Why Do Progressives Claim that Deficits Today Mean More Pain Tomorrow?

By L. Randall Wray

Yesterday I posted a blog here arguing that we should not conflate a sovereign government’s balance sheet with that of a household. One is the issuer of the currency, the other is a user. That makes a big difference. The currency issuer can spend by “financing” its purchases through credits to bank accounts, issues of new currency, or new issues of sovereign interest-paying debt that is considered to be the safest dollar-denominated asset in existence. Households cannot do that. I also argued that there is no “piper-paying” due date on which government needs to repay its debts, hence, no financial imperative to ever run a budget surplus (or even a balanced budget). Further, even if the government were to try to run surpluses to repay debt, that would (based on historical experience) throw the economy into a depression that would only increase budget deficits. Empirically, budget deficits are correlated with growth; budget surpluses precede depressions. Based solely on the historical record, only a fool would recommend budget surpluses as a policy goal. Yes, that implies that Robert Rubin and Pete Peterson advocate foolish policy.

Somewhat ironically (at least from my point of view) the shrillest critics come from the left. When I try to explain how government “really” spends, or why government is not like a household, or why the focus on budget deficits is misplaced, the loudest objections come from those who claim to be progressives. Indeed, on the matter of deficits, the only discernable difference between the “progressive” position and the “deficit hawk” position of a Pete Peterson is over the short run. Both agree that deficits today mean higher taxes and less government spending in the future—more burdens for our grandkids. Both agree that spending more now to relieve the pain of unemployment only means more pain in the future. The only difference of opinion comes down to the willingness to “party now” and “pay later”. Conservatives would forego the party to avoid the hangover; “progressives” would party like it is 1999, then deal with the migraines and stomach upsets later. I must say that if I had to choose between the two strategies, I would go with the conservatives: take the pain now and enjoy lower taxes later. Indeed, I cannot think of any justification for taking the party now and putting the burden of the aftermath on our children in the future—if that is what the choice really involved.

But here’s the deal. The “progressives” are wrong. Nay, they are dangerous. They are the worst enemies we face. At least with the Pete Petersons you know what you get: they oppose deficits precisely because they oppose any progressive policy that might help the average American today—the pain in the future is just a bogeyman to prevent progress today. Indeed, that is, by definition, the position of conservatives who want to return to the idyllic past when the poor suffered their deserved fate and the deserving enjoyed their privileges.

Progressives are supposed to be, well, progressive. But almost all of them constrain progressive policy to a Puritanical trade-off: anything that leads to improvement today is bought by more suffering later. They are far worse than the conservatives because no one who wants to improve the position of the average American would ever take the deficit hawk position of Pete Peterson seriously. We all know what he stands for. So the position of the progressives on deficits, which is identical in all important respects to that of the deficit hawks, is far more dangerous precisely because they appear to prefer progressive policy but warn that in the long run it will bankrupt us.

Why do they adopt a position that is fundamentally inimical to the progressive agenda?

Let me proffer an informed hypothesis. It is all politics. Back during the waning days of the Clinton administration, a high ranking economist of a major labor union laid it all out in public at an economics conference. Union surveys showed that voters trusted Democrats far more to protect Social Security than they trusted Republicans (a finding that is not surprising, given the efforts of Republicans dating back to the early postwar period to kill the program). As they have long argued, Republicans claimed that Social Security faces an Armageddon because when baby-boomers retire, payroll tax revenues will not cover Social Security benefit payments. This labor union economist assured the assembled crowd that this is not really a problem because Social Security is a government program, and as government is a sovereign issuer of the currency it can and will make all Social Security payments as they come due simply by crediting bank accounts. I was practically dumbfounded, having thought that I was just about the only economist who understood this.

But he went on. Democrats needed a campaign issue, he said, something candidate Gore the Bore could sink his teeth into. (Recall that this was before Gore had become the global warming messiah we all now love.) So the Democrats had decided that “save Social Security” would be his main campaign theme. Problem: Social Security did not and does not need saving because it does not and cannot face any financial problems. Solution: join the Pete Petersons and Senator Judds of the world, and claim that Social Security is going bankrupt. This would be a “two-for”. First, Gore could rise from the near-dead as savior of Social Security, garnering the support of voters fearing that Republicans would gut the program.

More importantly, Gore could collect the campaign contributions of Wall Streeters, who desperately wanted to privatize Social Security because the dot-com bubble was running out of steam. They wanted to manage a growing Trust Fund, charging huge fees from whence to pay Wall Street sized bonuses. And thanks to Clinton, the Democrats had become the official Protectorate of Wall Street’s cash flow (with Rubin and Summers the anointed minions). So Gore promised to save Social Security from the evil-doers on both the right and the left. The right wanted to slash benefits, the left wanted to use Social Security’s surpluses to finance other government spending. Gore would protect those surpluses by locking up Greenbacks in a safe, to be taken out later when the babyboomers retire. Not only that, he would have the federal government kick in some extra bucks by double counting Social Security’s surpluses. It was accounting nonsense, but Wall Street drooled in anticipation of obtaining access to the overstuffed safes.

But a funny thing happened on the way to the election: the population could not understand what the heck Gore was talking about, but it sure sounded scary. Baby Bush seemed to be a safer choice—he had lots of happy talk about making us all “stakeholders” in a new “ownership society”. That sounded a lot better than Gore’s scare mongering. Americans like to be scared about foreigners—immigrants, Reds, French fries—but they do not want to listen to incomprehensible plans to rescue near and dear entitlement programs to which they had become accustomed. Better to kill the messenger. (The same thing happened to Kyoto and cap-and-trade, but that is an issue to be left for another day.)

And so it goes. The “left” simply will not give up on the scare tactics. They want to terrorize the population about budget deficits, so they can propose some deficit-cutting policies in the distant future—preferably left for the next administration. More party today, more pain later. Who gets to party? Well, obviously, Wall Street—the main benefactors of the Democratic party and, no surprise, the main beneficiaries of bail-outs.

And what if Wall Street did not get its bail-outs? Armageddon, as Bernanke, Paulson, Rubin, and Geithner have been claiming for two years. In reality, there would have been no collapse, indeed, we would have been in far better shape had we simply closed down all of the insolvent financial institutions (which would have included all of the big ones). But the Wall Street rescue operation never had, and never will have, anything to do with saving the economy, dealing with retiring baby-boomers, or indeed with resolving any real world problems. It is all about stoking the flow of cash from Wall Street to Democrats.

Unfortunately, it is a strategy that will fail. Scaring voters and funneling money to Wall Street only generates distrust. Voters voted against Gore, against Kerry, and for change—that they thought they would get with Obama. They want honesty, not terror. They want action, not threats of deferred pain. They want jobs now, not excuses about “affordability” or “sustainability”. They don’t need nonsensical lectures about why the government can afford $23 trillion in promises to Wall Street, but it cannot afford to support Main Street. They want the sure recovery now, not scary talk about burdens this will place on future generations.

They will not accept the argument that because of some hypothetical revenue shortfalls 75 years from now, government cannot keep teachers employed and schools open now. They will not sit idly by as Haiti suffers from the same governmental near-paralysis that New Orleans experienced under the previous President. They want government to spend, now, on the necessary scale to deal with our problems, and those of our even less fortunate neighbors. They recognize that the problem is not one of “money”—something that costs the government nothing to create—but rather a failure of will to mobilize the ample and underused resources we now have to accomplish the tasks at a hand.

While more than two generations have passed, memories of WWII are still strong. Government ramped up its spending to 50% of GDP; its deficit reached 25% of GDP—almost twice as high as the ratio today. We shipped our highest tech products out of the country and we sent some of our most motivated and productive workers off to fight the war—many of whom never came back; we mobilized our labor force and went far beyond what anyone thought to be full employment—with the help of female workers that many had believed to be incapable of the work they successfully undertook; and we constrained our domestic consumption sector to preserve resources for the war effort. Still, living standards rose, inequality, racism, and poverty fell, and we emerged from the experience stronger than ever. The next generation experienced the “golden age” of US capitalism as we put resources to work producing for domestic consumption, and the rest of the world grew faster than it ever had before.

With the New Deal programs and constraints in place, the financial system played a secondary role, with no significant crises for a whole generation after the war. By design, Wall Street was tiny, and our financial institutions were simple, but they financed the most rapid and sustained growth of output and living standards our nation had ever seen. Over the course of the 1930s, we had downsized, strangled, and constrained Wall Street. It took a half century for it to fully recover—and once it did it returned to its old destabilizing ways. To make a long story short, finance gradually returned to the dominant position it enjoyed on the eve of the Great Depression—and duplicated the result.

In this current crisis, Wall Street refuses to downsize. It wants to emerge as the still dominate force that it had enjoyed before the crisis. Its biggest threat is the recognition that it is not needed, that it plays no important social function. Not only can the financial system be downsized by two-thirds or more without ill effects, the economy would actually perform better.

From Wall Street’s perspective, if government finance were truly understood, there would be little room left for the “financialization” that Goldman Sachs and others have been promoting. Securitization of mortgages and of other consumer debt is superfluous. Private pensions managed by Wall Street are unneeded–Social Security is safe and can be expanded as desired to provide decent and secure pensions. Health care insurance does not need to be reformed or expanded, instead, it needs to be eliminated and replaced by a single payer system. Government does not need to beg or bribe finance to fund efforts by entrepreneurs to create jobs because a federal job guarantee program can ensure continuous full employment. And Wall Street does not need to choose our candidates for us, as voters are perfectly capable of electing representatives of their interests. In short, it is difficult to conceive of any positive role for outsized finance to play.

Lest anyone think that I am advocating a bigger government, I want to make clear that I am actually arguing for less government intervention into the economy. The market wants to eliminate the biggest financial institutions. I think the market is correct. It wants to get rid of the riskiest financial instruments, such as credit default swaps and securitization. The market is correct on that score. The market would eliminate bonuses for Wall Street traders and CEOs—only Bernanke and Geithner stand in the way, providing government bail-outs that fund the outrageous rewards paid to the crooks and fools that created the crisis. The market would wipe out the mortgage debts of underwater homeowners—it is only the inducements provided by government that keep the mortgage servicers and first and second lien vampires afloat so that they can suck some more blood. And no rational market would have developed private employer-based pension plans or use of employment-related insurance as the dominant method of providing healthcare services. Both of these anomalies were created by partnerships of Government and Wall Street acting against the interests of the vast majority of Americans. I believe that we can have decent and rationalized retirements, health care, and jobs programs without increasing the size of government.

But the first step is to get beyond the deficit bogey. A government budget is not like a household budget. A government deficit—by itself–is neither good nor bad. And in any case government deficits are mostly not discretionary—they do not result from government policy but are largely “endogenously” determined by the nongovernment sector’s behavior. That is a topic for another blog. The most important thing to recognize that there is no “party today, pain tomorrow” trade-off. If government needs to spend more today to create jobs, provide healthcare, and support education, that simply means we can enjoy the benefits of fuller use of our resources. It does not impact our ability tomorrow to similarly use government spending as necessary to create jobs, provide healthcare, and support education. Indeed, it will make it easier because our nation will be in better shape tomorrow than it would have been if we had gone without jobs, healthcare and education today.

20 responses to “Why Do Progressives Claim that Deficits Today Mean More Pain Tomorrow?

  1. I like to consider radical ideas such as libertarianism and communism in the light of real world experience. Neither laissez-faire capitalism nor communism fairs well in such an examination, in spite of appealing theories. So what systems have worked the best? With regard to freedom, prosperity, and financial security, "social democracy" as practiced in Europe and Japan seems to have had the best results. Clearly, the U.S. health care system stands out as a relative failure. So my question to Professor Wray is: What countries (current or past) have had the best policies in your opinion? How about Japan, which has relatively low unemployment despite years of stagnation with regard to stock prices? I know you don't like the Euro (common currency). Were there outstanding governments in Europe before the advent of the common currency? Are there European countries today (such as Denmark) that have stayed out of the Euro and prosper? Which can we point to as proof that Modern Monetary Theories work in practice?

  2. I think that you are mischaracterizing the opinions of mainstream progressive economists to some degree. Mainstream progressive economists are not arguing "party now suffer later". I think that instead, they see the government as a giant Warren Buffet. When the economy is depressed, the government can take advantage of the low interest rates and ramp up its balance sheet, which can create enough growth to allow us to pay off the debt later. Its basically the same view a value investor takes. Buy into a company with good prospects but bad short term finances, and everyone can benefit in the long run.I do agree with you that even progressive economists have ceded the funding constraint argument to the conservatives. Its now not a matter of philosophy, but rather a matter of degree. Mainstream progressive economists are still overly concerned with deficit-GDP/debt-GDP ratios, and they believe fundamentally that deficits drive up real interest rates, which, in another concession to the noeclassicals, they believe to be endogenously determined. There is certainly too little emphasis on real capacity utilization and too much emphasis on finances. The back-and-forth arguments over Social Security Trust Fund are the most ridiculous examples of this.Democrats have indeed embraced the mantra of fiscal conservativism. I don't think, however, that there is any conspiracy behind this. I don't think that Gore's SS Lockbox idea was a result of some secret blood-pact between Wall Street and the New Dems. Remember it was Bush who wanted to privatize Social Security. If anything, Gore was anti-Wall Street in that regard.The real reason embracing fiscal conservativism makes sense is because, unfortunately, the public hates deficits. The vitriolic feedback to your post at Huffington and Naked Capitalism is evidence of this. Judging from the tenor of the comments, I thought you had put your post up on Free Republic! The same is true with just about every single opinion poll on the subject of deficits conducted over the past 30 years. Unfortunately, the public in general equates government finances to household finances. They remember the surpluses of the Clinton era and equate them with the low unemployment and high growth of that era.It is almost impossible for politicians to brush back against this overwhelming sentiment. It is far easier to ride with it. The Democrats were able to seize this idea when we posted surpluses on Clinton's watch, and they have been riding the fiscal responsibility mantra ever since.If this were all just some conspiracy, it would be much easier to break. Unfortunately, this is an issue that has deep roots in the psyche of the American public. Until this fundamental perception changes, mainstream economists and politicians have no choice but to tread lightly around this issue.

  3. I agree with the basics of MMT, but I think your argument would be stronger if you conceded one element of the deficit terrorists’ argument which is valid. This is that government debt owed to another country is for the debtor country a debt in the normal meaning of the word. That is, it is the same as when you or I get a mortgage to fund a house purchase.Put another way, U.S. government debt owed to China enables U.S. citizens to enjoy consumption now and defer the work needed to fund that consumption. As to repaying the debt to China, simply giving China dollars in exchange for Treasuries when the latter mature is not any sort of genuine or real repayment. However, if the Chinese chose to spend their Treasuries purchasing goods made in the U.S., that would involve the movement of real goods from the U.S. to China. That in turn would involve U.S. citizens forgoing consumption so as to make these goods. This is the equivalent of you or me going out to work to earn money which we DON’T spend on consumption, because we have chosen to use the money to repay a mortgage.

  4. Have you ever heard of Argentina, Germany 1920s, Zimbabwe, Japan just to name a few. Oh let me guess, this time is different.

  5. When I read your article comparing household and government budgets, I thought, "This is good, but where's the rest of the article? Where's all the good stuff that this implies?" Well, here it is. Nice job.

  6. I recognize that the only way to reboot the US economy would be for the US government to run deficits on social projects which would lead to full employment and greater social benefits for all. I also realize that this should be the primary function of government. If it's not, then why do we choose to live in a society? Those who don't agree should go live on their own in the woods, no big government, no huge public debt, no hyperinflation, no problems I guess. Having said that, the problem I see is that under a freely convertible exchange rate system, only the US can run a major deficit with relatively little harm to itself due to its reserve currency status. Foreign countries that have freely floating exchange rates and buy into the petro-dollar system would have their currency destroyed should they openly pursue such policies (see person's comment asking if anyone remembers Argentina etc.). As For countries who try to do away with the petro-dollar system, well we just call them terrorists and do everything we can to take them down economically and ultimately militarily (Iran, Venezuela, Cuba etc.). The problem is the freely convertible exchange rate system with the US as reserve currency. This makes the Federal Reserve the only player at the black jack table with no limit on its bets which makes it impossible to take down. All other players have limits and it is defined by the size of their FX reserves.I realize that all economies are planned, the question is who does the planning and how. My understanding is that economies that are centrally planned by the government do better. This does not imply state ownership of all capital however. In Japan, the government set the priorities and the private sector went ahead and figured it out. The US industrial-military system works the same. These models, dubbed state-led capitalism seem to have worked the best. Noam Chomsky often says that the huge Pentagon budget is nothing less than state-sponsored high-tech development. If it was called that however, it would be unacceptable by most people as this implies government controlling the economy.Finally, I recognize that this whole game is about public perception and the powers that be have without a doubt an interest in disinforming people which is easily done via the corporately-owned mainstream media as well as most academic circles.

  7. Thanks for the comments. Let me briefly organize some responses to a couple of common themes expressed in them1. The politics. Of course, I purposely was a bit over the top. Many progressives simply do not know enough about macroeconomics and especially accounting to understand the issues. So they extrapolate from personal household finance to the govt as a whole. That is why I wrote the first piece. However, there was also a decision made to push the deficit mania, specifically as a response to the Republican attack on SocSec. With regard to the public perception–exactly why does the public hate deficits so much? Because both parties and all recent Presidents wail about the deficits. At any time the Dems could stop playing that game. It would disappear from polite conversation. It is not a real issue. Unemployment is a real issue. Refocus.2. MMT: where does it work? Are there limits? First what many do not understand is at the most basic level, MMT is not really a theory (note I called my book Understanding Modern Money–and others came up with the MMT designation, somewhat misleading). It is a description of how sovereign currencies work. It is not a proposal, it is an explanation. Sovereign govts spend by crediting bank accts, tax by debiting them, sell bonds to offer interest earning alternative to reserves. Period. Not a theory. Not a proposal. It really works that way. In the US, in Japan, in the UK, in Turkey, in Brazil, in Canada–the list goes on and on. It is not limited to the biggest countries, nor to the country that issues the reserve currency.Now, yes, we do use this understanding to make policy proposals–a different issue. So "where does MMT work best"–is not the right question. Rather, "which sovereign nations use their monetary system to the greatest effect in serving the public purpose?". Yes, Scandanavia is probably the best example. Many european nations before the Euro would also qualify. However let me be clear: the US has also achieved great things, especially since WWII. We have often used the monetary system in the public interest. 3. Greece, Zimbabwe, Germany 1920s, Argetina 1990s–all examples of the problems faced by countries that are not sovereign–that is that do not issue a sovereign currency. Hence are not counterexamples at all–indeed they prove the point of MMT: adopting a sovereign currency and taking advantage of the benefits it provides is by far the best strategy. LRWRAY

  8. A comment and a question. First, there seems to be some mixing of the terms "Democrat" and "Progressive" in your article. Democrats are a political party loosely tied to an ideology but willing to shred that ideology to get elected. Progressives are more ideology based, however, in my view there doesn't seem to be a definitive consensus on deficit reduction by Progressive Economists. Maybe I'm wrong, but I'm not calling Gore (not an economist), Summers or Geithner "progressives."Second, your argument seems to indicate that the inevitable currency devaluation implied by unlimited spending in the present is innocuous. Is this a correct interpretation? Also, how does the increased debt service payments on the increased spending get resolved in your theory, other than in an Argentina like manner? Finally, I would argue that the Clinton surpluses did not lead us into this scenario…they did not cause the asset bubble which was the primary cause and secondarily by tax cuts and wars.Reply greatly appreciated. I am only an egg.

  9. I've been reading your and others' posts here and at New Deal 2.0 for months now, and I think I understand MMT well enough to be frustrated at just about any fiscal announcement that comes from the Democrats right now.However, what would be your solution to the huge revenue shortfalls faced by states and some municipalities right now? I know you've advocated for California to accept its IOUs as tax payments and thus create a de facto new currency that would let the state continue to provide services, but what of other states? They are not sovereign and cannot issue currency like the federal government can, and only one state (South Dakota?) has a central bank which it can use to finance its own projects.And as far as Wall Street serving no useful social service, you are beyond correct on that, however, conservatives would point out that the local taxes on those hideous bonuses finance the city and state government. Should that sector of the economy simply die, NYC and NY state may follow, right?

  10. Not to reply with a complete book here, but some simple comments:1) This article has a lot of important and economically accurate points, but strays too far off topic to affect any but the very most sophisticated reader. Verdict: Chop this in half, 2 articles; 1 about government debt and deficits and 2 Wall Street, Politics and History2) Single payer makes perfect sense. Europe and Canada are proving it. Yes, in any system there will be complaints, but that's life. The disloyal opposition is just playing any card they can to be relevant but as your article notes, fear of outside threats is good in US politics, fear of losing Government Entitlements, not… surprisingly, the disloyal oppo seems to make it work with fear of Government Entitlements simultaneously with fear of Loss of Government Entitlements… touche KC School – explain that!3) Governments print money, deficits are just part of the game… but furthermore for every Government dollar that walks out the door, a large percentage of it is taxed right back into the coffers, anywhere from 10-30% of those dollars (or more including state/local taxes) and that is why Government Spending is stimulus while tax cutting just builds deficits and should be narrowly focused on cutting taxes for work (payroll taxes, FICA) which is a true stimulus to persons who are likely to spend that money. Keep up the good work. Please, don't be afraid to re-org your blog posts before they leave the door. 2 posts with the above material would Really Play well…

  11. When Dr. Wray says that the government doesn't need to borrow to spend, it doesn't mean the government should spend excessively. The government should spend sufficiently to fill in the spending gap left by private savings. The private sector normally saves, and that is a leakage out of the income flows. Therefore the government, as the only entity that doesn't face insolvency problems should spend enough to fill in that gap. If it spends too much you will get inflation, if it spends to little you get unemployment. It's that simple. It should keep income in the private sector sufficient to buy back whatever has been produced.Hence saying the government is not constrained in its ability to spend is not the same as saying it should go out and spend like crazy. That's exactly what happened in the case of Zimbabwe. Their economy didn't have the productive capacity, and with the government's excessive spending it resulted in inflation. This is pure mismanagement of government finance. Therefore bringing Zimbabwe as a proof that that's what will happen to the US or any other country is wrong. US hasn't been operating at full capacity since WWII.

  12. To Egg (sorry there is no name):I am not Dr. Wray, but I'll try to answer the points you've raised. First of all currency devaluation is not even applicable to the US as it is on a flexible exchange rate. Devaluation is a term used for fixed exchange rate systems. Second nobody said unlimited spending, only spending enough to keep aggregate demand at the sufficient level. This doesn't have to cause currency depreciation (depends on the community's preference to import). Even if it lead to currency depreciation, it would mean that imports would now cost more so maybe americans would start buying local.Increased debt payments are met like any other government spending: by crediting bank accounts. This is what a country with sovereign currency does. Argentina defaulted on foreign denominated bonds, that's a completely different story. If the US government sells bonds denominated in Euro, they can't credit euro bank accounts, they can't "print" euros, which is not the case with dollars. Hence no sovereign government should sell bonds denominated in other country's currency. That's a shortcut to disaster.First, all the deregulation that brought the US financial system and the economy to its knees was started by Larry Summers, Robert Rubin and the rest of the gang during Clinton years. Secondly, Clinton surpluses meant that the public was running a deficit. It's very simple, a government surplus, means that the private sector needs to be in deficit (which is borrowing). This is an accounting identity. How do you think households accumulated all that debt? because the lack of government spending forced them to borrow more to keep their standard of living.

  13. Egg: Progressives may not equal Democrats. Agreed. I could name many progressives who do accept the "deficit dove" position: it might be ok to run them now, but we will have to pay for it later. Indeed, I cannot think of more than a half dozen who do not adopt that position. I won't name names, but some of the top progressives at the top progressive think tanks take the deficit dove position all of the time.2. You simply claim that budget deficits now must lead to currency depreciation later. It is a false claim. US deficits do not do that; over past 20 years by far the biggest deficits in the developed world have been the Japanese–yet the Yen stayed strong, even appreciated. 3. Clinton surplus killed the "real economy", caused deep "Bush Recession" that ended only because of an asset price speculative boom that was doomed to fail. Clinton had wiped out so much wealth and income that there was no way that we could have any kind of recovery except with unsustainable private sector deficits–that caused the collapse we are in. LRWRAY

  14. Thanks for the excellent response…

  15. Perhaps some more "deconstruction" of the concern about debt/deficits, and that relation to "owning", is what's needed. I confess, I'm one of those "progressive" "m" Marxists who'd bitch that Bush & Co did not pay for their stupid wars and instead had Congress suspend "pay-go". The complaint is simple enough: Physical resources committed to blowing up itself, people, and other things, should be accounted as such: They are gone, and somebody ought to have given up what was needed to do the blowing up …(When I was a child and Lyndon Johnson tried waging war on both poverty in America and poor people in Vietnam, I'd hear said: Guns or butter, not both. Lordy, might MMT be perverted to give the theoretical demonstration that both could be done?)Most people – even me – think/used to think of economic reality this way: Everything is owned by somebody, except what the law has not yet put into somebody's proprietary control. Consequently, to borrow is to use something of somebody else's. If it is borrowed, the other cannot use it; and so (cite Marshall, whoever), the owner is due compensation for loss of use for the duration…Along comes MMT and we hear: A third party, the State, can issue tokens .. etc.Even if one accepts that part of the story, some of the points raised above (and also over at Naked Capitalism) still require finessed accounting – at least theoretically: When to stop issuing tokens/ start recalling tokens because of inflation; the converse when deflation; AND the point re debts to third parties who in turn also issue their own Sovereign tokens.But most significantly, the matter of "owning" has got to be clarified. Owners of financial capital are those most fearful of inflation – and those who would live on paper investments, etc. MMT, as I understand what I can of it, is counter-rentier. If it's going to fly with the bourgeoisie, some proponent has got to explain – in manners shorter than a book – how MMT threatens no-one who is engaged in productive activity and who, having done their fair share of that through their life, now must live from the productivity of others.I'm sympathetic, I really am. I just have my fears that MMT is, in the final analysis, yet another flavor of well managed, rational and enlightened capitalism. And in the final analysis, owners are either dispossessed, or they win.

  16. Dave: At the most basic level, MMT is a description, not a theory. We can use the understanding to formulate policy. Sovereign govt does not borrow, it emits. Cash or bonds depending on nongovt sector's portfolio preference.I do agree with you that we need to identify the true costs of war. We are using resources in an unproductive manner–indeed in what could be a socially, politically and economically destructive manner. We are killing off our own kids as well as men, women and children abroad. Our kids are coming back with disabilities that will burden our society for many decades. War is inimical to democracy. Politicians all have to demonstrate how tough they are, including taking away civil liberties. Those are the costs (well, some of them).How to make the population understand this? Reinstitute the draft, so that every family sends some kids over to become targets? Of course, that is what progressives did during the Viet Nam war and it (eventually) worked. Or, ration output? Yes we did that–also helps to mitigate inflation pressures.Or raise taxes–impose a tax specifically identified as the "war tax". Fine. It would be like taxing smoking. Not sure it would prevent war but maybe it might reduce support for such adventures. But just be clear about it–it is a sin tax, not to raise finance for war.LRWray

  17. Dr. Wray:I agree with all your points except the last, that "the first step is to get past the deficit bogey." The preceding paragraph about the need to downsize Wall Street is much more persuasive; Progressives would do better to start there. "Downsize Wall Street!" is a winning slogan, "higher deficits!" is political suicide. Once you've rejected Wall Street pyramid schemes as a way to sustain the economy, the wisdom of MMT becomes more palatable. "Oh, if we're going to counteract the deflationary pressure of private sector savings and deleveraging in order to boost employment and GDP, the government has to run deficits, because that's the only way it can 'print money.' In fact, we don't have to bother with bond issues and central bank repurchases at all, we can cut out the middlemen and target unemployment directly by tying deficits to a job guarantee program."At least that was true for me. When I first read about MMT from Bill Mitchell, I was unwilling to take it seriously, even though I was already in the Ellen Brown "print debt- free money" camp, which amounts to the same thing. To a layman, the ironclad accounting identities and stock-flow consistent models of MMT don't look much different from the tautologies of Milton Friedman's QTM. Yes, it's internally consistent, but what bad assumptions do you make when relating the monetary system to the real economy? It was only after I'd read your 30 page working paper on Mexico that I could concede that you'd thought through all the issues (exchange rate feedbacks, cost push inflation) and might be on to something.-Dan

  18. Dave:I suggest you read Michael Hudson's posts on this blog for clarification on the link between macroeconomic policy and ownership/class warfare. He makes the distinction between the mostly productive economy of "real" goods and services and the mostly parasitic (rentier) economy of Finance, Insurance, and Real Estate that have benefited from neoliberal economic policies. The inflation of stock, real estate, and other assets during the past 30 years has disproportionately benefited the top 5% who own most of the assets. The middle class got some scraps to compensate for our stagnant real wages, but now that we've lost our illusory home equity and stock market gains in the crash, we might be receptive to a "counter-rentier" restructuring of the economy.MMT (which, I'll remind you, is descriptive, not prescriptive) is helpful for this agenda because it sees past the complications of Treasury and Central Bank procedure to recognize that monetary policy IS fiscal policy. You still have to tread carefully to avoid deflation or inflation, but fiscal policy can at least be targeted at the real economy.-Dan

  19. Randall, I agree with much you have posted at this site. I can also agree with the basic assumptions of MMT, with the gov't being able to adjust fiscal policy with only inflation as a main constraint (not "funding"). However, many of the conclusions just don't seem to follow. Maybe you are glossing over details that you neeed to fill in for your readers. Let me illustrate with a few questions:1. Your prescription for expanding fiscal policy to fight a drop in aggregate demand assumes that the gov't is efficient in its spending. What if it takes $3 of gov't spending to generate $1 of equivalent private sector job-generating demand? If so, very high deficits may ultimately be a very bad idea (for long term private sector growth). And can you trust spending from a gov't that is considerably influenced (controlled?) by the non-productive financial sector? Ultimately, just running deficits waiting for a recovery may not be the answer, but rather a wrenching depression that finally allows us the political change to throw off the financial leeches and cage them, after which we'd gain back the ability to grow (inhindered for a long time).2. I've seen it stated about MMT that if the private sector wants to save, the gov't must run deficits to compensate. So if the private sector wants to borrow excessively, should the gov't run a surplus to compensate? If not, why not?3. What's your opinion on Japan's situation? Is Japan on a sustainable or unsustainable path?4. Is there any historical evidence of the MMT approach working to deal with a bubble aftermath? Bush ran big deficits after the tech crash and recession. Was that the right thing?I'd appreciate your answers, and feel free to respond with links to any posts you've made in the past that address these questions. -ER

  20. I think you are right that the reason for progressive's lingering attachment to deficit reduction and "fiscal responsibility" is ultimately political. But I think you seriously underestimate the depth of the political hold this has on progressives. That makes for a fun and easy polemic, but it doesn't get us much closer to dislodging the myths in question.The thing to realize is that politicians generally convince themselves of what they feel it politically expedient to believe. This is not necessarily a vice, but it can easily become one if the beliefs in question (as with the ones we are discussing here) do not match reality. Progressives are attached to deficit hawkery (at least the "long run" version of it) because they believe it.You can see this if you at commentators like, say, Kevin Drum. He has no particular political reason to be good to Wall Street. But he definitely does believe in the long-run deficit hawk script. Witness his recent reaction to the interview James Galbraith gave Ezra Klein, where Galbraith straight out declared the economic risk from the deficits not just overblown, but non existent. So if the belief we are confronted with is (in the case of progressives at least) quite sincere, then in what sense is it political? Well, I think this has a great deal to do with the politics of the 80's as well as those of the 90's, and in particular with the strategy that Democrats came up with for opposing Reaganism's anti-government, upwards-redistributionist assault.From Proposition 13 forward, the American right discovered that it had a winning electoral formula in the advocacy of large tax cuts, even if those cuts had sharply anti-egalitarian consequences (that is, redistributed wealth upwards). To combat this, Democrats eventually (after much political failure) came up with the notion of turning themselves into the "true" guardians of fiscal rectitude. They would use the Reagan deficits as the trump card, against the distributional and anti-government consequences of supply-side tax cuts. The surprising success of Ross Perot's 3rd party bid in 1992 only seemed to reinforce the political utility of this approach. If you couldn't get a majority of voters to reject tax policies that redistributed wealth upwards, and put spending on public sector goods and services under constant budgetary pressure, then you could at least, just maybe, get them to see such cuts as unacceptably imprudent and selfish in relation to "our children and grandchildren" or "our seniors". In short, deficit hawkishness looked like a serviceable defensive strategy. The political success of G.W. Bush's first term, which revived for progressives the nightmare of Reaganism rampant, brought this same old strategy to the fore again. Recall all the progressive opinion elites who spilled ink during the 00's bashing Bush's deficits.So the progressive position has not been, actually, to say "let's party now and pay later." Rather, they have tried to present themselves as the "responsible adults" willing to pay now rather than party. It was only with the onset of the Great Recession that their position and hence their narrative had to shift to justifying large (-ish) increases in the deficit. But by then the habit of affirming the general deficit hawk view had become so entrenched a part of their political identity that it proved (and is proving) quite difficult to shed.