The Layman’s Case Against Austerity

By Stephanie Kelton

Steve Kraske of The Kansas City Star recently interviewed me for a piece about austerity.  The story ran in today’s paper. It doesn’t provide much depth (unlike bloggers, journalists have strict space constraints!), so I followed up with a few comments on the Star’s website.  I thought I’d share them here, since I’m always trying to improve the way I communicate these ideas with non-economists.  So here’s my best effort to make the anti-austerity case in simple terms.

1. When we allow our economy to operate below full employment (as now), we are sacrificing trillions of dollars in lost output and income each year. We can never go back and recover it.  It is gone forever.  You’ve seen the debt clock?  Here’s the lost output clock.

2. Capitalism runs on sales. In survey after survey, we find that the Number One reason businesses are slow to hire and invest in new plant & equipment is a lack of demand for the things they produce.  Businesses hire and invest when they’re swamped with customers.  See this story in The Wall Street Journal.

3. The two decades after WWII certainly aren’t the only time that robust growth reduced the DEBT/GDP ratio.  During the late 1990s and early 2000s, the economy grew at an above average clip.  Unemployment fell to 3.7%.  Inflation remained modest.  There was a job vacancy for every job seeker in America — genuine full employment.  Because people were working, there was less spending to support the unemployed (food stamps, unemployment compensation, etc.) and more people paying income taxes. The deficit disappeared, and the national debt fell to around 40% of GDP.  So you do not need post-WWII conditions to support the argument that economic growth is the way to reduce the debt.

4. The debt/GDP ratio falls when the denominator grows faster than the numerator.  Right now, just about everyone is fixated on using austerity (raising taxes and slashing spending) to reduce the numerator (DEBT).  The problem, as Europe has kindly shown us for years, is that austerity “works” by crushing incomes, which in turn crush sales (or what we call GDP).  So instead of bringing the ratio down, austerity hampers growth, which causes deficits and debt loads to rise.

5. Although virtually no one bothers to mention it, the deficit is currently falling at its fastest pace since the end of WWII.  Yes, right now in America, even before the sequester, the deficit was plummeting at a scorching rate.  Why?  Because the economy was recovering from the Great Recession.  Unemployment was falling and growth picked up to around 2.5 percent.  When people get jobs, they earn wages/salaries, pay income taxes and stop collecting unemployment.   

6. Policymakers on both sides of the political aisle are moving us in the wrong direction. The fiscal cliff and the sequester both impose austerity (tax increases and spending cuts) at a time when there are vast unused resources (labor, raw materials, excess capacity in our factories) and inflation is running below the Federal Reserve’s target.  These are exactly the wrong policies and they will hurt the economy.

7.  Saying that austerity is bad policy ≠ saying government needs to spend more money.  Businesses need customers, but the government does not have to be the one doing the buying.  We have been advocating a full payroll tax holiday (extended to the employee and the employer) for 5 years now.  That amounts to a 6.2 percent across-the-board cut in the wage bill, and the addition of almost $300/month to the take-home pay of the average worker.  Businesses need customers, and customers can be created by leaving more money in the hands of those who work for a living.  

8. We have a serious infrastructure problem in this country.  The American Society of Civil Engineers just released its 2013 Report Card, and it is ugly. Our ports, roads, waterways, etc. are in serious disrepair.  This makes it more expensive for businesses to produce/ship goods, which raises U.S. prices and reduces our global competitiveness.  Meanwhile, we have millions of out-of-work construction workers and manufacturing workers — the people with exactly the kinds of skills that are needed to repair and rebuild our national infrastructure.  So we have useful work that needs to be done, millions of people who want to contribute and policymakers with no plan to connect the two.  

9. What holds us back?  Fear of the Chinese? Fear of bond vigilantes?  Fear of the ratings agencies?  Fear of becoming the next Greece?  Fear of turning into Zimbabwe?  Fear of sticking our grandchildren with a huge tax bill?  This is what they tell us as they impose austerity.  None of it — I repeat — none of it has the slightest bearing on our reality.  

10.  Final (and most important) point: The United States of America has sovereign money.  The US dollar comes from the US government.  It cannot come from anywhere else.  We can never run out of dollars or be forced into default like Greece, which does not have its own currency.  We do not need to borrow from the Chinese to do the things that we decide to do for our economy.  As long as the real resources (labor, raw materials, factory capacity) are available, the financial resources (money) can always be there.    This can be done without causing inflation as long as the additional spending does not outstrip the economy’s capacity to produce.  We can afford to cut taxes and spend more money to improve our infrastructure without burdening the next generation.  Failing to get the economy back to full employment will burden us all for years to come.

Follow Stephanie on Twitter twitter.com/deficitowl

 

48 Responses to The Layman’s Case Against Austerity

  1. Amazing!! Keep it up.

  2. financial matters

    Excellent summary, thanks. The interesting thing is that other countries can do this also by concentrating on their domestic market. Using their currencies to productively build up their labor force for domestic consumption. This is how the US and UK got started. Unfortunately both are now seriously backtracking being taken in by the bells and whistles of destructive financialization.

  3. Detroit Dan

    Thanks! Evernoted for future use…

  4. May I paraphrase, ” What holds us back? Fear…? Fear…..? Fear…? Fear….?
    Fear…? Fear…? This is what they tell us as they impose austerity. None of it — I repeat — none of it has the slightest bearing on our reality. ” Stephanie Kelton.
    However what may be the real cause that holds us back maybe:”The double taxation on wages and personal income. The money needed by the individuals in our social group being taxed by the federal government (FICA and personal income taxes) that’s once, while at the same time that same issuance of currency is being taxed a second time by the Private For Profit Banks (PFPB) by the way at some incredibly high rates.

  5. golfer1john

    “Although virtually no one bothers to mention it, the deficit is currently falling at its fastest pace since the end of WWII. ”

    The link cited speaks about spending reductions, due to lower food stamps and unemployment costs. That’s not what has been happening. Spending is about level with 2009, but taxes are going up by about $180B each year.

    That’s almost $10T over 10 years, the way they like to measure things in Washington. More than twice the goals of Simpson-Bowles, fiscal cliff, or any “grand bargain”. If it were to continue (of course it is unsustainable) the budget would be balanced in 2017, a far more aggressive goal than even the Ryan budget plan.

    And that’s before the fiscal cliff. Before any data from the FICA increase or the sequester. Before any austerity actions.

    What do y’all think a $10T tax increase over 10 years would do to a $16T economy?

    If there is validity to MMT, which I believe there is, it would seem inevitable that the next recession must start very soon, long before this “recovery” closes the output gap.

    • Mano Philips

      $180 B per year works out close to $2 Trillion in 10 years, not $10 Trillion. Am I missing something here, or is this part of the Washington measurement problem?

      • golfer1john

        Glad you asked, as I think the number is wrong. Taxes are now $480B higher (4Q2012, I think; maybe 3Q2012) than 3 years previous, and have been going up $160B a year, not $180B.

        So, the first year taxes go up $160B.
        The second year, another $160B, now $320B higher than the baseline year, for a total of $480B more taxes collected so far.
        Third year, $480B higher, for a total of $960B so far.

        In the 10th year, $1600B more taxes than the baseline year, $8800B more taxes collected than would have been the case if they stayed at the level of the baseline year. So only about $9T not $10T. Not a material difference as far as the goodness or badness of the impact on the economy.

        I agree with Warren (see below). I thought he was too optimistic before.

        In Washington, if you cut something by $1 and don’t change it again after that, it’s a cut of $10 (over 10 years).

        Conversely, if you increase something by $1 and don’t change it again after that, it often doesn’t count at all.

        If you increase something 3.4% each year forever, it is called a cut, if someone else wants it to go up 3.9% each year.

        You can even raise something $1 for 8 years, and say it will be reduced $5 in year 9, and it’s a cut of $2 over 10 years.

    • Clonal Antibody

      @golfer1john

      If there is validity to MMT, which I believe there is, it would seem inevitable that the next recession must start very soon, long before this “recovery” closes the output gap.

      Did you see Warren Mosler’s short take? Double dip- this time it’s different

      During the last two post 2008 double dip scares I made the point that the 9% or so deficit was too large for that to happen, and instead recommended buying the dips.

      This time the deficit has been proactively cut to maybe a less than a 5% of GDP annual rate, in which case I see a meaningful chance of negative GDP.

      And one that is not being discounted by a market that’s remembering that the last two double dip scares didn’t materialize.

      • golfer1john

        Yes, but even negative GDP (initial estimate of -0.1 for 4Q12) didn’t stop the market. I’m beginning to think stocks and bonds can’t go down as long as the Fed is buying $85B a month. No matter what happens to the real economy. (Of course, when I go “all in” that’s the signal to sell.)

  6. Good show!

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  8. First, I think it is well laid out, but my opinion probably represents a small sector. I am not an economist, but I find the field interesting enough that I will take considerable time to read what I can, so have a somewhat geeky fascination with the subject.

    When communicating non-standard economic views with the public at large, I find two challenges. First, most have no formal economics education at all, not even a survey course. And, if they do, it will most likely be monetarist/neo-classically framed. (My 101 prof used to wear a Milton Friedman sweatshirt to class.) The rest get all their economics passively by absorbing the culture around them. For example, #10 above. While it is clear we don’t have to borrow from the Chinese as stated, how often do we see politicians pounding the podium, going on about how we rely on the Chinese to finance our excessive lifestyles? If someone only gets their input from top-of-the-hour news, this through its unquestioned repetition simply becomes orthodoxy.

    So, that statement in #10, part of a logical progression, and clear as it may seem, it alone requires acres of groundwork for most folks to grasp, who’s frame of thought has been contrarily conditioned from day one. What do you mean we don’t need to borrow from the Chinese? Just look at all the money we owe them already; we’re just living too high on the hog, and need to cut back…, and so on.

    Again, the points presented seems straightforward: US sovereign currency, we alone produce at will, can’t “run out,” don’t need to borrow. But it is not received smoothly by the audience. Each phrase sounds off alarms, as it goes against conventional wisdom, and conflicts with their understanding. So, by the time you get three sentences into your position, you’ve lost them, as they are still struggling or arguing with the first sentence.

    Additionally, and this is the second challenge, that Economics is considered a “soft” science. A physicist or medical doctor can proclaim something controversial, and people are more likely to accept it simply because of the respect they have for those fields. With Econ, everyone has an opinion, and since Econ, as a social science, is perceived as subjective, who’s to say you are anymore right than they?

    It doesn’t matter if you have a PhD, and they have a GED. Just look at the ignorant rantings against Nobel economists like Krugman and Stiglitz. Because Econ is not perceived to be absolute and binary, it somehow justifies intellectual equivalency for all points of view, no matter how poorly constructed or unsubstantiated. Who from the laiety would so flippantly take issue with Peter Higgs about particle mass? Hence one deals with pride as well as subject matter ignorance.

    How to improve on conveying all this to non-economists? I have no solution, but just offer the perspective of someone sitting in the bleachers. I know what it has taken me to un-condition myself from the common sense. I spent hundreds of hours nights and weekends in coffee houses reading and re-re-rereading material, wrestling with concepts, which just did not compute through the filter of my societally/culturally formed views.

    Most people will not — and understandably — do likewise. Grant it, most may not have as thick a block of wood capping off their neck bones as I, but I dare say, the undoing of a lifetime of such conditioning is no easy task for anyone — even once recognized and willingly sought.

    My hats off to you, Dr. Kelton, and all the rest at NEP. Just brilliant stuff. Thank you!

    • JohnfrmCleveland

      That about sums it up for me, too. I spend – or, more likely, waste – far too much time arguing with people in the comments sections. They are pretty much unreachable, I think. It feels like we need to reach a critical mass of people before our arguments can take root. Right now, discussions on mainstream boards still feel like it’s me against everybody else.

      About two years back I had the bright idea of composing what I hoped would become a viral email that attempted to explain how America was not $15 trillion in the hole. I went into my father’s email and selected about a dozen of the most rampant serial forwarders, all senior citizens, started with a clean email address, and tried to get the ball rolling that way. I thought for sure my Dad would get at least a few copies within the week. He got zero. But I still think that idea has potential – I just need a better email. Old people love to forward stuff.

      So there’s a challenge for the MMT illuminati – compose a short, catchy email that will entice people into reading a bit, or following a link. MMT in one paragraph. And no big words.

    • golfer1john

      You’re right that in a single dose MMT is too much to swallow. The student must be interested to start with, and must persevere long enough to grasp the points, resolving the conflicts, one by one. It needs to be packaged in short sound bites somehow.

    • sunflowerbio

      I think you have very well described the heart of the problem jrm. Even Stephanie’s compact and excellent exposition doesn’t get to first base past the emotional and intellectual blocks most people carry, the ones echoed by the MSM pundits and the “serious people” in Washington and NY. I still feel that Joe Firestone’s shock and awe, high value platinum coin seigniorage (HVPCS) proposal has the best chance of creating a game changing shift in public perception, although its adoption is a long shot at best, and by no means certain to accomplish the desired goals without a donnybrook of a fight.

      • Joe Firestone

        Bring on the donnybrook! I’m ready.

        • davidgmills

          When you constantly hear that the government is printing too much money, the only way I have found to argue against it is to show that the debt itself is proof that the government is not doing the printing. I simply say that if you could print money, would you borrow to buy a car? I follow that up with the next question which is if you could print money would you need to work to make an income? That always gets the ball rolling for the average person.

          • golfer1john

            “printing money” is an emotionally charged term. The negative implication relies on the household analogy. If you could print money, it would be counterfeiting, for one thing, and you probably wouldn’t print more than a few million dollars a year. The Fed is “printing” $85 B a month. That would strike most people as “too much”, and the fact that it is not having much of an effect on the real economy or on consumer prices, just on the bond and stock markets (to the extent that we can divine what moves the stock market), creates cognitive dissonance. This prompts people to make up or accept as truth various reasons why this “too much printing” will eventually cause a problem.

            But, in fact, the government does create money out of thin air, on a regular basis. And yet despite being able to do that, it does sell T-bills, its way of borrowing, and it does levy taxes, its way of generating an “income”. The reasons those are still legally required – taxing and borrowing – are grounded in a time when the government was more like a household, and do not apply any more. Nevertheless, government can print money and it still taxes and borrows anyway. Non-economists mostly know this.

            MMT says that Treasury creates money when it spends, and destroys it when it taxes, and the buying and selling of T-bills by Fed and Treasury is simply an asset swap, having no real effect. This contradicts the layman’s understanding, and is not easily accepted. Thinking of it in a different chronological sequence, one can say that the Fed first creates money when it buys T-bills. The Fed does not buy T-bills by drawing down its own account, but by simply marking up the seller’s account. The “new” dollars in the seller’s account did not exist before. Then, since Fed and Treasury are both “government”, Treasury can sell those T-bills (or some equivalent, essentially identical T-bills) for money (reversing and nullifying the Fed’s action); and then it can spend that money. The net result is the same, a net addition to outstanding dollars in the private economy. As if it had happened the way MMT says it did.

            The chronology is relevant at the dawn of time, when no dollars and no T-bills existed, but now that there are plenty of both floating around, it matters not in what order these transactions occur.

            The general public is aware, mostly, of “money printing” by the Fed, and may be more likely to understand how money comes to exist if the explanation starts out with the Fed, rather than with the Treasury, and then proceeds to explore the “dawn of time” sequence that must have occurred, and which is totally equivalent in its net effect. Clearly the Fed could not buy T-bills if they did not already exist in the private sector, and the Treasury could not have sold them if dollars did not already exist in the private sector. The dollars must first have been created by government spending, perhaps to buy gold bullion, which did exist in the private sector. Now that the gold standard is gone, government creates money only by buying aircraft carriers and other stuff, and paying employee salaries, and making transfer payments like Social Security, food stamps, and unemployment insurance. But it doesn’t have to borrow or tax first, just like it didn’t have to borrow or tax, and, indeed, could not have borrowed or taxed, to buy that first bar of gold, before any dollars or T-bills existed in the private sector. Those first dollars were created by government spending them. And so are all the other dollars that government “prints”.

            And government does not have to borrow or tax in order to spend, except for those obsolete laws. So it does borrow and tax anyway. (And, as it turns out, the right amount of taxing is a good thing.)

            Probably nobody in the non-economist audience is familiar with private banks creating money out of thin air. They think that banks lend their depositors’ dollars. Let them think that, until they grasp the fundamentals of MMT.

            Once people understand that government always “prints” all the money it spends, you can get to the idea that printing money is usually good, but can sometimes be bad if done in excess. Bunting is usually good, when a batter does it, but if every batter bunted on every pitch, the strategy would be ineffective. Printing money is the same way, a good thing when done at the right time, in the right amount, and for the right reasons, like bunting. Besides money-printing, we need most of the time to have some money-destroying (taxing), just like the baseball team needs to bunt sometimes, and to swing away most of the time.

            How much is the right amount of money-printing, and how do you know? This leads right into sectoral balances, and MMT is off and running.

            • davidgmills

              I am sorry, but to a layman, this is gobbledygook. All a layman understands is that there is 16 trillion dollars worth of debt and we are so indebted that we can’t afford anything because that is what the politicians and their economic gurus tell us. The only thing a layman will understand is cancellation of that debt. If it takes a 16 trillion dollar coin to do it, I am all for it.

              • Sunflowerbio

                Let’s go with Joe’s $60 T dollar coin or even $100 T and get some breathing room to establish the needed policy space.

              • Well, just frontally assault then. Tell them the facts. 16 trillion (not the correct number really, as that includes intragovernmental debt – which makes as much sense as telling a banker that your left arm owes your right kidney. You won’t get a loan, but a trip to a padded cell. ) – Ahem, 16 trillion or half of that or whatever, is CHUMP CHANGE compared to the wealth of the USA. Are they kidding? A few trillion bucks against the whole USA? Our debt has often been more than that (against GDP or any measure of national wealth). Call stupidity what it is. Stupid.

                And a debt which the sovereign can redeem at will / reduce by raising taxes, and which he can reward creditors by giving even more debt to them, which they would greedily accept because they know it is so valuable? The only reason to oppose MMT is because one is insane or has been hoodwinked into swallowing insane, stupid Big Lies.

    • So, how to inject ideas into the public discussion that are outside the narrow limits of convention? As mentioned above, even the basic truth that “the U.S. cannot run out of dollars” is outside of the conventional view and without considerable supporting evidence runs the risk of being received by the masses as being on the lunatic fringe.

      Noam Chomsky has battled this dynamic for many, many, years. He calls it the problem of concission. Unless one’s position can be expressed as sound bites that are within the limits of conventional wisdom, one won’t be invited on mainstream news or panel discussions. There just isn’t time for supporting evidence between commercials. And the corporate sponsors don’t really want to hear it anyway.
      https://www.youtube.com/watch?v=uXPvPxOFba0

      And when one considers that MMT opens the door to policy options that are unalterably opposed by the vested interests that own Congress, well one sees the obstacles to be overcome.

      This isn’t a counsel of despair. MMT and the pervasive criminality in the financial system are getting more exposure all the time. May you all keep the project alive.

    • Good article, Stephanie – and well pointed out about the mental jump, jrm!! I am with you on this one, I consider myself intelligent, truth-seeking and non-orthodox, however it has taken me around 15 years of reading various books and then bits on the internet to grasp the MMT stuff. I remember reading the Wikipedia article about it around three or four years ago, and it did not make much sense, only in the last two years or so I have grasped the MMT. Anyways, as jrm says, it takes some serious de-conditioning to appreciate it.

      This is why when I am explaining it to people I go very basic, and no big words without relevance to the daily experience of people. Also what we have to realize is that there are maybe three or four layers to the story, and the accounting layer that most MMTers are pushing is only one layer, and not necessarily the easiest one to grasp for a layman at the beginning.

  9. Peter Shaw

    At risk of complicating your clear account-
    2:”hire and invest” are two things. Wise business can (and does) invest during hard times; crucially, it doesn’t recruit.
    8: Government infrastructure projects, suitably disclosed, can be categorical demonstrations that they are non-inflationary. Anyone apprehensive of the effect of new money so released should ask how long it persists in the economy before removal as tax. The answer may surprise you. It also provides a timescale for the stimulus.

  10. It’s very clear to me, but for the general public I think it needs to be shorter, and simpler. Although Bill Clinton was known for very long speeches, he could also describe something complicated in a way that was easily understood and persuasive. That is what is needed. I think it’s a bit pretentious for me to try.

    • JohnfrmCleveland

      Maybe convincing Bill Clinton himself would be a good start. Anyone have his email address? :)

      • Stephanie Kelton

        No good. He and Chelsea are on the Pete Peterson payroll. Can’t be had. Already been bought.

        • golfer1john

          Since when? If before 1992, then fine, but if after 2000 don’t you think his “legacy” has something to do with it? I can’t imagine how he could admit that his greatest achievement as President was actually a colossal mistake, even if he came to believe it. Some people might, but not him. It wouldn’t take much, I think, to “buy” his support for austerity today.

        • Yes and no.

          He has at least paid lip service to the point that austerity does not work (too little too late perhaps).

          But whether that translates to any meaningful policy actions or momentum within the Democratic Party is a whole different story.

          However, given the tendency of the current DNC elites to talk the talk but not walk the walk, I’m inclined to be as cynical about Clinton prospects.

        • Hi Stephanie .
          I’m a big fan since I saw you on C-Span a few months ago.
          I shudder with horror when I hear about Hillary for Pres, my Choice would Sen Warren. How can I document
          Clintons connection to Peterson ? Thanks.

    • Your comment brings two quotes to mind:

      Dr. Michael Lerner: “[H]ere is a basic truth about communication: if you are referencing ideas that are already popular in the culture, you can do so with a short slogan; but if you are trying to introduce new ideas that do not resonate with the ‘established wisdom’ or ‘common sense’ of the culture, it often takes a nuanced discussion that is longer — and hence the nuanced position may feel too long . . . ”

      Einstein: “Everything should be made as simple as possible, but not simpler.”

      My feeling is that Dr. Kelton has done a very good job here. What’s critical is repetition and expansion in her and other NEP contributors’ future posts and posts and . . . .

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  12. The biggest reason why laypeople don’t “get it” usually is due to the pro-austerity plutocratic PR blitz that has poisoned the working class conscience with bogus suggestions that:

    1) The national debt is causing their economic strife.

    2) It’s their fault for not having skills or the motivation to get a job to contribute.

    3) It’s big government’s out of control spending that is causing them to be unemployed/poor (when in reality it’s the only thing keeping them from reaching complete destitution).

    It’s an up-hill battle, but the main reason why i created the Lost output clock was to actually try and make an effort to reach a mass audience with a more simplistic, new-media-friendly explanation of why austerity doesn’t work and government isn’t evil.

    I’ve found it helps to engage the other side, even on their dreaded home turf, and to avoid the buzzwords that are used to denigrate the left. Those on the right-wing who are working class and still vote for plutocratic policies are extremely prideful and need to be told that they live within a certain system which is contributing to their problems, and that it’s not personal inadequacy or failure that is to blame.

  13. Joe Firestone

    On “shock and awe” Platinum Coin Seigniorage, I still like the speech I composed for “the President” following his issuing a $60 T coin. I think it addresses a lot objections in pretty common sense terms. Here it is again:

    My Fellow Americans:

    1) Until now the Treasury has been borrowing the money the Government created back from the private sector, in order to cover our deficit spending, so the national debt has been steadily growing.

    2) That’s silly! According to the Constitution, this Government, of the people, by the people, and for the people, is the ultimate source of all US money. So why should we ever borrow US money back and pay interest on it, since we can create it any time by the authority of the Constitution and Congress?

    3) Congress has also imposed a debt ceiling, so, if and when we reach it, we can’t borrow back our own money without Congressional approval, anyway, and lately Congress has been using the need to raise the debt ceiling as an excuse to extort cuts in safety net and discretionary programs that the majority of Americans support.

    4) So, on my order, and in accordance with legislation passed by Congress in 1996, and with the US Code, the US Mint has issued $60 Trillion using a single 1 oz. platinum coin, and deposited it at the NY Fed. It’s legal tender, so the Fed credited the Mint’s Public Enterprise Fund (PEF) account with $60 Trillion in US Dollar credits using its unlimited authority from Congress to create them.

    5) This is not inflationary because the Fed will put our coin into its vault, and keep it there permanently out of circulation, and the Treasury will use the $60 T in USD credits only to pay back the national debt and to spend what Congress has already approved, which is only a small fraction of these credits and far from the amount needed to cause inflation.

    6) My action ends any possibility of a debt ceiling crisis in February or March, because we have no further need to borrow our own money back in the markets, and that’s why we don’t need the tea party or other Republicans, or even my fellow Democrats to agree to raise the debt ceiling any more.

    7) Now the Treasury, has plenty of money, much more than we need, in fact, to pay for all appropriations Congress has already approved for 2013, and may approve in March, including all deficit spending and, again, we won’t have to borrow our own money back, either to repay debts or to implement future deficit spending.

    8) So, we will pay all Government debts which will come due in 2013 and 2014. Treasury securities and all other debts included. We will also pay back all debts held by other agencies of Government and the Federal Reserve. When we do this we will lower the national debt by about $12 T, reducing the “debt burden” by about 75% by the end of 2014, and creating an actual Social Security trust fund with 2.7 T in cash reserves in it; and again, to do this we don’t have to borrow any of our own money back, and we will also reduce our interest costs on the outstanding national debt all through the remainder of 2013, 2014, and beyond until it is all paid off.

    9) None of the $60 T in new credits created by our actions is “money” in the private sector economy until the Treasury spends it. For now it is just capability to spend awaiting the appropriations of Congress to mandate deficit spending, should it need to compensate for the reduction in demand, probably close to 10% of GDP right now, caused by your own desire to save (which we want to do our best to facilitate), and your desire to import goods from foreign nations.

    10) We have created $60 Trillion in new credits even though we probably needed less than that to cover anticipated deficit spending and debt repayment until at least 2028. The reason for this, is that I wanted to have enough capability created in the Treasury account, so that the national debt could be completely paid off (except for a small amount in very long-term Treasury debt still not mature by 2028), and all projected Federal deficits covered over the next 15 years, even extraordinary deficit spending needed to be performed without further borrowing over this period.

    11) Of course, we can always make new coins if our projections about future deficits turn out to be wrong; but I thought it would be best to ensure that all $16.4 T plus of the “debt burden” can be completely eliminated from our political concerns; and also to provide enough funds in our spending account at the Fed, so that it would be very clear to Congress and all newly elected Representatives and Senators, that even though they, as required by the Constitution, continue to control the purse strings, the national purse is very, very full, and that we would be able to cover from the Treasury General Account whatever deficit spending for the public purpose, including for full employment, Medicare for All, infrastructure, education, and other things, that Congress, in its wisdom, chooses to appropriate now, before the next election, and for some elections to come.

    Good night, my fellow Americans! Rest well knowing that our beloved country won’t be defaulting on any of its debts when the debt ceiling is reached, and that I’ve prevented this without going over the legal debt ceiling, or borrowing any more, by providing money for spending mandated appropriations, in compliance with the laws authorizing Platinum Coin Seigniorage, while supporting the Constitution’s prohibition against our Government ever defaulting on its debts. I hope that, in the future, everyone in Congress will obey the 14th Amendment’s prohibition against questioning the validity of Federal Government debts, and think twice before they indulge themselves in loose talk about the possibility of the Federal Government defaulting on its obligations.

    America will always pay its debts in US Dollars according to the terms of the contracts it has concluded, and in line with the pension payments and other obligations that it owes. Neither you, nor the rest of the world need ever doubt that again! Nor need you ever think that our Government is running out of money for the things we must do. We can never run short of money unless Congress refuses voluntarily, to use its unlimited constitutional authority to make more of it. But as long as it delegates to me the authority to create high value platinum coins to cover our needs, you can be sure that running out of US money will never happen!

  14. Stephanie,

    I’m a layman, and I think this article is very well pitched at people like me. Here are a couple of things you could change to strengthen it:
    -#s 9 and 10: The austerians are very good at stilling up fears of hyperinflation ala Zimbabwe, Weimar Germany, Hungary, etc., so you should link to some evidence that shows we don’t need to fear inflation with the economy barely growing. Paul Krugman always points to long-term bond rates at 2% for this.
    -Linking to “Dearth of Demand Seen Behind Weak Hiring” in the Wall Street Journal: If you’re trying to convince the average schmoe like me, you’ll offend them by linking to something behind the Wall Street Journal’s paywall. Why not link to something that’s not behind their paywall, like this: http://online.wsj.com/article/BT-CO-20130211-707962.html

    Other than those points, it’s a great piece!

  15. I’m copy/pasting my comment for Naked Capitalism.

    If Prof Kelton were to come up with a real, real research paper, not a theoretical one, it would look like this:

    – X million miles of highways are required to be fixed
    – Y billion barrels of crude oils are needed
    – Z billion lbs of copper
    – A billion lbs of steel

    Out of these:
    – B billion is inside USA
    – C billion would have to be imported
    – D billion of F-35s would have to be exported in order to import those commoditites
    – F wars would have to be generated so the world pays USA with commodities for the service of being a world policeman.

    Bottom line: Give me the numbers Prof Kelton.

    Read more at http://www.nakedcapitalism.com/2013/05/the-laymans-case-against-austerity.html#0gXfBkVX6VWiJi70.99

  16. Prof Kelton
    Here’s my recommendation.
    Get together with the engineering depts at your university and come up with real numbers, not in dollars, but in real stuff like iron ore, copper, crude oil etc in tons to build/rebuild/fix an X length of highway/bridge.

    That’s when your research will have some real numerical value.

    • Thornton Parker

      This recommendation is a trap because it asks for determinations that those who believe in the supremacy of markets insist can only be made by markets in real time. No answers could be more than estimates that would immediately be challenged and could not be defended. The Club of Rome forecasts were and are still widely disparaged.

      The recommendation should be turned around. Instead of proving that there are sufficient resources to repair or rebuild the infrastructure, the challenge should be to prove that the economy can operate adequately if that work is not done. This is a normal risk assessment/analysis question.

      No one can provide numbers for much more than specific projects, or families of projects. Just in the infrastructure area, there are multiple ways to meet most needs. Will underground pipes be dug up and replaced? Will steel, plastic, or other materials be used to replace them? Or will many of them be lined with plastic liners at a low cost? Will water conservation and reuse reduce the total amount of piping required? Will bridges be built primarily with steel, or will they be reinforced concrete. If steel, will the components be fabricated in this country, China, Korea, or some other place?

      Other limits than inflation are also involved. For example, there are recent estimates that if the world’s proven carbon fuel reserves were consumed, the atmospheric effect would ensure catastrophic global warming.

      And what is inflation? Is QE already inflating financial assets like stocks, and if so, how should that be included in inflation measures?

      If we make the unlikely assumption that the US government becomes functional again in the foreseeable future, then the annual budgeting process would provide the best opportunity to make adjustments in spending and resource consumption as they are needed.

      The recommendation is a diversion that would involve you is a constant cycle of useless activity while today’ winners continue to dominate the economy.

  17. Stephanie, I think this is work in progress, so I’m replying to it accordingly.

    First, I don’t think this is the laymen’s case against austerity as much as it is the “The Case Against Austerity for Laymen.”

    I also think that the 10 points don’t hang together to tell a coherent story. The first two points are about leaving potential national income on the table, the employment gap and sales, and basically say that if we want full employment, and the maximum possible national income then we need sales.

    But then you jump to growth lowering the debt-to-GDP ratio at certain times of full employment in our history without a transition. The connection to sales producing jobs is not clear. The fourth point then discusses numerators and denominators of the ratio, gets around to sales and the connection to austerity in the third sentence and then makes a technical point about how austerity drives the ratio up rather than down. OK. So austerity doesn’t work on the ratio; but what does that have to do with what lay people care about? I think point four needs to be reorganized.

    Then point 5 talks about how fast the deficit has been falling and makes only a backwards connection to employment and no explicit connection to sales. Point 6 then moves to austerity and its being the wrong policy, but the transition from the previous points isn’t really clear, or at least wasn’t to me. I even had the feeling that point 6 should perhaps be point 1. For me point 7 seemed to just pop out. Again, the transition wasn’t there, and the most important sentence in the point was last, rather than first. Moving to 8, 9, 10. They also seemed somewhat disconnected and as I say below, 9 and 10 seemed to be in the wrong order.

    I’ve made some specific comments on each point below which I hope will help. But, I guess my basic point is that I don’t think that the points as currently ordered make the case. They just don’t seem like a coherent narrative to me.

    1. When we allow our economy to operate below full employment (as now), we are sacrificing trillions of dollars in lost output and income each year. We can never go back and recover it. It is gone forever. You’ve seen the debt clock?

    Here’s the lost output clock.

    Joe: I think “lost output” sounds too technical, for laymen. How about “national income”?

    2. Capitalism runs on sales. In survey after survey, we find that the Number One reason businesses are slow to hire and invest in new plant & equipment is a lack of demand for the things they produce. Businesses hire and invest when they’re swamped with customers. See this story in The Wall Street Journal.

    Joe: I’d suggest using “sales” again, rather than the economist’s word “demand.”

    3. The two decades after WWII certainly aren’t the only time that robust growth reduced the DEBT/GDP ratio. During the late 1990s and early 2000s, the economy grew at an above average clip. Unemployment fell to 3.7%. Inflation remained modest. There was a job vacancy for every job seeker in America — genuine full employment. Because people were working, there was less spending to support the unemployed (food stamps, unemployment compensation, etc.) and more people paying income taxes. The deficit disappeared, and the national debt fell to around 40% of GDP. So you do not need post-WWII conditions to support the argument that economic growth is the way to reduce the debt.

    Joe: How about:

    “Because people were working, government spending to support the unemployed (food stamps, unemployment compensation, etc.) went down and more people were paying income taxes.”

    4. The debt/GDP ratio falls when the denominator grows faster than the numerator. Right now, just about everyone is fixated on using austerity (raising taxes and slashing spending) to reduce the numerator (DEBT). The problem, as Europe has kindly shown us for years, is that austerity “works” by crushing incomes, which in turn crush sales (or what we call GDP). So instead of bringing the ratio down, austerity hampers growth, which causes deficits and debt loads to rise.

    Joe: Does that mean a lower debt-to-GDP ratio should be the target of fiscal policy, as long as we drive the ratio down by growing the deficit? And if we shouldn’t be targeting the deficit at all should there be a qualification in there somewhere?

    5. Although virtually no one bothers to mention it, the deficit is currently falling at its fastest pace since the end of WWII. Yes, right now in America, even before the sequester, the deficit was plummeting at a scorching rate. Why? Because the economy was recovering from the Great Recession. Unemployment was falling and growth picked up to around 2.5 percent. When people get jobs, they earn wages/salaries, pay income taxes and stop collecting unemployment.

    Joe: Doesn’t this statement, taken by itself, hint that it is desirable for the deficit to be going down at “a scorching rate”?

    6. Policymakers on both sides of the political aisle are moving us in the wrong direction. The fiscal cliff and the sequester both impose austerity (tax increases and spending cuts) at a time when there are vast unused resources (labor, raw materials, excess capacity in our factories) and inflation is running below the Federal Reserve’s target. These are exactly the wrong policies and they will hurt the economy.

    Joe: That’s perfect!

    7. Saying that austerity is bad policy ≠ saying government needs to spend more money. Businesses need customers, but the government does not have to be the one doing the buying. We have been advocating a full payroll tax holiday (extended to the employee and the employer) for 5 years now. That amounts to a 6.2 percent across-the-board cut in the wage bill, and the addition of almost $300/month to the take-home pay of the average worker. Businesses need customers, and customers can be created by leaving more money in the hands of those who work for a living.

    Joe: But it is saying that government deficit spending should increase; so isn’t the above statement likely to get laymen confused?

    8. We have a serious infrastructure problem in this country. The American Society of Civil Engineers just released its 2013 Report Card, and it is ugly. Our ports, roads, waterways, etc. are in serious disrepair. This makes it more expensive for businesses to produce/ship goods, which raises U.S. prices and reduces our global competitiveness. Meanwhile, we have millions of out-of-work construction workers and manufacturing workers — the people with exactly the kinds of skills that are needed to repair and rebuild our national infrastructure.

    So we have useful work that needs to be done, millions of people who want to contribute and policymakers with no plan to connect the two.

    Joe: I like this a lot. But I’d change the last sentence to: “So we have useful work that needs to be done, millions of people who want to contribute, as much deficit spending as we ever need, and policymakers with no plan to connect the three.”

    9. What holds us back? Fear of the Chinese? Fear of bond vigilantes? Fear of the ratings agencies? Fear of becoming the next Greece? Fear of turning into Zimbabwe? Fear of sticking our grandchildren with a huge tax bill? This is what they tell us as they impose austerity. None of it — I repeat — none of it has the slightest bearing on our reality.

    Joe: Why not?

    10. Final (and most important) point: The United States of America has sovereign money. The US dollar comes from the US government. It cannot come from anywhere else. We can never run out of dollars or be forced into default like Greece, which does not have its own currency. We do not need to borrow from the Chinese to do the things that we decide to do for our economy.

    As long as the real resources (labor, raw materials, factory capacity) are available, the financial resources (money) can always be there. This can be done without causing inflation as long as the additional spending does not outstrip the economy’s capacity to produce. We can afford to cut taxes and spend more money to improve our infrastructure without burdening the next generation. Failing to get the economy back to full employment will burden us all for years to come.

    Joe: I think 10 should come before 9, and then it should be used to explain why the fears now mentioned in 9 ignore the reality of our sovereign currency into account.

  18. Iowa Housewife Offers

    I like your article, Ms. Kelton. Please consider this as supplemental:

    If you want the people to suddenly understand that it is only their work that creates the wealth being divided and only the fact that they get up and go to work every day (and people are sure they will continue doing so) that backs a nation’s money and credit in the first place, I suggest you make this ‘go viral’, as they say:

    http://www.michaeljournal.org/myth.htm

    They say you really know your stuff when you can explain it to an 8-year-old and the child gets it. I truly think that article, put in story form as it is, proves that Louis Even knew his stuff.

    As the start of a do-it-yourself genius kit for laymen (so they can do the hardest learning there is, unlearning what isn’t true), I suggest the next 2 articles to follow up the Money Myth Exploded piece:

    http://www.michaeljournal.org/The%20Federal%20Reserve%20leaflet%20number%201%20.pdf

    http://www.envisioneer.net/RainForest/archimed.htm

    If those links are not worth people’s time to read and share widely, I will kiss Henry Kissinger on the lips. Seriously, don’t yiz think the conversation would change dramatically if all the people you are trying to talk to had previously been exposed to those 3 bits? I do.

    • golfer1john

      The Louis Even piece needs some work.

      When the banker arrived, he essentially enslaved the rest of them. He didn’t have to perform any labor, but he was fed and clothed and sheltered by the others. He was, essentially, the sovereign.

      As the monetary sovereign, he could have created money to pay the others for their labor in supporting him, and if he had done so, they would have had plenty of money in circulation to pay their interest and accumulate savings. The banker would have consumed 16.67% of the output, presumably, but charged only 8% interest, so the other 8.67% would have gone to increasing the “money supply”, the financial assets of the other 5.

      In this story, if all the debts are secured and no sovereign creates additional money, then the banker will own everything in the end. Or maybe not. When the farmer loses his farmland maybe he’ll go find another piece of land and continue farming, and trading his output with the others — except not with the banker. Meanwhile, the land the banker foreclosed will lie idle, and become worthless.

      As the story went, the banker “taxed” the others 16.67% of their output, and another 8% of their money on top of that. Leaving out the other side of real government activity, paying (creating money) in exchange for the 16.67% that it consumed.

      When the citizens formed a government and taxed themselves to pay the interest, they also opted not to tax the banker! Taxes were supposedly based on wealth, but the wealthiest among them paid no tax at all!

      “This is exactly what happens in our civilized countries, is it not?” He asks. No, it is not.

      In real life, bankers are not sovereigns. Bankers do not determine the unit of account, or collect taxes in that unit, or issue it to purchase the goods and services they need to run their banks. Government does that. When the citizens formed a government, that government should have assumed from the banker all the trappings of sovereignty, not just the power to tax.

      I see very little in this story that is relevant to modern life.

      As for relevance to MMT, the story adopts the discredited fable about the origin of money as a lubricant for trade. Money was created not to replace barter, nor to be a more convenient representation of gold. Money was created by sovereigns so that they could spend it, acquiring things from their subjects. Not by bankers, so that they could lend it.

      Again, the story misses the mark.

  19. Excellent post, Stephanie!

    I have just one question. Since our nation pays its debt by marking up numbers in private bank accounts, isn’t the title “national debt” a falsehood? I mean, if all I had to do to pay back creditors was mark up the numbers in their bank accounts, I’d never say I was in debt. I’d say I was the Federal Reserve.

    • Tyler, the marking up of accounts is not really paying a national debt, but merely transforming one government liability/debt (bonds) to another one (dollars). It is more like making change, two fives for a ten, than paying off a debt. If you moved your money from a savings account to a checking account, AND did nothing else, would you say the bank has paid its debt to you? The real paying off of the very real National Debt, which is in no way a falsehood, is when individuals use their government debt to pay taxes or buy something from the government.

      Relatedly, the true monetary power of the government is located in the Treasury, not the Federal Reserve. If you want to separate the two, the Treasury stands behind the Fed, not vice versa. The Fed’s dollars wouldn’t mean anything, any more than ancient Roman coins do, unless the Treasury accepted them.

      • Thanks, Calgacus. I don’t understand the following sentence you wrote: “The real paying off of the very real National Debt, which is in no way a falsehood, is when individuals use their government debt to pay taxes or buy something from the government.”

        Is there a difference between the National Debt and the Federal Debt?

  20. JohnfrmCleveland

    Since our numbers are still pretty small, and we are often on our own when debating on the internet, I think some teamwork would be in order. I read the comments in the Kansas City Star article, and Stephanie was hopelessly outnumbered by dummies. It’s a little late now, but a timely show of support would have been useful. Maybe a tweet for help, rallying the troops next time?

    I experienced the same problem at Hubpages, which is right there in the belly of the beast – it’s a huge blogsite, but my initial search for MMT turned up zero hits. (Search “Obama conspiracy,” on the other hand, and you will find no shortage of articles.) I enlisted the help of one friend to help with the comments, and if nothing else, it was enough to keep other commenters engaged. But it’s tough to convince people that you are right when the numbers are so badly stacked – not many people feel comfortable leaving the crowd to join the loner.

    Another place where we are behind – ready-to-go graphs and data to back up arguments. The conservatives are all over this – their information is organized and easy to find. Mike Norman had a few useful graphs here and there, but I have a heck of a time tracking them down when I need them.

    Sites like NEP are great, but you have to go looking for them – people curious enough to search out MMT are not the problem. There needs to be a plan to take this debate to the public, where it can’t be so easily ignored. And I think we should gang up whenever possible. I’m sick of being outnumbered all the time.

    • Joe Firestone

      John, there’s a Facebook group called the MMT Deficit Owl USA Committee. You may want to apply for membership in it. It’s where MMt activism is being discussed. At a minimum, when you need support in a discussion, it would be a good place to ask for help.

  21. –The United States of America has sovereign money. The US dollar comes from the US government–

    Brave suggestions by Stephanie. According to Adam Smith Civilisation and expensive government stand together. But excessive supply of currency will definitely result in high inflation unless production of goods and services (GDP growth) goes in tandem.