asset values, and try to offset the effects of the deleveraging? Should government have tried to sustain the unsustainable, or to return the private sector to its former unsustainable condition?

      Better regulation of banks could surely have helped the second bubble, but are cycles in the economy not inevitable? Even without banking fraud and poor underwriting, speculation in the housing market such as occurred in 2003-2006 would still drive up prices and construction to unsustainable levels, and prompt owners to take cash out of their home-ATM, and take out new loans at the peak of the market, and so be underwater in any price decline of 20% or more.

      Maybe some of MMT’s practices would result in greater stability, less violent cycles, less euphoria in the bubbles, less pain in the bursting.

      • @golfer

        Asset bubbles are usually created not from savings, but by the ability of people to borrow from the banks beyond their capacity to repay the loans from income.

        “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.”

        Thomas Jefferson

        It seems as if these assets bubbles are deliberately engineered in order to rob people of their hard earned money. In the last US housing boom, the banks, ably assisted in their machinations by the repeal of the Glass-Steagal Act, deliberately loaned money they knew full well could no be repaid and that they would then seize the property by foreclosure.

        • Sure, the “too much money” could be saved or borrowed.

          “In the last US housing boom, the banks, ably assisted in their machinations by the repeal of the Glass-Steagal Act, deliberately loaned money they knew full well could no be repaid and that they would then seize the property by foreclosure.”

          And how’s that working out for them? What they’re foreclosing on is mostly not people who can’t pay the mortgage on a property that is worth more than the loan. Those people can sell and preserve their credit rating. The banks are foreclosing underwater properties, and dumping them as fast as they think they can without depressing the market further, for less than the mortgage amount. No profit there.

          There are banks, which want profit from loans, and there are bankers and mortgage brokers who want commissions and bonuses and don’t care about bank profits. Which of those two groups do you think would make a loan they knew could not be repaid? I think the bubble got started by rising prices mainly due to housing demand in areas that retiring baby boomers were moving to. Which attracted speculators, and then crooks from the banking, real estate, and appraisal industries, and that’s when the real bubble got underway. Banks that made liars’ loans expected them to be repaid when the borrower flipped the house for a profit, and it worked for a few years before the bubble burst. They never wanted to foreclose.

          • “They never wanted to foreclose.”

            Not sure about that, they go about the process very quickly after the borrower misses two payments. They rae reluctant to reduce the principal owed or the interest rate to help out the borrower, probably because the bank has to take a write down on their assets, which makes them vulnerable to the regulators, who might shut them down or a bigger bank buying them out at cents on the dollar. Smaller banks are disappearing and the bigger banks are getting even more too big to fail.

            • Yes, once payments are missed the situation changes. The historical assumption would be that the property is still worth more than the mortgage, it’s only recently that it hasn’t been so. Old habits die hard. Still, in a falling market it pays to act quickly, and before the place gets trashed.

              My point was that they didn’t make the loan with the intention of foreclosing. I can’t imagine a situation of either rising or falling prices where that would be profitable for a bank. They make too much money in banking to be interested in real estate speculation.

              Oh, I thought of one. The bank owning the first mortgage might foreclose when the owner has taken a 2nd mortgage and is underwater on the total, but not on the first, and decides to (or has to) stop making payments. Not something a bank could plan for when making the first.

  11. Too much money in private hands (whatever that is defined as?) is not enough on it’s own to cause an incident of inflation. There has to be an accompanying real output constraint, does there not?

    Government running surpluses (assuming no change in the external sector) means the private sector is forced into a deficit. This invariably leads to an economic downturn as the national output gap expands.

    Government isn’t supporting the unsustainable by pursuing full employment and the associated spending required to reach that policy objective.

    The private sector wishes to/needs to/wants to save more (i.e.) service their debt and as such it is necessary, by definition, for the currency issuing government to run deficits. Again, assuming no material change to the external accounts.

    • @DanielD

      “Too much money in private hands (whatever that is defined as?) is not enough on it’s own to cause an incident of inflation. There has to be an accompanying real output constraint, does there not?”

      The distribution of the money in private hands determines what is spent on consumer goods compared with what is spent on speculation, such as the stock and commodity markets. Since the rich 1% cannot spend enough nspend enough on consumer goods, since they already have more than enough stuff, the consumer economy is starved of money. Few seem to realize that under the fractional reserve banking system, that all money is created as interest bearing debt, whereby No debts = No money. This is what enables the financial manipulators on Wall Street to cream off money from the real economy to its detriment.

      For every new billionaire, other people must be in debt to him either directly or indirectly, but most people think that he is a pillar of the community, especially when he brushes a few crumbs off his table for the poor, in order to reduce his tax bill.

  12. Excellent post however I was wondering if you could write a litte more on this subject?
    I’d be very thankful if you could elaborate a little bit further.

    Kudos!